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Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
 Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
For the quarterly period ended September 30, 2019.
 Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
For the transition period from                       to                     .
Commission File Number
001-35342
NEWLINK GENETICS CORPORATION
(Exact name of Registrant as specified in Its Charter)
Delaware
42-1491350
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
2503 South Loop Drive
AmesIowa 50010
(515) 296-5555
(Address, including zip code, and telephone number, including area code, of principal executive offices)
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common StockNLNKThe Nasdaq Stock Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes ý    No o

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý    No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o
Accelerated filer o
Non-accelerated filer 
Smaller reporting company 
Emerging growth company 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes     No ý
As of October 31, 2019, there were 37,314,076 shares of the registrant’s Common Stock, par value $0.01 per share, outstanding.




Table of Contents

http://api.tenkwizard.com/cgi/image?quest=1&rid=23&ipage=13185415&doc=11

NewLink Genetics Corporation
FORM 10-Q
Table of Contents
Page
Condensed Consolidated Balance Sheets as of September 30, 2019 and December 31, 2018
Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2019 and 2018
Condensed Consolidated Statement of Stockholders’ Equity for the Nine Months Ended September 30, 2019 and 2018
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2019 and 2018


2

Table of Contents

PART I

NewLink Genetics Corporation
Condensed Consolidated Balance Sheets
(unaudited)
(In thousands, except share data)
September 30,December 31,
20192018
Assets
Current assets:
Cash and cash equivalents
$98,527  $120,738  
Prepaid expenses and other current assets
3,311  5,536  
Income tax receivable
76  339  
Other receivables
740  459  
Total current assets
102,654  127,072  
Property and equipment, net
2,889  3,727  
Right-of-use asset
1,042    
Income tax receivable
69  140  
Total non-current assets
4,000  3,867  
Total assets$106,654  $130,939  
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable
$145  $555  
Accrued expenses
12,125  8,139  
Current portion of deferred rent
  92  
Current portion of lease liability
1,712    
Current portion of notes payable
58  61  
Total current liabilities
14,040  8,847  
Long-term liabilities:
Royalty obligation payable to Iowa Economic Development Authority
6,000  6,000  
Notes payable
  43  
Lease liability
217    
Deferred rent
  906  
Total long-term liabilities6,217  6,949  
Total liabilities20,257  15,796  
Stockholders' equity:
Blank check preferred stock, $0.01 par value: Authorized shares — 5,000,000 at September 30, 2019 and December 31, 2018; issued and outstanding shares — 0 at September 30, 2019 and December 31, 2018
    
Common stock, $0.01 par value: Authorized shares — 75,000,000 at September 30, 2019 and December 31, 2018; issued 37,426,844 and 37,343,547 at September 30, 2019 and December 31, 2018, respectively; and outstanding 37,314,076 and 37,251,220 at September 30, 2019 and December 31, 2018, respectively
373  373  
Additional paid-in capital
413,205  407,199  
Treasury stock, at cost: 112,768 and 92,327 shares at September 30, 2019 and December 31, 2018, respectively
(1,451) (1,417) 
Accumulated deficit
(325,730) (291,012) 
Total stockholders' equity
86,397  115,143  
Total liabilities and stockholders' equity$106,654  $130,939  
See accompanying notes to condensed consolidated financial statements.

3

Table of Contents

NewLink Genetics Corporation
Condensed Consolidated Statements
of Operations
(unaudited)
(In thousands, except share and per share data)

Three Months Ended September 30,Nine Months Ended September 30,
2019201820192018
Operating revenues:
Grant revenue
$  $  $  $11,268  
Licensing and collaboration revenue
246  120  503  1,004  
Total operating revenues
246  120  503  12,272  
Operating expenses:
 Research and development7,024  7,570  17,464  39,972  
General and administrative
8,279  7,588  19,484  23,792  
Total operating expenses
15,303  15,158  36,948  63,764  
Loss from operations(15,057) (15,038) (36,445) (51,492) 
Other income and expense:
Miscellaneous (expense) income, net(33) (18) (38) 16  
Interest income
567  664  1,815  1,510  
Interest expense
(25) (2) (50) (51) 
Other income, net
509  644  1,727  1,475  
Net loss before taxes(14,548) (14,394) (34,718) (50,017) 
Income tax benefit  6,991    6,991  
Net loss$(14,548) $(7,403) $(34,718) $(43,026) 
Basic and diluted loss per share$(0.39) $(0.20) $(0.93) $(1.16) 
Basic and diluted average shares outstanding37,308,523  37,214,363  37,286,930  37,178,542  
See accompanying notes to condensed consolidated financial statements.







4

Table of Contents

NewLink Genetics Corporation
Condensed Consolidated Statement of Stockholders' Equity
(unaudited)
(In thousands, except share data)

Nine Month Period ended September 30, 2019
Number of
Common
Shares
Outstanding
Common
Stock
Additional
Paid-in
Capital
Treasury Stock
Accumulated Deficit
Total
Stockholders' Equity
Balance at December 31, 201837,251,220  $373  $407,199  $(1,417) $(291,012) $115,143  
Share-based compensation
—  —  1,944  —  —  1,944  
Restricted stock vested44,329  —  —  —  —    
Repurchase of common stock(19,447) —  —  (32) —  (32) 
Net loss—  —  —  —  (10,036) (10,036) 
Balance at March 31, 201937,276,102  373  409,143  (1,449) (301,048) 107,019  
Share-based compensation—  —  1,773  —  —  1,773  
Restricted stock vested1,250  —  —  —  —    
Sales of shares under stock purchase plan23,967  —  30  —  —  30  
Repurchase of common stock(359) —  —  (1) —  (1) 
Net loss—  —  —  —  (10,134) (10,134) 
Balance at June 30, 201937,300,960  $373  410,946  $(1,450) (311,182) 98,687  
Share-based compensation—  —  2,259  —  —  2,259  
Restricted stock vested13,751  —  —  —  —    
Repurchase of common stock(635) —  —  (1) —  (1) 
Net loss—  —  —  —  (14,548) (14,548) 
Balance at September 30, 201937,314,076  373  413,205  (1,451) (325,730) 86,397  
   
