MADRIGAL PHARMACEUTICALS, INC. 10-K

Item 9A. Controls and Procedures. Disclosure Controls and Procedures We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) that are designed to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure. Under the supervision of our principal executive officer and principal financial officer, we evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Report. Based on that evaluation, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of December 31, 2020. Limitations on the Effectiveness of Controls and Procedures In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable, not absolute, assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs. 54 Table of Contents 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. 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) for our company. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP. This process includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Our management, including our principal executive officer and our principal financial officer, assessed the effectiveness of our internal control over financial reporting as of December 31, 2020. In making this assessment, our management used the criteria set forth in the “Internal Control—Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework). Based on its assessment under that framework, our management concluded that our internal control over financial reporting was effective as of December 31, 2020. PricewaterhouseCoopers LLP, an independent registered public accounting firm, has audited the effectiveness of our internal control over financial reporting as of December 31, 2020, as stated in its report, which is included herein. Changes in Internal Control Over Financial Reporting There have been no changes in our internal control over financial reporting during the quarter ended December 31, 2020 that have materially affected, or are reasonably likely to materially affect our internal control over financial reporting. Item 9B. Other Information. None. 55 Table of Contents PART III Certain information required by Part III is omitted from this Annual Report on Form 10-K because we intend to file our definitive Proxy Statement for our next Annual Meeting of Stockholders, pursuant to Regulation 14A of the Securities Exchange Act of 1934, as amended, or the 2021 Proxy Statement, no later than April 30, 2020, and certain information to be included in the 2021 Proxy Statement is incorporated herein by reference. Item 10. Directors, Executive Officers and Corporate Governance. The information required by this item concerning our directors, executive officers, Section 16 compliance and corporate governance matters is incorporated by reference in our 2021 Proxy Statement. Item 11. Executive Compensation. The information required by this item regarding executive compensation is incorporated by reference in our 2021 Proxy Statement. Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. The information required by this item regarding security ownership of certain beneficial owners and management is incorporated by reference in our 2021 Proxy Statement. In addition, information about our equity compensation plans is incorporated herein by reference to our 2021 Proxy Statement. Item 13. Certain Relationships and Related Transactions, and Director Independence. The information required by this item regarding certain relationships and related transactions is incorporated by reference in our 2021 Proxy Statement. Item 14. Principal Accountant Fees and Services The information required by this item regarding principal accounting fees and services is incorporated by reference in our 2021 Proxy Statement. 56 Table of Contents PART IV Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES Item 15(a) The following documents are filed as part of, or incorporated by reference into, this Annual Report on Form 10-K: Item 15(a)(1) and (2) The Consolidated Financial Statements beginning on page F-1 are filed as part of this Annual Report on Form 10-K. Other financial statement schedules have been omitted because the information required to be presented in them is not applicable or is shown in the financial statements or related notes. Item 15(a)(3) We have filed, or incorporated into this Annual Report on Form 10-K by reference, the exhibits listed on the accompanying Exhibit Index. Item 15(b) See Item 15(a)(3) above. Item 15(c) See Item 15(a)(2) above. Exhibit Number Exhibit Description Filed Herewith Incorporated by Reference herein from Form or Schedule Filing Date SEC File / Registration Number 2.1 Agreement and Plan of Merger and Reorganization, dated April 13, 2016, by and among Synta Pharmaceuticals Corp., the Registrant and Saffron Merger Sub, Inc. DEFA14A; Form 8-K (Exhibit 2.1) 4/14/2016 001-33277 3.1 Restated Certificate of Incorporation of the Registrant. Form 10-K (Exhibit 3.1) 3/31/2017 001-33277 3.2 Certificate of Designation of Preferences, Rights and Limitations of Series A Convertible Preferred Stock. Form 8-K (Exhibit 3.1) 6/21/2017 001-33277 3.3 Bylaws of the Registrant, as amended April 13, 2016. DEFA14A; Form 8-K (Exhibit 3.1) 4/14/2016 001-33277 4.1 Description of Securities of the Registrant Form 10-K (Exhibit 4.1) 2/26/20 001-33277 4.2 Securities Purchase Agreement, dated June 20, 2017, by and among the Registrant and the investors party thereto, including the Registration Rights Agreement attached as Exhibit B thereto. Form 8-K (Exhibit 10.1) 6/21/2017 001-33277 Equity Agreements 10.1 Sales Agreement, dated November 5, 2020, by and between Madrigal Pharmaceuticals, Inc. and Cowen and Company, LLC (concerning at-the-market offerings of Madrigal common stock). Form 8-K (Exhibit 1.1) 11/5/2020 001-33277 Agreements with Respect to Collaborations, Licenses, Research and Development 10.2 Research, Development and Commercialization Agreement, dated December 18, 2008, by and between Hoffmann-La Roche, Inc., F. Hoffmann-La Roche Ltd and the Registrant.† Form 10-Q (Exhibit 10.5) 11/14/2016 001-33277 57 Table of Contents Exhibit Number Exhibit Description Filed Herewith Incorporated by Reference herein from Form or Schedule Filing Date SEC File / Registration Number Equity Compensation Plans 10.3* Amended 2015 Stock Plan Definitive Proxy Statement (Annex A) 5/15/2019 001-33277 10.4* Form of Incentive Stock Option Agreement under Amended 2015 Stock Plan. Form 10-K (Exhibit 10.10) 3/31/2017 001-33277 10.5* Form of Nonqualified Stock Option Agreement under Amended 2015 Stock Plan. Form 10-K (Exhibit 10.11) 3/31/2017 001-33277 10.7* Form of Nonqualified Stock Option Agreement for Directors under Amended 2015 Stock Plan. Form 10-K (Exhibit 10.13) 3/31/2017 001-33277 10.8* Form of Restricted Stock Unit Agreement under Amended 2015 Stock Plan. Form 10-Q (Exhibit 10.1) 5/10/2016 001-33277 Agreements with Executive Officers and Directors 10.9* Letter Agreement, dated November 24, 2014, between Synta Pharmaceuticals Corp. and Marc R. Schneebaum Form 8-K (Exhibit 10.3) 12/4/2014 001-33277 10.11* Form of Indemnification