PRIVILEGED AND CONFIDENTIAL — ATTORNEY WORK PRODUCT
CALDERWOOD & HARKNESS LLP 1 Market Street, Spear Tower, Suite 3600 San Francisco, CA 94105 Telephone: (415) 773-5000
MEMORANDUM
To: Robert Adeyemi, Responsible Partner Jennifer Kwon, Billing Partner Audrey Zhou, Lead Associate
From: Brendan Walsh, Working Associate, Capital Markets Group
Date: November 22, 2021
Re: Preliminary Corporate Structure Chart — Lumos Analytics Inc. (Matter No. 1008-00002)
Subject: Organizational diagram, subsidiary structure, capitalization summary, and ownership breakdown in connection with the proposed initial public offering of Class A Common Stock on the Nasdaq Global Select Market
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I. Introduction and Purpose
The purpose of this memorandum is to provide a preliminary overview of the corporate structure, subsidiaries, capitalization, and ownership of Lumos Analytics Inc. ("Lumos," the "Company," or the "Issuer") as of November 2021, in connection with the Company's proposed initial public offering (the "IPO" or the "Proposed Offering") of shares of its Class A Common Stock, par value $0.0001 per share, on the Nasdaq Global Select Market.
This memorandum has been prepared solely for internal use by the Calderwood & Harkness LLP engagement team working on the above-referenced matter and is subject to the protections afforded by the attorney-client privilege and the work product doctrine. It is not intended to constitute legal advice to the Company or any other party and should not be shared with any third party without the prior written approval of Robert Adeyemi, the Responsible Partner on this matter.
The information set forth in this memorandum is based primarily on documents and data provided by Naomi Feinberg, General Counsel and Corporate Secretary of Lumos Analytics Inc., and David Lau, Chief Financial Officer of the Company, during the course of our preliminary due diligence review. All factual assertions herein remain subject to further verification and updating as additional documentation is received and reviewed. In particular, we note that the capitalization figures presented in this memorandum reflect the Company's pre-IPO status as of approximately December 31, 2021 (estimated), and are based on management-provided data. Final capitalization figures will need to be confirmed against audited year-end financial data to be provided by Meridian & Howe LLP, the Company's independent registered public accounting firm (Gregory Simmons, Audit Partner). We anticipate receiving draft audited financial statements in the first quarter of 2022.
For reference, the Company was incorporated in the State of Delaware on March 14, 2016, under the Delaware General Corporation Law. The Company's Employer Identification Number (EIN) is 82-3194567, and its Delaware File Number is 6281934. The Company maintains its principal executive offices at 450 Folsom Street, Suite 1200, San Francisco, California 94105.
This memorandum is organized as follows: Section II describes the parent entity; Section III sets forth the subsidiary structure; Section IV presents the capitalization summary; Section V contains the ownership breakdown; Sections VI and VII identify the Board of Directors and executive officers; Section VIII briefly summarizes certain material contractual relationships relevant to the corporate structure; Section IX provides an illustrative analysis of the IPO's impact on capitalization; and Section X identifies outstanding items and next steps for the engagement team.
II. Corporate Organization — Parent Entity
A. Lumos Analytics Inc.
The following is a summary of the key organizational details of the parent entity:
Full Legal Name: Lumos Analytics Inc.
Entity Type: C-corporation
Jurisdiction of Incorporation: State of Delaware
Date of Incorporation: March 14, 2016
Delaware File Number: 6281934
Employer Identification Number (EIN): 82-3194567
Principal Executive Offices: 450 Folsom Street, Suite 1200, San Francisco, California 94105
Registered Agent in Delaware: Capitol Registered Agents LLC, 850 New Burton Road, Suite 201, Dover, Delaware 19904
Foreign Qualifications: The Company is currently qualified to do business as a foreign corporation in the following states:
• California
• New York
• Texas
• Illinois
We will need to confirm through our due diligence review whether any additional foreign qualifications are required based on the Company's current operations, employee presence, and customer-facing activities in other jurisdictions. To the extent the Company has employees or maintains offices in states beyond those listed above, additional qualifications may be necessary prior to the IPO.
