1008-00002 · Lumos Analytics Inc · Registration Statement/SEC Comments

sec-comment-response-round-1.docx DOCUMENT Capital Markets

24 / 40 ← → ✕

CALDERWOOD & HARKNESS LLP Attorneys at Law

1 Market Street, Spear Tower, Suite 3600 San Francisco, California 94105 Telephone: (415) 773-5000 Facsimile: (415) 773-5001 www.calderwoodharkness.com

March 4, 2022

Via EDGAR and Sundial Data Systems

Division of Corporation Finance Office of Technology U.S. Securities and Exchange Commission 100 F Street, N.E. Washington, D.C. 20549

Attention: Ms. Karen Delacroix, Staff Attorney

Mr. Raymond Hicks, Staff Accountant

Re: Lumos Analytics Inc. Draft Registration Statement on Form S-1 Submitted January 10, 2022 CIK No. 0001923847 File Number 333-264518

Dear Ms. Delacroix and Mr. Hicks:

This firm represents Lumos Analytics Inc. ("Lumos" or the "Company"), a Delaware corporation, in connection with the above-referenced Draft Registration Statement on Form S-1 (the "Registration Statement") confidentially submitted to the U.S. Securities and Exchange Commission (the "Commission" or the "SEC") on January 10, 2022 pursuant to Title I, Section 106 of the Jumpstart Our Business Startups Act (the "JOBS Act"). We are writing in response to the comment letter from the staff of the Division of Corporation Finance (the "Staff") dated February 14, 2022 (the "Comment Letter"), which contained 42 comments relating to the Registration Statement.

Concurrently with the filing of this letter, the Company is submitting via EDGAR an amended Draft Registration Statement ("Amendment No. 1 to the DRS" or the "Amended DRS") reflecting the revisions described in the responses set forth below. For the convenience of the Staff, we have reproduced the text of each of the Staff's comments in bold below, followed by the Company's response. Unless otherwise indicated, all page references in this letter are to pages of the Amended DRS. Where the Company has revised disclosure in the Amended DRS in response to a Staff comment, the relevant revised text is reproduced or summarized in the applicable response below.

In addition to the revisions made in response to the Staff's comments, the Company has also revised the Amended DRS to update certain financial and other information, to reflect developments since the date of the original confidential submission, and to make other conforming and editorial changes throughout the document. These additional revisions are reflected in the Amended DRS marked to show changes from the originally submitted Registration Statement, which is being filed concurrently herewith.

Capitalized terms used but not defined herein have the meanings ascribed to them in the Registration Statement.

We are available to discuss any of the responses herein at your convenience. The principal contacts for this matter are Robert Adeyemi, Partner, and Audrey Zhou, Associate, whose contact information appears at the end of this letter.

RESPONSES TO STAFF COMMENTS

PROSPECTUS COVER PAGE

Comment 1. We note that the prospectus cover page refers generally to shares of Class A Common Stock being offered by the Company and certain selling stockholders. Please revise the cover page to clearly state the total number of shares being offered in the primary offering and the secondary offering, and to specify the number of shares being sold by each selling stockholder. See Item 501(b)(2) of Regulation S-K.

Response: The Company acknowledges the Staff's comment and has revised the prospectus cover page of the Amended DRS to provide the requested specificity. The revised cover page now states that the offering consists of:

• 12,941,176 shares of Class A Common Stock to be sold by the Company in a primary offering; and

• 3,500,000 shares of Class A Common Stock to be sold by the selling stockholders in a secondary offering, consisting of (i) 2,000,000 shares to be sold by Velthryn Venture Partners Fund IV, L.P. ("Velthryn") and (ii) 1,500,000 shares to be sold by Arclight Equity Group Fund VII, L.P. ("Arclight").

The total base offering therefore consists of 16,441,176 shares of Class A Common Stock. The Company has also disclosed on the revised cover page that the underwriters have been granted a 30-day overallotment option to purchase up to an additional 2,466,176 shares of Class A Common Stock (representing 15% of the total base offering of 16,441,176 shares) from the Company at the public offering price, less the underwriting discount. The cover page further discloses the preliminary estimated public offering price range of $16.00 to $18.00 per share. The Company has applied to list its Class A Common Stock on the Nasdaq Global Select Market under the ticker symbol "LMSA."

The Company will not receive any of the proceeds from the sale of shares by the selling stockholders. See the revised cover page beginning on page i of the Amended DRS.