Agreement between the Registrant and certain directors and executive officers. Form 8-K (Exhibit 10.2) 07/22/2016 001-33277 10.12* Non-Qualified Stock Option Agreement (outside of the Amended and Restated 2006 Stock Plan), dated December 8, 2014, between the Registrant and Marc Schneebaum. Form 10-K (Exhibit 10.46) 3/12/2015 001-33277 10.13* Letter Agreement, dated April 13, 2016, by and between the Company and Paul A. Friedman, M.D. Form 8-K (Exhibit 10.3) 7/22/2016 001-33277 10.14* Letter Agreement, dated April 13, 2016, by and between the Company and Rebecca Taub, M.D. Form 8-K (Exhibit 10.4) 7/22/2016 001-33277 21.1 List of Subsidiaries. X 23.1 Consent of PricewaterhouseCoopers LLP, Independent Registered Public Accounting Firm. X 31.1 Certification of Principal Executive Officer required by Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. X 58 Table of Contents Exhibit Number Exhibit Description Filed Herewith Incorporated by Reference herein from Form or Schedule Filing Date SEC File / Registration Number 31.2 Certification of Principal Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. X 32.1** Certifications of Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. X 101.INS Inline XBRL Instance Document. X 101.SCH Inline XBRL Taxonomy Extension Schema Document. X 101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document. X 101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document. X 101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document. X 101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document. X 104 Inline XBRL for the cover page of this Annual Report on Form 10-K, included in the Exhibit 101 Inline XBRL Document Set. X * Indicates a management contract, compensatory plan or arrangement. ** The certifications attached as Exhibit 32.1 that accompany this Annual Report on Form 10-K are not deemed filed with the SEC and are not to be incorporated by reference into any filing of the registrant under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date of this Annual Report on Form 10-K, regardless of any general incorporation language contained in any filing. † Confidential portions of these documents have been filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment. Item 16. Form 10-K Summary. None. 59 Table of Contents SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized. MADRIGAL PHARMACEUTICALS INC. Date: February 25, 2021 By: /s/ PAUL A. FRIEDMAN, M.D. Paul A. Friedman, M.D. Chief Executive Officer (Principal Executive Officer) POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each individual whose signature appears below hereby constitutes and appoints Paul A. Friedman, M.D., Marc R. Schneebaum and Brian J. Lynch, and each or either of them, acting individually, as his or her true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution for him or her and in his or her name, place and stead, in any and all capacities, to sign any and all amendments to this Report, and to file the same, with all exhibits thereto and other documents in connection therewith, with the SEC, granting unto said attorney-in-fact and agent, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully for all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent, or any of them, or their or his or her substitutes, may lawfully do or cause to be done or by virtue hereof. Pursuant to the requirements of the Exchange Act, as amended, this Report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signatures Title Date /s/ PAUL A. FRIEDMAN, M.D. Paul A. Friedman, M.D. Chairman of the Board of Directors and Chief Executive Officer (Principal Executive Officer) February 25, 2021 /s/ MARC R. SCHNEEBAUM Marc R. Schneebaum Senior Vice President and Chief Financial Officer (Principal Accounting and Financial Officer) February 25, 2021 /s/ REBECCA TAUB, M.D. Rebecca Taub, M.D. Director February 25, 2021 /s/ FRED B. CRAVES, PH.D. Fred B. Craves, Ph.D. Director February 25, 2021 /s/ KENNETH M. BATE Kenneth M. Bate Director February 25, 2021 /s/ KEITH R. GOLLUST Keith R. Gollust Director February 25, 2021 /s/ DAVID MILLIGAN, PH.D. David Milligan, Ph.D. Director February 25, 2021 /s/ RICHARD S. LEVY, M.D. Richard S. Levy, M.D. Director February 25, 2021 /s/ JAMES M. DALY James M. Daly Director February 25, 2021 60 Table of Contents INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page Report of Independent Registered Public Accounting Firm F-2 Consolidated Financial Statements: Consolidated Balance Sheets F-4 Consolidated Statements of Operations F-5 Consolidated Statements of Comprehensive Loss F-6 Consolidated Statements of Stockholders’ Equity F-7 Consolidated Statements of Cash Flows F-8 Notes to Consolidated Financial Statements F-9 F-1 Table of Contents REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders of Madrigal Pharmaceuticals, Inc. Opinions on the Financial Statements and Internal Control over Financial Reporting We have audited the accompanying consolidated balance sheets of Madrigal Pharmaceuticals, Inc. and its subsidiaries (the “Company”) as of December 31, 2020 and 2019, and the related consolidated statements of operations, of comprehensive loss, of stockholders’ equity and of cash flows for each of the three years in the period ended December 31, 2020, including the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company’s internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO. Basis for Opinions The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report On Internal Control Over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company’s internal control over financial reporting 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 audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated 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 consolidated 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 consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. Definition and Limitations of Internal Control over Financial Reporting A company’s internal control over financial reporting is a process designed 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. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. F-2 Table of Contents Critical Audit Matters The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Research and Development Costs As described in Notes 2 and 5 to the consolidated financial statements, management uses significant judgment in estimating the amount of research and development costs recognized in each reporting period. Management analyzes and estimates the progress of its preclinical studies and clinical trials, completion of milestone events per underlying agreements, invoices received and contracted costs when estimating the research and development costs to accrue in each reporting period. Total research and development costs incurred during the year ended December 31, 2020 were $184.8 million and research and development costs accrued were $31.6 million as of December 31, 2020. The principal considerations for our determination that performing procedures relating to research and development costs is a critical audit matter are the significant judgment by management when estimating the costs incurred for services performed by vendors that have not yet been invoiced in estimating the research and development costs to accrue in the reporting period. This in turn led to a high degree of auditor judgment, subjectivity and effort in performing procedures to evaluate the audit evidence obtained relating to estimates of costs accrued. Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls over management’s process relating to accruing research and development costs, including controls overestimating the costs incurred for services performed by vendors that have not yet been invoiced. These procedures also included, among others, testing management’s process for estimating the research and development costs to accrue in the reporting period, evaluating the completeness and accuracy of underlying data used in management’s estimate by testing for consistency with a sample of contracts and invoices, testing the number of patients screened for and enrolled in the trial, testing the mathematical accuracy of the calculation of the accrual for research and development costs incurred, and evaluating the reasonableness of assumptions used in the estimate. Evaluating the reasonableness of assumptions used in the estimate involved assessing management’s ability to reasonably estimate costs incurred that have not been invoiced by (i) performing a comparison of the estimated accrual to average procedure rates per contracts applied to the number of patients screened for and enrolled in the trial, and by (ii) performing a comparison of the estimated accrual to actual costs incurred on similar completed preclinical studies and clinical trials. /s/ PricewaterhouseCoopers LLP Philadelphia, Pennsylvania February 25, 2021 We have served as the Company’s auditor since 2016. F-3 Table of Contents MADRIGAL PHARMACEUTICALS, INC. Consolidated Balance Sheets (in thousands, except share and per share amounts) December 31, 2020 December 31, 2019 Assets Current assets: Cash and cash equivalents $ 54,004 $ 46,697 Marketable securities 230,145 392,348 Prepaid expenses and other current assets 1,014 1,152 Total current assets 285,163 440,197 Property and equipment, net 1,047 1,184 Right-of-use asset 785 675 Total assets $ 286,995 $ 442,056 Liabilities and Stockholders’ Equity Current liabilities: Accounts payable $ 1,017 $ 1,178 Accrued expenses 45,222 23,637 Lease liability 318 315 Total current liabilities 46,557 25,130 Long term liabilities: Lease liability 468 361 Total long term liabilities 468 361 Total liabilities 47,025 25,491 Stockholders’ equity: Preferred stock, par value $ 0.0001 per share authorized: 5,000,000 shares at December 31, 2020 and December 31, 2019; 1,969,797 shares issued and outstanding at December 31, 2020 and December 31, 2019 — — Common stock, par value $ 0.0001 per share authorized: 200,000,000 at December 31, 2020 and December 31, 2019; 15,508,146 and 15,429,154 shares issued and outstanding at December 31, 2020 and December 31, 2019, respectively 2 2 Additional paid-in-capital 665,385 639,567 Accumulated other comprehensive gain 47 216 Accumulated deficit ( 425,464 ) ( 223,220 ) Total stockholders’ equity 239,970 416,565 Total liabilities and stockholders’ equity $ 286,995 $ 442,056 See accompanying notes to consolidated financial statements. F-4 Table of Contents MADRIGAL PHARMACEUTICALS, INC. Consolidated Statements of Operations (in thousands, except share and per share amounts) Year Ended December 31, 2020 2019 2018 Revenues: Total revenues $ — $ — $ — Operating expenses: Research and development 184,809 72,324 25,389 General and administrative 21,864 22,648 15,293 Total operating expenses 206,673 94,972 40,682 Loss from operations ( 206,673 ) ( 94,972 ) ( 40,682 ) Interest income 4,329 11,024 7,671 Other income 100 — 200 Net loss $ ( 202,244 ) $ ( 83,948 ) $ ( 32,811 ) Net loss per common share: Basic and diluted net loss per common share $ ( 13.09 ) $ ( 5.45 ) $ ( 2.22 ) Basic and diluted weighted average number of common shares outstanding 15,446,638 15,394,659 14,796,712 See accompanying notes to consolidated financial statements. F-5 Table of Contents MADRIGAL PHARMACEUTICALS, INC. Consolidated Statements of Comprehensive Loss (in thousands, except share and per share amounts) Year Ended December 31, 2020 2019 2018 Net Loss $ ( 202,244 ) $ ( 83,948 ) $ ( 32,811 ) Other comprehensive income (loss): Unrealized gain (loss) on available-for-sale securities ( 169 ) 535 ( 288 ) Comprehensive loss $ ( 202,413 ) $ ( 83,413 ) $ ( 33,099 ) See accompanying notes to consolidated financial statements. F-6 Table of Contents MADRIGAL PHARMACEUTICALS, INC. Consolidated Statements of Stockholders’ Equity (in thousands, except share and per share amounts) Preferred stock Common stock Additional paid-in Capital Accumulated other comprehensive income (loss) Accumulated deficit Total stockholders’ equity Shares Amount Shares Amount Balance at December 31, 2017 1,969,797 $ — 14,227,634 $ 1 $ 288,750 $ ( 31 ) $ ( 106,461 ) $ 182,259 Issuance of common shares in equity offering, excluding to related parties, net of transaction costs — — 1,079,580 1 311,824 — — 311,825 Sale of common shares to related parties and exercise of common stock options, net of transaction costs — — 101,809 — 2,510 — — 2,510 Compensation expense related to stock options for services — — — — 13,489 — — 13,489 Unrealized loss on marketable securities — — — — — ( 288 ) — ( 288 ) Net loss — — — — — — ( 32,811 ) ( 32,811 ) Balance at December 31, 2018 1,969,797 $ — 15,409,023 $ 2 $ 616,573 $ ( 319 ) $ ( 139,272 ) $ 476,984 Sale of common shares to related parties and exercise of common stock options, net of transaction costs — — 20,131 — 235 — — 235 Compensation expense related to stock options for services — — — — 22,759 — — 22,759 Unrealized gain on marketable securities — — — — — 535 — 535 Net loss — — — — — — ( 83,948 ) ( 83,948 ) Balance at December 31, 2019 1,969,797 $ — 15,429,154 $ 2 $ 639,567 $ 216 $ ( 223,220 ) $ 416,565 Issuance of common shares in equity offering, excluding to related parties, net of transaction costs — — 39,607 — 667 — — 667 Sale of common shares to related parties and exercise of common stock options, net of transaction costs — — 39,385 — 4,421 — — 4,421 Compensation expense related to stock options for services — — — — 20,730 — — 20,730 Unrealized loss on marketable securities — — — — — ( 169 ) — ( 169 ) Net loss — — — — — — ( 202,244 ) ( 202,244 ) Balance at December 31, 2020 1,969,797 $ — 15,508,146 $ 2 $ 665,385 $ 47 $ ( 425,464 ) $ 239,970 See accompanying notes to consolidated financial statements. F-7 Table of Contents MADRIGAL PHARMACEUTICALS, INC. Consolidated Statements of Cash Flows (in thousands, except share and per share amounts) Years Ended December 31, 2020 2019 2018 Cash flows from operating activities: Net loss $ ( 202,244 ) $ ( 83,948 ) $ ( 32,811 ) Adjustments to reconcile net loss to net cash used