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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, 2020.
    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
LUMOS PHARMA, INC.
(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.)
4200 Marathon Blvd #200
AustinTexas 78756
(512) 215-2630
(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 StockLUMOThe 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 ☒    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 ☒    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 ☒
As of November 6, 2020, there were 8,297,058 shares of the registrant’s Common Stock, par value $0.01 per share, outstanding.



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Lumos Pharma, Inc.
FORM 10-Q
Table of Contents
Page
Condensed Consolidated Balance Sheets as of September 30, 2020 (unaudited) and December 31, 2019
Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2020 and 2019 (unaudited)
Condensed Consolidated Statement of Changes in Redeemable Convertible Preferred Stock and
Stockholders’ Equity (Deficit) for the Three and Nine Months Ended September 30, 2020 and 2019 (unaudited)
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2020 and 2019 (unaudited)
ITEM 3.

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Forward-Looking Statements
This quarterly report on Form 10‑Q for the quarter ended September 30, 2020 (this “Quarterly Report”) contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These forward-looking statements involve risks and uncertainties and reflect our current views with respect to, among other things, future events and our financial performance. When used in this report, the words “believe,” “may,” “could,” “will,” “estimate,” “continue,” “anticipate,” “intend,” “expect,” “indicate,” “seek,” “should,” “would,” and similar expressions are intended to identify forward-looking statements, though not all forward-looking statements contain these identifying words. These forward-looking statements are not historical facts, and are based on current expectations, estimates and projections about our industry, management’s beliefs and certain assumptions made by management, many of which, by their nature, are inherently uncertain and beyond our control. Accordingly, we caution you that any such forward-looking statements are not guarantees of future performance and are subject to risks, assumptions, estimates and uncertainties that are difficult to predict. Although we believe that the expectations reflected in these forward-looking statements are reasonable as of the date of this Quarterly Report, actual results may prove to be materially different from the results expressed or implied by the forward-looking statements.
Important factors that could cause actual results to differ materially from those in the forward-looking statements include, but are not limited to those summarized below:
the extent to which the COVID-19 coronavirus and related governmental regulations and restrictions may continue to impact our business, including our research, clinical trials, manufacturing and financial condition;
the development plan for our product candidate LUM-201 (ibutamoren);
our expectations regarding the potential benefits, activity, effectiveness and safety of our product candidates;
the development plan for our existing pipeline and potential partnership and out-licensing opportunities;
the timing of planned preclinical studies and clinical trials and availability of clinical data from such clinical trials;
the timing of and our ability to obtain 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 intellectual property position;
our ability to enter into strategic collaborations, licensing or other arrangements;
our dependence on collaborators for developing, obtaining regulatory approval for and commercializing product candidates in the collaboration;
our estimates regarding expenses, future revenues, capital requirements and needs for additional financing;
plans to develop and commercialize our product candidates;
our ability to obtain additional funds for our operations;
the rate and degree of market acceptance of any approved product candidates;
the commercialization of any approved product candidates;
the implementation of our business model and strategic plans for our business, technologies and product candidates;
our reliance on third parties to conduct our preclinical studies or any future clinical trials;
our ability to attract and retain qualified key management and technical personnel;
our reliance on third-party supply and manufacturing partners to supply the materials and components for, and manufacture, our research and development, preclinical and clinical trial product supplies; and
developments relating to our competitors or our industry.
For additional information regarding known material factors that could cause our actual results to differ from our projected results, please read (1) Part II, “Item 1A. Risk Factors” in this Quarterly Report; (2) our reports and registration statements filed from time to time with the Securities and Exchange Commission (the “SEC”), and (3) other public announcements we make from time to time. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Except as required by law, we assume no obligation to update or revise these forward-looking statements for any reason, even if new information becomes available in the future.
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PART I - FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements

Lumos Pharma, Inc.
Condensed Consolidated Balance Sheets
(In thousands, except share data)
September 30,December 31,
20202019
Assets(unaudited)
Current assets:
Cash and cash equivalents$105,575 $4,952 
Prepaid expenses and other current assets3,230 82 
Income tax receivable174  
Other receivables26,176 35 
Total current assets135,155 5,069 
Non-current assets:
Property and equipment, net594 84 
Right-of-use asset439 373 
Total non-current assets1,033 457 
Total assets$136,188 $5,526 
Liabilities, Redeemable Convertible Preferred Stock and Stockholders' Equity (Deficit)
Current liabilities:
Accounts payable$137 $365 
Accrued expenses6,293 709 
Current portion of lease liability535 189 
Total current liabilities6,965 1,263 
Long-term liabilities:
Royalty obligation payable to Iowa Economic Development Authority6,000  
Lease liability
35 191 
Deferred tax liability4,653  
Total long-term liabilities10,688 191 
Total liabilities17,653 1,454 
Commitments and contingencies
Redeemable convertible preferred stock:
Series A redeemable convertible preferred stock, $0.0001 par value: Authorized, issued and outstanding shares - 0 and 978,849 at September 30, 2020 and December 31, 2019, respectively
 21,904 
Series B redeemable convertible preferred stock, $0.0001 par value: Authorized, issued and outstanding shares - 0 and 1,989,616 at September 30, 2020 and December 31, 2019, respectively
 41,631 
Stockholders' equity (deficit):
Undesignated preferred stock, $ par value: Authorized shares - 5,000,000 at September 30, 2020 and December 31, 2019, respectively; issued and outstanding shares - 0 at September 30, 2020 and December 31, 2019
  
Common stock, $0.01 par value: Authorized shares - 75,000,000 and 36,000,000 at September 30, 2020 and December 31, 2019, respectively; issued and outstanding 8,293,312 and 1,177,933 at September 30, 2020 and December 31, 2019, respectively
83 12 
Additional paid-in capital182,028 202 
Accumulated deficit(63,576)(59,677)
Total stockholders' equity (deficit)118,535 (59,463)
Total liabilities, redeemable convertible preferred stock and stockholders' equity$136,188 $5,526 
See accompanying notes to condensed consolidated financial statements.

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Lumos Pharma, Inc.
Condensed Consolidated Statements of Operations
(unaudited)
(In thousands, except share and per share data)

Three Months Ended September 30,Nine Months Ended September 30,
2020201920202019
Revenues:
Licensing and collaboration revenue
$74 $ $128 $ 
Total revenues74  128  
Operating expenses:
 Research and development2,075 1,202 6,743 4,538 
General and administrative
5,156 1,496 12,634 2,893 
Total operating expenses
7,231 2,698 19,377 7,431 
Loss from operations(7,157)(2,698)(19,249)(7,431)
Other income and expense:
Other income, net6,322  6,482 23 
Interest income
168 29 246 65 
Interest expense
  (48) 
Other income, net
6,490 29 6,680 88 
Net loss before taxes(667)(2,669)(12,569)(7,343)
Income tax benefit2,432  9,321  
Net income (loss)1,765 (2,669)(3,248)(7,343)
Accretion of preferred stock to current redemption value (766)(651)(2,274)
Net income (loss) attributable to common shareholders$1,765 $(3,435)$(3,899)$(9,617)
Net income (loss) per share of common stock
Basic $0.21 $(2.56)$(0.62)$(7.15)
Diluted $0.21 $(2.56)$(0.62)$(7.15)
Weighted average number of common shares outstanding
Basic 8,293,312 1,343,483 6,267,576 1,344,755 
Diluted 8,486,804 1,343,483 6,267,576 1,344,755 
See accompanying notes to condensed consolidated financial statements.