Comment 2. Please revise the cover page to disclose the underwriting discount and estimated offering expenses. See Item 501(b)(3) of Regulation S-K.

Response: The Company acknowledges the Staff's comment and has revised the prospectus cover page to include the requested disclosure regarding the underwriting discount and estimated offering expenses. Specifically, the revised cover page now discloses the following:

• The underwriting discount is 6.5% of the public offering price per share.

• At the midpoint of the preliminary estimated public offering price range of $17.00 per share, the underwriting discount on the 12,941,176 shares offered by the Company in the primary offering would be approximately $1.105 per share, or approximately $14,300,000 in the aggregate.

• The estimated net proceeds to the Company from the primary offering, after deducting the underwriting discount, would be approximately $205,700,000 (assuming no exercise of the overallotment option), before deducting estimated offering expenses payable by the Company of approximately $4,800,000.

The revised cover page also identifies Pinnacle Securities LLC as the lead book-running managing underwriter, Whitfield & Company LLC as the joint book-running managing underwriter, and Graystone Capital Markets Inc. as the co-manager for the offering. See the revised cover page beginning on page i of the Amended DRS.

PROSPECTUS SUMMARY

Comment 3. We note that the prospectus summary contains a detailed description of the Company's business and competitive strengths. Please revise the summary to also reference key risks facing the Company, including its history of losses, the uncertainty of its path to profitability, and other material risks. See Item 503(a) of Regulation S-K and Section I.B.1 of SEC Release No. 33-8891.

Response: The Company acknowledges the Staff's comment and has revised the prospectus summary in the Amended DRS to provide a more balanced presentation that references key risks facing the Company alongside its business description and competitive strengths. In particular, the revised prospectus summary now includes a brief discussion of the following risks:

• The Company has incurred net losses since its inception, including a net loss of $(41.2) million for the fiscal year ended December 31, 2021 and a net loss of $(27.8) million for the fiscal year ended December 31, 2020, and the Company may not achieve profitability in the near term or at all.

• The Company operates in a highly competitive market and faces competition from larger, more established enterprise software providers, specialized fintech analytics firms, and financial institutions' proprietary solutions.

• The Company's success depends on its ability to retain and expand relationships with existing enterprise customers and to attract new customers.

• The Company relies on a dual-class common stock structure that concentrates voting control with its co-founders, which may limit the ability of other stockholders to influence corporate matters.

The revised summary also includes a prominent cross-reference directing prospective investors to the "Risk Factors" section beginning on page 21 of the Amended DRS for a more complete discussion of risks that should be considered before investing in the Company's Class A Common Stock. See the revised prospectus summary beginning on page 1 of the Amended DRS.

Comment 4. Please clarify the basis for the Company's statement on page 2 that it "processes over 2 billion transactions per month." Is this metric independently verified? If not, please so state. See Section I.B.1 of SEC Release No. 33-8891.

Response: The Company acknowledges the Staff's comment and has revised the disclosure on page 2 of the Amended DRS to clarify the basis for the transaction volume metric. The revised disclosure now states that the figure of over 2 billion transactions processed per month is based on internal platform data collected and measured by the Company's engineering and operations teams as of December 31, 2021. The metric reflects the aggregate number of discrete data transactions processed through the Company's LumosIQ Platform across its approximately 340 enterprise customers globally during the month of December 2021. The Company has further added qualifying language to state that this transaction volume figure has not been independently audited or verified by a third-party auditor or other independent source. The Company has also added a note that transaction volumes may fluctuate from period to period depending on customer usage patterns, seasonal trends, and changes in the Company's customer base. See the revised disclosure on page 2 of the Amended DRS.

Comment 5. Please clarify the statement on page 3 that Lumos serves "approximately 340 enterprise customers globally." How does the Company define "enterprise customer"? Please also disclose the methodology for arriving at this count. See Section I.B.1 of SEC Release No. 33-8891.

Response: The Company acknowledges the Staff's comment and has revised the disclosure on page 3 of the Amended DRS to include a clear definition of "enterprise customer" and to describe the methodology for arriving at the customer count. Specifically, the Amended DRS now defines "enterprise customer" as any organization that has entered into one or more active subscription agreements with the Company for access to the LumosIQ Platform (including any modules thereof) with an annual contract value ("ACV") of $100,000 or greater as of the applicable measurement date. The Company counts each parent organization as a single enterprise customer, regardless of the number of subsidiaries, divisions, or business units within that organization that may separately utilize the Company's platform.