Nine Month Period ended September 30, 2018
Number of
Common
Shares
Outstanding
Common
Stock
Additional
Paid-in
Capital
Treasury Stock
Accumulated Deficit
Total
Stockholders' Equity
Balance at December 31, 201737,109,556  $372  $389,786  $(1,142) $(237,459) $151,557  
Share-based compensation—  —  4,820  —  —  4,820  
Restricted stock vested84,262  1  105  —  —  106  
Repurchase of common stock(28,720) —  —  (261) —  (261) 
Cumulative effect of accounting change—  —  —  —  42  42  
Net loss—  —  —  —  (18,310) (18,310) 
Balance at March 31, 201837,165,098  373  394,711  (1,403) (255,727) 137,954  
Share-based compensation—  —  4,177  —  —  4,177  
Restricted stock vested1,250  —  —  —  —    
Sales of shares under stock purchase plan32,111  —  130  —  —  130  
Repurchase of common stock(359) —  —  (2) —  (2) 
Net loss—  —  —  —  (17,313) (17,313) 
Balance at June 30, 201837,198,100  $373  399,018  $(1,405) (273,040) 124,946  
Share-based compensation—     —  4,623  —     —  $4,623  
Restricted stock vested19,881  —  33  —  —  $33  
Repurchase of common stock(1,089) —  —  (4) —  $(4) 
Net loss—  —  —  —  (7,403) $(7,403) 
Balance at September 30, 201837,216,892  $373  $403,674  $(1,409) $(280,443) $122,195  

See accompanying notes to condensed consolidated financial statements.
5


NewLink Genetics Corporation
Condensed Consolidated Statements of Cash Flows
(unaudited)
(In thousands)
Nine Months Ended September 30,
20192018
Cash Flows From Operating Activities
    Net loss$(34,718) $(43,026) 
Adjustments to reconcile net loss to net cash used in operating activities:
Share-based compensation5,976  13,620  
Depreciation and amortization432  901  
 Impairment of fixed assets351    
    Gain on sale of fixed assets40  (16) 
 Amortization of right-of-use asset and change in operating lease liability(111)   
Changes in operating assets and liabilities:
Prepaid expenses and other current assets2,225  842  
    Other receivables(281) 9,982  
    Accounts payable and accrued expenses3,576  (11,749) 
    Income taxes receivable334  (7,042) 
    Unearned revenue  (56) 
    Deferred rent  (78) 
Net cash used in operating activities(22,176) (36,622) 
Cash Flows From Investing Activities
    Purchase of equipment  (7) 
    Proceeds on sale of equipment15  118  
Net cash provided by investing activities15  111  
Cash Flows From Financing Activities
    Issuance of common stock, net of offering costs30  269  
    Repurchase of common stock(34) (267) 
    Principal payments on notes payable(46) (138) 
Net cash used in financing activities(50) (136) 
Net decrease in cash and cash equivalents(22,211) (36,647) 
Cash and cash equivalents at beginning of period120,738  158,708  
Cash and cash equivalents at end of period$98,527  $122,061  
Supplemental disclosure of cash flows information:
Cash paid for interest$3  $6  
Cash paid for taxes, net$14  $  
Cash refunds received for taxes, net$348  $4  
See accompanying notes to condensed consolidated financial statements.