Business Description: Lumos Analytics Inc. operates a cloud-based, artificial intelligence-driven analytics platform primarily serving financial institutions. The Company's platform provides real-time transaction monitoring, fraud detection, regulatory reporting, and predictive risk modeling capabilities. The Company operates under a software-as-a-service ("SaaS") subscription model. According to management representations, the Company's platform currently processes over 2 billion transactions per month across approximately 340 enterprise customers globally.
Key Products and Services: The Company's primary product offerings include the following:
• LumosIQ Platform (Core): The Company's flagship cloud-based analytics platform, which serves as the foundational infrastructure for all of the Company's product modules and provides customers with real-time data ingestion, processing, and visualization capabilities.
• FraudLens Module: A machine learning-powered fraud detection module that integrates with the LumosIQ Platform to provide real-time identification and scoring of potentially fraudulent transactions across payment channels, account activity, and customer onboarding workflows.
• RegConnect Module (Regulatory Reporting): A regulatory reporting module designed to automate and streamline compliance reporting obligations for financial institutions across multiple jurisdictions, including Bank Secrecy Act/Anti-Money Laundering (BSA/AML) reporting, Suspicious Activity Reports (SARs), and Currency Transaction Reports (CTRs).
• DataBridge API Suite: A suite of application programming interfaces that enables enterprise customers to integrate the Company's analytics capabilities into their existing internal systems, third-party applications, and proprietary data workflows.
Employees: The Company had approximately 1,120 employees as of year-end 2021. The employee base spans engineering, product development, sales and marketing, customer success, and general and administrative functions distributed across the Company's offices in San Francisco, New York, London, and Bangalore.
III. Subsidiary Structure
A. Wholly-Owned Subsidiaries
Based on information provided by Naomi Feinberg during our initial due diligence sessions, the Company maintains three wholly-owned subsidiaries as described below. We note that this subsidiary list is preliminary and remains subject to confirmation through the Company's responses to our outstanding due diligence request list. We have requested that Ms. Feinberg provide copies of all organizational documents, certificates of formation, and corporate registrations for each subsidiary, as well as confirmation as to whether any additional entities — including dormant entities, special purpose vehicles, or entities formed in connection with prior transactions — exist or have existed.
The known wholly-owned subsidiaries are as follows:
1. Lumos Analytics UK Ltd.
Entity Type: Private limited company organized under the laws of England and Wales
Purpose: Lumos Analytics UK Ltd. serves as the Company's operational entity for European customer operations and sales. The subsidiary employs sales, customer success, and business development personnel based in the Company's London office. It is our understanding that the UK subsidiary contracts directly with certain European customers and serves as the Company's point of contact for European market activities, although we will need to confirm the scope of contracts held by this entity versus the parent. This entity may also have implications under the UK's data protection regime (UK GDPR) and the EU's General Data Protection Regulation to the extent it processes personal data of European data subjects. We have flagged these issues for further review.
Ownership: 100% owned directly by Lumos Analytics Inc.
2. Lumos Analytics India Private Limited
Entity Type: Private limited company organized under the laws of India
Purpose: Lumos Analytics India Private Limited houses a significant portion of the Company's engineering and software development team. The subsidiary is based in the Company's Bangalore office and functions primarily as an offshore development center. Based on preliminary representations from management, the India subsidiary does not independently contract with customers or generate revenue directly but operates as a cost center providing engineering services to the parent entity pursuant to an intercompany services arrangement. We will need to review the terms of any intercompany agreements and assess transfer pricing considerations in coordination with the Company's tax advisors.
Ownership: 100% owned directly by Lumos Analytics Inc.
3. Lumos Federal Solutions LLC
Entity Type: Limited liability company organized under the laws of the State of Delaware
Purpose: Lumos Federal Solutions LLC was formed for the purpose of entering into contracts with U.S. government agencies and federal financial regulatory bodies. The formation of a separate entity for government contracting purposes is consistent with industry practice and may be related to specific contracting, security clearance, or facility clearance requirements associated with federal procurement regulations (including the Federal Acquisition Regulation). We will need to confirm whether this entity holds any active government contracts, whether any such contracts are classified, and whether the entity is registered in the System for Award Management (SAM.gov).