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Lumos Pharma, Inc.
Condensed Consolidated Statement of Changes in Redeemable Convertible Preferred Stock and Stockholders' Equity (Deficit)
(unaudited)
(In thousands, except share data)
Series A redeemable convertible preferred stock
Series B redeemable convertible preferred stock
Common StockTreasury Stock, at cost
Additional
Paid-in
Capital
Accumulated Deficit
Total
Stockholders' Equity (Deficit)
SharesAmountSharesAmountSharesAmountSharesAmount
Balance at December 31, 2018978,849 $20,903 1,989,616 $39,592 1,345,402 $1 $ $12 $(46,932)$(46,919)
Share-based compensation— — — — — — — — 48 — 48 
Accretion of preferred stock to current redemption value (pre-merger)— 247 — 503 — — — — — (750)(750)
Net loss—  — — — — — — — — (2,105)(2,105)
Balance at March 31, 2019978,849  21,150 1,989,616 40,095 1,345,402 1   60 (49,787)(49,726)
Share-based compensation— — — — — — — — 40 — 40 
Accretion of preferred stock to current redemption value— 250 — 508 — — — — — (758)(758)
Net loss— — — — — — — — — (2,569)(2,569)
Balance at June 30, 2019978,849 21,400 1,989,616 40,603 1,345,402 1   100 (53,114)(53,013)
Share-based compensation— — — — — — — — 44 — 44 
Exercise of stock options — — — — 13 — — — — — — 
Treasury stock purchase, at cost— — — — (176,623)— 176,623 — — — — 
Accretion of preferred stock to current redemption value— 252 — 514 — — — — — (766)(766)
Net loss— — — — — — — — — (2,669)(2,669)
Balance at September 30, 2019978,849 $21,652 1,989,616 $41,117 1,168,792 $1 176,623 $ $144 $(56,549)$(56,404)


Balance at December 31, 2019978,849 $21,904 1,989,616 $41,631 1,177,933 $12 $ $202 $(59,677)$(59,463)
Accretion of preferred stock to current redemption value (pre-merger)— 216 — 435 — — — — — (651)(651)
Issuance of common stock to former stockholders of NewLink upon merger— — — — 4,146,405 41 — — 116,908 — 116,949 
Conversion of preferred stock into common stock upon merger(978,849)(22,120)(1,989,616)(42,066)2,968,465 30 — — 64,156 — 64,186 
Share-based compensation—  — — — — — — — 177 — 177 
Net income— — — — — — — — — 340 340 
Balance at March 31, 2020    8,292,803 83   181,443 (59,988)121,538 
Share-based compensation— — — — — — — — 274 — 274 
Sales of shares under stock purchase plan — — — — 509 — — — 6 — 6 
Net loss— — — — — — — — — (5,353)(5353)
Balance at June 30, 2020    8,293,312 83   181,723 (65,341)116,465 
Share-based compensation— — — — — — — — 305 — 305 
Net income— — — — — — — — — 1,765 1,765 
Balance at September 30, 2020 $  $ 8,293,312 $83 $ $ $182,028 $(63,576)$118,535 
See accompanying notes to condensed consolidated financial statements.

6


Lumos Pharma, Inc.
Condensed Consolidated Statements of Cash Flows
(unaudited)
(In thousands)
Nine Months Ended September 30,
20202019
Cash Flows From Operating Activities
Net loss$(3,248)$(7,343)
Adjustments to reconcile net loss to net cash used in operating activities:
Share-based compensation756 132 
Depreciation and amortization375 23 
Gain on sale of priority review voucher(6,300) 
In-process research and development charge426  
Benefit for deferred taxes(4,848) 
Changes in operating assets and liabilities:
Prepaid expenses and other current assets(495)(123)
Other receivables224  
Accounts payable and accrued expenses(2,907)954 
Net cash used in operating activities(16,017)(6,357)
Cash Flows From Investing Activities
Cash acquired in connection with merger 84,179  
Proceeds from sale of priority review voucher, net 32,500  
Purchase of equipment(18) 
Net cash provided by investing activities116,661  
Cash Flows From Financing Activities
   Sales of shares under stock purchase plan6  
    Principal payments on notes payable(27) 
Net cash used in financing activities(21) 
Net increase (decrease) in cash and cash equivalents100,623 (6,357)
Cash and cash equivalents at beginning of period4,952 14,022 
Cash and cash equivalents at end of period$105,575 $7,665 
See accompanying notes to condensed consolidated financial statements.



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Table of Contents
Lumos Pharma, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)