6

Table of Contents
NewLink Genetics Corporation
Notes to Condensed Consolidated Financial Statements
(unaudited)
1.     Description of Business
On June 4, 1999, NewLink Genetics Corporation (NewLink) was incorporated as a Delaware corporation. NewLink was formed to develop treatments for patients with cancer and other diseases. NewLink initiated operations in April 2000.
NewLink and its subsidiaries (the Company) have historically devoted substantially all of their efforts toward research and development. The Company has never earned revenue from commercial sales of its drugs.
The accompanying condensed consolidated financial statements as of September 30, 2019 and for the three and nine months ended September 30, 2019 have been prepared assuming the Company will continue as a going concern.
The Company’s cash and cash equivalents as of September 30, 2019 are expected to be adequate to satisfy the Company’s liquidity requirements through 2021. If available liquidity becomes insufficient to meet the Company’s operating obligations as they come due, the Company’s plans include selling additional shares of common stock, alternative funding arrangements and/or reducing expenditures as necessary to meet the Company’s cash requirements. However, there is no assurance that, if required, the Company will be able to raise additional capital or reduce discretionary spending to provide the required liquidity. Failure by the Company to successfully execute its plans or otherwise address its liquidity needs may have a material adverse effect on its business and financial position and may materially affect the Company’s ability to continue as a going concern.
Proposed Merger with Lumos Pharma
On September 30, 2019, the Company, Cyclone Merger Sub, Inc., a wholly-owned subsidiary of the Company (Merger Sub), and Lumos Pharma, Inc., a privately-held Delaware corporation (Lumos), entered into an Agreement and Plan of Merger and Reorganization (the Merger Agreement), pursuant to which, among other things, subject to the satisfaction or waiver of the conditions set forth in the Merger Agreement, Merger Sub will merge with and into Lumos, with Lumos surviving as a wholly-owned subsidiary of NewLink (the Merger). Following the Merger, NewLink will change its name to “Lumos Pharma, Inc.” and Lumos will change its name to a name mutually agreed upon by the Company and Lumos.
At the effective time of the Merger (Effective Time), each share of Lumos capital stock outstanding immediately prior to the Effective Time (excluding shares of Lumos capital stock held as treasury stock or held or owned by Lumos or Merger Sub prior to the Effective Time and shares held by Lumos stockholders who have exercised and perfected appraisal rights in accordance with Delaware law) shall be automatically converted solely into the right to receive a number of shares of NewLink’s common stock equal to the amount determined pursuant to a charter amendment to Lumos’ certificate of incorporation that will be filed prior to the Effective Time, at exchange ratios applicable to each type of Lumos capital stock. Pursuant to such conversion, immediately following the Merger, former Lumos stockholders will own approximately 50% of the aggregate number of shares of Company common stock issued and outstanding following the consummation of the Merger (the Post-Closing Shares), and the stockholders of the Company as of immediately prior to the Merger are expected to own approximately 50% of the aggregate number of Post-Closing Shares. Outstanding options to purchase Lumos common stock will be assumed by NewLink and converted into options to purchase a number of shares of NewLink’s common stock at the exchange ratio applicable to exchanging shares of Lumos common stock for NewLink’s common stock.
The Merger Agreement includes customary representations, warranties and covenants made by the Company and Lumos, including covenants relating to the Company's and Lumos' conduct of their respective businesses between the date of signing the Merger Agreement and the closing of the Merger. Consummation of the Merger is subject to certain closing conditions, including, among other things, approval by the stockholders of the Company and Lumos. Lumos stockholders approved the Merger in September 2019. The Merger Agreement contains certain termination rights for both the Company and Lumos, and further provides that, upon termination of the Merger Agreement under specified circumstances, the Company or Lumos, as applicable, may be required to pay the other party a termination fee of $2.0 million.
The Merger Agreement contemplates that the Company will also seek approval from its stockholders to effect a reverse stock split, with the split ratio to be mutually agreed to by the Company and Lumos immediately prior to the Effective Time. The Merger is expected to close in the first quarter of 2020.
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NewLink Genetics Corporation
Notes to Condensed Consolidated Financial Statements
(unaudited)
2. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared and presented by the Company in accordance with U.S. generally accepted accounting principles (U.S. GAAP) and the rules and regulations of the U.S. Securities and Exchange Commission (the SEC), and, in management’s opinion, reflect all adjustments necessary to present fairly the Company’s interim condensed financial information.
Certain information and footnote disclosures normally included in the Company’s annual financial statements prepared in accordance with U.S. GAAP have been condensed or omitted. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2018, included in the Company’s Annual Report on Form 10-K. The financial results for any interim period are not necessarily indicative of financial results for the full year.
3.     Significant Accounting Policies
Use of Estimates
The preparation of the condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Principles of Consolidation
The condensed consolidated financial statements include the financial statements of NewLink and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.
Financial Instruments and Concentrations of Credit Risk
Cash and cash equivalents, receivables, and accounts payable are recorded at cost, which approximates fair value based on the short-term nature of these financial instruments. The carrying value of notes payable was $58,000 and $104,000 as of September 30, 2019 and December 31, 2018, respectively, which approximate fair value using Level 2 inputs (computed in accordance with ASC 820). The Company is unable to estimate the fair value of the royalty obligation based on future product sales, as the timing of payments, if any, is uncertain.
Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents. Cash and cash equivalents are held by financial institutions and are federally insured up to certain limits. At times, the Company’s cash and cash equivalents balance exceeds the federally insured limits. To limit the credit risk, the Company invests its excess cash primarily in high-quality securities such as certificates of deposit and money market funds.
Property and Equipment
Property and equipment are capitalized as the Company believes they have alternative future uses and are stated at cost, less accumulated depreciation of $7.6 million and $7.0 million as of September 30, 2019 and December 31, 2018, respectively. Depreciation on all property and equipment is calculated on the straight-line method over the shorter of the lease term or estimated useful life of the asset. Computer equipment has useful lives of three to five years, lab equipment has a useful life of five years, and contract manufacturing organization equipment has a useful life of five years.
Recently Adopted Accounting Pronouncements
In February 2016, the FASB issued ASU No. 2016-02 (Topic 842), Leases, to improve financial reporting for leasing transactions. The Company adopted the standard on January 1, 2019 using the modified retrospective method, as required, applying the new standard to all leases existing as of the date of initial application. The Company has elected that the date of the initial application, January 1, 2019, will be the effective date. Consequently, financial information will not be updated and the disclosures required under the new standard will not be provided for dates and periods before January 1, 2019. The Company elected the "package of practical expedients", which permits the Company not to reassess under the new standard its prior conclusions about lease identification, lease classification and initial direct costs. The Company did not elect to apply the use-of-hindsight or the practical expedient pertaining to land easements; as the latter is not applicable to the Company.
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NewLink Genetics Corporation
Notes to Condensed Consolidated Financial Statements
(unaudited)
Upon adoption of the standard, the Company recorded a lease liability of $8.5 million and a right of use asset of $7.5 million associated with these leases. Included in the right-of-use asset are lease incentives that were previously recorded as deferred rent liability of $1.0 million as of December 31, 2018 on the consolidated balance sheet. There was no material impact to the consolidated statement of operations. Refer to Note 7 within for additional discussion around the lease liability and right of use asset as of September 30, 2019.
4.     Revenues
Revenue Recognition
Revenues are recognized under Topic 606 when control of the promised goods or services is transferred to the Company's customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services. Prior to transferring the government contracts over to Merck Sharp & Dohme Corp. (Merck) in June 2018, the Company received payments from government entities under its grants and contracts with the Department of Defense and the United States Department of Health and Human Services (HHS). These agreements provided the Company cost reimbursement plus a percentage for certain types of expenditures in return for research and development activities over a contractually defined period. Grant revenues were recognized over time and measured using the input method. The Company used labor costs and subcontractor fees as inputs to measure progress towards satisfying its performance obligations under these agreements. Under this method, the Company recognized revenue generally in the period during which the related costs were incurred, in an amount that reflected the consideration the Company expected to be entitled to in exchange for those goods or services transferred to the government entities due to the government entities' control over the research and development activities.
The grants and contracts with government entities were fully transferred to Merck as of June 2018. Accordingly, during the nine months ended September 30, 2019, the Company recognized no grant revenue. The Company had $520,000 and $309,000 of receivables relating to the government contracts on the balance sheet as of September 30, 2019 and December 31, 2018, respectively. The Company had $24,000 and $54,000 of accrued expenses for subcontractor fees incurred under the government contracts as of September 30, 2019 and December 31, 2018, respectively.
5.   License and Research Collaboration Agreement
Merck Sharp & Dohme Corp.
In November 2014, the Company entered into a licensing and collaboration agreement (the Merck Agreement) with Merck to develop, manufacture and commercialize rVSV-ZEBOV-GP, an Ebola vaccine the Company licensed from the Public Health Agency of Canada (PHAC). Under the terms of the Merck Agreement, the Company granted Merck an exclusive, royalty bearing license to rVSV-ZEBOV-GP and related technology. Under the Merck Agreement, the Company received a $30.0 million non-refundable, upfront payment in December 2014, and a one-time $20.0 million non-refundable milestone payment in February 2015 upon the initiation of the pivotal clinical trial using the current rVSV-ZEBOV-GP vaccine product as one arm of the trial. In addition, the Company can receive escalating royalties on potential commercial sales by Merck of the current product candidate ranging from single digit to double digits on the rVSV-ZEBOV-GP license agreement product sales and escalating royalties on potential commercial sales by Merck of products other than current products within the Company’s patent rights ranging from low to high single digit, on increasing levels of annual net sales worldwide. Merck is expected to lead the development of rVSV-ZEBOV-GP and any other rVSV-based viral hemorrhagic fever vaccine product candidates in order to create a marketable product safe for human use.
The Merck Agreement was amended on December 5, 2017 in connection with our entry into an amended and restated PHAC license on December 5, 2017. The amended Merck Agreement absolves our subsidiary, BioProtection Systems Corporation (BPS), from any future obligation to negotiate or amend the terms of the PHAC license, converts the scope of Merck's sublicense under PHAC’s intellectual property rights to be non-exclusive in the Ebola Sudan field of use, and requires Merck to reimburse us in certain circumstances where we may be obligated to pay royalties to PHAC as a result of Merck’s product sales but Merck would not otherwise be obligated to pay a royalty to us. On April 26, 2018, the Company entered into an agreement with Merck, the U.S. BioMedical Advanced Research and Development Authority (BARDA), and the Defense Threat Reduction Agency (DTRA) to transfer the government grants from BARDA and DTRA to Merck. The transfer was completed in June 2018 and Merck has replaced the Company as the prime contractor on all such grants.
For the three and nine months ended September 30, 2019, the Company recognized revenues under the amended Merck Agreement of $246,000 and $503,000, respectively, for work the Company performed as a subcontractor of Merck under the government contracts that were transferred to Merck. For the three and nine months ended September 30, 2018, the Company
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NewLink Genetics Corporation
Notes to Condensed Consolidated Financial Statements
(unaudited)
recognized license and collaboration revenue under the amended Merck Agreement of $120,000 and $949,000, respectively, for the reimbursement of costs not covered under government contracts.
6.   Common Stock Equity Incentive Plan
2009 Equity Incentive Plan
In April 2000, the stockholders approved the Company's 2000 Equity Incentive Plan (the 2000 Plan), in July 2009, the stockholders approved the Company's 2009 Equity Incentive Plan (the 2009 Plan), and in May 2019, the stockholders approved to amend and extend the Company's 2009 Equity Incentive Plan (the 2019 Plan). Following the approval of the 2019 Plan, no additional stock awards will be granted under the 2009 Plan. Shares that remained available for issuance pursuant to the exercise of options or issuance or settlement of stock awards under the 2009 Plan became available for issuance pursuant to the 2019 Plan and all shares that would have otherwise returned to the 2009 Plan became available for issuance pursuant to the 2019 Plan. Under the provisions of the 2019 Plan, the Company may grant the following types of common stock awards:
Incentive Stock Options
Nonstatutory Stock Options
Restricted Stock Awards
Stock Appreciation Rights
Awards under the 2019 Plan, as amended, may be made to officers, employees, members of the Board of Directors, advisors, and consultants to the Company. As of September 30, 2019, there were 12,400,653 shares of common stock authorized for the 2019 Plan and 5,271,904 shares remained available for issuance.
The following table summarizes the authorized increases of common stock under the 2009 Plan:
Date Authorized
Authorized Shares Added
May 15, 20101,238,095  
January 7, 2011714,285  
January 1, 2012823,649  
January 1, 2013839,407  
January 1, 20141,062,920  
January 1, 20151,119,233  
January 1, 20161,152,565  
January 1, 20171,166,546  
January 1, 20181,484,382  
January 1, 20191,490,048  
The increases in the authorized shares of common stock under the 2009 Plan in 2010 and 2011 were approved by the Company’s stockholders. The increases in the authorized shares of common stock under the 2009 Plan in 2012 through 2019 were made pursuant to an “evergreen provision,” in accordance with which, on January 1 of each year, from 2013 to (and including) 2019, a number of shares of common stock in an amount equal to 4% of the total number of shares of common stock outstanding on December 31 of the preceding calendar year, or such lesser amount of shares (or no shares) approved by the Company's Board of Directors, was added or will be added to the shares reserved under the 2009 Plan.
On May 9, 2019, the Company’s stockholders approved an amendment to the 2009 Plan which, among other modifications, included decreasing the automatic annual “evergreen provision” from 4% to 3%, in accordance with which, on January 1 of each year, from 2020 to (and including) 2029, a number of shares of common stock in an amount equal to 3% of the total number of shares of common stock outstanding on December 31 of the preceding calendar year, or such lesser amount of shares (or no shares) approved by the Company's Board of Directors, was added or will be added to the shares reserved under the 2009 Plan.
2010 Non-Employee Directors' Stock Award Plan
Under the terms of the Company’s 2010 Non-Employee Directors’ Stock Award Plan (the Directors’ Plan) which became effective on November 10, 2011, 238,095 shares of common stock were reserved for future issuance. On May 9, 2013, an
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NewLink Genetics Corporation
Notes to Condensed Consolidated Financial Statements
(unaudited)
additional 161,905 shares of common stock were added to the shares reserved for future issuance under the Directors' Plan. As of September 30, 2019, 268,902 shares remain available for issuance under the Directors' Plan.
2010 Employee Stock Purchase Plan
Under the terms of the Company’s 2010 Employee Stock Purchase Plan (the 2010 Purchase Plan), which became effective on November 10, 2011, 214,285 shares of common stock were reserved for future issuance. On May 9, 2013, an additional 185,715 shares of common stock were added to the shares reserved for future issuance under the 2010 Purchase Plan. As of September 30, 2019, 29,542 shares remained available for issuance under the 2010 Purchase Plan.
Share-based Compensation
Share-based compensation expense for the three months ended September 30, 2019 and 2018 was $2.3 million and $4.6 million, respectively. Share-based compensation expense for the nine months ended September 30, 2019 and 2018 was $6.0 million and $13.6 million, respectively. Share-based compensation expense is allocated between research and development and general and administrative expenses within the condensed consolidated statements of operations.
As of September 30, 2019, the total compensation cost related to nonvested option awards not yet recognized was $4.7 million and the weighted-average period over which it is expected to be recognized is 2.7 years.
Stock Options and Performance Stock Options
The following table summarizes the stock option activity, including options with market and performance conditions and options granted and forfeited in conjunction with the option exchange program, for the nine months ended September 30, 2019:
Number
of options
Weighted
average
exercise
price
Weighted average
remaining contractual
term (years)
Outstanding at beginning of period
7,978,030  $11.86  4.5
Options granted
3,753,274  1.77  
Options exercised
    
