Notes to Condensed Consolidated Financial Statements

(Unaudited)

1. Organization

MyoKardia, Inc. (the “Company”) is a clinical-stage biopharmaceutical company pioneering a precision medicine approach to discover, develop and commercialize targeted therapies for the treatment of serious and neglected rare cardiovascular diseases. The Company’s initial focus is on the treatment of heritable cardiomyopathies, a group of rare, genetically driven forms of heart failure that result from biomechanical defects in cardiac muscle contraction. The Company has used its precision medicine platform to generate a robust pipeline of therapeutic programs for the chronic treatment of the two most common forms of heritable cardiomyopathy—hypertrophic cardiomyopathy (“HCM”), and dilated cardiomyopathy (“DCM”).  The Company was incorporated on June 8, 2012 in Delaware and its corporate headquarters and operations are located in South San Francisco, California.

Liquidity

The Company has incurred significant operating losses since inception and has an accumulated deficit of $186.9 million as of September 30, 2018. The Company has relied on its ability to fund its operations through private and public equity financings, and to a lesser extent through a license and collaboration arrangement with its collaboration partner, Sanofi S.A. (“Sanofi”) through its subsidiary, Aventis, Inc. The Company has not yet received regulatory approval to commercialize or sell any product and does not have customers. Management expects operating losses and negative operating cash flows to continue for the foreseeable future. As the Company continues to incur losses, the transition to profitability is dependent upon the successful development, approval, and commercialization of its products and product candidates and the achievement of a level of revenues adequate to support its cost structure. The Company’s ultimate success depends on the outcome of its research and development activities. The Company expects to incur additional losses and negative cash flows for the foreseeable future and it anticipates the need to raise additional capital to fully implement its business plan. The Company intends to raise such capital through the issuance of additional equity, debt and/or strategic alliances with partner companies.

On March 8, 2018, the Company filed a Registration Statement on Form S-3ASR (the “2018 Shelf Registration Statement”) covering the potential offering, issuance, and sale of an indeterminate amount of common stock, preferred stock, debt securities, warrants and/or units. In May 2018, the Company completed a follow-on offering under the 2018 Shelf Registration Statement pursuant to which the Company issued 3,750,000 shares of common stock at a price of $49.00 per share. In addition, in June 2018, the Company sold an additional 211,174 shares of common stock directly to the underwriters when they partially exercised their over-allotment option at the price of $49.00 per share. Consequently , the Company received proceeds totaling approximately $181.9 million from the offering, net of underwriting discounts and commissions and offering expenses, which includes approximately $9.7 million received due to the underwriters’ partial exercise of their over-allotment option.  

As of September 30, 2018, the Company had $411.6 million of cash, cash equivalents and short and long-term investments and management believes that these amounts will be sufficient to meet the Company’s anticipated operating and capital expenditure requirements for the twelve months following the date of this Form 10-Q. Management’s belief with respect to its ability to fund operations is based on estimates that are subject to risks and uncertainties. If actual results are different from management’s estimates, the Company may need to seek additional funding.

2. Basis of Presentation and Summary of Significant Accounting Policies

Basis of Presentation

The accompanying condensed consolidated financial statements are unaudited, include the Company’s accounts and those of its wholly-owned subsidiary and have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”). All intercompany balances and transactions have been eliminated in consolidation. See “ Adopted Accounting Pronouncements – Revenue Recognition ” below for a discussion of certain revisions to prior period financial statements made in connection with the Company’s adoption of new revenue recognition guidance. See “ Adopted Accounting Pronouncements – Other” below for a discussion of a revisions to previous periods in the statement of cash flows, whereby restricted cash is included with cash and cash equivalents when reconciling the beginning of period and end of period total amounts.

The Company currently operates in one business segment, which is the identification, development and commercialization of therapies for the treatment of serious and neglected rare cardiovascular diseases and has a single reporting and operating unit. These interim statements, in the opinion of management, reflect all normal recurring adjustments necessary for the fair presentation of the Company’s financial position and results of operations for the interim periods ended September 30, 2018 and 2017.  

6

The results of operations for the interim periods are not necessa rily indicative of the results of operations to be expected for the full fiscal year or any interim period and should be read in conjunction with the audited financial statements for the year ended December 31, 2017 and the notes thereto, which are include d in the Company’s Annual Report on Form 10-K as of and for the year ended December 31, 2017. The significant accounting policies used in preparation of these condensed consolidated financial statements for the three and nine months ended September 30, 201 8 are consistent with those discussed in Note 2 to the consolidated financial statements in the Company’s 2017 Annual Report on Form 10-K and are updated below as necessary.

