MEMORANDUM
PRIVILEGED & CONFIDENTIAL — ATTORNEY WORK PRODUCT
TO: Naomi Feinberg, General Counsel & Corporate Secretary, Lumos Analytics Inc.
CC: David Lau, CFO, Lumos Analytics Inc. Robert Adeyemi, Partner, Calderwood & Harkness LLP Jennifer Kwon, Partner, Calderwood & Harkness LLP Brendan Walsh, Associate, Calderwood & Harkness LLP
FROM: Audrey Zhou, Associate, Calderwood & Harkness LLP
DATE: December 2021
RE: Lumos Analytics Inc. — Corporate Governance Readiness and Housekeeping Items in Connection with Proposed Initial Public Offering of Class A Common Stock
Matter No.: 1008-00002
This memorandum is a privileged and confidential attorney-client communication and constitutes attorney work product. It is intended solely for the use of the addressee and the individuals copied herein. This memorandum should not be disclosed to any third party without the prior written consent of Calderwood & Harkness LLP. Any inadvertent disclosure does not constitute a waiver of the attorney-client privilege or work product protection.
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I. Introduction and Purpose
This memorandum summarizes the results of Calderwood & Harkness LLP's ("Calderwood & Harkness" or the "Firm") review of the corporate governance posture and organizational documents of Lumos Analytics Inc. ("Lumos," the "Company," or the "Issuer"), a Delaware corporation headquartered at 450 Folsom Street, Suite 1200, San Francisco, California 94105, in connection with the Company's proposed initial public offering (the "IPO" or the "Offering") of shares of Class A Common Stock, par value $0.0001 per share (the "Class A Common Stock"), on the Nasdaq Global Select Market (proposed ticker symbol: "LMSA").
The purpose of this memorandum is to identify and prioritize all corporate housekeeping items that must be completed prior to the public filing of the Company's Registration Statement on Form S-1 (the "Registration Statement") with the Securities and Exchange Commission (the "SEC") and the effectiveness of the Offering. This memorandum is intended to serve as a comprehensive roadmap for Lumos management and outside counsel to ensure that the Company's corporate governance framework, organizational documents, capitalization records, and related matters are in proper order and compliant with the requirements of the Securities Act of 1933, as amended (the "Securities Act"), the Securities Exchange Act of 1934, as amended (the "Exchange Act"), the rules and regulations of the SEC, and the listing standards of The Nasdaq Stock Market LLC ("Nasdaq").
Our review has been based upon due diligence materials provided by Lumos management through the Company's virtual data room (hosted on Thackeray Solutions), including the Company's existing Certificate of Incorporation (as amended), Bylaws, Board of Directors minutes and written consents dating from 2016 to the present, stockholder agreements, equity plan documents, option grant records, material commercial contracts, and various other corporate records. We have also reviewed filings with the Delaware Secretary of State, foreign qualification records in the states of California, New York, Texas, and Illinois, and have conducted customary due diligence searches and inquiries.
The target timeline for substantially completing the housekeeping items described herein is prior to the confidential submission of the draft Registration Statement to the SEC (the "DRS Submission"), which is currently targeted for on or about January 10, 2022. The Company's working timeline anticipates an initial public filing of the Registration Statement in approximately April 2022, with the Offering expected to price and close in approximately May or June 2022, subject to market conditions and SEC review.
We note that this memorandum does not address all aspects of the IPO process, including the preparation and content of the Registration Statement itself, underwriting arrangements with Pinnacle Securities LLC (the "Lead Underwriter"), SEC comment letter responses, roadshow preparation, or other workstream items that are being tracked separately through the IPO Organizational Checklist circulated to the full working group. Rather, this memorandum focuses specifically on the corporate governance readiness and housekeeping items that fall within the purview of the Firm's corporate governance advisory mandate.
We recommend that this memorandum be reviewed by the Company's management team, including the General Counsel and CFO, and that any questions, corrections, or supplemental information be directed to the undersigned as promptly as practicable so that work on the identified action items may proceed without delay.
II. Current Corporate Organization
A. Incorporation and Good Standing — Delaware
Lumos Analytics Inc. was incorporated in the State of Delaware on March 14, 2016, by the filing of its original Certificate of Incorporation with the Delaware Secretary of State. The Company's Delaware file number is 6281934, and its Federal Employer Identification Number (EIN) is 82-3194567.
The Company's registered agent in the State of Delaware is Capitol Registered Agents LLC, located at 850 New Burton Road, Suite 201, Dover, Delaware 19904. Capitol Registered Agents LLC has served as the Company's registered agent since incorporation.
Based on our review of records obtained from the Delaware Secretary of State's office, the Company is currently in good standing in the State of Delaware. All franchise taxes have been paid and are current through the tax year ending December 31, 2021. The Company's annual report filings with the Delaware Secretary of State are up to date.
Recommendation: We recommend that the Company confirm its continued good standing with the Delaware Secretary of State at the time of the S-1 public filing and obtain an updated certificate of good standing dated within thirty (30) days of such filing. This certificate will be required as an exhibit or supporting document in connection with the Registration Statement and the Nasdaq listing application. We will coordinate with Capitol Registered Agents LLC to obtain the certificate on an expedited basis at the appropriate time.
B. Current Certificate of Incorporation
The Company's original Certificate of Incorporation was filed on March 14, 2016, and has been amended on multiple occasions since that date, principally in connection with the Company's successive preferred stock financing rounds. The relevant amendments are summarized as follows:
• June 2018: Amended and Restated Certificate of Incorporation filed in connection with the Series A Preferred Stock financing, authorizing and designating the rights, preferences, and privileges of the Series A Preferred Stock.
• September 2019: Certificate of Amendment filed in connection with the Series B Preferred Stock financing, authorizing and designating the rights, preferences, and privileges of the Series B Preferred Stock and increasing the number of authorized shares of Preferred Stock.