Options forfeited
(4,696,520) 11.43  
Options expired
(1,318,698) 5.93  
Outstanding at end of period
5,716,086  $6.96  4.0
Options exercisable at end of period
3,165,770  $11.09  0.9
The Company estimates the fair value of each stock option grant on the date of grant using a Black-Scholes option pricing model. For stock option grants issued with a market condition, the Company used a Monte Carlo simulation valuation model to determine the grant date fair value.
The following table summarizes the range of assumptions used to estimate the fair value of stock options granted, including those options granted with a market condition, during the nine months ended September 30, 2019:
Risk-free interest rate
1.8% to 2.7%
Expected dividend yield
%
Expected volatility
77.0% to 86.3%
Expected term (in years)
4 to 7.7
Weighted-average grant-date fair value per share
$1.89
No options were exercised during the nine months ended September 30, 2019. The fair value of awards vested during the nine months ended September 30, 2019 was $2.7 million.
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NewLink Genetics Corporation
Notes to Condensed Consolidated Financial Statements
(unaudited)
During the nine months ended September 30, 2019, the Company’s Board of Directors approved and granted 650,000 shares of equity awards to certain executives with either market or performance conditions. The equity awards had a weighted-average grant date fair value per share of $1.24. The equity awards vest upon the achievement of certain performance conditions. Certain performance conditions relating to the equity awards granted in 2017 were met during the three and nine months ended September 30, 2019 and 79,849 shares vested. None of the targets for 2019 equity awards have been met.
Restricted Stock and Performance Restricted Stock
Restricted stock is common stock that is subject to restrictions, including risks of forfeiture, determined by the planning committee of the Board of Directors in its sole discretion, for as long as such common stock remains subject to any such restrictions. A holder of restricted stock has all rights of a stockholder with respect to such stock, including the right to vote and to receive dividends thereon, except as otherwise provided in the award agreement relating to such award. Restricted stock awards are classified as equity within the consolidated balance sheets. The fair value of each restricted stock grant is estimated on the date of grant using the closing price of the Company's common stock on The Nasdaq Stock Market on the date of grant.
A summary of the Company's unvested restricted stock, including restricted stock with performance conditions, at September 30, 2019 and changes during the nine months ended September 30, 2019 are as follows:
Number of restricted stock shares
Weighted average grant date fair value
Unvested at beginning of period
68,585  $37.75  
Granted
    
