Priya, David, Naomi,
I wanted to reach out this evening to provide a candid assessment of the current market environment and its implications for the Lumos offering. I recognize this is not the message any of us hoped to be writing at this stage, but I believe it is critical that we address these developments head-on and with full transparency.
**Background**
As you know, the road show launched on April 25 and has now been underway for approximately two weeks. The preliminary prospectus (Red Herring) distributed at launch established a preliminary price range of $16.00–$18.00 per share, consistent with the Registration Statement on Form S-1/A (Amendment No. 1) publicly filed with the SEC on April 14, 2022 (SEC File Number 333-264518). At the midpoint of $17.00, the offering was sized at approximately 12,941,176 primary shares targeting gross proceeds of approximately $220 million, plus 3,500,000 secondary shares from Velthryn Venture Partners and Arclight Equity Group.
**Current Market Conditions**
Unfortunately, the market environment has deteriorated materially since the price range was set in mid-April. The key dynamics are as follows:
- The Nasdaq Composite declined approximately 12% in April 2022 alone, with continued deterioration into the first week of May. - The broader technology-sector selloff has been particularly severe for high-growth SaaS and fintech names — precisely the peer group against which Lumos is benchmarked by investors. - The IPO market has effectively frozen. Several comparable technology IPOs have been postponed or pulled in recent weeks, and there is little indication of near-term stabilization. - In light of these conditions, it is extremely challenging — and in our judgment, inadvisable — to attempt to achieve pricing within the $16.00–$18.00 preliminary range, which reflected market conditions as of mid-April that no longer prevail.
**Pinnacle Securities' Recommendation**
I spoke earlier today with Andrew Castellano, Managing Director, Coverage at Pinnacle Securities LLC. Pinnacle's strong recommendation is to pause the road show immediately pending a reassessment of market conditions. Andrew conveyed the following:
- Investor feedback during the road show has been positive on Lumos's business fundamentals. Investors have responded well to FY 2021 revenue of $187.4 million (58% year-over-year growth) and ARR of $206.8 million as of December 31, 2021. The Q1 2022 financial update — revenue of $54.9 million, ARR of $219.5 million as of March 31, 2022 — has been viewed as strong. - However, that positive sentiment on the business has been overwhelmed by significant concern about valuation levels in the current macro environment. Investors are simply not willing to underwrite new-issue paper at pre-correction multiples, regardless of the quality of the underlying company. - Pinnacle's view is that forcing pricing in this environment would likely result in either a failed offering or pricing at a level that would be highly dilutive and damaging to the company's long-term public market narrative.
Derek Kaplan at Whitfield & Company LLC concurs with the recommendation to pause. Hannah Morales at Graystone Capital Markets Inc. has also been consulted and is aligned with this view. In short, the syndicate is unified.
**Legal Considerations — S-1 Update Obligations and Financial Data Staleness**
From a legal perspective, a pause introduces several issues that we need to track carefully:
1. **Financial Statement Shelf Life.** The publicly filed S-1/A includes audited financial statements for FY 2021 (audited by Meridian & Howe LLP) and unaudited Q1 2022 interim financial data. Under SEC rules, if pricing is delayed significantly — particularly if the offering extends past mid-summer — the audited FY 2021 financials and Q1 2022 interim financials will become stale. Lumos would then need to include Q2 2022 financial results, requiring preparation and potentially audit review by Meridian & Howe, and would necessitate a post-effective amendment to the S-1.
2. **Material Developments.** Any material developments occurring during a delay period — including significant changes to the business, financial condition, or risk factors — would need to be disclosed via amendment or sticker supplement to the prospectus. Any such filing would trigger additional SEC review risk and could reset timing.
3. **Comfort Letter.** The comfort letter from Meridian & Howe (Gregory Simmons, engagement partner) would need to be brought down to a new date proximate to any rescheduled pricing, with new circle-up procedures conducted by the working group.
4. **EDGAR Filings and Printing.** Hennessy Consulting Group LLC would need to handle any updated EDGAR filings and prospectus reprints if amendments are required.
These considerations are manageable if the pause is measured in weeks. They become more burdensome — and costly — if the delay extends into months.
**Options Available to the Company**
As I see it, there are three paths available. I want to lay each out clearly so that you and the Board have a complete picture.
**Option A: Pause and Monitor (Recommended by Pinnacle in the Near Term)**
- Pause the road show for a defined monitoring window of 2–4 weeks. - Reconvene with the syndicate to reassess market conditions and investor appetite at the end of that period. - This preserves optionality. Importantly, a pause does not require any public filing or announcement, so there is no public signal of withdrawal. - *Risks:* Continued market deterioration could make eventual pricing more difficult. If the pause extends beyond the near term, financial data staleness becomes a concern, as discussed above.
**Option B: Re-Price the Offering**
- Consider reducing the preliminary price range below $16.00–$18.00 to reflect the new market reality. - This would require filing an amendment to the S-1 with a revised price range, which would become a public filing. - The underwriting discount remains at 6.5%, but net proceeds to the company would be materially reduced. At the original midpoint, the company was targeting approximately $200.9 million in net proceeds (after the estimated $14.3 million underwriting discount and offering expenses). A meaningfully lower price range would substantially reduce that figure. - The 3,500,000 secondary shares from Velthryn and Arclight would also be sold at a reduced per-share price. We would need to confirm that both Velthryn and Arclight remain willing to sell at a lower price, or whether they would elect to reduce or withdraw their secondary participation. - *Risks:* A publicly filed price reduction may signal weakness and discourage investors from participating, creating a negative feedback loop. There is also a real question of whether it is possible to identify a price at which investor demand stabilizes in this environment.