• February 2020: Certificate of Amendment filed in connection with the Series C Preferred Stock financing, authorizing and designating the rights, preferences, and privileges of the Series C Preferred Stock and making conforming changes to the authorized share capital.
• August 2020: Certificate of Amendment filed in connection with the Series D Preferred Stock financing, authorizing and designating the rights, preferences, and privileges of the Series D Preferred Stock and making conforming changes to the authorized share capital.
As currently in effect, the Certificate of Incorporation (as amended) authorizes the following capital stock:
• Common Stock: 500,000,000 shares authorized, par value $0.0001 per share, consisting of undesignated Common Stock and Class B Common Stock (10 votes per share).
• Class B Common Stock: 28,500,000 shares outstanding, held by the Company's co-founders:
• Priya Subramanian: 16,500,000 shares of Class B Common Stock
• Marcus Henley: 12,000,000 shares of Class B Common Stock
• Preferred Stock: Series A, Series B, Series C, and Series D designations, with 62,400,000 shares of Preferred Stock outstanding in the aggregate across all series.
In connection with our review of the current Certificate of Incorporation, we have identified the following items requiring cleanup or amendment in connection with the IPO:
(a) Protective Provisions for Preferred Holders. The Certificate of Incorporation contains extensive protective provisions for the holders of the Series A, Series B, Series C, and Series D Preferred Stock, including consent rights over incurrence of indebtedness, changes in the authorized share capital, amendments to the Certificate of Incorporation or Bylaws, and certain corporate transactions. These protective provisions will become inapplicable following the automatic conversion of all outstanding Preferred Stock to Class A Common Stock upon the closing of the IPO. The Amended and Restated Certificate of Incorporation (IPO Form) will eliminate these protective provisions entirely.
(b) References to Investor Rights Agreements. The Certificate of Incorporation contains cross-references to the Investor Rights Agreement, the Voting Agreement, and the Right of First Refusal and Co-Sale Agreement, certain of which will terminate by their terms upon the closing of the IPO. These references should be updated or removed in the IPO-form charter.
(c) Registered Agent and Registered Office References. We are in the process of confirming that the registered agent and registered office information set forth in the Certificate of Incorporation is current and accurate. If any discrepancies are identified, they will be corrected in the Amended and Restated Certificate of Incorporation (IPO Form).
The Amended and Restated Certificate of Incorporation (IPO Form) is discussed in detail in Section IV of this memorandum.
C. Current Bylaws
The Company's current Bylaws were adopted at the time of incorporation in March 2016 and have been informally amended on at least two occasions, based on our review of Board minutes reflecting approval of certain modifications to officer titles and meeting procedures. The current Bylaws are characteristic of a private company and do not contain a number of provisions that are standard — and in some cases required — for a Nasdaq-listed public company.
In particular, the current Bylaws lack or contain deficient versions of the following provisions:
(a) Advance Notice Provisions. The Bylaws do not contain advance notice provisions for stockholder director nominations or proposals at annual or special meetings of stockholders. Robust advance notice provisions are standard for public companies and serve an important function in ensuring orderly meeting procedures and providing the Board and management with adequate notice of stockholder actions.
(b) Forum Selection Clause. The Bylaws do not contain a forum selection clause designating the Delaware Court of Chancery (or, if such court lacks jurisdiction, the federal district court of the State of Delaware) as the exclusive forum for certain intra-corporate disputes. Such provisions have become common among Delaware-incorporated public companies and are generally enforced by the Delaware courts.
(c) Annual and Special Meeting Procedures. The existing Bylaws contain minimal procedural provisions governing the calling and conduct of annual and special meetings of stockholders. These provisions should be updated to reflect public-company practice, including record date mechanics, quorum requirements, adjournment procedures, and the requirements for calling special meetings.
(d) Officer Roles. The existing Bylaws should be updated to reflect the Company's current officer structure and to include provisions regarding officer appointment, removal, and succession that are consistent with public-company practice.
(e) Indemnification Provisions. The existing Bylaws contain indemnification provisions that, while generally consistent with the Delaware General Corporation Law ("DGCL"), should be updated and strengthened to be consistent with public-company practice, including mandatory indemnification and advancement of expenses for directors and officers to the fullest extent permitted by DGCL Section 145, and provisions for the Company to enter into indemnification agreements with its directors and officers.
Recommendation: We recommend that the current Bylaws be comprehensively replaced with new Amended and Restated Bylaws (IPO Form), to be adopted by the Board of Directors effective upon the closing of the IPO. The Amended and Restated Bylaws are discussed in detail in Section V of this memorandum. A draft is in preparation by Calderwood & Harkness and will be circulated to the Company for review.
D. Subsidiaries
Based on information provided by Lumos management, the Company has the following wholly-owned subsidiaries:
(a) Lumos Analytics UK Ltd. — A private limited company organized under the laws of England and Wales, established in 2019 to support the Company's European sales and customer success operations. Principal office located at 10 Finsbury Square, London EC2A 1AF, United Kingdom. Based on information provided by the Company, Lumos Analytics UK Ltd. is in good standing and current on all filings with Companies House.
(b) Lumos Analytics Canada Inc. — A corporation organized under the Canada Business Corporations Act, established in 2020 to support the Company's Canadian engineering team. Principal office located at 100 King Street West, Suite 3500, Toronto, Ontario M5X 1B1, Canada. Based on information provided by the Company, Lumos Analytics Canada Inc. is in good standing and current on all filings with Corporations Canada.
We are not aware of any minority-owned subsidiaries, joint ventures, variable interest entities, or other affiliated entities that would require separate disclosure in the Registration Statement or otherwise complicate the Company's corporate structure. We request that Lumos management confirm the completeness and accuracy of the foregoing subsidiary information and advise us of any additional entities, whether active or dormant, that are owned or controlled by the Company, directly or indirectly.