Vested
(59,330) 38.22  
Forfeited/cancelled
    
Unvested at end of period
9,255  $34.73  
As of September 30, 2019, the total remaining unrecognized compensation cost related to restricted stock was approximately $124,963 and is expected to be recognized over a weighted-average period of 0.3 years.
The Company does not have a formal policy regarding the source of shares issued upon exercise of stock options or issuance of restricted stock. The Company expects shares issued to be issued from treasury shares or new shares.
Option Exchange Program
On June 20, 2019, the Company commenced an option exchange program (Option Exchange) for its officers and employees to exchange eligible stock options to purchase up to an aggregate of 5,849,059 shares of the Company's common stock that had been granted to eligible holders, for a lesser number of new stock options with a lower exercise price. Stock options granted prior to December 31, 2018 with an exercise price equal to or greater than $2.97 and held by eligible holders in continuous service through the termination of the Option Exchange were eligible for exchange in the Option Exchange.
The eligible shares were exercisable for a reduced number of shares based on the following exchange ratios:
Exercise Price Range per ShareNumber of Outstanding Eligible OptionsExchange Ratio (Surrendered Stock Options to New Stock Options)
$2.97-$10.99
 2,725,812
2 to 1
$11.00-$24.99
 720,373
3 to 1
$25.00-And Up
 468,671
4 to 1
Upon the expiration of the Option Exchange on July 31, 2019, 45 eligible employees and 5 eligible directors had tendered an aggregate of 3,914,856 options, representing 67% of the total eligible options, for 1,720,341 new options to purchase shares of common stock (New Awards). Each New Award was granted on July 31, 2019, pursuant to the Company's 2009 Plan, with an exercise price per share of $1.77 per share, the closing price on the grant date of the New Awards. Each New Award has a maximum term of seven years. The New Awards will vest in equal annual amounts over either two or three years, depending on whether the tendered eligible option was vested as of the exchange date.
As a result of this transaction the Company will recognize additional stock-based compensation expense of $1.0 million over the vesting schedule of the New Awards.
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NewLink Genetics Corporation
Notes to Condensed Consolidated Financial Statements
(unaudited)
7.  Leases
The Company has certain facility leases with non-cancellable terms ranging between one and three years, with certain renewal options.
The Company records lease liabilities based on the present value of lease payments over the lease term using an incremental borrowing rate to discount its lease liabilities, as the rate implicit in the lease is typically not readily determinable. To compute the present value of the lease liability, the Company used a weighted-average discount rate of 5%. Certain lease agreements include renewal options that are under the Company's control. The Company includes optional renewal periods in the lease term only when it is reasonably certain that the Company will exercise its option. Prior to September 30, 2019, the Company had asserted it would renew the lease terms through expiry of the lease renewal option periods. At September 30, 2019, as part of the Company's efforts to reduce costs and conserve resources, the Company concluded it would not be seeking renewal of the leased facilities in Ames, Iowa and upon termination of the lease agreements, it would identify a new space for the Company. As a result of this decision, the Company remeasured the right-of-use assets and lease liabilities using the shorter term. The weighted-average remaining lease term as of September 30, 2019 is 1.0 year.
The Company does not separate lease components from non-lease components. Variable lease payments include payments to lessors for taxes, maintenance, insurance and other operating costs as well as payments that are adjusted based on an index or rate. The Company's lease agreements do not contain any residual value guarantees or restrictive covenants.
Future minimum lease payments under the non-cancellable operating leases (with initial or remaining lease terms in excess of one year) as of September 30, 2019 are as follows (in thousands), excluding option renewals:
For the Year Ended December 31:
2019$255  
2020599  
2021133  
20220  
20230  
Thereafter0  
Total future minimum lease payments987  
     Less: Imputed interest(9) 
     Unamortized lease incentive 951  
Total$1,929  
The following table summarizes the aggregate undiscounted non-cancelable future minimum lease payments for operating leases under the prior lease standard as of December 31, 2018 (in thousands), including option renewals:
For the Year Ended December 31:
2019$1,105  
20201,004  
2021923  
2022906  
2023909  
Thereafter6,570  
Total$11,417  

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NewLink Genetics Corporation
Notes to Condensed Consolidated Financial Statements
(unaudited)
8.   Income Taxes
For the three and nine months ended September 30, 2019 and 2018, the Company has recorded no and $7.0 million income tax benefit (expense). The income tax amount for the three and nine months ended September 30, 2019 and 2018 differs from the amount that would be expected after applying the statutory U.S. federal income tax rate primarily due to a full valuation allowance recorded against anticipated net operating loss carryforwards.
The Company has an income tax receivable as of September 30, 2019 for $140,000 of which $71,000 is recorded within short term receivables and $69,000 is recorded in long-term. The full amount was recorded as an income tax benefit in 2017 and is for the receipt of alternative minimum tax (AMT) credit carryovers. The Tax Cuts and Jobs Act of 2017 (the Tax Act), provides that the AMT credit carryovers are partially refundable beginning in 2018 as an offset to a tax liability. The Company expects the amount to be fully refunded by 2021.
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all 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. Management considers the scheduled reversal of deferred tax liabilities, projected taxable income, and tax planning strategies in making this assessment. Valuation allowances have been established for the entire amount of the net deferred tax assets as of September 30, 2019 and December 31, 2018, respectively, due to the uncertainty of future recoverability.
The Company has a reserve for uncertain tax positions related to state tax matters of $653,000 as of September 30, 2019 recorded within Accrued Expenses in the condensed consolidated balance sheet, which includes the accrual of interest and penalties. The Company does not expect the amount to change significantly within the next 12 months.
9.   Net Loss per Share of Common Stock
Basic loss per share is based upon the weighted-average number of shares of common stock outstanding during the period, without consideration of common stock equivalents. Diluted loss per share is based upon the weighted-average number of common shares outstanding during the period plus additional weighted-average potentially dilutive common stock equivalents during the period when the effect is dilutive.