in operating activities: Stock-based compensation expense 20,730 22,759 13,489 Depreciation and amortization expense 471 112 96 Changes in operating assets and liabilities: Prepaid expenses and other current assets 138 332 ( 998 ) Accounts payable ( 161 ) ( 1,309 ) 558 Accrued expense 21,585 16,783 ( 2,168 ) Accrued interest, net of interest received on maturity of investments 1,920 3,647 ( 3,673 ) Net cash used in operating activities ( 157,561 ) ( 41,624 ) ( 25,507 ) Cash flows from investing activities: Purchases of marketable securities ( 329,342 ) ( 619,303 ) ( 614,358 ) Sales and maturities of marketable securities 489,456 650,182 234,304 Purchases of property and equipment, net of disposals ( 334 ) ( 172 ) ( 22 ) Net cash provided by (used in) investing activities 159,780 30,707 ( 380,076 ) Cash flows from financing activities: Proceeds from issuances of stock, excluding related parties, net of transaction costs 4,421 — 311,825 Proceeds from the sale of related party stock and exercise of common stock options, net of transaction costs 667 235 2,510 Net cash provided by financing activities 5,088 235 314,335 Net increase (decrease) in cash and cash equivalents 7,307 ( 10,682 ) ( 91,248 ) Cash and cash equivalents at beginning of period 46,697 57,379 148,627 Cash and cash equivalents at end of period $ 54,004 $ 46,697 $ 57,379 Supplemental disclosure of cash flow information: Obtaining a right-of-use asset in exchange for a lease liability $ 451 $ 900 $ — Purchases of property and equipment in accounts payable at period end — 897 — See accompanying notes to consolidated financial statements. F-8 Table of Contents MADRIGAL PHARMACEUTICALS, INC. Notes to Consolidated Financial Statements 1. Organization, Business and Basis of Presentation Organization and Business Madrigal Pharmaceuticals, Inc. (the “Company” or “Madrigal”) is a clinical-stage pharmaceutical company developing novel, high-quality, small-molecule drugs addressing major unmet needs in cardiovascular, metabolic, and liver diseases. The Company’s lead compound, MGL-3196 (resmetirom), is being advanced for non-alcoholic steatohepatitis (“NASH”), a liver disease that commonly affects people with metabolic diseases such as obesity and diabetes, and non-alcoholic fatty liver disease (“NAFLD”). The Company initiated two Phase 3 studies of resmetirom in NASH in 2019 that are ongoing. The Company previously completed Phase 2 studies of resmetirom in NASH in May of 2018 and Heterozygous Familial Hypercholesterolemia (“HeFH”) in February of 2018. Madrigal was originally incorporated as a private company (“Private Madrigal”) on August 19, 2011 and operations commenced in September 2011. On July 22, 2016, Private Madrigal completed a reverse merger (the “Merger”) into Synta Pharmaceuticals Corp. (“Synta”). Upon the consummation of the Merger, the historical financial statements of Private Madrigal became the Company’s historical financial statements. 2. Summary of Significant Accounting Policies Principle of Consolidation The consolidated financial statements include the financial statements of the Company and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. Use of Estimates The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect certain reported amounts of assets and liabilities, and the reported amounts of revenues and expenses during the reporting periods. The Company bases its estimates on historical experience and various other assumptions that management believes to be reasonable under the circumstances. Changes in estimates are recorded in the period in which they become known. Actual results could differ from those estimates. Cash and Cash Equivalents The Company considers all highly liquid investments with original maturities of three months or less at the date of purchase to be cash equivalents. The Company maintains its cash in bank accounts, the balance of which, at times, exceeds Federal Deposit Insurance Corporation insured limits. The primary objective of the Company’s investment activities is to preserve its capital for the purpose of funding operations and the Company does not enter into investments for trading or speculative purposes. The Company’s cash is deposited in highly rated financial institutions in the United States. The Company invests in money market funds and high-grade, commercial paper and corporate bonds, which management believes are subject to minimal credit and market risk. Marketable Securities Marketable securities consist of investments in high-grade corporate obligations, and government and government agency obligations that are classified as available-for-sale. Since these securities are available to fund current operations they are classified as current assets on the consolidated balance sheets. The Company adjusts the cost of available-for-sale debt securities for amortization of premiums and accretion of discounts to maturity. The Company includes such amortization and accretion as a component of interest income, net. Realized gains and losses and declines in value, if any, that the Company judges to be other-than-temporary on available-for-sale securities are reported as a component of interest income. To determine whether other-than-temporary impairment exists, the Company considers whether it intends to sell the debt security and, if the Company does not intend to sell the debt security, it considers available evidence to assess whether it is more likely than not that it will be required to sell the security before the recovery of its amortized cost basis. During the years ended December 31, 2020, 2019 and 2018, the Company determined it did not have any securities that were other-than-temporarily impaired. F-9 Table of Contents Marketable securities are stated at fair value, including accrued interest, with their unrealized gains and losses included as a component of accumulated other comprehensive income or loss, which is a separate component of stockholders’ equity. The fair value of these securities is based on quoted prices and observable inputs on a recurring basis. Realized gains and losses are determined on the specific identification method. During the years ended December 31, 2020, 2019 and 2018, the Company did not have any realized gains or losses on marketable securities. Fair Value of Financial Instruments The carrying amounts of the Company’s financial instruments, which include cash equivalents, and marketable securities, approximate their fair values. The fair value of the Company’s financial instruments reflects the amounts that would be received upon sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value hierarchy has the following three levels: Level 1—quoted prices in active markets for identical assets and liabilities. Level 2—observable inputs other than Level 1 inputs. Examples of Level 2 inputs include quoted prices in active markets for similar assets or liabilities and quoted prices for identical assets or liabilities in markets that are not active. Level 3—unobservable inputs that reflect the Company’s own