Recommendation: We recommend that the Company confirm the good standing and current filing status of each subsidiary prior to the S-1 filing and obtain certificates of good standing or equivalent status certificates from the applicable jurisdictions. The Company should also confirm that foreign qualification requirements have been satisfied in any jurisdiction where a subsidiary conducts business operations, maintains employees, or has a physical presence.
III. Capitalization Summary and Equity Cleanup
A. Current Capital Structure (Pre-IPO, as of December 31, 2021)
Based on the Company's capitalization table and stockholder records provided by Naomi Feinberg, the Company's capital structure as of December 31, 2021 is as follows:
Common Stock:
Class B Common Stock — Holder Detail:
Preferred Stock:
Note: The Series B/C and Series C/D allocations among Arclight and Velthryn, respectively, reflect that both investors participated across multiple rounds. The precise per-series breakdown should be confirmed against the Company's stockholder ledger and the applicable stock purchase agreements.
Employee Stock Option Pool:
Fully Diluted Shares Outstanding (Pre-IPO):
The fully diluted share count set forth above is approximate and subject to confirmation upon final reconciliation of the Company's stockholder records, option ledger, and capitalization table. We note that the precise fully diluted share count will be a critical input into the IPO pricing analysis, the S-1 financial disclosures, and the pro forma financial statements that will be included in the Registration Statement.
B. Preferred Stock Conversion
Pursuant to the terms of the Company's Certificate of Incorporation (as amended), all outstanding shares of Series A, Series B, Series C, and Series D Preferred Stock will automatically convert into shares of Class A Common Stock upon the closing of a "Qualified IPO," which is defined in the Certificate of Incorporation as an underwritten public offering of Common Stock pursuant to an effective registration statement under the Securities Act, with aggregate gross proceeds to the Company of not less than $75,000,000 and a per-share offering price of not less than $12.50 (the "Qualified IPO Threshold"). Based on the currently anticipated IPO price range of $16.00 to $18.00 per share and the anticipated offering size, we expect that the IPO will satisfy the Qualified IPO Threshold and that the automatic conversion will be triggered at closing.
Action Items:
(a) Confirm the conversion ratio applicable to each series of Preferred Stock. Based on our preliminary review, all series of Preferred Stock convert on a one-for-one basis into Class A Common Stock, but this must be confirmed against the specific terms of each series designation, particularly with respect to any anti-dilution adjustments that may have been triggered by subsequent financing rounds at lower prices. Our initial review indicates that no anti-dilution adjustments have been triggered (all subsequent rounds were at higher prices than the preceding series), but this should be verified.
(b) Confirm whether any holders of Preferred Stock have waived or modified their conversion rights, or whether any special conversion mechanics apply.
(c) Prepare the mechanics for the automatic conversion, including notice to stockholders, coordination with the transfer agent, and the issuance of Class A Common Stock in book-entry form upon conversion.
Following the automatic conversion of the Preferred Stock, the Amended and Restated Certificate of Incorporation (IPO Form) will eliminate the Series A through Series D Preferred Stock designations and will reauthorize a new class of blank-check Preferred Stock (with no shares initially outstanding), enabling the Board of Directors to issue shares of Preferred Stock in one or more series with such rights, preferences, and privileges as the Board may determine, without stockholder approval. This is discussed further in Section IV below.
C. Equity Plan and Option Cleanup
The Company currently maintains one equity incentive plan: the Lumos Analytics Inc. 2016 Stock Option and Grant Plan (the "2016 Plan"), which was adopted by the Board of Directors and approved by the Company's stockholders in 2016 and has been amended on several occasions to increase the number of shares reserved for issuance thereunder.
Key Statistics (as of December 31, 2021):
• Total shares reserved under the 2016 Plan: 14,800,000
• Options currently outstanding: 11,300,000
• Weighted-average exercise price of outstanding options: $4.82
• Options available for future grant: 3,500,000
• Shares issued upon exercise of previously vested options: Approximately 1,500,000 (to be confirmed with Company records)
We have commenced a review of the 2016 Plan and the Company's option grant documentation and have identified the following items requiring attention:
(a) Board and Committee Authorization. We must confirm that all option grants made under the 2016 Plan were properly authorized by the Board of Directors or, where applicable, by a duly constituted Compensation Committee or authorized officer acting pursuant to a proper delegation of authority. Our review of Board minutes and written consents is ongoing, and we have requested from the Company complete records of all option grants, including Board or committee resolutions, unanimous written consents, and any delegations of granting authority to officers.
(b) Option Grant Documentation. We must verify that each outstanding option is supported by a properly executed stock option agreement, notice of grant, and applicable vesting schedule. Any deficiencies in documentation should be remediated prior to the S-1 filing.
(c) Exercise Prices and Section 409A Valuations. Under Section 409A of the Internal Revenue Code, stock options granted to employees must be granted with an exercise price that is not less than the fair market value of the underlying stock on the date of grant. The Company has historically obtained independent valuations (commonly referred to as "409A valuations") from Meridian Valuation Advisors LLC to establish the fair market value of its Common Stock at various points in time. We must review the 409A valuation reports to confirm that all option grants were made at exercise prices equal to or greater than the fair market value determined under the applicable 409A valuation. Any options granted at exercise prices below the applicable fair market value could create adverse tax consequences for the option holders and potential disclosure issues in the Registration Statement.
(d) Cheap Stock Analysis. In connection with IPO registrations, the SEC Staff routinely reviews the history of equity issuances by the issuer during the 12- to 18-month period preceding the IPO filing to assess whether equity-based compensation was granted at exercise prices below the fair market value that was (or should have been) assigned to the issuer's common stock. This analysis is commonly referred to as a "cheap stock" review. Given that the Company has granted options at a weighted-average exercise price of $4.82, the Series D Preferred Stock was issued at a price of $12.50 per share in August 2020, and the anticipated IPO price range is $16.00 to $18.00 per share, there is a significant differential between recent option grant prices and the anticipated IPO price. We anticipate that the SEC Staff will scrutinize the Company's stock-based compensation expense and the assumptions underlying the Company's common stock valuations during the IPO review process. The Company's auditors (Penrose Firth CPAs LLP) will need to be consulted on the accounting treatment and disclosure implications.