The following table presents the computation of basic and diluted loss per share of common stock (in thousands, except share and per share data):
Three Months Ended September 30,Nine Months Ended September 30,
2019201820192018
Loss attributable to common stockholders
(14,548) $(7,403) $(34,718) $(43,026) 
Basic and diluted weighted-average shares outstanding37,308,523  37,214,363  37,286,930  37,178,542  
Basic and diluted loss per share
$(0.39) $(0.20) $(0.93) $(1.16) 

All common stock equivalents are excluded from the computation of diluted loss per share during periods in which losses are reported since the result would be anti-dilutive. As of September 30, 2019, anti-dilutive stock options and restricted stock awards excluded from our calculation totaled 5,716,086 and 9,255, respectively. As of September 30, 2018, anti-dilutive stock options and restricted stock awards excluded from our calculation totaled 8,371,005 and 89,053, respectively.
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NewLink Genetics Corporation
Notes to Condensed Consolidated Financial Statements
(unaudited)
10. Restructuring and Severance Charges
The Company records liabilities for costs associated with exit or disposal activities in the period in which the liability is incurred. Employee severance costs are accrued when the restructuring actions are probable and estimable. Costs for one-time termination benefits in which the employee is required to render service until termination in order to receive the benefits, is recognized ratably over the future service period. The Company also records costs incurred with contract terminations associated with restructuring activities.
On September 30, 2019, the Company adopted a restructuring plan to reduce its headcount by approximately 60%, which consisted primarily of clinical and research and development staff, and made several changes to senior leadership in order to conserve resources.
In addition to the restructuring, Charles J. Link, Jr, M.D. retired from the Company and the Board of Directors, effective August 3, 2019 and Nicholas Vahanian retired from his position as the President and member of the Board of Directors, effective September 27, 2019, and will remain an employee of the Company through a transition period ending November 11, 2019.
In conjunction with the restructuring and departure of Company executives, the Company recorded restructuring and severance charges of $4.5 million during the three and nine months ended September 30, 2019 of which $2.9 million is included within general and administrative expenses and $1.6 million is included within research and development expenses. As a result of the restructuring, the Company also recorded an impairment charge of $351,000 relating to fixed assets which management determined had no or limited future use. The fair value of impaired fixed assets was determined based on management’s estimate of market resale value.
In July 2018, the Company reduced its headcount by approximately 30% as compared to June 30, 2018 and made several changes to senior leadership effective July 26, 2018 in order to conserve resources to advance its clinical development programs. Restructuring charges of $1.3 million were recorded during the three and nine months ended September 30, 2018.
The following table shows the amount accrued for restructuring and severance activities which is recorded within Accrued Expenses in the condensed consolidated balance sheet (in thousands):
Employee Severance Cost
Total
Balance as of December 31, 2018$649  $649  
Expensed
4,489  4,489  
Cash Payments
554  554  
Balance as of September 30, 2019$4,584  $4,584  