Ownership: 100% owned directly by Lumos Analytics Inc.
Additional Notes: Based on information received to date, all three subsidiaries are directly and wholly owned by Lumos Analytics Inc. No minority interests, joint ventures, or strategic equity investments in or by third parties have been identified to date. There are no intermediate holding companies or multi-tiered subsidiary structures. If any such arrangements exist, they have not yet been disclosed to us. We have specifically requested that the Company confirm this point in writing.
Caveat: The subsidiary list set forth above is preliminary and subject to confirmation via a comprehensive review of the Company's corporate records, including organizational documents, state and foreign government filings, franchise tax records, and any related intercompany agreements. We will update this section of the memorandum as our due diligence review progresses.
B. Organizational Diagram (Textual Description)
The following is a textual description of the Company's organizational structure, which is intended to be rendered as a graphical organizational chart in the final version of this document. The graphical diagram will be prepared for inclusion in the Registration Statement on Form S-1 and the prospectus, as applicable.
LUMOS ANALYTICS INC. (Delaware C-Corporation — Parent Entity)
| ─────────────────────────────┼─────────────────────────────
• Lumos Analytics UK Ltd. — Private limited company organized under the laws of England and Wales — 100% owned
• Lumos Analytics India Private Limited — Private limited company organized under the laws of India — 100% owned
• Lumos Federal Solutions LLC — Limited liability company organized under the laws of the State of Delaware — 100% owned
As noted above, the Company maintains a flat subsidiary structure with no intermediate holding companies. All three subsidiaries are directly owned by the parent entity. This relatively straightforward organizational structure is typical for a venture-backed technology company at this stage of development. To the extent additional entities are identified during the course of our due diligence review, this diagram will be updated accordingly.
IV. Capitalization Summary (Pre-IPO, as of December 31, 2021, Estimated)
The following capitalization summary is based on management-provided data and remains subject to verification against the Company's audited financial statements for the fiscal year ended December 31, 2021, which will be prepared by Meridian & Howe LLP (Gregory Simmons, Audit Partner). All share figures are approximate and may be adjusted upon completion of the audit and reconciliation of the Company's stock ledger.
A. Authorized Capital Stock
The Company's current Certificate of Incorporation, as amended to date, authorizes a total of 500,000,000 shares of Common Stock, par value $0.0001 per share. As currently structured, the Company has a single class of common stock.
In connection with the Proposed Offering, the Company intends to adopt an Amended and Restated Certificate of Incorporation (the "Restated Charter") that will become effective upon the closing of the IPO. The Restated Charter will implement a dual-class common stock structure, consisting of:
• Class A Common Stock: Entitled to one (1) vote per share. Class A Common Stock is the class of shares that will be publicly offered in the IPO. Upon the conversion of all outstanding shares of preferred stock in connection with the IPO closing, such shares will be designated as Class A Common Stock. Existing shares of common stock held by non-founder stockholders will also be reclassified as Class A Common Stock.
• Class B Common Stock: Entitled to ten (10) votes per share. Class B Common Stock will be held exclusively by the Company's co-founders, Priya Subramanian and Marcus Henley. The Class B Common Stock is not transferable except to permitted transferees (to be defined in the Restated Charter) and is subject to a sunset provision as described in Section V.B below.
We note that as of the date of this memorandum, the existing charter provides for a single class of common stock. The reclassification into dual-class shares will occur pursuant to the Restated Charter, which this firm will draft in coordination with the Company's General Counsel. A preliminary draft of the Restated Charter is expected to be circulated to the engagement team in December 2021.