1. Description of Business
Organization and Nature of operations
Lumos Pharma, Inc. is a clinical-stage biopharmaceutical company. References in this Quarterly Report to “us,” “we,” “our,” “the Company,” or “Lumos” are to Lumos Pharma, Inc. and its wholly-owned subsidiaries. With our principal executive offices located in Austin, Texas and additional executive and administrative offices located in Ames, Iowa, we are engaged in advancing our clinical program and focused on identifying, acquiring, developing, and commercialization of novel products and new therapies for people with rare diseases on a global level, for which there is currently a significant unmet need for safe and effective therapies. Our common stock is listed on the NASDAQ Global Select Market (“NASDAQ”) and trades under the ticker symbol “LUMO.”
The Company entered into a business combination (the “Merger”) between the Company, formerly known as NewLink Genetics Corporation (“NewLink”), Cyclone Merger Sub, Inc. (“Merger Sub”), a wholly owned subsidiary of NewLink, and Lumos Pharma, Inc., which has since been renamed “Lumos Pharma Sub, Inc.” (“Private Lumos”). The Merger closed on March 18, 2020, and Merger Sub merged with and into Private Lumos, with Private Lumos surviving as a wholly-owned subsidiary of the Company. Immediately prior to the closing of the Merger, the shares of NewLink common stock were adjusted with a reverse split ratio of 1‑for‑9. Under the terms of the Merger, Private Lumos stockholders received an aggregate of 4,146,398 shares of NewLink common stock (after giving effect to the reverse split) for each share of outstanding common stock, Series A Preferred Stock and Series B Preferred Stock of Private Lumos converted at an exchange ratio of 0.1308319305, 0.0873621142 and 0.1996348626, respectively. Immediately following the reverse stock split and the completion of the Merger, there were 8,292,803 shares of the Company’s common stock outstanding, of which approximately 50% was held by each of Private Lumos and NewLink security holders.
The Merger was accounted for as a reverse asset acquisition. Private Lumos was deemed to be the accounting acquirer for accounting purposes and NewLink the accounting acquiree. Accordingly, for accounting purposes: (i) the assets acquired and liabilities assumed were recorded based on their estimated fair values on the Merger date, (ii) the reported historical operating results of the combined company prior to the Merger will be those of Private Lumos and not of NewLink after retroactively giving effect to the common stock exchange ratio, reverse stock split and change in par value for all periods presented, and (iii) for periods prior to the transaction, shareholders’ authorized capital of the combined company is presented based on the historical authorized capital of NewLink.
After the consummation of the Merger, the combined company has focused its efforts on the development of Private Lumos’ sole product candidate, secretagogue ibutamoren (“LUM-201”), a potential oral therapy for pediatric growth hormone deficiency (“PGHD”) and other rare endocrine disorders.
Liquidity and Risks
The Company has historically devoted substantially all of its efforts toward research and development and has never earned revenue from commercial sales of its products. Management expects to continue to incur additional substantial losses in the foreseeable future as a result of the Company’s research and development activities. However, the Company believes that its existing cash and cash equivalents of approximately $105.6 million as of September 30, 2020 will be sufficient to allow the Company to fund its operations through read out of the Phase 2b clinical trial for a subset of patients with PGHD indication under its LUM-201 product candidate and for at least 12 months from the filing date of this Quarterly Report. If available liquidity becomes insufficient to meet the Company’s obligations as they come due, our future operations will be reliant on additional equity or financing arrangements. There can be no assurances that, in the event that the Company requires additional financing, such financing will be available on terms which are favorable to the Company, or at all. If the Company is unable to raise additional funding to meet its working capital needs in the future, it will be forced to delay or reduce the scope of its research programs and/or limit or cease its operations.
The pandemic caused by an outbreak of a new strain of coronavirus (“COVID-19”), has resulted, and is likely to continue to result, in significant national and global economic disruption and may adversely affect the Company’s operations. The Company is actively monitoring the potential impact of COVID-19, if any, on the carrying value of certain assets and its continued operations. To date, we have experienced limited delays related to clinical trials as clinical sites adapt their
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Lumos Pharma, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)
procedures to caring for patients during a pandemic, however, we have not incurred impairment of any assets as a result of COVID-19. The extent to which these events may impact the Company’s business, clinical development, regulatory efforts, and the value of its common stock, will depend on future developments, which are highly uncertain and cannot be predicted at this time. The duration and intensity of these impacts and resulting disruption to the Company’s operations is uncertain and the Company will continue to evaluate the impact that these events could have on the operations, financial position, and the results of operations and cash flows during fiscal year 2020.
2. Summary of Significant Accounting Policies and Recent Accounting Pronouncements
Principles of Consolidation
The accompanying condensed consolidated financial statements include the accounts of Lumos and its wholly-owned subsidiaries and have been prepared in accordance with accounting principles generally accepted in the U.S. (“U.S. GAAP”). All significant intercompany accounts and transactions are eliminated in consolidation.
Basis of Presentation
The accompanying condensed consolidated financial statements have been prepared in accordance with U.S. GAAP for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments of a normal and recurring nature considered necessary for a fair presentation have been included in the accompanying condensed consolidated financial statements. The results of operations for the interim period are not necessarily indicative of the results that will be realized for the entire fiscal year. These condensed consolidated financial statements should be read in conjunction with Private Lumos’s audited financial statements and accompanying notes thereto as of and for the year ended December 31, 2019 included in Company’s current report on Form 8-K/A as filed with the SEC on June 1, 2020.
The Merger was accounted for as a reverse asset acquisition. Private Lumos is deemed to be the accounting acquirer for accounting purposes and NewLink the accounting acquiree. Accordingly, for accounting purposes: (i) the assets acquired and liabilities assumed were recorded based on their estimated fair values on the Merger date, (ii) the reported historical operating results of the combined company prior to the Merger will be those of Private Lumos and not of NewLink after retroactively giving effect to the common stock exchange ratio, reverse stock split and change in par value for all periods presented, and (iii) for periods prior to the transaction, shareholders’ authorized capital of the combined company is presented based on the historical authorized capital of NewLink.
Use of Estimates
The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities and expenses and the disclosure of contingent assets and liabilities in the Company’s financial statements and accompanying notes. Significant management estimates that affect the reported amounts of assets and liabilities include useful lives of property and equipment, stock-based compensation, accruals for clinical trials and deferred tax assets. While we believe that the estimates and assumptions used in preparation of our condensed consolidated financial statements based on our knowledge of current events and actions that we may undertake in the future are appropriate, actual results could differ from those estimates, and any such differences may be material.
Acquired In-Process Research and Development
Acquired in-process research and development (“IPR&D”) expense consists of the initial up-front payments incurred in connection with the acquisition or licensing of product candidates that do not meet the definition of a business under ASC 805, Business Combinations. During the nine months ended September 30, 2020, the Company expensed the acquired in-process research and development asset of $426,000 acquired as part of the Merger as there is no future economic benefit.
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Lumos Pharma, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)
Asset Held for Sale
Judgment is required in determining whether an asset meets the criteria for classification as "assets held for sale" in the condensed consolidated financial statements. Criteria considered by management include the existence of and commitment to a plan to dispose of the assets, the expected selling price of the assets, the expected timeframe of the completion of the anticipated sale and the period of time any amounts have been classified within assets held for sale. The Company reviews the criteria for assets held for sale each period and reclassifies such assets as appropriate. We classified the priority review voucher (“PRV”) that was carried at its original fair value less cost to sell as held for sale. The PRV was sold on July 27, 2020 (see Note 4).
Share-Based Compensation
Stock options and performance stock options
The Company recognizes compensation costs related to stock options granted to employees and non-employees based on the estimated fair value of the awards on the date of grant. The Company estimates the grant date fair value, and the resulting stock-based compensation expense, using the Black-Scholes option-pricing model. The Company records forfeitures as they are incurred. The grant date fair value of the stock options is expensed on a straight-line basis over the applicable vesting period, which generally is four years. The fair value of performance-based stock options is recognized as compensation expense beginning at the time in which the performance conditions are deemed probable of achievement, over the remaining requisite service period. The assumptions used in Black-Scholes option-pricing model are as follows:
Expected term. The expected term of stock options represents the period that the stock options are expected to remain outstanding and is based on vesting terms, exercise term and contractual lives of the options. The expected term is based on the simplified method and is estimated as the average of the weighted average vesting term and the time to expiration as of the grant date.
Expected volatility. As the Company does not have sufficient historical stock price information to meet the expected life of the stock option grants, it uses a blended volatility based on the trading history from the common stock of a set of comparable publicly-listed biopharmaceutical companies. Volatility for employee stock purchase plan (“ESPP”) shares is equal to the Company’s historical volatility over the six-month offering period.
Risk-free interest rate. The risk-free interest rate is based on the U.S. Treasury yield with a maturity equal to the expected term of the stock options in effect at the time of grant.
Dividend yield. The expected dividend is assumed to be zero as the Company has never paid dividends and has no current plan to pay any dividends on its common stock.
Restricted stock units
Service-based restricted stock units are valued using the market price of our common stock on the grant date. The grant date fair value of the restricted stock units is expensed on a straight-line basis over the applicable vesting period, which generally is four years.
Employee stock purchase plan
Our ESPP allows employees to purchase common stock at a 15% discount from the lower of the common stock closing price on the first or last day of the offering period. The current offering period is from July 1, 2020 to December 31, 2020. We use the Black-Scholes Model to determine fair value, which incorporates assumptions as described above. The grant date fair value of the ESPP is expensed on a straight-line basis over the applicable vesting period, which generally is six months.
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 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.
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Lumos Pharma, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)
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 money market funds.
Net Income (Loss) Per Share
Basic net income (loss) per share is computed by dividing net loss applicable to common stockholders by the weighted average number of common shares outstanding during the period, without consideration for common stock equivalents. Diluted net income per share reflects the potential dilution, using the treasury stock method.
Recently Issued Accounting Standards
From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board (“FASB”) or other standard setting bodies and adopted by us as of a specified effective date, if applicable to us.
In December 2019, the FASB issued ASU 2019-12, Income Taxes (“ASC 740”), which simplifies the accounting for income taxes by eliminating certain exceptions to the guidance in ASC 740 related to the approach for intra-period tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. The new guidance also simplifies aspects of the accounting for franchise taxes and enacted changes in tax laws or rates and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. The guidance is effective for calendar-year public business entities in 2021 and interim periods within that year. Early adoption is permitted. The Company does not expect adoption of this new guidance will have a material impact on its financial position or results of operations.
3. NewLink Merger
The Company completed the Merger on March 18, 2020. The Merger was accounted for as a reverse asset acquisition as NewLink did not meet the definition of a business pursuant to Topic 805, Business Combinations, as NewLink did not have the ability to generate outputs. Private Lumos was deemed to be the accounting acquirer because immediately following the Merger: (i) Lumos stockholders owned approximately 50% of outstanding common stock of the Company, (ii) the board of directors of the Company (the "Board") consists of three members designated by Private Lumos, three members designated by NewLink and the Board unanimously appointed an independent seventh member and (iii) the Company is led by Private Lumos’ then current chief executive officer and chief scientific officer, with other current members of senior management from both Private Lumos and NewLink.
For accounting purposes: (i) the assets acquired and liabilities assumed were recorded based on their estimated fair values on the Merger date, (ii) the reported historical operating results of the combined company prior to the Merger will be those of Private Lumos and not of NewLink after retroactively giving effect to the common stock exchange ratio, reverse stock split and change in par value for all periods presented, and (iii) for periods prior to the transaction, shareholders’ authorized capital of the combined company is presented based on the historical authorized capital of NewLink.
As the fair value of the NewLink net assets acquired, including the intangible assets of the PRV and IPR&D not previously reflected on NewLink’s balance sheet, were more clearly evident, fair valuing the net assets was determined to be a more reliable approach in determining the cost of net assets acquired. Except for the items noted herein, the fair value of the net assets acquired were determined to be the carrying value due to their short-term nature and ability to convert to cash. Based on most current observable inputs and trends in the market of the PRVs, we determined an estimated transaction price of the acquired PRV under the precedent transaction method to be $95.0 million, which is the observed median guideline in the range of publicly disclosed transactions of $80.0 million to $111.0 million from 2018 and through 2020. We applied a present value factor and estimated selling costs to the estimated transaction price to arrive at a fair value of the PRV. The PRV was recorded at an asset value of $87.9 million along with a corresponding liability due to Merck Sharp & Dohme Corp. (“Merck”) of $35.7 million. In addition, we recorded a deferred tax liability of $9.5 million for the step up in book basis over tax basis for the net value of the PRV. The fair value assigned to the acquired IPR&D was estimated based on the estimated expected net proceeds from the sales of these assets as intellectual property. As these assets are no longer being actively pursued in further clinical development by the Company, the IPR&D fair value of $426,000 were expensed to research and development expenses in the statement of operations for the three months ended March 31, 2020.
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Lumos Pharma, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)
The following table summarizes the estimated fair value of the assets acquired and liabilities assumed on March 18, 2020, the date of the Merger (in thousands):
Assets acquired:
Cash and cash equivalents$84,179 
Prepaid and other current assets2,999
Income tax receivable192
Property and equipment1,020
Economic interest in PRV87,920
Other intangible assets426
Other non-current assets517
Total Assets Acquired177,253
Liabilities assumed:
Accounts payable285
Accrued expenses and other current liabilities8,788
PRV-related liability owed to Merck35,720
Royalty obligation payable to Iowa Economics Development Authority6,000
Deferred tax liability9,500
Other long-term liabilities12
Total liabilities assumed60,305
Total net assets acquired$116,948 

