Contract analysis

I. Purpose and Scope of Memorandum This memorandum is an internal Calderwood & Harkness LLP work product prepared in anticipation of the proposed initial public offering (the "IPO" or the "Offering") of Class A Common Stock, par value $0.0001 per share (the "Class A Common Stock"), of Lumos Analytics Inc. ("Lumos," the "Company," or the "Issuer"), a Delaware corporation, on the Nasdaq Global Select Market under the t

II. Overview of Statutory Framework This Section provides an overview of the statutory framework governing liability for material misstatements and omissions in connection with a registered public offering of securities, with a focus on Sections 11 and 12(a)(2) of the Securities Act. These provisions are the primary sources of civil liability exposure in connection with an initial public offering and, accordingly, ar

Section 11 of the Securities Act, codified at 15 U.S.C. § 77k, provides a private right of action for any person who acquires a security issued pursuant to a registration statement that, at the time it became effective, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading.

Section 11 is the most potent source of civil liability in the context of a registered public offering. Its purpose, as articulated by the Supreme Court and by the legislative history of the Securities Act, is to ensure the completeness and accuracy of the information contained in registration statements by imposing significant potential liability on the persons responsible for the preparation and accuracy of those d

Section 12(a)(2) of the Securities Act, codified at 15 U.S.C. § 77l(a)(2), provides a private right of action against any person who offers or sells a security by means of a prospectus or oral communication that includes an untrue statement of a material fact or omits to state a material fact necessary in order to make the statements, in light of the circumstances under which they were made, not misleading. The provi

Section 11 is tied specifically to the registration statement. Liability attaches if the registration statement, at the time it became effective, contained a material misstatement or omission. The provision covers all persons who acquired securities issued under the registration statement, regardless of privity, and imposes strict liability on the issuer.

Section 12(a)(2) is tied to the prospectus and oral communications. Liability attaches if a prospectus or oral communication used in connection with the offering contained a material misstatement or omission. The provision requires privity but is potentially broader in scope than Section 11 in one significant respect: it reaches oral communications made in connection with the offering, which are not covered by Sectio

III. Identification of Potentially Liable Persons This Section identifies all persons who would be potentially liable under Sections 11 and 12(a)(2) of the Securities Act in connection with the Lumos IPO, had the Offering been completed. A detailed chart of potentially liable persons with maximum exposure calculations is set forth in Appendix A to this memorandum. A. The Issuer — Lumos Analytics Inc. Lumos Analytics

Section 11 Liability. Under Section 11(a)(1), the issuer is strictly liable for material misstatements or omissions in the Registration Statement at the time it became effective. As noted above, the issuer is unique among Section 11 defendants in that it cannot assert a due diligence defense. Regardless of the care exercised by the Company in preparing the Registration Statement, and regardless of whether the Company

Section 12(a)(2) Liability. The Company would also be liable under Section 12(a)(2) as a statutory seller with respect to the primary shares sold in the Offering. As the entity offering and selling 12,941,176 shares of Class A Common Stock, the Company would be in privity with each purchaser of a primary share and would be subject to claims for rescission or damages in the event that the prospectus or any oral commun

1. Priya Subramanian — Chair of the Board, Co-Founder, and Chief Executive Officer. Ms. Subramanian is both a signing officer and a director and is therefore subject to liability under both Section 11(a)(2) and Section 11(a)(3). As an inside director with day-to-day management responsibility, she would be held to the highest standard of care among the directors for purposes of the due diligence defense.

2. Marcus Henley — Director, Co-Founder, and Chief Technology Officer. Mr. Henley is an inside director with responsibility for the Company's technology platform and product development. Although he did not sign the Registration Statement (having been named as a director but not as a signing officer), he is liable as a director under Section 11(a)(3). As an inside director, he would be held to a higher standard than

3. Diane Ochoa — Independent Director; Managing Partner of Ridgeline Capital Partners Fund II, L.P. ("Ridgeline"). Ms. Ochoa was designated to the Board by Ridgeline pursuant to the Investors' Rights Agreement. Although classified as independent under the Nasdaq listing standards, Ms. Ochoa's affiliation with Ridgeline, a significant pre-IPO investor, may subject her to more searching inquiry under the due diligence

4. Samuel Adebayo — Independent Director; former Chief Financial Officer of Verdant Software Corp. Mr. Adebayo serves as Chair of the Audit Committee. His extensive financial expertise and accounting background may be relevant to the standard of care applicable to his review of the financial disclosure in the Registration Statement, although courts have not uniformly imposed a heightened standard on directors solely

5. Catherine Mercer — Independent Director; Operating Partner of Arclight Equity Group Fund VII, L.P. Ms. Mercer's affiliation with Arclight, one of the selling stockholders in the Offering, creates a potential conflict of interest and may subject her to heightened scrutiny under the due diligence analysis. As an Operating Partner of one of the selling funds, she has direct access to information regarding the fund's

6. Jonathan Tsai — Director and designee of Velthryn Venture Partners; Managing Partner, Velthryn Venture Partners. Mr. Tsai was designated to the Board by Velthryn pursuant to the Investors' Rights Agreement. As the Managing Partner of the largest selling stockholder and a significant pre-IPO investor (approximately 21.0% pre-IPO ownership), Mr. Tsai occupies a dual role that may subject him to heightened scrutiny.