B. Common Stock Outstanding
As of the estimated date of December 31, 2021, the following shares of common stock are, or will be, outstanding:
Class B Common Stock Outstanding: 28,500,000 shares
The 28,500,000 shares of Class B Common Stock will be held exclusively by the Company's two co-founders:
Class A Common Stock: Upon the closing of the IPO, all outstanding shares of preferred stock will automatically convert into shares of Class A Common Stock on a 1:1 basis (subject to potential anti-dilution adjustments, which we do not currently anticipate will apply). In addition, all existing shares of common stock held by stockholders other than the two co-founders will be reclassified as Class A Common Stock. The total number of shares of Class A Common Stock outstanding immediately prior to the IPO (after conversion of preferred stock but prior to issuance of primary shares in the offering) will be confirmed upon finalization of the capitalization table.
Other Common Stock Holders: In addition to the 28,500,000 shares held by the co-founders, additional shares of common stock are held by early employees, angel investors, and other individual holders. The precise number of such shares is subject to confirmation upon completion of our stock ledger review, but based on the fully diluted share count analysis in Section IV.E below, we estimate approximately 16,000,000 shares are held by such other common stockholders.
C. Preferred Stock Outstanding (Series A through Series D)
The Company has completed four rounds of preferred stock financing, designated as Series A, Series B, Series C, and Series D. All shares of preferred stock will automatically convert into shares of Class A Common Stock upon the closing of the IPO, on a one-for-one basis, subject to any applicable anti-dilution adjustments (none of which are currently anticipated to apply based on the preliminary price range for the Proposed Offering).
The following table summarizes the preferred stock outstanding:
\ Note:* The precise allocation of shares between Series B and Series C for Arclight Equity Group Fund VII, L.P. (which holds a combined total of 18,600,000 shares of Series B and Series C Preferred Stock) and the precise allocation between Series C and Series D for Velthryn Venture Partners Fund IV, L.P. (which holds a combined total of 24,800,000 shares of Series C and Series D Preferred Stock) is subject to confirmation upon review of the underlying stock purchase agreements and the Company's stock ledger. The aggregate 62,400,000 shares of preferred stock outstanding has been confirmed by management.
We have requested copies of all preferred stock purchase agreements, investors' rights agreements, voting agreements, and rights of first refusal and co-sale agreements associated with each financing round. These documents are expected to contain registration rights provisions, information rights, board designation rights, protective provisions, and other covenants that will need to be analyzed in connection with the S-1 preparation and the negotiation of the underwriting agreement.
D. Employee Stock Option Pool
The Company maintains an equity incentive plan under which stock options have been granted to employees, consultants, and other service providers. The key parameters of the option pool are as follows:
Weighted-Average Exercise Price (WAEP) of Outstanding Options: $4.82 per share
We note that the Company will likely need to adopt a new equity incentive plan in connection with the IPO (the "2022 Equity Incentive Plan"), which will serve as the successor to the existing plan. The terms of the 2022 Equity Incentive Plan, including the share reserve, will need to be determined in coordination with the Compensation Committee of the Board of Directors and disclosed in the Registration Statement. Additionally, an Employee Stock Purchase Plan ("ESPP") may also be adopted. We will coordinate with the Company's compensation consultants regarding the design and sizing of these plans.
We have requested the Company's complete stock option ledger, including grant dates, exercise prices, vesting schedules, expiration dates, and the identity of all optionees. This review is critical to ensure accuracy of the capitalization table and to identify any potential Section 409A compliance issues related to the pricing of past option grants.
E. Fully Diluted Shares Outstanding (Pre-IPO)
Based on the information available to us, the total fully diluted shares outstanding on a pre-IPO basis is approximately 118,200,000 shares. The composition of the fully diluted share count is as follows:
The figure of approximately 16,000,000 shares attributed to "Other common stock holders" is derived as a residual calculation: 118,200,000 total fully diluted shares, less 28,500,000 founder shares, less 62,400,000 preferred shares (as-converted), less 11,300,000 outstanding options, equals approximately 16,000,000 shares. This residual figure is subject to confirmation upon completion of the stock ledger review and reconciliation.