4. License and Research Collaboration and PRV Asset Purchase Agreements
In November 2014, NewLink entered into a worldwide license and collaboration agreement (the “NewLink Merck Agreement”), with Merck, to develop and potentially commercialize its Ebola vaccine rVSV∆G-ZEBOV that it licensed from the Public Health Agency of Canada ("PHAC"). rVSV∆G-ZEBOV was also eligible to receive a PRV if approval was granted by the U.S. Food and Drug Administration (the "FDA"), with the Company entitled to 60% and Merck entitled to the remaining 40% of the PRV value obtained through sale, transfer or other disposition of the PRV. On December 20, 2019, Merck announced that the FDA approved its application for ERVEBO® (Ebola Zaire Vaccine, Live) for the prevention of disease caused by Zaire Ebola virus in individuals 18 years of age and older.
On July 27, 2020, Lumos and Merck entered into the asset purchase agreement (the “PRV Asset Purchase Agreement”), whereby Lumos and Merck each agreed that Merck would purchase the PRV from the Company for $100.0 million. Merck will pay us $60 million, representing our share of the purchase price in two installments. The first installment of $34.0 million was received by us at the closing during the three months ended September 30, 2020 and the second installment of $26.0 million is due on January 11, 2021 and is recorded within other receivables on the condensed consolidated balance sheets. We recognized a gain of $6.3 million, net of $1.5 million in costs incurred, from the sale of the PRV and such gain is recorded within other income, net on the condensed consolidated statements of operations.
Under the NewLink Merck Agreement, as amended, the Company has the potential to earn royalties on sales of the vaccine in certain countries, if the vaccine is successfully commercialized by Merck. However, we believe that the market for the vaccine will be limited primarily to areas in the developing world that are excluded from royalty payment or where the vaccine is donated or sold at low or no margin, and therefore we do not expect to receive material royalty payments from Merck in the foreseeable future. For the three and nine months ended September 30, 2020, the Company recognized revenues of $74,000 and $128,000, respectively, for work the Company performed in relation to ERVEBO®, as a subcontractor of Merck.
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Lumos Pharma, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)
5. Leases
The Company has certain facility leases with non-cancellable terms ranging between one and two 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 the Merger, NewLink had asserted it would not renew the lease terms through expiry of the lease renewal option periods. The weighted-average remaining lease term as of September 30, 2020 is less than 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, 2020 are as follows (in thousands), excluding option renewals:
For the Year Ended December 31:
2020$188 
2021278 
Total future minimum lease payments466 
     Less: Imputed interest(10)
Unamortized lease incentive114 
Total$570 