Reclassifications

The cash and cash equivalents on the condensed consolidated statements of cash flows for the nine months ended September 30, 2017 has been reclassified to include restricted cash to conform to the current period’s presentation. Such reclassification did not impact the Company’s net loss or financial position.

Use of Estimates

The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make certain estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, other comprehensive gain (loss) and the related disclosures.  On an ongoing basis, management evaluates its estimates, including estimates related to license and collaboration revenues, accrued clinical trial and manufacturing development expenses and stock-based compensation expense. Significant estimates in these condensed consolidated financial statements include estimates made in connection with accrued research and development expenses, stock-based compensation expense and revenue.  The Company bases its estimates on historical experience, known trends and other market-specific or other relevant factors that it believes to be reasonable under the circumstances. Actual results may differ from those estimates or assumptions.

Significant accounting policies are described in Note 2 to the consolidated financial statements as of and for the year ended December 31, 2017 included in the Annual Report.  There have been no changes to the Company’s significant accounting policies during the nine months ended September 30, 2018, except as described below.

Adopted Accounting Pronouncements - Revenue Recognition

Effective January 1, 2018, the Company adopted Accounting Standards Codification Topic 606,  Revenue from Contracts with Customers  (“ASC 606”) using the full retrospective transition method.  This standard applies to all contracts with customers, except for contracts that are within the scope of other standards, such as leases, insurance, certain collaboration arrangements and financial instruments.  Under ASC 606, the Company recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration which the Company expects to receive in exchange for those goods or services.  To determine revenue recognition for arrangements that the Company determines are within the scope of ASC 606, the Company 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 a performance obligation.  The Company only applies the five-step model to contracts when it is probable that Company will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer.  At contract inception, once the contract is determined to be within the scope of ASC 606, the Company assesses the goods or services promised within each contract and determines those that are performance obligations and assesses whether each promised good or service is distinct.  The Company then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.

Licenses of intellectual property :   Upon the inception of a Collaboration Agreement, if the license to the Company’s intellectual property is determined to be distinct from the other performance obligations identified in the arrangement, the Company recognizes revenue from non-refundable, up-front fees allocated to the license when the license is transferred to the customer and the customer is able to use and benefit from the license. For licenses that are bundled with other promises, the Company utilizes judgement to assess the nature of the combined performance obligation to determine whether the combined performance obligation is satisfied over time or at a point in time and, if over time, the appropriate method of measuring proportional performance for purposes of recognizing revenue from non-refundable, up-front fees. The Company evaluates the measure of proportional performance each reporting period and, if necessary, adjusts the measure of performance and related revenue recognition.  

Milestone payments :  At the inception of each arrangement that includes development, regulatory or commercial milestone payments, the Company evaluates whether the milestones are considered probable of being reached and estimates the amount to be included in the transaction price. ASC 606 suggests two alternatives to use when estimating the amount of variable consideration: the expected value method and the most likely amount method. Under the expected value method, an entity considers the sum of

7

probability-weighted amounts in a range of possible consid eration amounts. Under the most likely amount method, an entity considers the single most likely amount in a range of possible consideration amounts. Whichever method is used, it should be consistently applied throughout the life of the contract; however, it is not necessary for the Company to use the same approach for all contracts. The Company expects to use the most likely amount method for development and regulatory milestone payments. If it is probable that a significant revenue reversal would not occu r, the associated milestone value is included in the transaction price. Milestone payments that are not within the control of the Company or the licensee, such as regulatory approvals, are not considered probable of being achieved until those approvals are received. The transaction price is then allocated to each performance obligation on a relative stand-alone selling price basis. The Company recognizes revenue when the performance obligations under the contract are satisfied. At the end of each subsequent reporting period, the Company re-evaluates the probability or achievement of each such milestone and any related constraint, and if necessary, adjusts its estimates of the overall transaction price. Any such adjustments are recorded on a cumulative catch- up basis, which would affect revenues and earnings in the period of adjustment.

Royalties :  For arrangements that include sales-based royalties, including milestone payments based on the level of sales, and the license is deemed to be the predominant item to which the royalties relate, the Company recognizes revenue at the later of (i) when the related sales occur, or (ii) when the performance obligation to which some or all of the royalty has been allocated has been satisfied (or partially satisfied). To date, the Company has not recognized any royalty revenue resulting from its collaboration arrangement.

Up-front payments and fees are recorded as deferred revenue upon receipt or when due and may require deferral of revenue recognition to a future period until the Company performs its obligations under these arrangements. Amounts payable to the Company are recorded as accounts receivable when the Company’s right to consideration is unconditional. The Company does not assess whether a contract has a significant financing component if the expectation at contract inception is such that the period between payment by the customer and the transfer of the promised goods or services to the customer will be one year or less.