**Option C: Withdraw the Offering**
- File Form RW with the SEC pursuant to Rule 477 to withdraw the Registration Statement in its entirety. - No securities have been sold, and the underwriting agreement (negotiated execution version) has not been executed, so termination is procedurally clean. - The lock-up agreements executed in favor of Pinnacle Securities would not become operative, as the lock-up period of 180 days runs from the date of the final prospectus, which has not been issued. - Withdrawal preserves Lumos's ability to refile confidentially in the future when market conditions improve, under the JOBS Act confidential submission process (assuming Lumos continues to qualify as an emerging growth company). - Certain costs already incurred would not be recoverable, including legal fees, accounting fees, the SEC registration fee of $20,394, the Nasdaq listing fee, and printing costs. However, the D&O tail policy with Terrace Hill Insurance Group ($30 million aggregate limit, $2.4 million premium) has not yet been bound, so that significant cost would not be incurred. - *Risks:* Withdrawal is a more definitive step. While it is not uncommon in this environment and the market generally does not penalize companies for withdrawing IPOs in adverse conditions, it does require rebuilding momentum when the company is ready to return.
Our team is currently preparing a fuller memorandum analyzing the legal and practical consequences of withdrawal in detail. We will circulate that to you as soon as it is finalized, which I anticipate will be later this week.
**Board Considerations**
Any decision to proceed, re-price, pause, or withdraw should ultimately be made by the Board of Directors, with input from the pricing committee (Priya, David, and Diane Ochoa). I would recommend scheduling a Board meeting during the week of May 16 to discuss these options formally. That timing would allow Pinnacle to prepare an updated market assessment and investor feedback summary to inform the Board's discussion.
In advance of that meeting, I would recommend that Jonathan Tsai (Velthryn designee) and Rebecca Stahl (Arclight designee) be consulted, given their dual roles as Board members and representatives of the selling stockholders. Their views on the secondary offering and the acceptable pricing parameters will be important to the overall analysis.
I would also note that Michael Sorrentino at Hargrove & Liddell LLP, as underwriters' counsel, will likely coordinate separately with the syndicate banks on their perspective. We will stay in close contact with Michael's team to ensure alignment.
**Investor Rights and Contractual Considerations**
A few additional items that warrant attention:
- The existing investor rights agreement may contain provisions relevant to the decision to delay or withdraw, including registration rights and demand rights. We are reviewing this and will flag any issues. - We should confirm that the revolving credit facility with Ashford National Bank ($50 million commitment, approximately $15 million drawn as of March 31, 2022) does not contain any covenants that would be triggered by a withdrawal of the IPO. I do not recall any such provision, but we will verify. - Finally, given Lumos's cash position of $94.3 million as of December 31, 2021 and the current burn rate, we should confirm — and I expect this is the case — that the company is not dependent on IPO proceeds for near-term operations. This is both a practical question and one that investors and the Board will want to understand clearly.
**Proposed Next Steps**
1. Our team will prepare a detailed memorandum on the legal consequences of each option, with particular focus on the withdrawal path. We will also update the organizational checklist to reflect the pause. 2. Audrey Zhou will coordinate with Lisa Drummond (ECM, Pinnacle Securities) to obtain a written summary of investor feedback from the road show to date. 3. I recommend that we schedule a call tomorrow, May 10, with Priya, David, Naomi, and the C&H team (Jennifer, Audrey, Brendan, and me) to discuss the situation in greater detail and begin framing the Board presentation. 4. Until the Board has been consulted, I would strongly recommend holding off on any external communications regarding the status of the offering.
I am available this evening and all day tomorrow. My direct line is (415) 508-7241, and I can be reached on my cell at any time.
**A Final Word**
I want to acknowledge that this is a disappointing development, particularly given the extraordinary effort that the entire team — Lumos management, the syndicate, and all of the advisors — has invested in getting to this point. The road show preparation and execution have been exemplary, and the investor reception of Lumos's business story has validated everything we believed about this company's market position.
It is important to keep in perspective that the headwinds we are facing are entirely macro-driven. They are not a reflection of Lumos's business performance, which remains strong by any measure. The IPO market is cyclical, and the current dislocation will pass. When it does, Lumos will be well positioned to return to market from a position of strength.
In the meantime, Calderwood & Harkness is fully committed to advising you and the Board on the best path forward, and we will work closely with Pinnacle and the rest of the working group to ensure that whatever course of action is chosen is executed thoughtfully and in the best interests of the company and its stockholders.
I look forward to speaking with you tomorrow.
Best regards,
Robert Adeyemi Partner Calderwood & Harkness LLP 1 Market Street, Spear Tower, Suite 3600 San Francisco, CA 94105 425 Lexington Avenue, 42nd Floor New York, NY 10017 T: (415) 508-7241 radeyemi@calderwoodharkness.com
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