6. Stock-Based Compensation
Stock Options and Performance Stock Options
In 2012, Private Lumos adopted the 2012 Equity Incentive Plan (“2012 Plan”), and in 2016 it adopted the 2016 Stock Plan (“2016 Plan” and together with the 2012 Plan, the “Plans”). In connection with the Merger, all outstanding options under the Plans were assumed and such assumed options may be exercised to purchase common stock of the Company after the Merger. Subsequent to the Merger, the Plans were terminated as to future awards.
In connection with the Merger, the Company assumed NewLink’s 2009 Equity Incentive Plan which was effective since July 2009 and was subsequently amended on May 9, 2019 (the “2019 Plan”). The 2019 Plan has a 10 year term from the Board adoption date of March 22, 2019 and on January 1 of each year through January 1, 2029, in accordance with an “evergreen provision”, 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 Board, will be added to the shares reserved under the 2019 Plan. The 2019 Plan provides for the grant of incentive stock options, nonstatutory stock options, restricted stock awards and stock appreciation rights to officers, employees, members of the Board, advisors, and consultants to the Company. As of September 30, 2020, we had 462,502 shares available for grant under the 2019 Plan.
In connection with the Merger, the Company re-valued the assumed stock options, and it did not result in a material incremental expense for the three and nine months ended September 30, 2020.
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Lumos Pharma, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)
The table below summarizes the stock option activity, including options with market and performance conditions, during the nine months ended September 30, 2020:
Number
of options
Weighted
average
exercise
price
Weighted average
remaining contractual
term (years)
Outstanding at beginning of period
596,312 $30.76 5.0
Options granted
511,604 8.19 
Options exercised
  
Options forfeited
(2,052)20.90 
Options expired
(76,834)30.95 
Outstanding at end of period
1,029,030 $19.54 7.3
Options exercisable at end of period
444,623 $31.93 5.3
The weighted-average assumptions used to value the stock options using the Black-Scholes option-pricing were as follows:
Risk-free interest rate
0.35% to 0.46%
Expected dividend yield
%
Expected volatility
86.1% to 89.3%
Expected term (in years)
5.8 to 6.0
Weighted-average grant-date fair value per share
$5.87
2010 Non-Employee Directors' Stock Award Plan
In connection with the Merger, the Company assumed NewLink’s 2010 Non-Employee Directors’ Stock Award Plan (the "Directors’ Plan") which was effective on November 10, 2011. As of September 30, 2020, no shares remain available for grant under the Directors' Plan.
2010 Employee Stock Purchase Plan
In connection with the Merger, the Company assumed NewLink’s 2010 Employee Stock Purchase Plan (the "2010 Purchase Plan"), which was effective on November 10, 2011. As of September 30, 2020, 2,119 shares remain available for issuance under the 2010 Purchase Plan.
Restricted Stock Units
The table below summarizes the restricted stock units activity during the nine months ended September 30, 2020:
Number
of restricted shares
Weighted
average
grant date fair value
Unvested at beginning of period210 $312.94 
Granted73,987 7.90 
Vested(443)159.10 
Forfeited/cancelled  
Unvested at end of period73,754 $7.86 


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Lumos Pharma, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)
Share-Based Compensation Expense
Stock-based compensation expenses included in the Company’s condensed consolidated statements of operations for the three and nine months ended September 30, 2020 and 2019 were (in thousands):
Three Months Ended September 30,Nine Months Ended September 30,
2020201920202019
Research and Development$10 $ $75 $ 
General and Administrative295 44 681 132 
Total $305 $44 $756 $132 
As of September 30, 2020, we had unrecognized compensation cost of $3.7 million and the weighted-average period over which it is expected to be recognized is 3.3 years.
7. Long-Term Debt and Conversion to Royalty Obligation
In March 2005, NewLink entered into a $6.0 million forgivable loan agreement with the Iowa Department of Economic Development (the “IDED”). Under the agreement, in the absence of default, there were no principal or interest payments due until the completion date for the project. This loan was converted into a royalty obligation under the terms of a settlement agreement entered into on March 26, 2012, with the Iowa Economic Development Authority, as successor in interest to the IDED. As no payments are expected in the next 12 months, the entire royalty obligation of $6.0 million, which we assumed in connection with the Merger, is considered as long-term liability as of September 30, 2020.
8. Income Taxes
For the three and nine months ended September 30, 2020, the Company recorded a benefit of $2.4 million and $9.3 million, respectively. For the three and nine months ended September 30, 2019, the Company recorded no income tax benefit. The income tax benefit is as follows (in thousands):
Three Months Ended September 30,Nine Months Ended September 30,
2020201920202019
Current tax benefit$ $ $4,473 $ 
Deferred tax benefit2,432  4,848  
Total income tax benefit$2,432 $ $9,321 $ 
On March 25, 2020, in response to the COVID-19 pandemic, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was signed into law to provide emergency assistance to affected individuals, families, and businesses. The CARES Act provides numerous tax provisions and other stimulus measures, including temporary changes regarding the prior and future utilization of net operating losses. The CARES Act amends the net operating losses ("NOLs") provisions of the Tax Cut and Jobs Act of 2017 (the "Tax Act"), providing for a five year carryback for NOLs generated in tax years beginning after December 31, 2017 and before January 1, 2021. A tax benefit of $4.5 million related to pre-tax NOLs was carried back to each of the five taxable years to fully offset taxable income with a full receivable recorded for this amount as of March 31, 2020. The Company received the full refund in July 2020.
The income tax amount for the three and nine months ended September 30, 2020 differs from the amount that would be expected after applying the statutory U.S. federal income tax rate primarily due to the benefit of $4.5 million recorded as a result of the CARES Act. Additionally, the income tax benefit for the three and nine months ended September 30, 2020 includes $2.4 million and $4.8 million, respectively, for the release of the valuation allowance related to Private Lumos NOLs and a current period benefit for losses the Company anticipates will be offset by future income. The income tax amount for the three and nine months ended September 30, 2019 differs from the amount that would be expected after applying the statutory U.S. federal income tax rate primarily due to the full valuation allowance.
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Lumos Pharma, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)
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. As a result of the Merger, a deferred tax liability of $9.5 million was recorded for the step up in book basis over tax basis for the net value of the PRV which the Company sold in July 2020. A net deferred tax liability of $4.7 million is shown on the condensed consolidated balance sheets as of September 30, 2020.
Based on Section 382 ownership change analyses through March 18, 2020, as a result of the Merger, both historical NewLink and Private Lumos experienced Section 382 ownership changes on March 18, 2020.
The Company has a reserve for uncertain tax positions related to state tax matters of $0.7 million as of September 30, 2020 recorded within accrued expenses in the condensed consolidated balance sheets, 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 Income (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 income (loss) per share of common stock (in thousands, except share and per share data) and the number of unexercised stock options and restricted stock units, which are common stock equivalents, that have been excluded from the diluted net loss calculation as their effect would have been anti-dilutive for all periods presented:

Three Months Ended September 30,Nine Months Ended
September 30,
2020201920202019
Net income (loss)$1,765 $(2,669)$(3,248)$(7,343)
Accretion of preferred stock to current redemption value (766)(651)(2,274)
Net income (loss) attributable to common shareholders$1,765 $(3,435)$(3,899)$(9,617)
Weighted-average shares outstanding - Basic8,293,312 1,343,483 6,267,576 1,344,755 
Add: dilutive effect stock options and restricted stock units193,492    
Weighted-average shares outstanding - Diluted 8,486,804 1,343,483 6,267,576 1,344,755 
Net income (loss) per share - Basic$0.21 $(2.56)$(0.62)$(7.15)
Net income (loss) per share - Diluted$0.21 $(2.56)$(0.62)$(7.15)
Anti-dilutive stock options 394,672 291,754 1,029,030 291,754 
Anti-dilutive restricted stock units  73,754  
Total anti-dilutive common stock equivalents excluded
394,672 291,754 1,102,784 291,754 

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
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Lumos Pharma, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)
recognized ratably over the future service period. The Company also records costs incurred with contract terminations associated with restructuring activities.
On September 30, 2019, prior to the Merger, NewLink 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 NewLink and the NewLink 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 his employment with the company ended on November 11, 2019.
In conjunction with the restructuring and departure of former NewLink executives, NewLink recorded restructuring and severance charges of $5.6 million during the year ended December 31, 2019. The following table shows the amount accrued for restructuring activities which is recorded within accrued expenses in the condensed consolidated balance sheets (in thousands):
Total Employee Severance Cost
Balance as of December 31, 2019$4,700 
Expensed 
Cash payments4,262 
Balance as of September 30, 2020$438 

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 for the Southern District of NY”), captioned Abramson v. NewLink Genetics Corp., et al., Case 1:16-cv-3545 (the “Securities Action”). Subsequently, the Court for the Southern District of NY 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 NewLink, NewLink’s former Chief Executive Officer Charles J. Link, Jr., and NewLink’s former 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 NewLink’s investors. The Defendants filed a motion to dismiss the amended complaint on July 14, 2017. On March 29, 2018, the Court for the Southern District of NY 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 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 NewLink'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 NewLink’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 for the Southern District of NY 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. In an opinion dated July 13, 2020, the Second Circuit Court of Appeals affirmed the district court’s dismissal of the second amended complaint in part, vacated the district court’s dismissal of the second amended complaint in part, and remanded the matter to the district court for further proceedings. On August 6, 2020, the Company filed a Petition for Rehearing en banc requesting reconsideration of portions of the opinion from the Second
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Lumos Pharma, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)
Circuit Court of Appeals and is awaiting the Court’s determination concerning the petition. 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 NewLink in the Court for the Southern District of NY, against NewLink’s former Chief Executive Officer Charles J. Link, Jr., NewLink’s former Chief Medical Officer and President Nicholas Vahanian, and NewLink 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 NewLink 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 NewLink. The plaintiff does not quantify any alleged damages in the complaint but seeks restitution for damages to NewLink, attorneys’ fees, costs, and expenses, as well as an order directing that proposals for strengthening board oversight be put to a vote of NewLink’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 for the Southern District of NY 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 (the “Ely Action”). By agreement of the parties and order dated June 26, 2017, the Court for the Southern District of NY 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 had 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
The following discussion and analysis should be read in conjunction with the unaudited condensed consolidated financial statements and notes thereto included in Part I, Item 1 of this quarterly report on Form 10‑Q for the quarter ended September 30, 2020 (this “Quarterly Report”) and Private Lumos’s audited consolidated financial statements and notes thereto and management's discussion and analysis of financial condition and results of operations for the year ended December 31, 2019 included in our Current Report on Form 8-K/A, filed with the Securities and Exchange Commission (“SEC”) on June 1, 2020. This Quarterly Report 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, such statements are subject to the “safe harbor” created by those sections and involve risks and uncertainties. Forward-looking statements are based on our management’s beliefs and assumptions and on information available to our management as of the date hereof. As a result of many factors, such as those set forth under Part II, “Item 1A. Risk Factors” in this Quarterly Report, our actual results may differ materially from those anticipated in these forward-looking statements, accordingly, you should not place undue reliance on these forward-looking statements. 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. Such factors may be amplified by the COVID-19 pandemic and its potential impact on our business and the global economy.
Overview
Lumos Pharma, Inc. is a clinical-stage biopharmaceutical company. References in this report to “us,” “we,” “our,” “the Company,” or “Lumos” are to Lumos Pharma, Inc. and its wholly-owned subsidiaries. With our principal executive offices located in Austin, Texas and additional executive and administrative offices located in Ames, Iowa, we are engaged in advancing our clinical program and focused on identifying, acquiring, developing, and commercialization of novel products and new therapies for people with rare diseases on a global level, for which there is currently a significant unmet need for safe and effective therapies. Our common stock is listed on the NASDAQ Global Select Market (“NASDAQ”) and trades under the ticker symbol “LUMO”.
We entered into a business combination (the “Merger”) between the Company, formerly known as NewLink Genetics Corporation (“NewLink”), Cyclone Merger Sub, Inc. ("Merger Sub"), a wholly owned subsidiary of NewLink, and Lumos Pharma, Inc., (“Private Lumos”), which has since been renamed “Lumos Pharma Sub, Inc.” The Merger closed on March 18, 2020, and Merger Sub merged with and into Private Lumos, with Private Lumos surviving as a wholly-owned subsidiary of the Company. Immediately prior to the closing of the Merger, the shares of NewLink common stock were adjusted with a reverse split ratio of 1-for-9. Under the terms of the Merger, Private Lumos stockholders received an aggregate of 4,146,398 shares of our common stock (after giving effect to the reverse split) for each share of outstanding common stock, Series A Preferred Stock and Series B Preferred Stock of Private Lumos converted at an exchange ratio of 0.1308319305, 0.0873621142 and 0.1996348626, respectively. Immediately following the reverse stock split and the completion of the Merger, there were 8,292,803 shares of the Company’s common stock outstanding, of which approximately 50% was held by each of Private Lumos and NewLink security holders.
The Merger was accounted for as a reverse asset acquisition as NewLink did not meet the definition of a business pursuant to Topic 805, Business Combinations, as NewLink did not have the ability to generate outputs. Private Lumos was deemed to be the accounting acquirer because immediately following the Merger: (i) Lumos stockholders owned approximately 50% of outstanding common stock of the Company, (ii) the board of directors of the Company (the "Board") consists of three members designated by Private Lumos, three members designated by NewLink and the Board unanimously appointed an independent seventh member and (iii) the Company is led by Private Lumos’ then current chief executive officer and chief scientific officer, with other current members of senior management from both Private Lumos and NewLink. Accordingly, for accounting purposes: (i) the assets acquired and liabilities assumed were recorded based on their estimated fair values on the Merger date (ii) the reported historical operating results of the combined company prior to the Merger will be those of Private Lumos and not of NewLink after retroactively giving effect to the common stock exchange ratio, reverse stock split and change in par value for all periods presented, and (iii) for periods prior to the transaction, shareholders’ authorized capital of the combined company is presented based on the historical authorized capital of NewLink.
Since the consummation of the Merger, we have focused our efforts on the development of Private Lumos’ sole product candidate, LUM-201, a potential oral therapy for PGHD and other rare endocrine disorders.