As revised, the disclosure clarifies that the count of approximately 340 enterprise customers is measured as of December 31, 2021. The Company determines the customer count based on a review of its contract management system as of the applicable measurement date, counting only customers with active (i.e., non-expired and non-terminated) subscription agreements meeting the ACV threshold described above. See the revised disclosure on page 3 of the Amended DRS.

RISK FACTORS

Comment 6. We note that several of the Company's risk factors are generic in nature and do not sufficiently describe risks specific to the Company's business, operations, and financial condition. Please revise your risk factors to include company-specific disclosure throughout, and quantify risks where possible. See Item 105 of Regulation S-K and Section II of SEC Release No. 33-10825.

Response: The Company acknowledges the Staff's comment and has conducted a comprehensive review and revision of the risk factors throughout the Amended DRS to ensure that each risk factor contains company-specific disclosure, concrete examples, and, where feasible and appropriate, quantitative information. The Company has endeavored to tailor each risk factor to describe the specific manner in which the identified risk relates to the Company's business, operations, industry, financial condition, and the offering. Generic language has been removed or replaced with company-specific disclosure throughout the section. Specific revisions to individual risk factors are described in the Company's responses to Comments 7 through 13 below, and the Company respectfully directs the Staff's attention to the revised "Risk Factors" section beginning on page 21 of the Amended DRS for the full text of all revised risk factors.

Comment 7. We note the risk factor on page 24 regarding customer concentration. Please revise this risk factor to disclose the actual percentage of revenue attributable to the Company's top 10 customers. See Item 105 of Regulation S-K.

Response: The Company acknowledges the Staff's comment and has revised the customer concentration risk factor on page 24 of the Amended DRS to include the requested quantitative disclosure. The revised risk factor now discloses that, as of December 31, 2021, the Company's top 10 customers by Annual Recurring Revenue represented approximately 34% of the Company's total ARR of $206.8 million. The revised disclosure further states that no single customer accounted for more than 10% of total revenue in any of the fiscal years ended December 31, 2021 or December 31, 2020. The Company has also included discussion of the potential impact of the loss of one or more of these significant customers on the Company's revenue and operating results, including the risk that a loss of a significant customer could result in a material decline in ARR and recognized revenue and could adversely affect the Company's growth trajectory and operating margins. See the revised risk factor on page 24 of the Amended DRS.

Comment 8. We note the risk factor on page 28 regarding the dual-class stock structure. Please revise this risk factor to quantify the founders' expected post-IPO voting control. See Item 105 of Regulation S-K.

Response: The Company acknowledges the Staff's comment and has revised the dual-class stock structure risk factor on page 28 of the Amended DRS to include specific quantitative disclosure regarding the co-founders' expected post-IPO voting power. The revised risk factor now discloses the following:

• Following the completion of the IPO, co-founder and Chief Executive Officer Priya Subramanian will hold 16,500,000 shares of Class B Common Stock, and co-founder and Chief Technology Officer Marcus Henley will hold 12,000,000 shares of Class B Common Stock, for an aggregate of 28,500,000 shares of Class B Common Stock.

• Each share of Class B Common Stock is entitled to 10 votes per share, resulting in aggregate Class B voting power of 285,000,000 votes.

• Based on midpoint offering assumptions (i.e., the sale of 12,941,176 shares of Class A Common Stock by the Company, 3,500,000 shares by selling stockholders, and no exercise of the overallotment option), the co-founders are expected to collectively hold approximately 73.5% of the total voting power of the Company's outstanding capital stock immediately following the IPO.

The revised risk factor also discloses the automatic sunset provision applicable to the Class B Common Stock, under 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: (i) the date that is seven years after the closing of the IPO; (ii) the date on which a co-founder transfers any shares of Class B Common Stock to a person or entity that is not a "permitted transferee" as defined in the Company's Amended and Restated Certificate of Incorporation; or (iii) the date on which the co-founders collectively hold fewer than 10% of the total number of shares of Common Stock (Class A and Class B combined) then outstanding. See the revised risk factor on page 28 of the Amended DRS.

Comment 9. Given that the founders will hold more than 50% of the total voting power of the Company's outstanding capital stock following the IPO, please add a risk factor addressing the Company's expected status as a "controlled company" under the Nasdaq listing rules and any corporate governance exemptions upon which the Company intends to rely. See Item 105 of Regulation S-K.