Impact of Adoption – ASC 606

The Company entered into a license and collaboration agreement that became effective in August 2014, which is within the scope of ASC 606, under which it has licensed certain rights to its HCM-1 (which includes mavacamten and MYK-224), HCM-2 and DCM-1 (which includes MYK-491) programs to Sanofi and may enter into other such arrangements in the future. The terms of the arrangement include payment to the Company of one or more of the following: non-refundable, up-front license fees, development and regulatory and commercial milestone payments, and royalties on net sales of licensed products.

The Company has applied the five-step model of the new standard to the Company’s contract with Sanofi, as it is the only contract that will be impacted by the adoption of the new revenue standards. The Company has implemented the new revenue standards using the full retrospective transition method and has revised its comparative financial statements as if ASC 606 had been effective for those periods.

The following tables summarize the financial statement line items that were affected due to the Company’s implementation of ASC 606 (in thousands, except for share and per share amounts) :

8

The change to net loss and deferred revenue in the condensed consolidated statement of cash flows, as revised above, reflects (i) the Company’s determination that the Sanofi continuation payment of $45.0 million received in January 2017 relates to three performance obligations that were previously accounted for as one combined unit of accounting and (ii) the result of the Company utilizing a cost-based input method to measure proportional performance for each interim period during the year ending December 31, 2017, instead of straight-line.

Impact of Adoption – ASU 2016-18

As discussed in “Adopted Accounting Pronouncements – Other” below, the change to cash, cash equivalents and restricted cash in the table above reflects the Company’s implementation of ASU 2016-18 whereby amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning of period and end of period total amounts shown on the statement of cash flows.  The Company implemented this change using a retrospective transition method.

9

The following table summarizes the cash balances that were affec ted due to the Company’s implementation of ASU 2016-18 (in thousands):

Adopted Accounting Pronouncements – Other

In May 2017, the Financial Accounting Standards Board (“ FASB”) issued ASU No. 2017-09—Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting. The amendments in this ASU provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718 to address diversity in practice. An entity should account for the effects of a modification unless all the three specified conditions are met. The current disclosure requirements in Topic 718 apply regardless of whether an entity is required to apply modification accounting under the amendments in this ASU. The amendments in this ASU are effective for all entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2017, with early adoption permitted. The amendments in this ASU should be applied prospectively to an award modified on or after the adoption date. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements .

In November 2016, the FASB issued ASU No. 2016-18 (Topic 230), Restricted Cash, Statement of Cash Flows . This ASU 2016-18 requires that a state ment of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. ASU 2016-18 is effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years, with early adoption permitted. The amendments in this ASU should be applied using a retrospective transition method to each period presented. Other than the change in presentation in the accompanying consolidated statements of cash flows, the adoption of this guidance had no effect on the Company’s financial position, results of operations or liquidity.

Recent Accounting Pronouncements

From time to time, new accounting pronouncements are issued by the FASB or other standard setting bodies and adopted by the Company as of the specified effective date. Unless otherwise discussed, the impact of recently issued standards that are not yet effective will not have a material impact on the Company’s consolidated financial statements upon adoption. Under the Jumpstart Our Business Startups Act of 2012, as amended (the “JOBS Act”), the Company meets the definition of an emerging growth company and has irrevocably elected to opt out of the extended transition period for complying with new or revised accounting standards pursuant to Section 107(b) of the JOBS Act.

In August 2018, the FASB issued ASU 2018-13 (Topic 820), Fair Value Measurement, which modifies the disclosure requirements in Topic 820 by removing requirements for disclosing (i) amounts of and reasons for transfers between the Level 1 and Level 2 hierarchies, (ii) the policy for timing of transfers between levels and (iii) the valuation processes for Level 3 fair value measurements. The ASU 2018-13 amendment also adds requirements for disclosure of changes in unrealized gains and losses for the period relating to Level 3 fair value measurements and other factors considered in the valuation of Level 3 investments. This amendment is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The Company has evaluated this amendment and it is not expected to have a material impact to the Company’s financial statements.

In July 2018, the FASB issued issued amendments ASU 2018-10, Codification Improvements, and ASU 2018-11, Targeted Improvements to the ASU No. 2016-02 (Topic 842), Leases previously issued in February 2016. These ASUs, taken together, modify lease accounting for lessees to increase transparency and comparability by recording lease assets and liabilities for operating leases and disclosing key information about leasing arrangements. These amendments are required to be implemented for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The new lease standard originally required the adoption of the standard using the modified retrospective transition method; however, the July 2018 amendments provide entities with an additional (and optional) transition method to adopt the new lease standard. Under this transition method, an entity initially applies the new lease standard at the adoption date and recognizes a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption.