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LUM-201 Growth Hormone Secretagogue
Our pipeline is focused on the development of an orally administered small molecule, LUM-201, which is a growth hormone (“GH”) secretagogue, also called ibutamoren, for rare endocrine disorders where injectable recombinant human growth hormone ("rhGH") is currently approved. We acquired LUM-201 from Ammonett Pharma LLC ("Ammonett") in July 2018. LUM-201 received the Orphan Drug Designation (“ODD”) in the United States and the European Union for Growth Hormone Deficiency (“GHD”) in 2017. We hold the United States patent 9763919 “Detecting and Treating Growth Hormone Deficiency,” which has been issued with an expiration in 2036, and other patent applications are pending in multiple jurisdictions. If approved, LUM-201 has the potential to become the first approved oral GH secretagogue to treat rare endocrine disorders associated with GH deficiencies, starting with PGHD, providing an alternative to the current standard regimen of daily injections.
A secretagogue is a substance that stimulates the secretion or release of another substance. LUM-201 stimulates the release of GH and is referred to as a GH secretagogue. The current targeted indications for LUM-201 are PGHD, Turner Syndrome and Children Born Small for Gestational Age (“SGA”), in each case in a certain subset of affected patients.
LUM-201 stimulates GH via the GH secretagogue receptor, also known as the ghrelin receptor, thus providing a differentiated mechanism of action to treat some rare endocrine disorders (involving a deficiency of GH) by increasing the amplitude of endogenous, pulsatile GH secretion. LUM-201’s stimulatory effect is regulated by both circulating levels of GH and its down-stream mediator insulin-like growth factor which at elevated levels feedback or negatively regulate additional release of GH from the pituitary, hence protecting against hyperstimulation of GH release. LUM-201 has been observed to stimulate endogenous GH in patients who have a functional but reduced hypothalamic pituitary GH axis. LUM-201 is a tablet formulation that will be administered orally once daily and potentially provides a new therapeutic approach to the 35-year old standard of care (subcutaneous injectable rhGH) for treating rare endocrine disorders associated with GH deficiencies.
In October 2020, we launched our OraGrowtH Trials program to study the effects of LUM-201 in PGHD and initiated our Phase 2b clinical trial (“OraGrowtH210 Trial” or the “Phase 2b Trial”) with the opening of the initial sites participating in this study. We anticipate data read out for the OraGrowtH210 Trial mid-year 2022. The coronavirus pandemic has caused pervasive interruptions to clinical trials industrywide. Facing similar near-term impediments, we have experienced some limited delays related to the pandemic as clinical sites adapt their procedures to caring for patients during a pandemic and we may experience further delays should significant pandemic related disruptions persist. Depending on the outcome of data developed in the Phase 2b Trial and the timing of such data, we plan to conduct separate Phase 2 clinical trials to study the effects of LUM-201 for Turner Syndrome and SGA in a certain subset of affected patients.
We also plan to initiate a second concurrent trial of LUM-201 in PGHD during the first quarter of 2021, exploring the effects of the mechanism of action of LUM-201 in amplifying the pulsatile secretion of growth hormone. This study (“OraGrowtH212 Trial”) will focus on pharmacokinetic and pharmacodynamic endpoints at two different doses in a limited number of children with PGHD, corroborating the amplified pulsatile secretion demonstrated in prior LUM-201 studies in adults. OraGrowtH212 will be conducted at a single specialized pediatric center with the capacity to conduct the more frequent sample acquisition and monitoring required for these types of clinical trials. This study will run in parallel with OraGrowtH210 Trial with the intention that the data will be supportive in any future regulatory filings.
On August 12, 2020, we entered into Amendment No. 1 to the Lumos Merck Agreement with Merck (the “Lumos Merck Agreement Amendment”). Pursuant to the Lumos Merck Agreement Amendment, we obtained from Merck a worldwide, non-exclusive, sublicensable (subject to Merck’s consent in the United States, specified major European countries and Japan, such consent not to be unreasonably withheld) license under the specified patents and know-how that are the subject of our exclusive license to develop, manufacture and commercialize LUM-201 for diagnostic purposes, excluding Autism Spectrum Disorders. Additionally, we and Merck agreed that, among other things, (a) our sublicensees have the right to grant further sublicenses (subject to Merck’s prior written consent, not to be unreasonably withheld), and (b) if we provide Merck with a notice that we intend to enter into a development or commercial arrangement with a third party with respect to LUM-201 for the treatment or prevention of any and all indications (excluding Autism Spectrum Disorders) in the United States, specified European countries or Japan, and either Merck does not submit terms for such arrangement within a specified period of time or we and Merck do not (despite good faith negotiations) enter into a definitive agreement with Merck for such arrangement within a specified period of time after Merck’s submission of such terms, then we have the right, for a specified period of time thereafter, to enter into a development or commercial arrangement with any third party with respect to LUM-201, without having to submit a new notice to Merck with respect to such arrangement, and if any such third party agreement is entered into, such third party may hire a contract sales force for LUM-201 without Merck’s prior written consent.
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The graphic below depicts these indications with their respective development status.
https://cdn.kscope.io/23ec3df5478a174885236240b43c72c2-nlnk-20200930_g2.jpg
LUM-201 for the Treatment of a Subset of PGHD Patients
Lumos is initially developing LUM-201 for a subset of patients with PGHD. PGHD is a rare endocrine disorder occurring in approximately one in 3,500 persons aged birth to 17 years. Causes of PGHD can be congenital (children are born with the condition), acquired (brain tumor, head injuries or other causes), iatrogenic (induced by medical treatment) or idiopathic (of unknown cause). Children with untreated PGHD will have significant growth failure (potential adult heights significantly less than five feet and may have abnormal body composition with decreased bone mineralization, decreased lean body mass and increased fat mass).
The main therapeutic goal in PGHD is to restore growth, enabling short children to achieve normal height and prevent complications that could involve metabolic abnormalities, cognitive deficiencies and reduced quality of life. Current treatment of PGHD is limited to daily subcutaneous injections of rhGH with a treatment cycle lasting up to an average of seven years. Poor compliance with daily rhGH injections during treatment can result in an adverse impact on growth.
LUM-201 is intended to provide an oral treatment to stimulate the release of endogenous GH in PGHD patients who have a functional but reduced hypothalamic pituitary GH axis and are expected to respond to LUM-201. Lumos believes this group represents 50% to 60% of PGHD patients. In October 2020, we launched our OraGrowtH Trials program to study the effects of LUM-201 in PGHD and initiated our OraGrowtH210 Trial. The trial is a randomized study testing three doses of LUM-201 in a parallel enrollment approach versus the current standard dose of injectable rhGH. The primary endpoint of the study is preliminary validation of our predictive enrichment marker (“PEM”) patient selection strategy as evidenced by the percentage of selected patients who grow in response to LUM-201. Secondary endpoints include selection of a pediatric dose of LUM-201 for future studies including Phase 3 and determination of the degree of repeatability of the PEM selection process in patients screened for participation in OraGrowtH210. We anticipate data read out for the OraGrowtH210 Trial mid-year 2022.
Potential expansion of LUM-201 into additional endocrine indications
Lumos is also in the planning stages for developing LUM-201 for patients with Turner Syndrome. Turner Syndrome is a sex-linked developmental disorder that affects females only (one normal X chromosome while the other X chromosome is either missing or structurally changed). It causes growth failure that begins before birth and continues into infancy and childhood, where it can be accentuated by the absence of puberty. If left untreated, girls with Turner Syndrome will usually achieve an average adult height that is significantly shorter than their peers.