assumptions about the assumptions market participants would use in pricing the asset or liability. Financial assets and liabilities are classified in their entirety within the fair value hierarchy based on the lowest level of input that is significant to the fair value measurement. The Company measures the fair value of its marketable securities by taking into consideration valuations obtained from third-party pricing sources. The pricing services utilize industry standard valuation models, including both income and market-based approaches, for which all significant inputs are observable, either directly or indirectly, to estimate fair value. These inputs include reported trades of and broker-dealer quotes on the same or similar securities, issuer credit spreads, benchmark securities and other observable inputs. As of December 31, 2020 and 2019, the Company’s financial assets valued based on Level 1 inputs consisted of cash and cash equivalents in a money market fund and its financial assets valued based on Level 2 inputs consisted of high-grade corporate bonds and commercial paper. During the years ended December 31, 2020, 2019 and 2018, the Company did not have any transfers of financials assets between Levels 1 and 2. As of December 31, 2020 and 2019, the Company did not have any financial liabilities that were recorded at fair value on a recurring basis on the balance sheet. Research and Development Costs Research and development costs are expensed as incurred. Research and development costs are comprised of costs incurred in performing research and development activities, including internal costs (including stock-based compensation), costs for consultants, milestone payments under licensing agreements, and other costs associated with the Company’s preclinical and clinical programs. In particular, the Company has conducted safety studies in animals, optimized and implemented the manufacturing of our drug, and conducted Phase 1-3 clinical trials, all of which are considered research and development expenditures. Management uses significant judgment in estimating the amount of research and development costs recognized in each reporting period. Management analyzes and estimates the progress of its preclinical studies and clinical trials, completion of milestones events per underlying agreements, invoices received and contracted costs when estimating the research and development costs to accrue in each reporting period. Actual results could differ from the Company’s estimates. The Company’s historical estimates for research and development costs have not been materially different from the actual costs. Patents Costs to secure and defend patents are expensed as incurred and are classified as general and administrative expense in the Company’s statements of operations. Patent expenses were approximately $ 353 thousand, $ 408 thousand and $ 226 thousand for the years ended December 31, 2020, 2019 and 2018, respectively. Stock-Based Compensation The Company recognizes stock-based compensation expense based on the grant date fair value of stock options granted to employees, officers and directors. The Company uses the Black-Scholes option pricing model to determine the grant date fair value as management believes it is the most appropriate valuation method for its option grants. The Black-Scholes model requires inputs for risk-free interest rate, dividend yield, volatility and expected lives of the options. The expected lives for options granted represent the F-10 Table of Contents period of time that options granted are expected to be outstanding. The Company uses the simplified method for determining the expected lives of options. Expected volatility is based upon an industry estimate or blended rate including the Company’s historical trading activity. The risk-free rate for periods within the expected life of the option is based on the U.S. Treasury yield curve in effect at the time of the grant. The Company estimates the forfeiture rate based on historical data. This analysis is re-evaluated at least annually and the forfeiture rate is adjusted as necessary. Certain of the employee stock options granted by the Company are structured to qualify as incentive stock options (ISOs). Under current tax regulations, the Company does not receive a tax deduction for the issuance, exercise or disposition of ISOs if the employee meets certain holding requirements. If the employee does not meet the holding requirements, a disqualifying disposition occurs, at which time the Company may receive a tax deduction. The Company does not record tax benefits related to ISOs unless and until a disqualifying disposition is reported. In the event of a disqualifying disposition, the entire tax benefit is recorded as a reduction of income tax expense. The Company has not recognized any income tax benefit for its share-based compensation arrangements due to the fact that the Company does not believe it is more likely than not it will realize the related deferred tax assets. Income Taxes The Company uses the asset and liability method to account for income taxes. Deferred tax assets and liabilities are determined based on the expected future tax consequences of temporary differences between the Company’s financial statement carrying amounts and the tax basis of assets and liabilities using enacted tax rates expected to be in effect in the years in which the differences are expected to reverse. The Company currently maintains a 100 % valuation allowance on its deferred tax assets. Comprehensive Loss Comprehensive loss is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. Changes in unrealized gains and losses on marketable securities represent the only difference between the Company’s net loss and comprehensive loss. Basic and Diluted Loss Per Common Share Basic net loss per share is computed using the weighted average number of common shares outstanding during the period, excluding restricted stock that has been issued but is not yet vested. Diluted net loss per common share is computed using the weighted average number of common shares outstanding and the weighted average dilutive potential common shares outstanding using the treasury stock method. However, for the years ended December 31, 2020, 2019 and 2018, diluted net loss per share is the same as basic net loss per share as the inclusion of weighted average shares of unvested restricted common stock and common stock issuable upon the exercise of stock options would be anti-dilutive. The following table summarizes outstanding securities not included in the computation of diluted net loss per common share as their inclusion would be anti-dilutive: As of December 31, 2020 2019 2018 Common stock options 1,837,540 1,461,987 1,132,618 Unvested restricted common stock — — 52,063 Preferred stock 1,969,797 1,969,797 1,969,797 Recent Accounting Pronouncements None. 3. Liquidity and Uncertainties The Company is subject to risks common to development stage companies in the Bio-Pharmaceutical industry including, but not limited to, uncertainty