10

The amendments also provide lessors with a practical expedient, by class of underlying asset, to not separate nonlease components from the associated lease componen t and, instead, to account for those components as a single component if the nonlease components otherwise would be accounted for under the new revenue guidance (Topic 606) and certain criteria are met. If the nonlease component or components associated wi th the lease component are the predominant component of the combined component, an entity is required to account for the combined component in accordance with Topic 606. Otherwise, the entity must account for the combined component as an operating lease in accordance with Topic 842.

The Company will adopt the new standard on January 1, 2019 by recognizing a cumulative-effect adjustment to the opening balance of retained earnings as of that date. Although the Company anticipates recording leased assets and liabilities for its facilities in South San Francisco, the ultimate impact of adopting ASU 2016-02 and its amendments will depend on the Company’s lease portfolio as of the adoption date .   In addition, the Company is in the process of identifying and designing the appropriate changes to its accounting policies, business processes, and related internal controls to support recognition and disclosure requirements under ASC 842 and is implementing these changes over the remainder of 2018 .

In June 2018, the FASB issued ASU No. 2018-07 (Topic 718), Compensation – Stock Compensation .  The update represents an expansion of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. An entity should apply the requirements of Topic 718 to nonemployee awards except for specific guidance on inputs to an option pricing model and the attribution of cost (that is, the period of time over which share-based payment awards vest and the pattern of cost recognition over that period). The amendments specify that Topic 718 applies to all share-based payment transactions in which a grantor acquires goods or services to be used or consumed in a grantor’s own operations by issuing share-based payment awards. The amendments also clarify that Topic 718 does not apply to share-based payments used to effectively provide (1) financing to the issuer or (2) awards granted in conjunction with selling goods or services to customers as part of a contract accounted for under Topic 606, Revenue from Contracts with Customers.  The Company will adopt ASU 2018-17 in the first quarter of 2019 and it is not expected to have a material impact to the Company’s financial statements.

In February 2018, the FASB issued ASU No. 2018-05 (Topic 740) Income Taxes, Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118 .  The update provides guidance that gives entities the option to reclassify to retained earnings tax effects related to items in accumulated other comprehensive income (OCI) that the FASB refers to as having been stranded in accumulated OCI as a result of tax reform. Entities can early adopt the guidance in any interim or annual period for which financial statements have not yet been issued and apply it either (1) in the period of adoption or (2) retrospectively to each period in which the income tax effects of the Tax Cuts and Jobs Act related to items in accumulated OCI are recognized.  The Company will adopt ASU 2018-05 in the first quarter of 2019 utilizing the modified retrospective transition method. The adoption of this standard has not had and through the one-year period of adoption, is not expected to have a material impact to the Company’s financial statements.

3. Sanofi License and Collaboration Agreement

Sanofi (Aventis Inc.)

In August 2014, the Company entered into an exclusive License and Collaboration Agreement (“Collaboration Agreement”) with Aventis Inc., a wholly-owned subsidiary of Sanofi, for the research, development and potential commercialization of pharmaceutical products for the treatment, prevention and diagnosis of hypertrophic and dilated cardiomyopathy, as well as potential additional indications.  The Company has determined that Sanofi is a related party of the Company due to its close collaborative relationship and that it is the Company’s only partner.  In addition, Sanofi is a beneficial shareholder of the Company’s common stock.

Under the Collaboration Agreement, the Company granted Sanofi royalty-bearing licenses to develop and commercialize products resulting from its lead candidate programs HCM-1, HCM-2 and DCM-1. The licenses provide Sanofi with worldwide rights in the case of DCM-1 and rights outside the United States with respect to the HCM-1 and HCM-2 programs. The terms of the Collaboration Agreement also state that the Company is responsible for conducting research and development activities through early human efficacy studies for all three programs, except for specified research activities to be conducted by Sanofi.

Upon entering into this agreement, the Company received an up-front non-refundable cash payment of $35.0 million and Sanofi made an up-front equity purchase of $10.0 million (additional equity investments from Sanofi totaling $21.4 million were received subsequent to the effective date of the Collaboration Agreement). The Company was also eligible to receive additional payments and services, as follows: (1) a one-time, non-refundable payment of $25.0 million contingent upon submission of an Investigational New Drug (“IND”) application before certain regulatory authority(ies) for its DCM-1 program; (2) up to $45.0 million in funding from Sanofi of approved in-kind research and clinical activities; (3) a non-refundable continuation payment of $45.0 million contingent upon Sanofi’s notification of its decision to continue the agreement beyond December 31, 2016; and, (4) up to $15.0 million in research and development funding for the lead compound in each program if studies leading to proof-of-concept (“POC”) are extended beyond December 31, 2018.

11

During the fourth quarter of 2016, the Company submitted an I ND application to the U.S. Food and Drug Administration and as a result, the Company received the $25.0 million milestone payment from Sanofi.  