(e) Public-Company Plan Requirements. The 2016 Plan was designed for a private company and does not contain a number of provisions that are standard for the equity incentive plans of publicly traded companies, including share counting rules appropriate for a public company, provisions for performance-based awards, and compliance with the requirements of Nasdaq Listing Rule 5635 regarding stockholder approval of equity compensation plans. Accordingly, we recommend that the Company adopt a new equity incentive plan — the Lumos Analytics Inc. 2022 Equity Incentive Plan (the "2022 EIP") — for post-IPO equity grants. The 2016 Plan will remain in effect with respect to outstanding awards but will be frozen such that no new grants will be made under the 2016 Plan following the adoption of the 2022 EIP.
(f) Employee Stock Purchase Plan. We also recommend that the Company adopt a Lumos Analytics Inc. 2022 Employee Stock Purchase Plan (the "2022 ESPP"), which would allow eligible employees to purchase shares of Class A Common Stock at a discount (typically 85% of the lower of the fair market value on the first day of the offering period or the last day of the purchase period) through payroll deductions. ESPPs are a standard benefit offered by publicly traded technology companies and can be an important tool for employee retention and engagement. The 2022 ESPP would be designed to qualify under Section 423 of the Internal Revenue Code.
Recommendation: Adopt the 2022 Equity Incentive Plan and the 2022 Employee Stock Purchase Plan, each to be approved by the Board of Directors and the Company's stockholders prior to the effectiveness of the Registration Statement. Drafts of both plans are in preparation by Calderwood & Harkness and will be circulated to the Company for review. Both plans will be filed as exhibits to the Registration Statement and described in the "Executive Compensation" section thereof.
D. Stockholder Records and Transfer Agent
The Company's stockholder records are currently maintained internally by Naomi Feinberg in her capacity as Corporate Secretary, using an electronic capitalization table management system (Sterling Reach Health IT). While Sterling Reach Health IT has served adequately for a private company, the Company will need to engage a professional transfer agent and registrar to manage its stockholder records following the IPO.
The Company has identified Broadleaf Transfer Services Inc., located at 250 Royall Street, Canton, Massachusetts 02021, as its proposed transfer agent and registrar for the Class A Common Stock following the IPO. We understand that the Company has been in preliminary discussions with Broadleaf regarding engagement terms and that a formal engagement letter has not yet been executed.
Recommendations:
(a) Engage Broadleaf Transfer Services Inc. as the Company's transfer agent and registrar as promptly as practicable and no later than the date of the DRS Submission (targeted for January 10, 2022). The engagement should be formalized through an executed transfer agent agreement, which Calderwood & Harkness will review.
(b) Coordinate with Broadleaf on the transfer of the Company's stockholder records from Sterling Reach Health IT to Broadleaf's systems, including reconciliation of all outstanding shares of Common Stock, Class B Common Stock, and Preferred Stock (prior to conversion), as well as option and restricted stock records.
(c) Ensure that all outstanding stock certificates (if any) are accounted for. To the extent that the Company has issued physical stock certificates to stockholders, founders, or employees, the Company should coordinate the collection and cancellation of such certificates and the conversion to book-entry form. We understand from the Company that the majority of shares have been issued in uncertificated form through Sterling Reach Health IT, but a small number of physical certificates may have been issued to the co-founders and early employees. This should be confirmed.
(d) Coordinate with Broadleaf and the Lead Underwriter on share issuance logistics for the IPO closing, including the issuance of new shares of Class A Common Stock to IPO investors through the Depository Trust Company ("DTC") and the conversion of Preferred Stock to Class A Common Stock.
IV. Amended and Restated Certificate of Incorporation (IPO Form)
A. Key Provisions
In connection with the IPO, the Company will adopt a new Amended and Restated Certificate of Incorporation (the "IPO Charter") that will replace the existing Certificate of Incorporation (as amended) in its entirety. The IPO Charter is being drafted by Calderwood & Harkness and will reflect the following key provisions:
Dual-Class Common Stock Structure. The IPO Charter will authorize two classes of common stock:
• Class A Common Stock: Entitled to one (1) vote per share on all matters submitted to a vote of the stockholders. The Class A Common Stock is the class that will be publicly offered in the IPO.
• Class B Common Stock: Entitled to ten (10) votes per share on all matters submitted to a vote of the stockholders. The Class B Common Stock will not be publicly traded and will be held exclusively by the Company's co-founders, Priya Subramanian and Marcus Henley. In all respects other than voting (and conversion), the Class A Common Stock and Class B Common Stock will have identical rights, including with respect to dividends, distributions, and liquidation.
Sunset Provision. Each share of Class B Common Stock will automatically convert into one (1) share of Class A Common Stock upon the earliest to occur of the following events:
(i) The seventh (7th) anniversary of the closing date of the IPO;
(ii) The date on which any share of Class B Common Stock is transferred to any person or entity that is not a "Permitted Transferee" (as such term will be defined in the IPO Charter to include the other co-founder, immediate family members, and estate planning vehicles controlled by the co-founder); and
(iii) The first date on which the co-founders, together with their respective Permitted Transferees, collectively hold less than ten percent (10%) of the total number of shares of Common Stock (Class A and Class B combined) then outstanding.
The sunset provision is designed to ensure that the dual-class structure is time-limited and will unwind either upon the passage of a fixed period, upon transfers outside the founders' control, or upon the founders' collective economic stake falling below a meaningful threshold. This structure is consistent with current market practice for dual-class IPOs and is in line with the recommendations of certain proxy advisory firms and institutional investors, although we note that some institutional investors and governance advocates prefer shorter sunset periods (e.g., three to five years). The Company should be prepared to address questions from investors regarding the chosen sunset structure during the IPO roadshow.