11. Commitments and Contingencies
From time to time, claims are asserted against the Company arising in the ordinary course of business. In the opinion of management, liabilities, if any, arising from existing claims are not expected to have a material effect on the Company's earnings, financial position, or liquidity.
On or about May 12, 2016, Trevor Abramson filed a putative securities class action lawsuit in the United States District Court for the Southern District of New York (the Court), captioned Abramson v. NewLink Genetics Corp., et al., Case 1:16-cv-3545 (the Securities Action). Subsequently, the Court appointed Michael and Kelly Nguyen as lead plaintiffs and approved their selection of Kahn, Swick & Foti, LLC as lead counsel in the Securities Action. On October 31, 2016, the lead plaintiffs filed an amended complaint asserting claims under the federal securities laws against the Company, the Company’s Chief Executive Officer Charles J. Link, Jr., and the Company’s Chief Medical Officer and President Nicholas Vahanian, (collectively, the Defendants). The amended complaint alleges the Defendants made material false and/or misleading statements that caused losses to the Company’s investors. The Defendants filed a motion to dismiss the amended complaint on July 14, 2017. On March 29, 2018, the Court dismissed the amended complaint for failure to state a claim, without prejudice, and gave the lead plaintiffs until May 4, 2018 to file any amended complaint attempting to remedy the defects in their claims. On May 4, 2018, the lead plaintiffs filed a second amended complaint asserting claims under the federal securities laws against
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NewLink Genetics Corporation
Notes to Condensed Consolidated Financial Statements
(unaudited)
the Defendants. Like the first amended complaint, the second amended complaint alleges that the Defendants made material false and/or misleading statements or omissions relating to the Phase 2 and 3 trials and efficacy of the product candidate algenpantucel-L that caused losses to the Company’s investors. The lead plaintiffs do not quantify any alleged damages in the second amended complaint but, in addition to attorneys’ fees and costs, they sought to recover damages on behalf of themselves and other persons who purchased or otherwise acquired the Company’s stock during the putative class period of September 17, 2013 through May 9, 2016, inclusive, at allegedly inflated prices and purportedly suffered financial harm as a result. The Defendants filed a motion to dismiss the second amended complaint on July 31, 2018. On February 13, 2019, the Court dismissed the second amended complaint for failure to state a claim, with prejudice, and closed the case. On March 14, 2019, lead plaintiffs filed a notice of appeal. The briefing on lead plaintiffs' appeal was completed in early July 2019 and oral argument before the Second Circuit Court of Appeals was held on October 21, 2019. The Company intends to continue defending the Securities Action vigorously.
On or about April 26, 2017, Ronald Morrow filed a shareholder derivative lawsuit on behalf of the Company in the United States District Court for the Southern District of New York, or the Court, against the Company’s Chief Executive Officer Charles J. Link, Jr., the Company’s Chief Medical Officer and President Nicholas Vahanian, and Company directors Thomas A. Raffin, Joseph Saluri, Ernest J. Talarico, III, Paul R. Edick, Paolo Pucci, and Lota S. Zoth (collectively, the Morrow Defendants), captioned Morrow v. Link., et al., Case 1:17-cv-03039 (the Morrow Action). The complaint alleges that the Morrow Defendants caused the Company to issue false statements in its 2016 proxy statement regarding risk management and compensation matters in violation of federal securities law. The complaint also asserts state law claims against the Morrow Defendants for breaches of fiduciary duties, unjust enrichment, abuse of control, insider trading, gross mismanagement, and corporate waste, alleging that the Morrow Defendants made material misstatements or omissions related to the Phase 2 and 3 trials and efficacy of the product candidate algenpantucel-L, awarded themselves excessive compensation, engaged in illegal insider trading, and grossly mismanaged the Company. The plaintiff does not quantify any alleged damages in the complaint but seeks restitution for damages to the Company, attorneys’ fees, costs, and expenses, as well as an order directing that proposals for strengthening board oversight be put to a vote of the Company’s shareholders. The language for such proposals is not specified in the complaint. The plaintiff also contemporaneously filed a statement of relatedness, informing the Court that the Morrow Action is related to Abramson v. NewLink Genetics Corp., et al., Case 1:16-cv-3545. On May 19, 2017, the plaintiff dismissed the Morrow Action without prejudice. Also on May 19, 2017, plaintiffs’ counsel in the Morrow Action filed a new shareholder derivative complaint that is substantively identical to the Morrow Action, except that the plaintiff is Rickey Ely. The latter action is captioned Ely v. Link, et al., Case 17-cv-3799, or the Ely Action. By agreement of the parties and order dated June 26, 2017, the Court temporarily stayed the Ely Action until the Securities Action is dismissed or otherwise finally resolved. Under the terms of the stay, the plaintiff in the Ely Action has until March 15, 2019 (30 days after dismissal of the Securities Action with prejudice) to file an amended derivative complaint or rest upon the current derivative complaint. By further agreement of the parties, dated March 15, 2019, the Ely Action will continue to be stayed pending the outcome of the appeal in the Securities Action. If the Securities Action continues to be dismissed in its entirety following its appeal plaintiff in the Ely Action has agreed to withdraw or dismiss the action, with prejudice. The Company disputes the claims in the Ely Action and intends to defend against them vigorously.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995, and such statements are subject to the “safe harbor” created by those sections.  Forward-looking statements are based on our management’s beliefs and assumptions and on information available to our management as of the date hereof. In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “could,” “would,” “expect,” “plans,” “anticipates,” “believes,” “estimates,” “projects,” “predicts,” “potential” and similar expressions intended to identify forward-looking statements. Examples of these statements include, but are not limited to, statements regarding: the expected completion and timing of the proposed merger with Lumos Pharma; the expected solicitation of and the actual stockholders’ approval of issuance of NewLink’s common stock pursuant to the merger agreement and reverse stock split; the expected focus of the combined company post consummation of the proposed merger; the development plan for LUM-201; the development plan for our existing pipeline and potential partnership and out-licensing opportunities; our ongoing and planned preclinical studies and clinical trials; the timing of the release of the results of data from ongoing preclinical studies and clinical trials; the timing of and our ability to obtain and maintain regulatory approvals for our product candidates; the clinical utility of our product candidates; our plans to leverage our existing technologies to discover and develop additional product candidates; our ability to quickly and efficiently identify and develop product candidates; our intellectual property position; the potential benefits of strategic collaboration agreements and our ability to enter into strategic arrangements; our estimates regarding expenses, future revenues, capital requirements and needs for additional financing; plans to develop, commercialize, market and manufacture our product candidates; and other risks and uncertainties, including those described in Part II, Item 1A, “Risk Factors” of this Quarterly Report and in our other periodic reports filed from time to time with the Securities and Exchange Commission, or SEC, including our Annual Report on Form 10-K for the year ended December 31, 2018.  Our actual results could differ materially from those discussed in our forward-looking statements for many reasons, including those risks. You should not place undue reliance on these forward-looking statements, which apply only as of the date of this Quarterly Report on Form 10-Q. You should read this Quarterly Report on Form 10-Q completely. Except as required by law, we assume no obligation to update these forward-looking statements publicly, or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future.

The following discussion and analysis should be read in conjunction with the unaudited financial statements and notes thereto included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

Overview
NewLink Genetics Corporation (the Company, NewLink, we, our or us) is a clinical-stage company that has historically focused on developing novel immunotherapeutic products for the treatment of patients with cancer. Our leading small-molecule product candidates currently in clinical development target the indoleamine-2, 3-dioxygenase (IDO) pathway, which is one of the key pathways for cancer immune escape. These product candidates, indoximod and NLG802 (a prodrug of indoximod), are IDO pathway inhibitors with mechanisms of action that center around breaking the immune system’s tolerance to cancer. We also have an additional small molecule product candidate, NLG207 (formerly CRLX101), which is a nanoparticle-drug conjugate (NDC) consisting of a cyclodextrin-based polymer backbone linked to camptothecin, a topoisomerase 1 inhibitor.
Based on early clinical data from our Phase 1/2 clinical trials, our clinical program to date has been focused on targeted indications with great unmet need where indoximod, NLG802, and NLG207 have produced encouraging early data. Updated Phase 1b data for indoximod for the cohort of pediatric patients with newly diagnosed treatment-naïve diffuse intrinsic pontine glioma (DIPG) has been accepted for presentation at the upcoming ESMO Immuno-Oncology Congress 2019, 11-14 December 2019, Geneva, Switzerland.
Recent Events
On September 30, 2019, we entered into an Agreement and Plan of Merger and Reorganization (the Merger Agreement) with Cyclone Merger Sub, Inc., a wholly-owned subsidiary of NewLink (Merger Sub) and Lumos Pharma, Inc., a privately-held Delaware corporation (Lumos), pursuant to which, among other things, subject to the satisfaction or waiver of the conditions set forth in the Merger Agreement, Merger Sub will merge with and into Lumos, with Lumos surviving as our wholly-owned subsidiary (the Merger). Following the Merger, we will change our name to “Lumos Pharma, Inc.” and Lumos will change its name to a name mutually agreed upon by us and Lumos.
At the effective time of the Merger (Effective Time), each share of Lumos capital stock outstanding immediately prior to the Effective Time (excluding shares of Lumos capital stock held as treasury stock or held or owned by Lumos or Merger Sub
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prior to the Effective Time and shares held by Lumos stockholders who have exercised and perfected appraisal rights in accordance with Delaware law) shall be automatically converted solely into the right to receive a number of shares of our common stock equal to the amount determined pursuant to a charter amendment to Lumos’ certificate of incorporation that will be filed prior to the Effective Time, at exchange ratios applicable to each type of Lumos capital stock. Pursuant to such conversion, immediately following the Merger, former Lumos stockholders will own approximately 50% of the aggregate number of shares of our common stock issued and outstanding following the consummation of the Merger (the Post-Closing Shares), and our stockholders as of immediately prior to the Merger will own approximately 50% of the aggregate number of Post-Closing Shares. Outstanding options to purchase Lumos common stock will be assumed by us and converted into options to purchase a number of shares of our common stock at the exchange ratio applicable to exchanging shares of Lumos common stock for our common stock.
The Merger Agreement includes customary representations, warranties and covenants made by the Company and Lumos, including covenants relating to the Company’s and Lumos’ conduct of their respective businesses between the date of signing the Merger Agreement and the closing of the Merger. Consummation of the Merger is subject to certain closing conditions, including, among other things, approval by the stockholders of the Company and Lumos. Lumos stockholders approved the Merger in September 2019. The Merger Agreement contains certain termination rights for both NewLink and Lumos, and further provides that, upon termination of the Merger Agreement under specified circumstances, NewLink or Lumos, as applicable, may be required to pay the other party a termination fee of $2.0 million.
The Merger Agreement contemplates that we will also seek approval from our stockholders to effect a reverse stock split, with the split ratio to be mutually agreed to by the Company and Lumos immediately prior to the Effective Time. The Merger is expected to close in the first quarter of 2020.
After the consummation of the Merger, the combined company expects to focus its efforts on the development of Lumos’ sole product candidate, LUM-201 (ibutamoren), a potential oral therapy for pediatric growth hormone deficiency (PGHD) and other rare endocrine disorders. Our management does not intend to pursue further internal development of its existing pipeline upon consummation of the Merger, but will continue to evaluate our pipeline pending results of the DIPG cohort of our Phase 1b clinical trial for indoximod and, depending on such results, may seek to identify potential partnerships and out-licensing opportunities.