In December 2016, Sanofi provided notice to the Company of its election to continue the collaboration through December 31, 2018 pursuant to the terms of the Collaboration Agreement. In connection with Sanofi’s decision to continue the collaboration, the Company received the $45.0 million milestone payment.

The Company is also entitled to receive tiered royalties ranging from the mid-single digits to the mid-teens on net sales of certain HCM-1, HCM-2 and DCM-1 finished products outside the United States and on net sales of certain DCM-1 finished products in the United States. Sanofi is eligible to receive tiered royalties ranging from the mid-single digits to the low-teens on net sales of certain HCM-1 and HCM-2 finished products in the United States.

Revenue Recognition

The Company evaluated the Collaboration Agreement under ASC 606 and determined that it had the following performance obligations: (1) the licenses of intellectual property for each of the HCM-1, HCM-2 and DCM-1 programs, and (2) the performance of research and development services, including regulatory support, for each of the three programs.  The Company considered whether the licenses have standalone functionality and are capable of being distinct; however, given the fact that the research and development services are of such a specialized nature that can only be performed by the Company and Sanofi cannot benefit from the intellectual property licenses without the Company’s performance, the Company determined that the intellectual property licenses are not distinct from the research and development services and thus the license and research and development services for each program are combined into three separate performance obligations.

Contract Term

For revenue recognition purposes, the Company determined that the Collaboration Agreement is a period to period contract for which the Company had enforceable rights and obligations from inception through December 31, 2016.  Sanofi had the right to terminate the Collaboration Agreement prior to December 31, 2016 or to extend the contract term through December 31, 2018.  If Sanofi had elected to terminate the agreement, the termination would have had taken effect on December 31, 2016 and all licensed rights would have reverted to the Company. The Company did not have any obligation to reimburse Sanofi any portion of the payments received if Sanofi had terminated the agreement.

In December 2016, Sanofi elected to continue the Collaboration Agreement through an extended term ending December 31, 2018 and made the $45.0 million continuation payment to the Company. The Company determined that the extended term was to be treated as a separate contract because such an extension was not probable at the inception of the contract, the extension represents additional goods and services, and such activities are priced commensurate to the effort required and do not involve any significant discount. It was also concluded that the extended term provides the Company with enforceable rights and obligations for the two-year period ending December 31, 2018.  

Because Sanofi retains the option in the Collaboration Agreement to extend the arrangement, neither party is committed to perform and the contract does not have enforceable rights and obligations beyond December 31, 2018.

Transaction Price

The Company’s assessment of the transaction price included an analysis of amounts to which it expected to be entitled for providing goods or services to the customer which at contract inception consisted of the upfront cash payment, valued at $34.3 million, net of the fair value of $0.7 million allocated to the option provided to Sanofi to acquire equity, and variable consideration of $25.0 million, subject to an IND application. Sanofi paid the Company the $25.0 million milestone upon the Company’s application for the IND. In 2016, after the IND application was made and when the Company determined it was deemed probable that significant reversal in the amount of cumulative revenue recognized will not occur, the Company included this amount in the transaction price.  As of December 31, 2016, all performance obligations associated with the initial term were satisfied.       

The extended term (from January 1, 2017 to December 31, 2018) has a fixed fee of $45.0 million, paid by Sanofi contemporaneously with the notice of continuation of the contract.  The Company therefore determined that the transaction price for this extended term is $45.0 million.

12

As previously noted above, the Collaboration Agreement also includes up to $45.0 million in funding from Sanofi of approved in-kind research and clinical activities. Sanofi is the decisi on maker on how to provide these services and such services are used in the development of joint program technology which is co-owned by both parties. As such the Company concluded that these in-kind contributions do not constitute consideration paid by Sa nofi to the Company.  

Any consideration related to sales-based royalties will be recognized when the related sales occur and therefore have also been excluded from the transaction price.  

Methodology for Recognition

Since the Company has determined that the three performance obligations are satisfied over time, the Company has selected a single revenue recognition method that it believes most faithfully depicts the Company’s performance in transferring control of the services. ASC 606 allows entities to choose between two methods to measure progress toward complete satisfaction of a performance obligation:  

1. Output methods - recognize revenue on the basis of direct measurements of the value to the customer of the goods or services transferred to date relative to the remaining goods or services promised under the contract (e.g. surveys of performance completed to date, appraisals of results achieved, milestones reached, time elapsed, and units produced, or units delivered); or

2. Input methods - recognize revenue on the basis of the entity’s efforts or inputs to the satisfaction of a performance obligation (e.g., resources consumed, labor hours expended, costs incurred, or time elapsed) relative to the total expected inputs to the satisfaction of that performance obligation.