F. Last Private Valuation
The Company's most recent private financing round was the Series D Preferred Stock financing, which closed on August 24, 2020. The key valuation metrics from that round are as follows:
• Per Share Price (Series D): $12.50
• Fully Diluted Shares Outstanding (at time of Series D): Approximately 118,200,000 shares (as estimated above; the precise fully diluted share count at the time of the Series D closing may have been slightly lower depending on options granted between August 2020 and the current date)
• Post-Money Valuation: $12.50 per share × 118,200,000 fully diluted shares = approximately $1,477,500,000 (approximately $1.478 billion)
The Series D post-money valuation indicates that the Company was valued at approximately $1.478 billion on a fully diluted basis as of August 2020. The preliminary price range for the Proposed Offering ($16.00–$18.00 per share) represents a premium to the Series D price, reflecting the Company's growth in revenue, customer count, and platform capabilities since the Series D financing.
V. Ownership Breakdown (Pre-IPO, Fully Diluted Basis)
A. Summary Table
The following table sets forth the approximate ownership of Lumos Analytics Inc. on a fully diluted basis prior to the Proposed Offering:
We note that the "Other holders" category includes the approximately 16,000,000 shares of common stock identified in Section IV.E above, as well as any shares of preferred stock held by investors other than the three lead investors identified in the table (i.e., shares of preferred stock held by follow-on investors or co-investors in the Series A through Series D rounds that are not separately identified above). The precise breakdown of this category will be confirmed upon completion of the stock ledger review.
B. Founder Voting Control (Post-IPO Projection)
One of the critical features of the proposed dual-class structure is the concentration of voting power in the hands of the Company's two co-founders. The following analysis illustrates the projected founder voting control immediately following the closing of the IPO:
Class B Voting Power:
28,500,000 shares of Class B Common Stock × 10 votes per share = 285,000,000 votes
Estimated Class A Voting Power (Post-IPO):
Upon closing of the IPO, all outstanding shares of preferred stock will automatically convert into shares of Class A Common Stock on a 1:1 basis. In addition, the Company will issue 12,941,176 new shares of Class A Common Stock in the primary offering (at the $17.00 midpoint of the preliminary price range), and existing shares of common stock held by non-founder stockholders will be reclassified as Class A. Based on these assumptions:
• Preferred stock converted to Class A: 62,400,000 shares
• New primary shares issued in IPO: 12,941,176 shares
• Other existing Class A common holders: ~16,000,000 shares (estimated)
• Secondary shares (already outstanding; no new issuance): 3,500,000 shares (included in preferred conversion above)
• Unexercised options: 11,300,000 shares (not included in outstanding shares until exercised)
• Total estimated Class A shares outstanding post-IPO: ~91,341,176 shares (excluding unexercised options), or approximately 102,641,176 shares if a broader estimate is applied inclusive of certain exercised options and other adjustments
Total Class A votes: approximately 102,641,176 votes (at 1 vote per share)
Total Voting Power and Founder Percentage:
• Total votes: 285,000,000 (Class B) + 102,641,176 (Class A) = approximately 387,641,176 votes
• Founder voting percentage: 285,000,000 ÷ 387,641,176 = approximately 73.5%
This analysis demonstrates that the co-founders will maintain approximately 73.5% of the total voting power of the Company immediately following the IPO, notwithstanding holding only approximately 21.7% of the total economic interest (on a post-IPO, fully diluted basis). This level of voting control is significant and will need to be prominently disclosed as a risk factor in the Registration Statement.
Sunset Provision: The Restated Charter is expected to include an automatic sunset provision pursuant to which all outstanding shares of Class B Common Stock will automatically convert into shares of Class A Common Stock (on a one-for-one basis) upon the earliest to occur of the following events:
(i) the seventh (7th) anniversary of the closing of the IPO;
(ii) the transfer of any shares of Class B Common Stock by a co-founder to any person or entity that is not a "permitted transferee" (as such term will be defined in the Restated Charter); or
(iii) the date on which the co-founders collectively hold less than ten percent (10%) of the total outstanding shares of common stock (Class A and Class B combined).
The specific terms of the sunset provision will be finalized in the drafting of the Restated Charter. We recommend that the engagement team coordinate with the underwriters' counsel (expected to be Grayson & Drummond LLP) regarding market standards for sunset provisions in dual-class IPOs.