Post-IPO Voting Control Analysis. Following the closing of the IPO (and assuming no exercise of the underwriter's over-allotment option), the co-founders will hold approximately 73.5% of the total voting power of the Company's outstanding capital stock, calculated as follows:
• Class B Common Stock votes: 28,500,000 shares × 10 votes per share = 285,000,000 votes
• Class A Common Stock votes (estimated, post-conversion of Preferred Stock and IPO issuance): Approximately 102,641,176 shares × 1 vote per share = 102,641,176 votes
• Total votes: Approximately 387,641,176
• Co-founder voting power: 285,000,000 / 387,641,176 = approximately 73.5%
This level of voting control has significant implications for the Company's governance, as discussed in Sections VI.C and VII of this memorandum.
Authorized Share Capital. The IPO Charter will authorize the following shares of capital stock:
• Common Stock: 500,000,000 shares, par value $0.0001 per share, consisting of Class A Common Stock and Class B Common Stock.
• Preferred Stock: We recommend authorizing 50,000,000 shares of blank-check Preferred Stock, par value $0.0001 per share. The Board of Directors will be empowered to issue shares of Preferred Stock in one or more series, with such voting powers, designations, preferences, and relative, participating, optional, and other special rights as the Board may determine, without stockholder approval. This is a standard provision for publicly traded Delaware corporations and provides the Board with flexibility for future financings, strategic transactions, and other corporate purposes. The number of authorized shares of Preferred Stock should be discussed with the Lead Underwriter and may be adjusted based on market practice and investor feedback.
Exculpation Provision. The IPO Charter will include an exculpation provision pursuant to Section 102(b)(7) of the DGCL, eliminating the personal liability of directors to the Company and its stockholders for monetary damages for breaches of fiduciary duty as a director, to the fullest extent permitted by the DGCL. This provision does not eliminate liability for breaches of the duty of loyalty, acts or omissions not in good faith or involving intentional misconduct or a knowing violation of law, violations of Section 174 of the DGCL (relating to unlawful payment of dividends), or any transaction from which a director derived an improper personal benefit.
Elimination of Cumulative Voting. The IPO Charter will expressly provide that stockholders are not entitled to cumulative voting in the election of directors. This is standard for publicly traded Delaware corporations.
Elimination of Stockholder Action by Written Consent. Following the effectiveness of the IPO, stockholders will not be permitted to take action by written consent in lieu of a meeting. All stockholder actions will be required to be taken at a duly called annual or special meeting of stockholders. This provision is standard for publicly traded companies and is designed to prevent hostile or surprise stockholder actions outside the orderly meeting process.
Blank-Check Preferred Stock Authorization. As noted above, the Board will be authorized to issue Preferred Stock in one or more series without stockholder approval. While this provision provides the Board with valuable flexibility, it also serves as a potential anti-takeover device (commonly referred to as a "poison pill" or "shareholder rights plan" enabler). The availability of blank-check preferred stock will be disclosed in the "Risk Factors" and "Description of Capital Stock" sections of the Registration Statement.
B. Adoption Mechanics
Under the DGCL and the Company's existing Certificate of Incorporation, the adoption of the IPO Charter requires (i) the approval of the Board of Directors and (ii) the written consent of the holders of a majority of the voting power of the Company's outstanding capital stock entitled to vote thereon.
Given the Company's current ownership structure, the requisite stockholder approval can be obtained through written consents executed by the following stockholders, who collectively represent well in excess of a majority of the Company's outstanding voting power:
• Velthryn Venture Partners Fund IV, L.P.
• Arclight Equity Group Fund VII, L.P.
• Priya Subramanian
• Marcus Henley
We expect that each of these stockholders will consent to the adoption of the IPO Charter, as the conversion of Preferred Stock to Class A Common Stock and the dual-class structure are consistent with the terms previously negotiated among the Company and its investors. We will prepare the form of written consent for circulation to these stockholders and will coordinate execution through Naomi Feinberg.
The IPO Charter will become effective upon the filing of the Amended and Restated Certificate of Incorporation with the Delaware Secretary of State, which is expected to occur immediately prior to the closing of the IPO. The precise timing of the filing will be coordinated with the Lead Underwriter and the Company's IPO working group.
A draft of the IPO Charter is currently in preparation by Calderwood & Harkness and will be circulated to the Company, the Lead Underwriter, and the Lead Underwriter's counsel for review and comment.
V. Amended and Restated Bylaws (IPO Form)
In connection with the IPO, the Company will adopt new Amended and Restated Bylaws (the "IPO Bylaws") that will comprehensively replace the Company's existing Bylaws. The IPO Bylaws will be adopted by the Board of Directors effective upon the closing of the IPO and will contain the following key provisions:
(a) Advance Notice Requirements. The IPO Bylaws will include detailed advance notice provisions requiring stockholders to provide timely written notice to the Corporate Secretary of any director nominations or proposals for other business to be presented at annual or special meetings of stockholders. The advance notice window will be calibrated to fall between 90 and 120 days prior to the first anniversary of the preceding year's annual meeting (with adjustments for the first annual meeting following the IPO and for changes in the meeting date). The advance notice provisions will require disclosure of specified information about the nominating or proposing stockholder, the proposed nominee or proposal, and any agreements or arrangements relating thereto.
