Business Context and Reporting Period
Company: Madrigal Pharmaceuticals, Inc.
Filing Type: Form 8-K (Current Report)
Date of Report: March 27, 2017
Subject: Non-reliance on previously issued financial statements and restatement of earnings per share (EPS) for the three and nine months ended September 30, 2015 and 2016.
Key Financial Metrics and Restatement Impact
The filing discloses a restatement of EPS due to an error in calculating weighted average shares outstanding. The error involved incorrectly including shares issued upon conversion of convertible notes payable during the reverse merger with Synta Pharmaceuticals Corp. in the share count.
Impact on Financial Statements:
- Net Loss: No impact. Previously reported net losses remain unchanged.
- Assets, Liabilities, Expenses, Cash Flows: No impact.
- Weighted Average Shares Outstanding: Significantly reduced for all restated periods.
- Earnings Per Share (EPS): Basic and diluted net loss per share increased (became more negative) due to the reduced share count.
| Period | Net Loss (Unchanged) | Previously Reported EPS | Restated EPS | Previously Reported Shares | Restated Shares |
|---|---|---|---|---|---|
| Three Months Ended Sept 30, 2016 | $(14,048,740) | $(1.34) | $(1.59) | 10,462,182 | 8,847,155 |
| Nine Months Ended Sept 30, 2016 | $(18,638,589) | $(2.24) | $(6.04) | 8,329,548 | 3,087,588 |
| Three Months Ended Sept 30, 2015 | $(1,799,834) | $(0.25) | $(10.46) | 7,253,655 | 172,045 |
| Nine Months Ended Sept 30, 2015 | $(4,962,094) | $(0.68) | $(29.15) | 7,253,655 | 170,227 |
Material Changes and Internal Controls
Material Weakness Identified: Management concluded that the errors resulted from a material weakness in internal controls over financial reporting. Specifically, controls failed to ensure the accuracy of EPS calculations and the retrospective application of the recapitalization in the reverse merger.
Remediation: The Company modified its procedures for calculating EPS and provided additional instruction to accounting staff. Management believes these steps will remediate the weakness in future periods.
Effectiveness of Controls: Management concluded that disclosure controls and procedures were not effective as of the date of the filing.
Guidance, Outlook, and Risks
Forward-Looking Statements: The filing includes statements regarding the ongoing evaluation of the restatement's impact on internal controls. These are subject to risks and uncertainties.
Accountant Discussions: The Audit Committee discussed the restatement with Friedman LLP (auditor for fiscal year 2015) and PricewaterhouseCoopers LLP (auditor for fiscal year 2016).
Financial Outlook: The filing does not provide specific revenue, profit, or cash flow guidance for future periods, nor does it detail operational outlook beyond the restatement context.
Key Facts for Investor Verification
- Verify the corrected weighted average shares outstanding in subsequent filings to ensure the restatement logic is consistently applied.
- Review the Company's next Form 10-K or 10-Q to confirm the remediation of the material weakness in internal controls.
- Note that while EPS figures changed significantly, the underlying net loss and cash flow positions for the periods in question remain unchanged.
- Confirm the status of the reverse merger accounting treatment in future reports to ensure no further retrospective adjustments are required.