of product development and commercialization, dependence on key personnel, uncertainty of market acceptance of products and product reimbursement, product liability, uncertain protection of proprietary technology, potential inability to raise additional financing necessary for development and commercialization, and compliance with the U.S. Food and Drug Administration and other government regulations. F-11 Table of Contents The Company has incurred losses since inception, including approximately $ 202.2 million for the year ended December 31, 2020, resulting in an accumulated deficit of approximately $ 425.5 million and $ 223.2 million as of December 31, 2020 and 2019, respectively. Management expects to incur losses for the foreseeable future. To date, the Company has funded its operations primarily through the issuance of convertible debt, the proceeds from the Merger on July 22, 2016, and proceeds from sales of the Company’s common and Series A Convertible Preferred Stock (see Note 6). The Company believes that its cash, cash equivalents and marketable securities at December 31, 2020 will be sufficient to fund operations past one year from the issuance of these financial statements. To meet its future capital needs, the Company intends to raise additional capital through debt or equity financings, collaborations, partnerships or other strategic transactions. However, there can be no assurance that the Company will be able to complete any such transactions on acceptable terms or otherwise. The inability of the Company to obtain sufficient funds on acceptable terms when needed could have a material adverse effect on the Company’s business, results of operations and financial condition. The Company has the ability to delay certain research activities and related clinical expenses if necessary due to liquidity concerns until a date in which those concerns are relieved. 4. Cash, Cash Equivalents and Marketable Securities A summary of cash, cash equivalents and available-for-sale marketable securities held by the Company as of December 31, 2020 and 2019 is as follows (in thousands): December 31, 2020 Cost Unrealized gains Unrealized losses Fair value Cash and cash equivalents: Cash (Level 1) $ 716 $ — $ — $ 716 Money market funds (Level 1) 53,288 — — 53,288 Total cash and cash equivalents 54,004 — — 54,004 Marketable securities: Corporate debt securities due within 1 year of date of purchase (Level 2) 227,172 80 ( 36 ) 227,216 Corporate debt securities due within 1 to 2 years of date of purchase (Level 2) 2,926 4 ( 1 ) 2,929 Total cash, cash equivalents and marketable securities $ 284,102 $ 84 $ ( 37 ) $ 284,149 December 31, 2019 Cost Unrealized gains Unrealized losses Fair value Cash and cash equivalents: Cash (Level 1) $ 1,772 $ — $ — $ 1,772 Money market funds (Level 1) 44,925 — — 44,925 Total cash and cash equivalents 46,697 — — 46,697 Marketable securities: Corporate debt securities due within 1 year of date of purchase (Level 2) 309,365 220 ( 40 ) 309,545 Corporate debt securities due within 1 to 2 years of date of purchase (Level 2) 82,767 39 ( 3 ) 82,803 Total cash, cash equivalents and marketable securities $ 438,829 $ 259 $ ( 43 ) $ 439,045 F-12 Table of Contents 5. Accrued Liabilities Accrued liabilities as of December 31, 2020 and 2019 consisted of the following (in thousands): December 31, 2020 December 31, 2019 Contract research organization costs $ 31,646 $ 13,775 Other clinical study related costs 3,901 2,621 Compensation and benefits 4,686 2,779 Professional fees 830 1,177 Other 4,159 3,285 Total accrued liabilities $ 45,222 $ 23,637 6. Stockholders’ Equity Common Stock Each common stockholder is entitled to one vote for each share of common stock held. The common stock will vote together with all other classes and series of stock of the Company as a single class on all actions to be taken by the Company’s stockholders. Each share of common stock is entitled to receive dividends, as and when declared by the Company’s board of directors. The Company has never declared cash dividends on its common stock and does not expect to do so in the foreseeable future. Preferred Stock The Series A Preferred Stock has a par value of $ 0.0001 per share and is convertible into shares of the common stock at a one -to-one ratio, subject to adjustment as provided in the Certificate of Designation of Preferences, Rights and Limitations of Series A Convertible Preferred Stock, that the Company filed with the Secretary of State of the State of Delaware on June 21, 2017 (the “Series A Certificate”). The terms of the Series A Preferred Stock are set forth in the Series A Certificate. Each share of the Series A Preferred Stock is convertible into shares of Common Stock following notice that may be given at the holder’s option. Upon any liquidation, dissolution or winding-up of the Company, whether voluntary or involuntary, after the satisfaction in full of the debts of the Company and the payment of any liquidation preference owed to the holders of shares of capital stock of the Company ranking prior to the Series A Preferred Stock upon liquidation, the holders of the Series A Preferred Stock shall participate pari passu with the holders of the Common Stock (on an as-if-converted-to-Common-Stock basis) in the net assets of the Company. Shares of the Series A Preferred Stock will generally have no voting rights, except as required by law. Shares of the Series A Preferred Stock will be entitled to receive dividends before shares of any other class or series of capital stock of the Company (other than dividends in the form of the Common Stock) equal to the dividend payable on each share of the Common Stock, on an as-converted basis. At-The-Market Issuance Sales Agreement In November 2020, the Company entered into an at-the-market sales agreement (the “2020 Sales Agreement”), with Cowen and Company, LLC (“Cowen”), pursuant to which the Company may, from time to time, issue and sell shares of its common stock. The Company is not obligated to make any sales of its common stock under the 2020 Sales Agreement. Any shares sold will be sold pursuant to the effective shelf registration statement on Form S-3, (the “Registration Statement”), and the prospectus supplement to the Registration Statement. The Sales Agreement authorizes an aggregate offering of up to $ 200 million in shares of our common stock, from time to time, at the Company’s option, through Cowen as its sales agent. Sales of common stock through Cowen may be made by any method that is deemed an “at-the-market” offering as defined in Rule 415 promulgated under the Securities Act of 1933, as amended, including by means of ordinary brokers’ transactions at market prices, in block transactions or as otherwise agreed by the Company and Cowen. Subject to the terms and conditions of the 2020 Sales Agreement, Cowen will use commercially reasonable efforts consistent with its normal trading and sales practices to sell the common stock based upon the Company’s instructions (including any price, time or size limits or