(b) Exclusive Forum Selection Clause. The IPO Bylaws will designate the Court of Chancery of the State of Delaware (or, if such court lacks subject matter jurisdiction, the federal district court of the State of Delaware) as the sole and exclusive forum for (i) any derivative action or proceeding brought on behalf of the Company, (ii) any action asserting a claim of breach of a fiduciary duty owed by any director, officer, or employee of the Company to the Company or its stockholders, (iii) any action asserting a claim arising pursuant to any provision of the DGCL, the IPO Charter, or the IPO Bylaws, and (iv) any action asserting a claim governed by the internal affairs doctrine. The exclusive forum provision will not apply to claims arising under the Securities Act or the Exchange Act, for which the federal courts have exclusive or concurrent jurisdiction as a matter of federal law. We will also consider including a provision designating the federal district courts of the United States as the exclusive forum for claims arising under the Securities Act, consistent with the Delaware Supreme Court's decision in Salzberg v. Sciabacucchi, 227 A.3d 102 (Del. 2020).
(c) Proxy Access Provisions. The IPO Bylaws will include proxy access provisions permitting a stockholder, or a group of up to 20 stockholders, who have continuously held at least 3% of the Company's outstanding Class A Common Stock for at least three years, to nominate candidates for up to the greater of two directors or 20% of the Board for inclusion in the Company's proxy materials, subject to customary eligibility, procedural, and informational requirements. The inclusion of proxy access provisions at IPO is becoming more common among technology companies and is viewed favorably by many institutional investors and proxy advisory firms.
(d) Annual and Special Meeting Procedures. The IPO Bylaws will contain detailed provisions governing the calling and conduct of annual and special meetings of stockholders, including provisions regarding record dates, quorum requirements (a majority of the voting power of the outstanding shares entitled to vote, present in person or represented by proxy), adjournment procedures, inspector of elections, and the authority of the chairman of the meeting to prescribe rules for the conduct of the meeting. Special meetings of stockholders may be called by the Board of Directors, the Chairperson of the Board, or holders of shares representing not less than 25% of the total voting power of the outstanding capital stock.
(e) Officer Appointment and Removal Procedures. The IPO Bylaws will include provisions governing the appointment, removal, and succession of officers, including the Chief Executive Officer, President (if any), Chief Financial Officer, General Counsel, Corporate Secretary, and such other officers as the Board may appoint from time to time. Officers will serve at the pleasure of the Board and may be removed with or without cause.
(f) Indemnification and Advancement of Expenses. The IPO Bylaws will include robust indemnification provisions for directors and officers, consistent with DGCL Section 145, providing for mandatory indemnification and advancement of expenses to the fullest extent permitted by Delaware law. The indemnification provisions will be supplemented by individual indemnification agreements between the Company and each of its directors and officers, which Calderwood & Harkness is preparing as a separate workstream item.
(g) Board Vacancies. The IPO Bylaws will provide that vacancies on the Board of Directors (whether caused by resignation, removal, death, or an increase in the authorized number of directors) may be filled by a majority of the remaining directors, even if less than a quorum, or by the sole remaining director. Directors elected to fill vacancies will hold office until the next annual meeting of stockholders and until their successors are duly elected and qualified.
A draft of the IPO Bylaws is currently in preparation by Calderwood & Harkness and will be circulated to the Company for review. The IPO Bylaws will be filed as an exhibit to the Registration Statement.
VI. Board of Directors — Composition and Independence Analysis
A. Current Board Composition
The Company's Board of Directors currently consists of seven (7) members. The following table sets forth the current composition of the Board, including each director's role, how each director came to serve on the Board, and our preliminary assessment of each director's independence status under the applicable Nasdaq listing standards:
B. Nasdaq Independence Requirements
Nasdaq Listing Rule 5605(a)(2) defines an "independent director" as a person other than an executive officer or employee of the company or any other individual having a relationship which, in the opinion of the company's Board of Directors, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director. In addition, Nasdaq Listing Rule 5605(a)(2) sets forth specific per se bars to independence, including (among others):
• A director who is, or at any time during the past three years was, employed by the company;
• A director who accepted, or who has a family member who accepted, compensation from the company in excess of $120,000 during any period of twelve consecutive months within the three years preceding the determination of independence (excluding certain specified payments);
• A director who is a family member of an individual who is, or at any time during the past three years was, employed by the company as an executive officer;
• A director who is, or has a family member who is, a partner in, or a controlling stockholder or an executive officer of, any organization to which the company made, or from which the company received, payments for property or services in the current or any of the past three fiscal years that exceed 5% of the recipient's consolidated gross revenues for that year, or $200,000, whichever is more; and
• A director who is, or has a family member who is, employed as an executive officer of another entity where at any time during the past three years any of the executive officers of the company served on the compensation committee of such other entity.
Nasdaq Listing Rule 5605(b)(1) requires that a majority of the Board of Directors of a Nasdaq-listed company be comprised of independent directors. This requirement may be subject to exemptions, as discussed below.
Current Status. Based on our preliminary analysis, three (3) of the Company's seven (7) current directors — Diane Ochoa, Samuel Adebayo, and Catherine Mercer — qualify as independent directors under Nasdaq Listing Rule 5605(a)(2). This represents 42.9% of the Board, which falls short of the majority-independence requirement (which would require at least four (4) of seven (7) directors to be independent).
The remaining four (4) directors are not independent for the following reasons:
• Priya Subramanian — Not independent because she is the Company's CEO and an executive officer.
• Marcus Henley — Not independent because he is the Company's CTO and an executive officer.
• Jonathan Tsai — Not independent because, as the Managing Partner of Velthryn Venture Partners, he is a representative of Velthryn Venture Partners Fund IV, L.P., which holds approximately 21.0% of the Company's fully diluted pre-IPO shares. This material relationship, in the Board's judgment, would interfere with the exercise of independent judgment. In addition, Tsai's role as the designee of a significant stockholder under a contractual board designation right is indicative of a material relationship with the Company.
• Rebecca Stahl — Not independent because, as a Partner of Arclight Equity Group, she is a representative of Arclight Equity Group Fund VII, L.P., which holds approximately 15.7% of the Company's fully diluted pre-IPO shares. The same analysis applied to Tsai applies to Stahl.
Issue: The Board does not currently satisfy the Nasdaq majority-independence requirement.