The Company concluded that it will utilize a cost-based input method to measure proportional performance and to calculate the corresponding amount of revenue to recognize. The Company believes this is the best measure of progress because other measures do not reflect how the Company executes its performance obligations under the contract with Sanofi. In applying the cost-based input methods of revenue recognition, the Company uses actual costs incurred relative to budgeted costs to fulfill the combined performance obligations. Revenue will be recognized based on actual costs incurred as a percentage of total actual and budgeted costs as the Company completes its performance obligations, which will be fulfilled by December 31, 2018. A cost-based input method of revenue recognition requires management to make estimates of costs to complete the Company’s performance obligations. In making such estimates, significant judgment is required to evaluate assumptions related to cost estimates. The cumulative effect of revisions to estimated costs to complete the Company’s performance obligations will be recorded in the period in which changes are identified and amounts can be reasonably estimated. A significant change in these assumptions and estimates could have a material impact on the timing and amount of revenue recognized in future periods.

For the nine months ended September 30, 2018 and 2017, the Company recognized $21.2 million and $8.5 million of license and collaboration revenue, respectively.  

The following table presents changes in the Company’s contract assets and liabilities, which excludes research and development reimbursements under the mavacamten registration program plan, for the nine months ended September 30, 2018 and 2017 (in thousands):

13

Deferred revenue of $12.4 million as of September 30, 2018 consists of the $45.0 million continuation payment received in January 2017, less $11.4 million recognized in the year ended December 31, 2017 and $21.2 millio n recognized during the nine months ended September 30, 2018. The $12.4 million in deferred revenue will be recognized through December 31, 2018 as the performance obligations are satisfied.

Registration Program Plan and Pre-POC Cost Sharing

In addition to amounts due to the Company under the Collaboration Agreement, Sanofi is conditionally responsible for reimbursing the Company for (i) one half or more of the registration program plan (“RPP”) costs after clinical proof-of-concept is established for the lead compound under each of the HCM-1 and HCM-2 programs; and (ii)  if the Company has initiated a clinical trial of a compound under a proof-of-concept development plan and not terminated its development thereof and if another Additional Compound is identified as a development candidate for the same program, the Company is entitled to full reimbursement of pre-proof-of-concept (“pre-POC”) research and development costs on development candidates mutually identified as such Additional Compounds, with the objective of conducting IND-enabling studies and clinical trials on such candidate. An “Additional Compound” is a compound that qualifies as a secondary compound to the lead compound in each program. The estimated amount to be so reimbursed shall be provided by the Company in advance of the decision whether to initiate further development of such Additional Compounds and there is no contractual limit on the costs to be incurred by the Company and reimbursed by Sanofi. The Company has the right, but not the obligation to conduct development of Additional Compounds and Sanofi is entitled to terminate the agreement with respect to any program prior to the delivery by the Company to Sanofi of a final study report.

Effective October 2017, Sanofi is sharing RPP costs for the mavacamten program during the remainder of the contract term. Registration program costs are subject to review and approval by the Company and Sanofi and include amounts incurred relating to clinical trials, development and manufacturing of, and obtaining regulatory approvals for mavacamten, and include direct employee costs and direct out-of-pocket costs incurred, by or on behalf of a party, that are specifically identifiable or reasonably and directly allocable to those activities.

Pursuant to the Additional Compounds provisions of the Collaboration Agreement, in August 2018 Sanofi agreed to reimburse the Company for eligible costs it has incurred in the development of  the MYK-224 compound, which has been identified as an Additional Compound under the HCM-1 program. Eligible costs are subject to review and approval under the same procedures as under the RPP program; reimbursable costs consist of research and development activities agreed to by the Company and Sanofi that were negotiated and budgeted prior to the application for reimbursement. Under the Collaboration Agreement, Sanofi will continue to reimburse the Company for eligible MYK-224 identified and agreed to under the program, through proof-of-concept. Only one Additional Compound for each of the three programs is eligible for reimbursement under the Collaboration Agreement and only after a clinical trial of an initial compound under the program has been established and not terminated.

Accordingly, for the HCM-1 program, the Additional Compound MYK-224 was nominated and the Company invoiced Sanofi $2.6 million for costs incurred through September 30, 2018.

Estimated reimbursements are invoiced to Sanofi before each interim period based on budgeted amounts.  For the RPP program, these estimates consist of one half of the Company’s mavacamten development budget in excess of Sanofi’s mavacamten development budget each interim period. For the MYK-224 compound, these estimates consist of all of the Company’s research and development budget related to the compound for the forthcoming quarter. After each period end, a review of the actual expenses incurred is performed and any adjustments are carried forward to future invoices. Actual amounts received from Sanofi are applied to the applicable interim period to reduce the Company’s research and development expenses.  

