Contract analysis

I. Purpose and Scope This memorandum serves as the Section 11 backup file documenting the factual basis, source materials, and legal analysis supporting key disclosure positions in the Registration Statement on Form S-1 filed by Lumos Analytics Inc., a Delaware corporation ("Lumos," the "Company," or the "Issuer"), with the United States Securities and Exchange Commission (the "SEC" or the "Commission"). The Registra

II. Due Diligence Process Overview

II.A. Document Collection and Review Calderwood & Harkness LLP issued a comprehensive due diligence request list (the "Due Diligence Request List") to Lumos management in November 2021, addressed to Naomi Feinberg, General Counsel and Corporate Secretary of the Company, and David Lau, Chief Financial Officer of the Company. The Due Diligence Request List was prepared in accordance with C&H's standard form for technol

II.B. Management Interviews and Verification Sessions Calderwood & Harkness LLP conducted multiple interview and verification sessions with senior management of the Company throughout the due diligence process. These sessions served the dual purpose of (i) developing the factual basis for disclosure in the Registration Statement and (ii) verifying the accuracy and completeness of information provided by the Company i

II.C. Third-Party Confirmation In connection with its due diligence investigation, C&H reviewed and relied upon the following third-party materials and confirmations: Auditor Reports. C&H reviewed the independent auditor's reports issued by Meridian & Howe LLP for each of fiscal year 2019, fiscal year 2020, and fiscal year 2021. Each report contained an unqualified opinion on the Company's consolidated financial stat

II.D. SEC Comment Letter Process The Registration Statement on Form S-1 was initially filed with the SEC on January 28, 2022. The following summarizes the comment letter process with the SEC Division of Corporation Finance: First Comment Letter. The SEC Staff issued its initial comment letter on February 14, 2022, containing forty-two (42) comments. The comments addressed a broad range of disclosure topics, including

III.A. Overview of Risk Factor Framework The risk factor disclosures in the Registration Statement are governed by Item 105 of Regulation S-K, which requires disclosure of the material factors that make an investment in the registrant speculative or risky. Effective November 9, 2020, the SEC amended Item 105 to require that risk factors be organized under relevant headings and that each risk factor adequately describ

III.B. History of Net Losses / Path to Profitability Factual Basis. The Company has incurred net losses in each year since its inception in 2016. For fiscal year ended December 31, 2021, the Company reported a net loss of $(41.2) million. For the same period, the Company reported Adjusted EBITDA of $(18.7) million. For the quarter ended March 31, 2022 (unaudited), the Company reported a net loss of $(13.8) million. T

III.C. Customer Concentration Risk Factual Basis. As of December 31, 2021, the Company had approximately 340 enterprise customers globally, with annual recurring revenue ("ARR") of $206.8 million. As of March 31, 2022, ARR had grown to $219.5 million. The Company's platform processes over two billion transactions per month on behalf of its customer base. The Company's top ten customers, by ARR, represented approximat

III.D. Dual-Class Stock Structure Factual Basis. The Company's Amended and Restated Certificate of Incorporation, to be filed in connection with the completion of the IPO, establishes a dual-class capital structure consisting of Class A Common Stock and Class B Common Stock. Each share of Class A Common Stock is entitled to one (1) vote per share. Each share of Class B Common Stock is entitled to ten (10) votes per s

III.E. Regulatory Risk in Financial Services / Fintech Factual Basis. The Company provides analytics software solutions to financial institutions and fintech companies for transaction monitoring, fraud detection, regulatory reporting, and predictive risk modeling. As such, the Company operates in a regulatory environment that encompasses federal and state banking regulations, data privacy and data protection laws (in

III.F. Competition from Larger Enterprise Software Providers Factual Basis. The Company operates in a competitive market for analytics, fraud detection, and regulatory compliance software solutions for the financial services industry. The Company's competitive landscape includes established enterprise technology companies with significantly greater financial, technical, marketing, and sales resources than the Company

III.G. Market Conditions and Macroeconomic Uncertainty Factual Basis. The broader technology sector experienced significant market volatility during the first half of 2022, with the Nasdaq Composite Index declining approximately 12% during the month of April 2022 alone, reflecting investor concerns regarding rising interest rates, inflationary pressures, geopolitical instability, and a reassessment of technology comp

III.H. Infrastructure Dependency Risk Factual Basis. The Company relies on third-party cloud infrastructure services provided by Brindoval Data Centers LLC ("Brindoval") for the hosting, storage, and processing of substantially all of its customer-facing platform operations. The Master Cloud Services Agreement between the Company and Brindoval, dated January 15, 2021, has a five-year initial term (expiring January 14

IV. Management's Discussion and Analysis (MD&A) — Disclosure of Operating Trends

IV.A. Revenue Growth and Key Performance Metrics Factual Basis. The Company's revenue has grown significantly since inception, reflecting increasing adoption of the Company's platform by enterprise customers in the financial services industry. The Company's total revenue for the periods presented in the Registration Statement was as follows: Annual recurring revenue ("ARR") as of December 31, 2021 was $206.8 million,

IV.B. ARR Methodology Disclosure The SEC Staff's first-round comment letter included a comment specifically addressing the Company's use of the annual recurring revenue metric in the Registration Statement. The Staff noted that ARR is a non-GAAP financial measure and requested that the Company provide: (i) a clear definition of ARR, including the specific components that are included and excluded from the calculation

IV.C. Gross Margin Analysis Factual Basis. The Company's gross margin for fiscal year 2021 was 72.3%, reflecting the Company's subscription-based revenue model and the scalability of its platform architecture. Gross margin for fiscal year 2020 was 68.9%, reflecting the impact of the Company's early investment in cloud infrastructure capacity in advance of customer demand. The improvement in gross margin from fiscal y

IV.D. Non-GAAP Financial Measures — Adjusted EBITDA Factual Basis. For fiscal year 2021, the Company reported Adjusted EBITDA of $(18.7) million, compared to a GAAP net loss of $(41.2) million. The reconciliation of GAAP net loss to Adjusted EBITDA for fiscal year 2021 is as follows: The Company defines Adjusted EBITDA as net loss, adjusted to exclude stock-based compensation expense, depreciation and amortization ex

IV.E. Liquidity and Capital Resources Factual Basis. As of December 31, 2021, the Company's principal sources of liquidity consisted of: (i) cash and cash equivalents of $94.3 million; and (ii) the Ashford National Bank revolving credit facility with a total commitment of $50 million, of which approximately $15 million was drawn as of March 31, 2022 and approximately $35 million remained available for future borrowin

IV.F. Critical Accounting Policies The MD&A section of the Registration Statement includes disclosure of the Company's critical accounting policies and estimates, which are those accounting policies that require significant management judgment and that could have a material impact on the Company's financial statements if different assumptions or estimates were used. The following critical accounting policies are disc

V. Related-Party Transaction Disclosures

V.A. Disclosure Framework The related-party transaction disclosures in the Registration Statement are governed by Item 404 of Regulation S-K, which requires disclosure of any transaction since the beginning of the registrant's last fiscal year (or any currently proposed transaction) in which: (i) the amount involved exceeds $120,000; (ii) the registrant is a participant; and (iii) any related person has or will have

V.B. Investor Rights Agreement Parties. The Investor Rights Agreement, dated as of the Series D closing (August 24, 2020, as amended), is among Lumos Analytics Inc., Velthryn Venture Partners Fund IV, L.P. ("Velthryn"), Arclight Equity Group Fund VII, L.P. ("Arclight"), and Ridgeline Capital Partners Fund II, L.P. ("Ridgeline"). As of the date of the Registration Statement, the ownership positions of these investors