We have prepared this Management’s Discussion and Analysis of Financial Condition and Results of Operations and the forward-looking statements contained in this report as if the Merger will not be consummated. If the Merger is consummated, many of the forward-looking statements related to our current product candidates and contained in this report would no longer be applicable.
IDO Pathway Inhibitors
In cancer, the IDO pathway regulates immune response by suppressing T-cell activation, which enables cancer to avoid immune response. IDO is overexpressed in many cancers, both within tumor cells as a direct defense against T-cell attack, and also within antigen presenting cells in tumor-draining lymph nodes, thereby promoting peripheral tolerance to tumor associated antigens (TAAs). When hijacked by developing cancers in this manner, the IDO pathway may facilitate the survival, growth, invasion and metastasis of malignant cells whose expression of TAAs might otherwise be recognized and attacked by the immune system.
The IDO pathway refers to a series of reactions initiated by IDO that result in the reduction of the amino acid tryptophan in the local tumor environment. We believe the local presence of tryptophan in adequate concentrations promotes antitumor T-cells, and the local reduction of tryptophan combined with the presence of the breakdown product of tryptophan metabolism, kynurenine, is understood to suppress the activation of T-cells. Preclinical and, increasingly, clinical data suggest that IDO pathway inhibitors may also enhance the anti-tumor effects of other immunotherapies, chemotherapies and radiation when used as a combination therapy for patients with cancer.
Currently, we have a clinical development program primarily focused on the IDO pathway. Our small-molecule IDO pathway inhibitor product candidates currently in clinical development include indoximod and NLG802. Our product candidates are designed to counteract immunosuppressive effects of the IDO pathway, a fundamental mechanism regulating immune response. Indoximod acts as a tryptophan mimetic, thereby signaling the activation of antitumor T-cells by the activation of mammalian target of rapamycin (mTOR), acts directly on T-cells, and modulates aryl hydrocarbon receptor (AhR)-mediated effects.
We have observed an encouraging safety profile for our IDO pathway inhibitors. They are also orally bioavailable and we believe they offer the potential to be synergistic with other therapies such as radiation, chemotherapy, vaccination and immunotherapies involving other checkpoint inhibitors such as anti-PD-1, anti-programmed cell death ligand-1 (PD-L1), or
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anti-cytotoxic T-lymphocyte antigen 4 (CLTA4). Clinical data suggest an increase in clinical activity without adding significant toxicity.
Indoximod
Indoximod, our lead IDO pathway inhibitor, is currently in clinical development in combination with other cancer therapeutics for patients with DIPG. We believe there may be future opportunities to apply indoximod to a broader set of cancer indications based upon clinical data generated by the Company and potentially resulting from data generated by others with ongoing IDO clinical development programs. More than 900 patients have been treated with indoximod to date and it has generally been well-tolerated, including in combination with PD-1 checkpoint inhibitors, various chemotherapy agents, radiation, and a cancer vaccine.
A tablet formulation of indoximod hydrochloride has been developed for adult patients and a sprinkle formulation is being developed for pediatric indications. We plan to use our new tablet formulation of indoximod in any future clinical trials.
Two U.S. patents covering both the salt and prodrug formulations of indoximod were issued in the U.S. on August 15, 2017 and February 19, 2019 providing exclusivity until at least 2036. We are currently pursuing international patent coverage for these formulations.
NLG802
NLG802 is a prodrug of indoximod. NLG802 is intended to increase bioavailability and exposure to indoximod above levels currently achievable by direct oral administration of indoximod. We filed an Investigational New Drug (IND) application with the U.S. Food and Drug Administration (FDA), in the first quarter of 2017 and the first patient was dosed with NLG802 in a Phase 1 clinical trial in July 2017. The purpose of this Phase 1 trial is to assess preliminary safety and to determine the recommended dose for subsequent Phase 2 evaluations. NLG802 is a new chemical entity with patent coverage into 2036. We are also pursuing international patent coverage for NLG802.
In May 2019, we presented updated results for the Phase 1 dose escalation trial for NLG802 at the Immuno-Oncology 2019 World Congress. Pharmacokinetics (PK) results were also reported from this study. After continuous twice-daily dosing with NLG802 at all levels, significantly higher PK exposure as compared to indoximod was observed. At 1452 mg twice daily, the highest dose administered, NLG802 produced a 6-fold increase in Cmax and a 4.7-fold increase in AUC compared with molar equivalent indoximod dosing.
The treatment regimen was well tolerated with no NLG802-related serious adverse events reported. The recommended Phase 2 dose was established at 1452 mg BID based on achieving preclinical exposure levels required for pharmacodynamic effects of indoximod