The Company recorded a $2.6 million and $1.0 million  receivable for reimbursable RPP and MYK-224 expenses, as of September 30, 2018 and December 31, 2017 respectively, which are recorded as receivable from collaboration partner and included in current assets in the condensed consolidated balance sheets. As of September 30, 2018 and December 31, 2017, the Company has recorded $10.9 million and $4.4 million, respectively, as prepayments from collaboration partner, to apply to future research and development expenses. Prepayments from collaboration partner are included in current liabilities in the condensed consolidated balance sheets. The Company recorded $14.8 million and zero as reductions to research and development expenses for the nine months ended September 30, 2018 and 2017, respectively.

14

The following table presents the Sanofi research and development reimbursement receivables and related prepayment activity during the nine mont hs ended September 30, 2018 (in thousands):

4. Fair Value Measurements

Financial assets and liabilities are recorded at fair value. The accounting guidance for fair value provides a framework for measuring fair value, clarifies the definition of fair value and expands disclosures regarding fair value measurements. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the reporting date. The accounting guidance establishes a three-tiered hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value as follows:

Level 1—Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date.

Level 2—Inputs other than quoted market prices included in Level 1 are either directly or indirectly observable for the asset or liability through correlation with market data at the measurement date and for the duration of the instrument’s anticipated life.

Level 3—Inputs reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. Consideration is given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model.

The following table sets forth the Company’s financial instruments that were measured at fair value on a recurring basis by level within the fair value hierarchy (in thousands):

15

The following table is a summary of amortized cost, unrealized gain and loss, and fair value of the Company’s marketable securities by contractual maturities (in thousands):

5. Balance Sheet Components

Depreciation expense was $0.4 million and $0.4 million for the three months ended September 30, 2018 and 2017, respectively and $1.1 million and $1.0 million for the nine months ended September 30, 2018 and 2017, respectively.

16

6. Commitments and Contingencies

Purchase Commitments

The Company conducts product research and development programs through a combination of internal and collaborative programs that include, among others, arrangements with universities, contract research organizations and clinical research sites. The Company has contractual arrangements with these organizations; however, these contracts are generally cancelable on 30 days’ notice and the obligations under these contracts are largely based on services performed.

Facilities

In September 2018, the Company entered into a noncancelable operating lease (the “Lease”) for approximately 129,846 square feet of space in Brisbane, California (the “New Facility”). The date on which the Company will become responsible for paying rent under the Lease (the “Rent Commencement Date”) will be the date the premises are ready for occupancy, currently anticipated to be January 2020. The Lease expires 10 years after the Rent Commencement Date. The Lease grants the Company an option to extend the Lease for an additional 10-year period. Future minimum rental payments under the Lease during the 10-year term are $93.2 million in the aggregate. The Lease further provides that the Company is obligated to pay to the landlord certain costs, including taxes and operating expenses. As of September 30, 2018, the Lease term has not commenced as the Company did not have the right to use or control physical access to the New Facility.

In September 2018 t he Company provided a standby letter of credit of $1.9 million as security for its obligations under the Lease. This standby letter of credit together with standby letters on Existing Facilities (as defined below) are classified as long-term assets within restricted cash and other on the balance sheet.

The Company currently leases approximately 48,400 square feet of office and lab space in two separate facilities in South San Francisco, California (the “Existing Facilities”). All of the lease agreements associated with the Existing Facilities expire on or before January 2020. The Company does not plan to cancel the existing lease agreements for its Existing Facilities prior to their respective expiration dates.

Future annual minimum lease payments due under the new and existing operating leases at December 31 of each year are as follows (in thousands):

Rent expense for the three months ended September 30, 2018 and 2017 was $0.6 million and $0.3 million, respectively, and for the nine months ended September 30, 2018 and 2017 was $1.6 million and $1.0 million, respectively. The operating leases require the Company to share in prorated operating expenses and property taxes based upon actual amounts incurred; those amounts are not fixed for future periods and, therefore, are not included in the future commitments listed above.

17

Contingencies

From time to time, the Company may have contingent liabilities that arise in the ordinary course of business activities. The Company accrues for such a liability when it is probable that future expenditures will be made, and such expenditures can be reasonably estimated. There were no contingent liabilities requiring accrual or disclosure as of September 30, 2018 or December 31, 2017.

Guarantees and Indemnifications

The Company enters into standard indemnification arrangements in the ordinary course of business.

Pursuant to certain of these arrangements, the Company indemnifies, holds harmless, and agrees to reimburse the indemnified parties for losses suffered or incurred by the indemnified party, in connection with any trade secret, copyright, patent or other intellectual property infringement claim by any third-party with respect to the Company’s technology. The term of these indemnification arrangements is generally perpetual. The maximum potential amount of future payments the Company could be required to make under these agreements is not determinable because it involves claims that may be made against the Company in the future but have not yet been made.