7. Rebecca Stahl — Director and designee of Arclight Equity Group; Partner, Arclight Equity Group. Ms. Stahl was designated to the Board by Arclight pursuant to the Investors' Rights Agreement. Like Mr. Tsai, her dual role as a director and a principal of a selling stockholder creates potential conflicts and may result in heightened scrutiny under the due diligence analysis. Each of the foregoing directors is entitle

1. Velthryn Venture Partners Fund IV, L.P. — a Delaware limited partnership selling up to 2,000,000 shares of Class A Common Stock in the Offering. The general partner of Velthryn is Velthryn Venture Partners Management IV, LLC, a Delaware limited liability company. The principal of the general partner is Jonathan Tsai, who also serves as a director of Lumos. Velthryn holds approximately 21.0% of the Company's pre-IP

2. Arclight Equity Group Fund VII, L.P. — a Delaware limited partnership selling up to 1,500,000 shares of Class A Common Stock in the Offering. The general partner of Arclight is Arclight Equity Management VII, LLC, a Delaware limited liability company. The principals of the general partner include Rebecca Stahl (who serves as a director of Lumos) and Catherine Mercer (who serves as a director of Lumos as an Operati

Section 12(a)(2) Liability. The selling stockholders are potentially liable under Section 12(a)(2) as statutory sellers of their respective shares. Each selling stockholder is in privity with the purchasers of the shares it offers and sells, and each would be subject to claims for rescission or damages if the prospectus (or any oral communication made in connection with the sale) contained a material misstatement or

1. Pinnacle Securities LLC — Lead Book-Running Managing Underwriter. Pinnacle is a full-service investment bank and broker-dealer registered with the Commission and a member of FINRA. The managing directors responsible for this engagement are Andrew Castellano (Coverage) and Lisa Drummond (Equity Capital Markets). Pinnacle's principal offices are located at 399 Park Avenue, New York, New York 10022. As lead book-runn

2. Whitfield & Company LLC — Joint Book-Running Managing Underwriter. Whitfield is a registered broker-dealer and FINRA member. The managing director responsible for this engagement is Derek Kaplan. Whitfield's principal offices are located at 200 Vesey Street, 38th Floor, New York, New York 10281. As joint book-runner, Whitfield shares lead responsibility for the marketing and distribution of the Offering.

3. Graystone Capital Markets Inc. — Co-Manager. Graystone is a registered broker-dealer and FINRA member. The managing director responsible for this engagement is Hannah Morales. Graystone's principal offices are located at 140 Broadway, 30th Floor, New York, New York 10005. As co-manager, Graystone's underwriting commitment and corresponding liability exposure are smaller than those of the book-running managers.

Section 11 Exposure. Under Section 11(e), the liability of each underwriter is limited to the total price at which the securities underwritten by such underwriter and distributed to the public were offered to the public. The total underwriting discount for the Offering was 6.5% of the public offering price, resulting in an aggregate discount of approximately $14,300,000 on the primary shares at the $17.00 midpoint. T

Section 12(a)(2) Liability. The underwriters are also potentially liable under Section 12(a)(2) as statutory sellers or solicitors of the securities. As the entities through which the shares are offered and sold to the public, the underwriters are in privity with the purchasers and would be subject to claims for rescission or damages. The reasonable care defense under Section 12(a)(2) is available to the underwriters

1. Meridian & Howe LLP ("M&H") — Independent Registered Public Accounting Firm. M&H (audit partner: Gregory Simmons) audited the Company's consolidated financial statements for the fiscal years ended December 31, 2019, December 31, 2020, and December 31, 2021, and issued its audit report thereon, which is included in the Registration Statement. M&H has consented to the inclusion of its audit report in the Registratio

2. Calderwood & Harkness LLP ("C&H") — Issuer's Counsel. C&H rendered a legal opinion on the validity of the Class A Common Stock being offered in the IPO, which was included as Exhibit 5.1 to the Registration Statement (as amended). To the extent that C&H is named as an expert with respect to this legal opinion, liability could attach under Section 11(a)(4) with respect to that "expertised" portion of the Registrati