C. Key Investor Details
The following are additional details regarding the Company's principal institutional investors, each of which holds a significant equity position and maintains one or more designees on the Company's Board of Directors.
1. Velthryn Venture Partners Fund IV, L.P.
General Partner: Velthryn Venture Partners Management IV, LLC
Principal / Board Designee: Jonathan Tsai, Managing Partner
Address: 2100 Sand Hill Road, Suite 300, Menlo Park, California 94025
Entity Type: Delaware limited partnership
Holdings: Combined Series C and Series D Preferred Stock: 24,800,000 shares, representing approximately 20.98% of fully diluted shares outstanding
Role in Proposed IPO: Velthryn Venture Partners Fund IV, L.P. is expected to participate as a selling stockholder in the Proposed Offering, selling up to 2,000,000 shares of Class A Common Stock (upon conversion from preferred stock) in the secondary component of the offering. The remaining shares held by Velthryn will be subject to the standard 180-day lock-up agreement.
Board Representation: Jonathan Tsai serves as a member of the Company's Board of Directors as a designee of Velthryn Venture Partners Fund IV, L.P. Mr. Tsai is not expected to be classified as an independent director under Nasdaq listing standards due to his affiliation with a significant stockholder.
2. Arclight Equity Group Fund VII, L.P.
General Partner: Arclight Equity Management VII, LLC
Principals: Rebecca Stahl, Partner (Board designee); Catherine Mercer, Operating Partner (independent Board member)
Address: 780 Third Avenue, 22nd Floor, New York, New York 10017
Entity Type: Delaware limited partnership
Holdings: Combined Series B and Series C Preferred Stock: 18,600,000 shares, representing approximately 15.74% of fully diluted shares outstanding
Role in Proposed IPO: Arclight Equity Group Fund VII, L.P. is expected to participate as a selling stockholder in the Proposed Offering, selling up to 1,500,000 shares of Class A Common Stock (upon conversion from preferred stock) in the secondary component of the offering. The remaining shares held by Arclight will be subject to the standard 180-day lock-up agreement.
Board Representation: Arclight Equity Group Fund VII, L.P. has two representatives on the Company's Board of Directors: Rebecca Stahl, who serves as a Board designee and is not expected to be classified as independent under Nasdaq listing standards, and Catherine Mercer, an Operating Partner at Arclight who is expected to be classified as an independent director. We note that Ms. Mercer's independence classification will need to be carefully analyzed in light of her role as an Operating Partner at Arclight, and we intend to review the specific facts of her engagement with Arclight to confirm that she satisfies the independence requirements under Nasdaq Rule 5605(a)(2) and Rule 10A-3 under the Securities Exchange Act of 1934.
3. Ridgeline Capital Partners Fund II, L.P.
Principal: Diane Ochoa, Managing Partner (independent Board member)
Address: 525 University Avenue, Suite 400, Palo Alto, California 94301
Entity Type: Delaware limited partnership
Holdings: Series A Preferred Stock: 9,200,000 shares, representing approximately 7.78% of fully diluted shares outstanding
Role in Proposed IPO: Ridgeline Capital Partners Fund II, L.P. is not expected to be a selling stockholder in the Proposed Offering. All shares held by Ridgeline will be subject to the standard 180-day lock-up agreement.
Board Representation: Diane Ochoa serves as a member of the Company's Board of Directors and is expected to be classified as an independent director under applicable Nasdaq listing standards.
VI. Board of Directors Composition
As of the date of this memorandum, the Company's Board of Directors consists of seven (7) members. The following table summarizes the composition of the Board:
The Board currently includes three (3) directors who are expected to satisfy the independence requirements under Nasdaq listing standards: Diane Ochoa, Samuel Adebayo, and Catherine Mercer. We note that under Nasdaq Rule 5605(b)(1), a majority of the Board must consist of independent directors within one year of the listing date. With three independent directors out of seven total, the Company does not currently satisfy the majority-independence requirement. The Company will need to either add one or more independent directors or reduce the size of the Board prior to the one-year anniversary of the IPO closing. We recommend that the engagement team discuss this issue with the Company's General Counsel to develop a plan for achieving compliance within the requisite timeline. The Company may rely on the phase-in provisions available to newly listed companies under Nasdaq Rule 5615(b)(1).
