NewLink Genetics Merger

3 Months Ended

Mar. 31, 2020

NewLink Genetics MergerAs described in Note 1, Private Lumos merged with the Company on March 18, 2020. The Merger was accounted for as a reverse merger with Private Lumos as the accounting acquirer based upon the terms of the Merger Agreement and other factors including: (i) Lumos stockholders owned approximately 50% of outstanding common stock of the Company immediately following the closing of the Merger, (ii) the board of directors of the Company (the "Board") consists of three members designated by the NewLink, three members designated by Private Lumos and the Board unanimously appointed a 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. The Merger was accounted for as an asset acquisition in accordance with U.S. GAAP as the assets acquired and liabilities assumed from NewLink do not meet the definition of a business as defined by ASC 805, Business Combinations as NewLink does not contain the processes in place to generate outputs. For accounting purposes, Private Lumos is considered to be acquiring the assets and liabilities of NewLink in

this Merger. Management allocated the net assets acquired and liabilities assumed in connection with the transaction based on their estimated acquisition date fair values as described below.

The fair value of the net assets acquired on March 18, 2020 was $116.9 million. As NewLink’s assets were predominately comprised of cash offset by current liabilities, the carrying value of NewLink’s net assets, including the fair value of acquired intangible assets not previously reflected on NewLink’s balance sheet, is considered to be the best indicator of the fair value and the purchase price. The purchase price assigned a value to the assets and liabilities acquired based on the accumulated cost of the acquisition and allocated based on the acquired assets and liabilities relative fair value. Given the cost of the acquisition was computed based on the fair value of the net assets acquired, the relative fair values assigned equate to the computed fair values of the acquired assets and liabilities.

The acquired net assets of NewLink based on their fair values as of March 18, 2020 are as follows (in thousands):


Assets acquired:
Cash and cash equivalents	$	84,179
Prepaid and other current assets	2,999
Income tax receivable	192
Property and equipment	1,020
Economic interest in PRV	87,920
Other intangible assets	426
Other non-current assets	517
Total Assets Acquired	177,253

Liabilities assumed:
Accounts payable	285
Accrued expenses and other current liabilities	8,788
PRV-related liability owed to Merck	35,720
Royalty obligation payable to Iowa Economics Development Authority	6,000
Deferred tax liability	9,500
Other long-term liabilities	12
Total liabilities assumed	60,305
Total net assets acquired	$	116,948

On January 3, 2020, Merck Sharp & Dohme Corp. ("Merck") notified NewLink that they had been issued a PRV in connection with the U.S. Food and Drug Administration (the "FDA") approval of EVREBO® (Ebola Zaire Vaccine, Live). Under the terms of the NewLink Merck Agreement (as defined below), on February 4, 2020, Merck assigned all of its rights and interests in connection with the PRV to NewLink. The Company is entitled to 60 percent of the value of the PRV obtained through sale, transfer or other disposition of the PRV, with 40 percent to be payable to Merck upon completion of the sale. The Company intends to sell the PRV in the open market and does not intend to use the PRV for any purpose other than sale in the open market for cash consideration. Management used the precedent transaction method under the market approach to estimate the value of the PRV and relied on purchase prices indicated by actual precedent priority review voucher transactions that were reasonably comparable to the PRV owned by the Company. The Market Approach requires several judgments and assumptions to determine the fair value including discount rates, probability assumption of sale, expected consolidated transaction sales price, and tax rates. The 40 percent ownership owed to Merck is separately reflected as a liability in the condensed consolidated balance sheet. Management used an estimated transaction price of $95.0 million based on the observed median guideline transaction of the range of publicly disclosed transactions of $80.0 million to $111.0 million from 2018 and through 2020. This reflects the most current observable inputs as of March 18, 2020 and trends in the market of PRVs and accounts for the decline in the transaction values since the peak sale of $350.0 million in 2015. The timing of the sale of the PRV may be impacted by the COVID-19 pandemic, however, for the valuation at March 18, 2020, no adjustments to timing were made. The fair values

of the NewLink assets did not attribute any value to future royalties that NewLink might be entitled to receive under the NewLink Merck Agreement or from other assets because management did not believe that any such royalties would be paid in the foreseeable future, if ever.

The fair value assigned to the acquired in-process research and development assets was estimated based on the estimated expected net proceeds from the sales of these assets as intellectual property. These assets are no longer being actively pursued in further clinical development by the Company. The acquired in-process research and development expenses of $426,000 were expensed to research and development expenses in the statement of operations for the three months ended March 31, 2020.

Acquired in-process research and development

Acquired in-process research and development 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.