other customary parameters or conditions the Company may impose). The 2020 Sales Agreement may be terminated by the Company at any time upon 10 days’ notice. F-13 Table of Contents As of December 31, 2020, 39,607 shares have been sold under the 2020 Sales Agreement for an aggregate of approximately $ 4.8 million in gross proceeds. Net proceeds to the Company were approximately $ 4.4 million after deducting commissions and other transaction costs. Approximately $ 195.2 million remained reserved under the Company’s shelf registration statement and the applicable prospectus supplement for possible future issuance under the 2020 Sales Agreement. June 2018 Registered Offering of Common Stock In June 2018, the Company entered into an underwriting agreement with Goldman Sachs & Co. LLC, as representative of the several underwriters named therein (the “June 2018 Underwriters”), relating to an underwritten public offering (the “June 2018 Offering”) of 1,079,580 shares of the Company’s common stock, including 95,973 shares of the Company’s common stock purchased by the June 2018 Underwriters pursuant to a 30 -day option to purchase such additional shares granted therein, at a public offering price of $ 305.00 per share. The June 2018 Offering resulted in gross proceeds to the Company of approximately $ 329.3 million, and net proceeds to the Company of approximately $ 311.8 million, after deducting the June 2018 Underwriters’ discount and other offering costs. The June 2018 Offering closed on June 11, 2018. 7. Stock-based Compensation The 2015 Stock Plan, as amended, is our primary plan through which equity based grants are awarded. We ceased making new awards under the 2006 Stock Plan upon adoption of the 2015 Stock Plan. The 2015 Stock Plan provides for the grant of incentive stock options, non-statutory stock options, restricted stock and other stock-based compensation awards to employees, officers, directors, and consultants of the Company. The administration of the 2015 Stock Plan is under the general supervision of the Compensation Committee of the Board of Directors. The terms of stock options awarded under the 2015 Stock Plan, in general, are determined by the Compensation Committee, provided the exercise price per share generally shall not be set at less than the fair market value of a share of the common stock on the date of grant and the term shall not be greater than ten years from the date the option is granted. As of December 31, 2020, the Company had options outstanding to purchase 1,837,540 shares of its common stock, which includes options outstanding under its 2006 Stock Plan. As of December 31, 2020, 936,407 shares were available for future issuance. The following table summarizes stock option activity during the twelve months ended December 31, 2020: Shares Weighted average exercise price Weighted average remaining contractual life (years) Aggregate intrinsic value (in thousands) Outstanding at January 1, 2020 1,461,987 $ 64.67 — — Options granted 449,625 92.51 — — Options exercised ( 39,385 ) 16.94 — — Options cancelled ( 34,687 ) 102.35 — — Outstanding at December 31, 2020 1,837,540 $ 71.80 6.95 $ 91,776 Exercisable at December 31, 2020 1,185,889 $ 55.24 6.09 $ 82,075 The total cash received by the Company as a result of stock option exercises was $ 0.7 million, $ 0.2 million and $ 2.5 million for the years ended December 31, 2020, 2019, and 2018. The total intrinsic value of options exercised was $ 4.1 million in the year ended December 31, 2020. The weighted-average grant date fair values, based on the Black-Scholes option model, of options granted during the year ended December 31, 2020, 2019 and 2018 was $ 68.07 , $ 91.19 and $ 137.49 , respectively. Restricted Common Stock The Company’s share-based compensation plan provides for awards of restricted shares of common stock to employees, officers, directors and consultants to the Company. Restricted stock awards are subject to forfeiture if employment or service terminates during the prescribed retention period. Restricted shares vest over the service period. There were no outstanding restricted shares or activity in 2020. F-14 Table of Contents Stock-Based Compensation Expense Stock-based compensation expense during the years ended December 31, 2020, 2019 and 2018 was as follows (in thousands): Years Ended December 31, 2020 2019 2018 Stock-based compensation expense by type of award: Stock options $ 20,730 $ 22,487 $ 12,997 Restricted stock — 272 492 Total stock-based compensation expense $ 20,730 $ 22,759 $ 13,489 Effect of stock-based compensation expense by line item: Research and development $ 8,833 $ 8,277 $ 3,707 General and administrative 11,897 14,482 9,782 Total stock-based compensation expense included in net loss $ 20,730 $ 22,759 $ 13,489 Unrecognized stock-based compensation expense on stock options as of December 31, 2020 was $ 38.8 million with a weighted average remaining period of 2.6 years. 8. Leases In 2019, the Company entered into an operating lease for office space, which was renewed and extended in 2020. We adopted ASU 2016-02, “Leases,” on January 1, 2019 requiring, among other changes, operating and finance leases with terms exceeding twelve months to be recognized as a right-of-use asset (or “ROU”) and lease liabilities on the balance sheet. Operating lease ROU assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at the commencement date. The lease term is determined to be the non-cancelable period including any lessee renewal options that are considered reasonably certain of exercise. The interest rate implicit in lease contracts is typically not readily determinable. As such, the Company used judgment to determine an appropriate incremental borrowing rate, which is the rate incurred to borrow on a collateralized basis over a similar term in a similar economic environment. Future minimum payments under the Company’s operating leases related to the ROU asset and lease liability as of December 31, 2020 was as follows (in thousand): Operating Leases 2021 370 2022 371 2023 155 Thereafter — Total minimum payments $ 896 Less: imputed interest 110 Present value of lease liabilities $ 786 As of December 31, 2020, the weighted average remaining operating lease term was 2.4 years and the weighted average discount rate used to determine the operating lease liabilities was 3.25 %. Cash paid related to the lease liability was $ 303 and $ 297 thousand for years ended December 31, 2020 and 2019 respectively. Operating lease costs during the year ended December 31, 2020 was $ 347 and $ 386 thousand for years ended December 31, 2020 and 2019 respectively. Rent expense during the year ended December 31, 2020 and 2019 was $ 0 thousand and $ 239 thousand, respectively. Short term and variable leases costs were immaterial during the years ended December 31, 2020, 2019 and 2018. 