The three independent directors also satisfy the requirements for independent committee membership under Nasdaq rules and applicable SEC regulations. The proposed committee assignments, which are subject to finalization through the adoption of formal committee charters, are as follows:
Audit Committee:
• Samuel Adebayo (Chair; financial expert within the meaning of Item 407(d)(5) of Regulation S-K and Rule 10A-3 under the Exchange Act)
• Diane Ochoa
• Catherine Mercer
Compensation Committee:
• Catherine Mercer (Chair)
• Diane Ochoa
• Samuel Adebayo
Nominating and Corporate Governance Committee:
• Diane Ochoa (Chair)
• Samuel Adebayo
• Catherine Mercer
We will prepare drafts of the committee charters for review by the Board and will coordinate with Ms. Feinberg's office regarding scheduling of Board and committee organizational actions in advance of the IPO.
VII. Executive Officers
The following table identifies the Company's current executive officers:
We will need to obtain detailed biographical information for each executive officer for inclusion in the Registration Statement on Form S-1, including educational background, prior employment history, and any other public company directorships held during the past five years. We have submitted a biographical questionnaire to each officer through Ms. Feinberg's office and expect to receive completed questionnaires by mid-December 2021.
In addition, we will need to review each officer's employment agreement, any change of control or severance arrangements, equity compensation agreements, and any indemnification agreements entered into between the officer and the Company.
VIII. Material Contractual Relationships (Summary Reference)
For purposes of providing context to the corporate structure and identifying financial dependencies relevant to the due diligence process and the preparation of the Registration Statement, the following is a summary of certain material contractual relationships that have been identified to date. This section is not intended to be a comprehensive listing of all material contracts and will be supplemented as additional agreements are reviewed.
Master Cloud Services Agreement with Brindoval Data Centers LLC:
Brindoval Data Centers LLC, a Virginia limited liability company, serves as the Company's primary cloud infrastructure provider. The Company entered into a Master Cloud Services Agreement with Brindoval dated January 15, 2021, with a five-year initial term. The agreement includes an annual minimum commitment of $8.2 million for dedicated computing, storage, and network resources. Given the significance of this commitment and the Company's reliance on Brindoval's infrastructure for its core platform operations, this agreement is expected to be filed as a material contract exhibit to the Registration Statement (pursuant to Item 601(b)(10) of Regulation S-K).
Strategic Partnership Agreement with Nordwell Financial Technologies Inc.:
The Company entered into a Strategic Partnership Agreement with Nordwell Financial Technologies Inc., a Delaware corporation, dated March 30, 2021, with a three-year initial term. The agreement contemplates co-development and distribution of embedded analytics capabilities that integrate the Company's LumosIQ Platform with Nordwell's financial services technology platform. We will need to review this agreement in detail to assess the scope of any intellectual property licensing, revenue-sharing arrangements, exclusivity provisions, and potential competitive restrictions.
Revolving Credit Facility with Ashford National Bank:
The Company maintains a revolving credit facility with Ashford National Bank, an OCC-chartered national bank, pursuant to a credit agreement dated June 1, 2021. The facility has a total commitment of $50 million, bears interest at SOFR plus 275 basis points, and matures on June 1, 2024. As of the most recently available information (approximately March 31, 2022, as projected), approximately $15 million was drawn under the facility. We will need to review the credit agreement in detail to identify any covenants, change of control provisions, or restrictions on the Company's ability to consummate the IPO or distribute proceeds.
intellectual Property:
The Company holds the following registered trademarks with the United States Patent and Trademark Office (USPTO): "Lumos," "Lumos AI," "LumosIQ," and "FraudLens." In addition, the Company holds 14 issued U.S. utility patents and has 7 pending patent applications, primarily related to machine learning-based fraud detection algorithms and real-time transaction scoring methodologies. A comprehensive intellectual property audit will be conducted as part of our due diligence review, and we will coordinate with the Company's patent counsel to obtain a complete schedule of all registered and pending intellectual property.