Response: The Company acknowledges the Staff's comment and has added a new risk factor in the Amended DRS addressing the Company's expected status as a "controlled company" under Nasdaq Listing Rule 5615(c). The new risk factor discloses the following:

• Because the co-founders are expected to collectively hold approximately 73.5% of the total voting power of the Company's outstanding capital stock immediately following the IPO, the Company will qualify as a "controlled company" under the Nasdaq listing rules.

• As a controlled company, the Company may elect not to comply with certain corporate governance requirements of the Nasdaq listing rules, including (a) the requirement that a majority of the board of directors be composed of independent directors, (b) the requirement that the Company have a compensation committee composed entirely of independent directors, and (c) the requirement that the Company have a nominating and corporate governance committee composed entirely of independent directors.

• The Company currently intends to rely on the controlled company exemption with respect to the requirement that a majority of its board of directors be composed of independent directors and with respect to the composition of its nominating and corporate governance committee. However, the Company does not currently intend to rely on the controlled company exemption with respect to the composition of its compensation committee, and the Company's Compensation Committee will be composed entirely of independent directors at the time of the IPO.

• If the Company relies on any of these exemptions, investors will not have the same protections afforded to stockholders of companies that are subject to all of the corporate governance requirements of the Nasdaq listing rules.

See the new risk factor on page 30 of the Amended DRS.

Comment 10. We note the risk factor on page 32 regarding competition. Please revise this risk factor to identify the Company's principal competitors or categories of competitors. See Item 105 of Regulation S-K.

Response: The Company acknowledges the Staff's comment and has revised the competition risk factor on page 32 of the Amended DRS to identify the principal categories of competitors that the Company faces. The revised risk factor now discloses that the Company competes with the following categories of competitors:

• Large enterprise software providers — diversified technology companies that have developed or acquired analytics, artificial intelligence, and data management capabilities and offer these capabilities as part of broader enterprise software suites to financial institution customers. These competitors have substantially greater financial, technical, marketing, and distribution resources than the Company.

• Specialized fintech analytics firms — companies that focus specifically on analytics, fraud detection, risk management, or regulatory compliance solutions for the financial services industry and that may compete directly with one or more of the Company's products or platform modules.

• In-house and proprietary solutions — certain large financial institutions have developed, and may continue to develop, proprietary analytics, fraud detection, and risk management platforms internally, which could reduce demand for third-party solutions such as the Company's LumosIQ Platform.

Consistent with the Company's view that the competitive landscape is broad and evolving, and that identifying individual competitors by name in the Registration Statement could convey an inaccurate impression regarding the relative significance of any particular competitor, the Company has not identified specific competitors by name. The Company does not believe such identification is required under Item 105 of Regulation S-K. See the revised risk factor on page 32 of the Amended DRS.

Comment 11. Please add a risk factor addressing the Company's dependence on its cloud infrastructure provider. Please identify the provider, the material terms of the arrangement, and the risks associated with this dependence. See Item 105 of Regulation S-K.

Response: The Company acknowledges the Staff's comment and has added a new risk factor in the Amended DRS addressing the Company's reliance on its primary cloud infrastructure provider. The new risk factor discloses the following:

• The Company's LumosIQ Platform is hosted on cloud infrastructure provided by Brindoval Data Centers LLC ("Brindoval") under a Master Cloud Services Agreement dated January 15, 2021 (the "Brindoval MCSA").

• The Brindoval MCSA has an initial term of five years (expiring January 15, 2026), with an annual minimum commitment of $8.2 million (representing approximately $41.0 million in aggregate minimum payments over the initial term).

• The Company's business depends on the continuous availability and performance of Brindoval's infrastructure. Any significant disruption, including service outages, data breaches, or performance degradation attributable to Brindoval, could adversely impact the Company's ability to serve its customers and could result in customer dissatisfaction, service level agreement credits, reputational harm, and potential loss of customers.

• Although the Brindoval MCSA provides for certain service level commitments and remedies, the Company's recourse in the event of a material service disruption may be limited by the terms of the agreement, including limitations on liability.

• The concentration of the Company's cloud infrastructure with a single provider creates vendor dependency risk. Migrating to an alternative cloud infrastructure provider would be time-consuming, technically complex, and costly, and could result in service disruptions during the transition period.

• The Brindoval MCSA may be terminated by either party under certain circumstances, including material breach that remains uncured after a specified notice period. Termination of the agreement, whether by Brindoval or by the Company, could materially disrupt the Company's operations.