The Company indemnifies its officers and directors for certain events or occurrences, subject to certain limits, while the officer or director is or was serving at the Company’s request in such capacity, as permitted under Delaware law and in accordance with its certificate of incorporation and bylaws, and agreements providing for indemnification entered into with its officers and directors. The term of the indemnification period lasts as long as an officer or director may be subject to any proceeding arising out of acts or omissions of such officer or director in such capacity.

The maximum amount of potential future indemnification of directors and officers is unlimited; however, the Company currently holds director and officer liability insurance. This insurance allows the transfer of risk associated with its exposure and may enable it to recover a portion of any future amounts paid.

The Company believes that the fair value of these indemnification obligations is minimal. Accordingly, the Company has not recognized any liabilities relating to these obligations for any period presented.

7. Stockholders’ Equity

On March 8, 2018 the Company filed the 2018 Shelf Registration Statement covering the potential offering, issuance, and sale of an indeterminate amount of common stock, preferred stock, debt securities, warrants and/or units. In May 2018, the Company completed a follow-on offering under the 2018 Shelf Registration Statement pursuant to which the Company issued 3,750,000 shares of common stock at a price of $49.00 per share. In June 2018, the Company sold an additional 211,174 shares of common stock directly to the underwriters when they partially exercised their over-allotment option at the price of $49.00 per share. In the period ending June 30, 2018, the Company received proceeds totaling approximately $181.9 million from the offering, net of underwriting discounts and commissions and offering expenses, which includes approximately $9.7 million received due to the underwriters’ partial exercise of their over-allotment option.

18

8. Stock-Based Compensation

The Company classifies stock-based compensation expense in the accompanying condensed consolidated statements of operations and comprehensive loss based on the department to which a recipient belongs. The following table sets forth stock-based compensation expense related to equity awards granted to employees and consultants for all periods presented (in thousands):

The following summarizes option and other equity award activity under the 2012 Equity Incentive Plan and 2015 Stock Option and Incentive Plan: 

Restricted stock units (“ RSUs”) settle into shares of common stock upon vesting and the exercise price is the market price on the date of vesting .

Pursuant to the terms of the Company’s 2015 Employee Stock Purchase Plan (the “2015 ESPP”), on April 30, 2018, the Company issued 12,847 shares to participants in the 2015 ESPP in exchange for their contributions during the period from November 1, 2017 to April 30, 2018.

In relation to stock options and awards to purchase common stock that vest upon the achievement of performance criteria, there was zero and zero stock-based compensation expense recorded for the three months ended September 30, 2018 and 2017, respectively, and $193,000 and $174,000 in stock-based compensation expense was recorded for the nine months ended September 30, 2018 and 2017, respectively. The Company begins to recognize expenses related to these stock options and awards during the period upon concluding that certain performance criteria are considered probable.

19

9. Net Loss per Share Attributable to Common Stockholders

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

The following outstanding shares of potentially dilutive securities were excluded from the computation of diluted net loss per share attributable to common stockholders for the periods presented because including them would have been antidilutive:

As of September 30, 2018, the Company has contributions from plan participants of $0.5 million under the 2015 ESPP, which if converted, would be equivalent to 11,766 shares based on 85% of the stock price at the beginning of the offering period. As of September 30, 2017, the Company had contributions from plan participants of $0.3 million under the 2015 Employee Stock Purchase Plan, which if converted, would have been equivalent to 25,668 shares based on 85% of the stock price at the beginning of the offering period.

10. Income taxes

On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (“Tax Act”) was signed into law making significant changes to the Internal Revenue Code. Changes include, but are not limited to, a corporate tax rate decrease from 35% to 21% effective for tax years beginning after December 31, 2017, the transition of U.S. international taxation from a worldwide tax system to a territorial system, and a one-time transition tax on the mandatory deemed repatriation of cumulative foreign earnings as of December 31, 2017. 

Also, on December 22, 2017, Staff Accounting Bulletin No. 118 (“SAB 118”) was issued to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Act. For the nine months ended September 30, 2018, the Company noted no additional guidance or information that affects the provisional amounts initially recorded at zero for the transition tax and the remeasurement of the deferred tax assets for the year ended December 31, 2017. As a result, the Company recorded no adjustment to the transition tax and the remeasurement of the deferred tax assets. The Company will continue to monitor and analyze any additional guidance and information that may be issued by the federal and state tax authorities. Any subsequent adjustment to these amounts will be recorded to current tax expense in the 2018 interim period during which the analysis is complete. 

20