9. Commitments and Contingencies The Company has a Research, Development and Commercialization Agreement with Hoffmann-La Roche (“Roche”) which grants the Company a sole and exclusive license to develop, use, sell, offer for sale and import any Licensed Product as defined by the agreement. The agreement requires future milestone payments to Roche. In 2019, the Company commenced a Phase 3 study in Non-Alcoholic Steatohepatitis (NASH), which triggered a $ 2 million milestone payment under the agreement. Remaining milestones under F-15 Table of Contents the agreement total $ 8 million and are earned by achieving specified objectives related to future regulatory approval in the United States and Europe of a product developed from resmetirom. A single-digit royalty payment range is based on net sales of products developed from resmetirom, subject to certain reductions. Except as described above, the Company has not achieved any additional product development or regulatory milestones and had no Licensed Product sales for the years ended December 31, 2020, 2019 and 2018. The Company has entered into customary contractual arrangements and letters of intent in preparation for and in support of the Phase 3 clinical trials. 10. Income Taxes At December 31, 2020, the Company had federal net operating loss (“NOL”) carryforwards of approximately $ 99.9 million available to reduce future taxable income, of which $ 40.4 million will expire between 2031 and 2037. The Company also has state operating loss carryforwards of approximately $ 88.6 million, available to reduce future taxable income, which expire between 2031 and 2040. The Company has unused federal research and development carryforwards of approximately $ 13.4 million which will begin to expire in 2031. The Internal Revenue Code (“IRC”) limits the amounts of NOL carryforwards that a Company may use in any one year in the event of certain cumulative changes in ownership over a three-year period as described in Section 382 of the IRC. Such change in ownership could limit the Company’s utilization of the NOL, and could be triggered by subsequent sales of securities by the Company or stockholders. The deferred tax asset related to the NOL reflected on the financial statements could be affected by this limitation. Although a formal analysis has not been completed, the Company has determined that an ownership change likely occurred for Madrigal during the year ended December 31, 2017. The net operating losses are expected to be subject to an annual limitation; however, none of these NOLs is expected to expire before becoming available to reduce future taxable income. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. As there is no assurance of future taxable income, a full valuation allowance has been established to offset the deferred tax assets. The valuation allowance increased $ 66.6 million for the year ended December 31, 2020. Changes in the deferred tax asset will be recorded as an income tax benefit or expense on the accompanying consolidated statements of operations. Entities are also required to evaluate, measure, recognize and disclose any uncertain income tax provisions taken on their income tax returns. The Company has analyzed its tax positions and has concluded that as of December 31, 2020 there were no uncertain positions. The 2016 through 2020 tax returns are open to review by the IRS and state taxing authorities. Interest and penalties, if any, as they relate to income taxes assessed, are included in the income tax provision. There was no income tax related interest and penalties included in the income tax provision for 2020. F-16 Table of Contents Temporary differences that give rise to deferred tax assets and liabilities are as follows (in thousands): For the years ended December 31, 2020 2019 2018 Deferred Tax Liabilities Unrealized gains on investments $ 14 $ 62 $ — Total Deferred Tax Liabilities $ 14 $ 62 $ — Deferred Tax Assets Charitable contributions $ 51 $ 15 $ 13 Accrued expenses 1,318 759 498 Intangibles 883 983 477 Stock compensation 16,812 10,943 4,395 Property, plant & equipment 68 13 9 Unrealized loss on investment — — 92 Net operating losses 27,933 17,635 14,851 Capitalized R&D 71,128 29,364 15,108 R&D credit 14,205 6,141 3,505 Total deferred tax assets before valuation allowance 132,398 65,853 38,948 Valuation allowance ( 132,384 ) ( 65,791 ) ( 38,948 ) Total deferred tax assets 14 62 — Net deferred tax assets $ — $ — $ — Differences between the effective income tax rate and the US statutory rate were as follows (in thousands): For the years ended December 31, 2020 2019 2018 Tax benefit at U.S. federal statutory rate $ ( 42,471 ) $ ( 17,629 ) $ ( 6,890 ) Stock based compensation ( 68 ) ( 47 ) ( 3,415 ) Other nondeductible expenses 1 14 — State income taxes benefit before valuation allowance, net of federal benefit ( 16,580 ) ( 6,613 ) ( 5,460 ) Increase in domestic valuation allowance 66,593 26,843 17,529 Research and development credit ( 7,472 ) ( 2,636 ) ( 1,604 ) Other adjustments ( 3 ) 68 ( 160 ) Income tax expense (benefit) $ — $ — $ — F-17 Table of Contents 11. Quarterly Financial Data (unaudited) The following tables present a summary of quarterly results of operations for 2020 and 2019 (in thousands, except shares and per share data): Three months ended March 31, 2020 June 30, 2020 September 30, 2020 December 31, 2020 Revenues: Total revenues $ — $ — $ — $ — Operating expenses: Research and development 33,400 44,688 53,292 53,429 General and administrative 4,605 5,639 5,494 6,126 Total operating expenses 38,005 50,327 58,786 59,555 Loss from operations ( 38,005 ) ( 50,327 ) ( 58,786 ) ( 59,555 ) Interest income 1,870 1,204 823 432 Other income — 100 — — Net loss $ ( 36,135 ) $ ( 49,023 ) $ ( 57,963 ) $ ( 59,123 ) Net loss per common share: Basic and diluted net loss per common share $ ( 2.34 ) $ ( 3.18 ) $ ( 3.75 ) $ ( 3.82 ) Basic and diluted weighted average number of common shares outstanding 15,429,154 15,433,348 15,448,425 15,475,291 Three months ended March 31, 2019 June 30, 2019 September 30, 2019 December 31, 2019 Revenues: Total revenues $ — $ — $ — $ — Operating expenses: Research and development 12,373 15,594 19,447 24,910 General and administrative 5,746 7,110 4,748 5,044 Total operating expenses 18,119 22,704 24,195 29,954 Loss from operations ( 18,119 ) ( 22,704 ) ( 24,195 ) ( 29,954 ) Interest income 3,039 3,005 2,766 2,214 Other income — — — — Net loss $ ( 15,080 ) $ ( 19,699 ) $ ( 21,429 ) $ ( 27,740 ) Net loss per common share: Basic and diluted net loss per common share $ ( 0.98 ) $ ( 1.28 ) $ ( 1.39 ) $ ( 1.80 ) Basic and diluted weighted average number of common shares outstanding 15,364,465 15,368,986 15,415,096 15,429,154 12. Subsequent Event As of February 24 , 2021 the company has sold 549,617 shares under the 2020 Sales Agreement (described in Note 6) for an aggregate of approximately $ 67.8 million in gross proceeds in 2021 to date. Net proceeds to the Company were approximately $ 66.5 million after deducting commissions and other transaction costs. Approximately $ 127.3 million remained reserved under the Company’s shelf registration statement and the applicable prospectus supplement for possible future issuance under the 2020 Sales Agreement. F-18