IV. Materiality Standards The question of materiality is central to any analysis of potential liability under Sections 11 and 12(a)(2) of the Securities Act. Both provisions require that the alleged misstatement or omission be "material" in order to give rise to liability. This Section sets forth the applicable legal standards for materiality and applies those standards to the key areas of disclosure in the Lumos Reg

1. Revenue Recognition Policies and ARR Methodology. The Company's revenue recognition policies under ASC 606 and its methodology for calculating ARR are critical to investors' understanding of the Company's financial performance and growth trajectory. The Company reported FY 2021 ARR of $206.8 million and Q1 2022 ARR of $219.5 million. Any misstatement in the methodology used to calculate ARR, or any inconsistency b

2. Non-GAAP Financial Measures. The Company presents Adjusted EBITDA as a key non-GAAP financial measure, which was $(18.7) million for FY 2021. The presentation of non-GAAP measures is governed by Regulation G and Item 10(e) of Regulation S-K, which require a reconciliation to the most directly comparable GAAP measure and a discussion of why management believes the non-GAAP measure is useful to investors. We have re

3. History of Net Losses and Path to Profitability. The Company has a history of significant net losses. The Company reported a net loss of $(41.2) million for FY 2021 and a net loss of $(13.8) million for Q1 2022. The Company has never achieved profitability on an annual basis. The Registration Statement includes risk factor disclosure and MD&A discussion regarding the Company's history of losses, its expectation th

4. Revenue Growth Deceleration. The Company's year-over-year revenue growth rate decelerated from 58% (FY 2020 to FY 2021: $118.6 million to $187.4 million) to 40% (Q1 2021 to Q1 2022: $39.2 million to $54.9 million). This deceleration is a material trend that could affect investors' assessment of the Company's growth trajectory and valuation. The MD&A section of the Registration Statement addresses this deceleration

5. Dual-Class Voting Structure. The Company's capital structure includes Class A Common Stock (1 vote per share) and Class B Common Stock (10 votes per share). The Class B Common Stock is held exclusively by the Company's founders, Priya Subramanian (16,500,000 Class B shares) and Marcus Henley (12,000,000 Class B shares). Following the completion of the IPO, the founders would hold approximately 73.5% of the total v

6. Sunset Provision on Class B Shares. As noted above, the sunset provision is disclosed in the Registration Statement. We have reviewed the draft Amended and Restated Certificate of Incorporation to confirm that the sunset provision is accurately described.

7. Related-Party Transactions. The Registration Statement discloses the related-party transactions involving Velthryn Venture Partners, Arclight Equity Group, and Ridgeline Capital Partners, including the investor rights agreements, registration rights agreements, and board designation rights. Additionally, the indemnification agreements entered into between the Company and its directors and officers are disclosed. W

8. Stock-Based Compensation and Cheap Stock Analysis. The Company's equity incentive plan authorizes the issuance of up to 14,800,000 shares, of which 11,300,000 options were outstanding at a weighted-average exercise price ("WAEP") of $4.82 per share. The gap between the WAEP and the proposed IPO price range ($16.00 to $18.00, midpoint $17.00) raises "cheap stock" issues, as the SEC Staff may question whether the Co

9. Customer Concentration Risk. As noted above, the Company's top 10 customers represent approximately 34% of ARR. The Registration Statement discloses this concentration risk in the risk factors section. We have recommended that the Company consider whether any single customer accounts for more than 10% of revenue (which would require specific identification under Item 101(c)(1)(vii) of Regulation S-K) and have been

10. Material Contracts. The Registration Statement identifies and describes the Company's material contracts, including (a) the Brindoval Data Centers LLC agreement (a five-year infrastructure hosting agreement with an annual minimum commitment of $8.2 million), (b) the Nordwell Financial Technologies Inc. strategic partnership (a three-year initial term technology partnership), and (c) the Ashford National Bank revo

V. Defenses This Section analyzes the defenses available to the various categories of defendants under Sections 11 and 12(a)(2) of the Securities Act. The due diligence defense under Section 11(b) is the most significant defense for non-issuer defendants and is the primary driver of the due diligence process. Additional defenses, including the negative causation defense under Section 11(e), the reasonable care defens

Section 11(b) provides that a non-issuer defendant may avoid liability by establishing that, after reasonable investigation, such defendant had reasonable ground to believe, and did believe, at the time the registration statement became effective, that the statements therein were true and that there was no omission to state a material fact required to be stated therein or necessary to make the statements therein not

2. Application to Specific Defendant Categories The due diligence standard is not applied uniformly across all categories of defendants. The courts have recognized that the level of investigation required to satisfy the standard varies depending on the defendant's role, access to information, expertise, and relationship to the issuer. The following analysis applies the due diligence standard to the specific categorie