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Lumos is also in the planning stages for developing LUM-201 for the indication of SGA. SGA is a child born with birth weight and/or length under two standard deviations (“SDS”) for the gestational age and sex of the population. Approximately five percent of all newborn children are SGA and a spectrum of factors are found to be causative: maternal, placental, fetal, metabolic, and genetic. In the newborn period, SGA children are at greater risk of life-threatening conditions: hypoglycemia, hypercoagulability, necrotic enterocolitis, direct hyperbilirubinemia, and hypotension. Approximately 10% of SGA children do not achieve catch-up growth and remain short (≥-2 SDS) into adulthood.
NewLink’s Legacy Oncology Candidates
In connection with the Merger, we acquired NewLink’s small-molecule product candidates. These product candidates, indoximod, NLG802 (a prodrug of indoximod) and NLG919 (a direct IDO1 enzymatic inhibitor) are indoleamine-2, 3-dioxygenase pathway inhibitors. We also acquired an additional small molecule product candidate, NLG207, which is a nanoparticle-drug conjugate consisting of a cyclodextrin-based polymer backbone linked to camptothecin, a topoisomerase 1 inhibitor, which was out-licensed to Ellipses Pharma Limited, effective December 17, 2019.
Two U.S. patents covering both the salt and prodrug formulations of indoximod were issued in the United States on August 15, 2017 and February 19, 2019, respectively, providing exclusivity until at least 2036. We are continuing to pursue international patent coverage for these formulations in some countries, and we are exploring the potential for further development and licensing opportunities but currently do not have any active program for these acquired small molecule product candidates.
Ebola Vaccine
In November 2014, NewLink entered into the NewLink Merck Agreement with Merck to develop and potentially commercialize its Ebola vaccine rVSV∆G-ZEBOV that it licensed from PHAC. rVSV∆G-ZEBOV was also eligible to receive a PRV if approval was granted by the FDA, with the Company entitled to 60% of the PRV value obtained through sale, transfer or other disposition of the PRV. On December 20, 2019, Merck announced that the FDA approved its application for ERVEBO® (Ebola Zaire Vaccine, Live) for the prevention of disease caused by Zaire Ebola virus in individuals 18 years of age and older. On July 27, 2020, we and Merck entered into the PRV Asset Purchase Agreement, whereby we and Merck each agreed that Merck would purchase the PRV from us for $100.0 million. Merck will pay us $60.0 million, representing our share of the purchase price in two installments. The first installment of $34.0 million was received by us at the closing during the three months ended September 30, 2020 and the second installment of $26.0 million is due on January 11, 2021 and is recorded within other receivables on the condensed consolidated balance sheets.
We also have the potential to earn royalties on sales of the vaccine in certain countries, if the vaccine is successfully commercialized by Merck. However, we believe that the market for the vaccine will be limited primarily to areas in the developing world that are excluded from royalty payment or where the vaccine is donated or sold at low or no margin and therefore we do not expect to receive material royalty payments from Merck in the foreseeable future.
Financial Overview
Revenue
We have no products approved for commercial sale and have not generated any revenue from product sales. In the future, we may generate revenue from product sales, royalties on product sales, or license fees, milestones, or other upfront payments if we enter into any collaborations or license agreements. We expect that our future revenue will fluctuate from quarter to quarter for many reasons, including the uncertain timing and amount of any such payments and sales.
Research and Development Expenses
Research and development expenses consist primarily of costs incurred to advance our product candidate, LUM-201. Our research and development expenses include internal personnel expenditures along with external research and development expenses incurred under arrangements with third parties, such as contract research and manufacturing organizations, consultants, and our scientific advisors.
We expense research and development costs as incurred. Nonrefundable advance payments for goods and services that will be used in future research and development activities are capitalized as an asset and expensed when the service has been performed or when the goods have been received. We expect our research and development expenses to increase for the foreseeable future as we continue to conduct our clinical trial programs for our product candidates develop our pipeline and pursue regulatory approval of our product candidates.
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General and Administrative Expenses
General and administrative expenses consist primarily of professional fees for legal, auditing, tax and business consulting services, personnel expenses and travel costs. We expect that general and administrative expenses will increase in the future as we expand our operating activities. In addition, we expect to incur significant additional costs associated with being a SEC registrant. These increases will likely include legal fees, costs associated with Sarbanes-Oxley compliance, accounting fees, directors’ and officers’ liability insurance premiums, and other expenses.
Critical Accounting Policies and Significant Judgments and Estimates
We have prepared our condensed consolidated financial statements in accordance with U.S. GAAP which requires us to make estimates, assumptions and judgments that affect the reported amount of assets, liabilities, expenses. On an ongoing basis, we evaluate these estimates and judgments. We based our estimates on historical experience and on various assumptions that we believe to be reasonable under the circumstances. These estimates and assumptions form the basis for making judgments about the carrying values of assets and liabilities and the recording of expenses that are not readily apparent from other sources. Actual results could, therefore, differ materially from these estimates under different assumptions or conditions.
Aside from the changes disclosed in Note 2 to the condensed consolidated financial statements included in Item 1, Part I of this Quarterly Report, management believes there have been no material changes to the critical accounting policies from those discussed in Private Lumos’s audited financial statements and accompanying notes thereto as of and for the year ended December 31, 2019 included in Company’s current report on Form 8-K/A as filed with the SEC on June 1, 2020.
COVID-19
The pandemic caused by an outbreak of COVID-19 has resulted, and is likely to continue to result, in significant national and global economic disruption and may adversely affect our operations. We are actively monitoring the potential impact of COVID-19, if any, on the carrying value of certain assets and its continued operations. To date, we have experienced limited delays related to clinical trials as clinical sites adapt their procedures to caring for patients during a pandemic, however, we have not incurred impairment of any assets as a result of COVID-19. The extent to which these events may impact our business, clinical development, regulatory efforts, and the value of our common stock, will depend on future developments, which are highly uncertain and cannot be predicted at this time. The duration and intensity of these impacts and resulting disruption to our operations is uncertain and we will continue to evaluate the impact that these events could have on our operations, financial position, and results of operations and cash flows during fiscal year 2020.

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Results of Operations
Comparison of the Three Months Ended September 30, 2020 and 2019:
Three Months Ended September 30,
20202019Change in $Change in %
(in thousands)(in thousands)
Revenues:
Licensing and collaboration revenue
$74 $— 74 100 %
Total revenues$74 $— 
Operating expenses:
 Research and development$2,075 $1,202 873 73 %
General and administrative
5,156 1,496