IX. Proposed IPO Capitalization Impact (Illustrative)
The following analysis is provided for illustrative purposes to assist the engagement team in understanding the potential impact of the Proposed Offering on the Company's capitalization. All figures are preliminary and based on the assumed midpoint of the preliminary price range ($17.00 per share). Actual figures will depend on the final offering price, the number of shares sold, and whether the overallotment option is exercised.
A. Proposed Offering Summary
We note that the Company will not receive any proceeds from the sale of secondary shares by the selling stockholders. The gross proceeds attributable to the secondary shares (3,500,000 × $17.00 = $59,500,000 at midpoint) will be received by Velthryn and Arclight, respectively, net of the applicable underwriting discount.
B. Post-IPO Shares Outstanding (Illustrative, at Midpoint, Excluding Overallotment)
Upon closing of the IPO (assuming the midpoint price and no exercise of the overallotment option), the Company's capitalization is expected to be as follows:
• All 62,400,000 shares of preferred stock will automatically convert into 62,400,000 shares of Class A Common Stock on a one-for-one basis.
• The Company will issue 12,941,176 new shares of Class A Common Stock in the primary offering.
• Class B Common Stock will remain unchanged at 28,500,000 shares, held by the two co-founders.
• Existing common stock held by non-founder stockholders (approximately 16,000,000 shares) will be reclassified as Class A Common Stock.
• The 3,500,000 secondary shares sold by Velthryn and Arclight are already included in the 62,400,000 preferred shares that will convert to Class A and therefore do not represent additional newly issued shares. The secondary offering component does not increase the total number of shares outstanding.
Estimated total shares outstanding post-IPO (illustrative):
The above figures exclude the 11,300,000 outstanding but unexercised stock options, which would bring the total fully diluted share count to approximately 131,141,176 shares on a post-IPO basis (prior to any exercise of the overallotment option). If the overallotment option is exercised in full, an additional 2,466,176 shares would be issued, increasing the post-IPO fully diluted share count to approximately 133,607,352 shares.
X. Outstanding Items and Next Steps
The following items remain outstanding and will need to be addressed as the engagement team continues its work in connection with the Proposed Offering:
1. Confirmation of Complete Subsidiary List. We have submitted a due diligence request to Naomi Feinberg, General Counsel, requesting a comprehensive list of all subsidiaries, affiliates, and related entities of the Company, including dormant entities and entities that may have been formed but are not currently active. Responses are pending.
2. Verification of Capitalization Table. The capitalization figures set forth in this memorandum are based on management-provided data and remain subject to verification against the Company's audited financial statements for the fiscal year ended December 31, 2021, to be prepared by Meridian & Howe LLP (Gregory Simmons, Audit Partner). We expect to receive draft audited financial statements in Q1 2022.
3. Confirmation of Outstanding Warrants or Convertible Instruments. We have asked the Company to confirm whether any outstanding warrants, convertible notes, SAFEs, or other convertible instruments exist that have not yet been identified. If any such instruments are outstanding, the fully diluted share count and ownership breakdown will need to be adjusted accordingly.
4. Completion of Stock Option Ledger Review. We have requested the Company's complete stock option ledger, including a detailed listing of all outstanding grants with grant dates, exercise prices, vesting schedules, and expiration dates. This review is necessary to verify the weighted-average exercise price, confirm the number of options that are in-the-money at the proposed IPO price, and identify any potential Section 409A compliance issues.
5. Finalization of the Amended and Restated Certificate of Incorporation. The Restated Charter implementing the dual-class common stock structure will need to be drafted, circulated to the engagement team and the Company for comment, and finalized prior to the filing of the Registration Statement. Key provisions include the dual-class structure, the sunset provision, and updated protective provisions and corporate governance provisions appropriate for a publicly traded company.