Recommendations. We recommend that the Company consider the following alternatives to address the independence shortfall:
(i) Reclassify an Investor-Designee Director as Independent. Under this approach, the Company would determine that one of the investor-designee directors (Tsai or Stahl) qualifies as independent notwithstanding their affiliation with a significant stockholder. We view this approach as unlikely to be supportable under Nasdaq rules given the materiality of the stockholder relationships involved and the contractual board designation rights that gave rise to their appointments. While Nasdaq's independence definition is based on a case-by-case analysis of whether a relationship would interfere with independent judgment, the market convention and regulatory expectation is that representatives of significant stockholders with contractual board designation rights are not treated as independent.
(ii) Appoint One Additional Independent Director. Under this approach, the Company would expand the Board from seven (7) to eight (8) members and appoint one additional director who qualifies as independent under Nasdaq rules. With four (4) of eight (8) directors being independent, the Board would satisfy the majority-independence requirement at the time of the IPO. We recommend this approach as the most straightforward path to compliance and note that the addition of another independent voice to the Board may also be viewed favorably by public-market investors and proxy advisory firms.
(iii) Rely on the Nasdaq Phase-In Exemption. Nasdaq Listing Rule 5615(b)(1) allows a company listing in connection with its initial public offering to phase in compliance with the majority-independent-board requirement over a one-year period following listing, provided that at least one independent director is on the Board at the time of listing, a majority of the Board is independent within 90 days of listing, and all required independent directors are in place within one year of listing. The Company could rely on this phase-in exemption in the event that an additional independent director cannot be identified and appointed prior to the IPO. However, reliance on the phase-in exemption must be disclosed in the S-1, which may draw attention from investors and proxy advisory firms.
(iv) Rely on the Controlled Company Exemption. As discussed in Section VI.C below, the Company will qualify as a "controlled company" under Nasdaq Listing Rule 5615(c) following the IPO, which would exempt it from the majority-independent-board requirement. If the Company elects to rely on the controlled company exemption, the independence shortfall would not be a compliance issue. However, reliance on the controlled company exemption requires disclosure and carries reputational considerations that the Company should carefully evaluate.
We recommend that Lumos management and the Board discuss these alternatives and reach a decision as to the preferred approach in advance of the DRS Submission. Calderwood & Harkness is available to facilitate these discussions and to assist with the identification and appointment of an additional independent director if the Company elects to pursue that approach.
Analysis of Catherine Mercer's Independence. We have conducted a detailed analysis of whether Catherine Mercer qualifies as an independent director under Nasdaq Listing Rule 5605(a)(2), given her role as an Operating Partner of Arclight Equity Group. Our analysis and conclusions are as follows:
• Ms. Mercer serves as an Operating Partner of Arclight Equity Group, a private equity firm. In this capacity, she provides strategic advisory services to Arclight's portfolio companies but does not serve as a general partner, managing member, or officer of Arclight Equity Management VII, LLC (the management company of Arclight Equity Group Fund VII, L.P., the Lumos investor).
• Ms. Mercer does not have a direct economic interest in the management fees or carried interest earned by Arclight Equity Management VII, LLC in connection with its investment in Lumos. Her compensation from Arclight is in the form of a fixed annual retainer and project-based consulting fees that are not directly tied to the performance of, or fees generated by, the Arclight Fund VII investment in Lumos.
• Ms. Mercer does not have a family relationship with any executive officer of Lumos, nor has she been employed by Lumos or received compensation from Lumos in excess of $120,000 during any twelve-month period within the preceding three years (other than compensation for Board service, which is excluded from the independence analysis under Nasdaq rules).
• Ms. Mercer's appointment to the Board was not made pursuant to the contractual board designation right held by Arclight Equity Group Fund VII, L.P. under the Investor Rights Agreement. That designation right has been exercised by Rebecca Stahl. Ms. Mercer was appointed to the Board by a separate vote of the Board of Directors at the recommendation of the Nominating Committee.
• Based on the foregoing, we conclude that Ms. Mercer qualifies as an independent director under Nasdaq Listing Rule 5605(a)(2), subject to final confirmation of the following: (1) that Ms. Mercer has not received any compensation or payments from Lumos (other than Board fees) that would exceed the applicable Nasdaq thresholds; (2) that Ms. Mercer does not have any other business or personal relationship with the Company or its executive officers that has not been disclosed to us; and (3) that the Board, in its judgment, determines that Ms. Mercer's relationship with Arclight does not interfere with her ability to exercise independent judgment as a director. We recommend that Ms. Mercer complete a detailed director questionnaire to confirm the foregoing, which we will prepare and circulate.
C. Controlled Company Exemption
Nasdaq Listing Rule 5615(c) provides that a company of which more than 50% of the voting power for the election of directors is held by an individual, a group, or another company qualifies as a "controlled company" and may exempt itself from the following Nasdaq corporate governance requirements:
• The requirement that a majority of the Board be independent (Nasdaq Listing Rule 5605(b)(1));
• The requirement that the Compensation Committee be composed entirely of independent directors (Nasdaq Listing Rule 5605(d)); and
• The requirement that the Nominating Committee be composed entirely of independent directors or that director nominations be made by a majority of independent directors.
Importantly, the controlled company exemption does not extend to the Audit Committee independence requirements. All members of the Audit Committee must be independent regardless of whether the Company relies on the controlled company exemption.
Analysis. Following the closing of the IPO, the Company's co-founders — Priya Subramanian and Marcus Henley — will collectively hold approximately 73.5% of the total voting power of the Company's outstanding capital stock through their ownership of Class B Common Stock (carrying 10 votes per share). Specifically:
• Priya Subramanian: 16,500,000 shares of Class B Common Stock × 10 votes = 165,000,000 votes
• Marcus Henley: 12,000,000 shares of Class B Common Stock × 10 votes = 120,000,000 votes
• Total co-founder votes: 285,000,000 out of approximately 387,641,176 total votes = 73.5%
For purposes of the controlled company analysis, the question arises whether Subramanian and Henley constitute a "group" for purposes of Nasdaq Listing Rule 5615(c). Based on their status as co-founders of the Company, their shared history of coordinated action as the Company's co-founders and senior executives, and the expectation that they will continue to act in concert with respect to the governance of the Company, we believe it is appropriate to treat them as a group for controlled company purposes. Nevertheless, we note that some commentators have raised questions about whether two individuals who do not have a formal agreement to vote together necessarily constitute a "group." We recommend that the Board address this question explicitly in any resolution electing controlled company status, and we will include appropriate disclosure language in the Registration Statement.
Conclusion. Lumos will qualify as a "controlled company" under Nasdaq Listing Rule 5615(c) following the IPO. If the Company elects to rely on the controlled company exemption, it need not comply with the majority-independent-board requirement, the fully-independent-compensation-committee requirement, or the fully-independent-nominating-committee requirement. The Company must, however, continue to comply with the Audit Committee independence requirements under Nasdaq Listing Rule 5605(c)(2) and SEC Rule 10A-3.
Recommendation. We recommend that the Board carefully consider whether to elect controlled company status. While the controlled company exemption is legally available and commonly relied upon by dual-class companies, there are reputational and governance considerations that weigh against reliance:
• Proxy advisory firms (ISS, Tarrant Partners LLC) generally view reliance on the controlled company exemption unfavorably and may issue negative voting recommendations with respect to directors or governance proposals of companies that rely on the exemption.
• Certain institutional investors, including large index funds and pension funds, have adopted policies disfavoring investments in companies that rely on the controlled company exemption or that maintain dual-class structures without strong governance counterbalances.
• Even if the controlled company exemption is available, best governance practice may counsel in favor of voluntarily maintaining a majority-independent board, a fully independent compensation committee, and a fully independent nominating committee, as a signal of the Company's commitment to robust corporate governance.
We recommend discussing these considerations with the Company's management and Board and reaching a decision prior to the DRS Submission, as the Company's governance structure will need to be described in the Registration Statement.
VII. Board Committee Composition
A. Audit Committee
Nasdaq Listing Rule 5605(c) requires that every Nasdaq-listed company have an Audit Committee composed of at least three (3) members, all of whom must be independent directors under Nasdaq Listing Rule 5605(c)(2) and SEC Rule 10A-3. At least one member of the Audit Committee must be an "audit committee financial expert" as defined under SEC regulations. The controlled company exemption does not apply to the Audit Committee independence requirements; accordingly, regardless of whether the Company elects controlled company status, the Audit Committee must be composed entirely of independent directors.
Additionally, each member of the Audit Committee must be able to read and understand fundamental financial statements, including a company's balance sheet, income statement, and cash flow statement, and at least one member must have past employment experience in finance or accounting, requisite professional certification in accounting, or other comparable experience or background that results in the individual's financial sophistication.
Proposed Audit Committee Members:
All three proposed members satisfy the independence requirements under Nasdaq Listing Rule 5605(c)(2) and SEC Rule 10A-3, which imposes additional independence criteria for audit committee members, including that such members may not (i) accept, directly or indirectly, any consulting, advisory, or other compensatory fee from the Company or any of its subsidiaries (other than in the member's capacity as a director or committee member) or (ii) be an affiliated person of the Company or any of its subsidiaries. Based on our preliminary analysis, none of the proposed members receives any compensatory fees from the Company other than standard Board and committee compensation, and none is an affiliated person of the Company.
Action Item: Calderwood & Harkness is preparing a draft Audit Committee Charter that will comply with the requirements of Nasdaq Listing Rule 5605(c) and SEC Rule 10A-3. The charter will address, among other things, the committee's responsibilities with respect to the appointment, compensation, and oversight of the Company's independent registered public accounting firm (currently Penrose Firth CPAs LLP), the review and approval of the Company's financial statements and earnings releases, oversight of the Company's internal controls and risk management processes, the review and approval of related-party transactions, the establishment of procedures for the receipt, retention, and treatment of complaints regarding accounting, internal accounting controls, and auditing matters, and the committee's authority to engage independent advisors. The draft charter will be circulated to the Company for review and will be adopted by the Board prior to the IPO.
B. Compensation Committee
Nasdaq Listing Rule 5605(d) requires that every Nasdaq-listed company have a Compensation Committee composed of at least two (2) members, all of whom must be independent directors, unless the Company qualifies as and elects to be treated as a "controlled company" under Nasdaq Listing Rule 5615(c), in which case the independence requirement for the Compensation Committee may be waived.
In addition to the Nasdaq independence requirements, members of the Compensation Committee should also satisfy the requirements for "non-employee directors" under SEC Rule 16b-3 (to ensure that equity grants to executive officers are exempt from the short-swing profit provisions of Section 16(b) of the Exchange Act) and should qualify as "outside directors" for purposes of any applicable tax regulations.
Proposed Compensation Committee Members:
All three proposed members satisfy the independence requirements under Nasdaq Listing Rule 5605(d)(2), including the enhanced independence criteria applicable to compensation committee members. None of the proposed members has accepted compensatory fees from the Company (other than standard Board and committee compensation), and none is an affiliated person of the Company.
Action Item: Calderwood & Harkness is preparing a draft Compensation Committee Charter. The charter will address the committee's responsibilities with respect to the review and approval of executive officer compensation (including base salary, annual incentive compensation, equity awards, and severance and change-in-control arrangements), the oversight of the Company's equity incentive plans, the review and recommendation of director compensation, the preparation of the Compensation Discussion and Analysis ("CD&A") for inclusion in the Company's proxy statement (beginning with the first proxy statement following the IPO), and the committee's authority to retain independent compensation consultants and other advisors. The draft charter will be circulated to the Company for review.