See the new risk factor on page 34 of the Amended DRS.

Comment 12. Please revise the risk factor on page 36 regarding regulatory risk to address specific regulatory frameworks applicable to the Company's customers, particularly financial institutions, and to the Company's platform. See Item 105 of Regulation S-K.

Response: The Company acknowledges the Staff's comment and has substantially revised the regulatory risk factor on page 36 of the Amended DRS. The revised risk factor now addresses the following specific regulatory frameworks and considerations:

• The Company's financial institution customers are subject to extensive regulation by federal and state banking regulators, including the Office of the Comptroller of the Currency, the Federal Reserve Board, the Federal Deposit Insurance Corporation, the Consumer Financial Protection Bureau, and state banking departments. Regulatory requirements applicable to the Company's customers may directly or indirectly affect the Company's business, including requirements related to vendor management, outsourcing, data security, and third-party risk management.

• The Company processes, stores, and transmits data on behalf of its financial institution customers that is subject to various data privacy and security laws and regulations, including the Gramm-Leach-Bliley Act ("GLBA") and its implementing regulations, the California Consumer Privacy Act ("CCPA") as amended by the California Privacy Rights Act ("CPRA"), the New York SHIELD Act, and, with respect to certain international customers, the European Union General Data Protection Regulation ("GDPR") and other international data protection laws. Compliance with these evolving requirements imposes significant costs and operational burdens on the Company.

• The Company's FraudLens fraud detection and predictive risk modeling products rely on machine learning and artificial intelligence algorithms. The regulatory landscape for AI/ML applications in financial services is rapidly evolving, with increasing attention from regulators regarding the explainability, fairness, bias, and transparency of algorithmic decision-making. New regulations or guidance in these areas could require the Company to modify its products or restrict certain product functionalities, which could adversely affect the Company's business and results of operations.

See the revised risk factor on page 36 of the Amended DRS.

Comment 13. Please add a risk factor addressing the Company's revolving credit facility and any restrictive covenants thereunder. See Item 105 of Regulation S-K.

Response: The Company acknowledges the Staff's comment and has added a new risk factor in the Amended DRS addressing the Company's revolving credit facility. The new risk factor discloses the following:

• On June 1, 2021, the Company entered into a Revolving Credit Agreement (the "Credit Agreement") with Ashford National Bank (the "Lender"), providing for a revolving credit facility with a commitment amount of $50.0 million (the "Revolving Credit Facility"). Borrowings under the Revolving Credit Facility bear interest at a rate equal to the Secured Overnight Financing Rate ("SOFR") plus 275 basis points. The Revolving Credit Facility matures on June 1, 2024.

• As of March 31, 2022, the Company had approximately $15.0 million in outstanding borrowings under the Revolving Credit Facility.

• The Credit Agreement contains affirmative and negative covenants that, among other things, restrict the Company's ability to (i) incur additional indebtedness, (ii) grant liens on assets, (iii) make acquisitions, investments, or capital expenditures above specified thresholds, (iv) pay dividends or make other distributions on capital stock, (v) enter into transactions with affiliates, (vi) sell or transfer assets, and (vii) amend certain material agreements. The Credit Agreement also requires the Company to maintain compliance with specified financial covenants, including a minimum liquidity covenant and a minimum ARR growth rate covenant.

• The Credit Agreement contains customary events of default, including cross-default provisions with other material indebtedness. A breach of any covenant or an event of default under the Credit Agreement could result in acceleration of all outstanding borrowings, which would adversely affect the Company's liquidity and financial condition.

See the new risk factor on page 38 of the Amended DRS.

USE OF PROCEEDS

Comment 14. We note that the use of proceeds disclosure on page 41 states that the Company intends to use the net proceeds from this offering for "general corporate purposes, including working capital, R&D investment, and potential strategic acquisitions." Please provide more specific disclosure regarding the Company's planned allocation of net proceeds, to the extent practicable. In particular, please disclose whether any portion of the net proceeds will be used to repay amounts outstanding under the Company's revolving credit facility with Ashford National Bank. If the Company is unable to identify specific uses, please provide additional information regarding the terms of the facility. See Item 504 of Regulation S-K.

Response: The Company acknowledges the Staff's comment and has revised the use of proceeds section on page 41 of the Amended DRS to provide additional specificity regarding the Company's planned allocation of net proceeds. The revised disclosure now states as follows:

• At the midpoint of the preliminary estimated public offering price range of $17.00 per share and after deducting the underwriting discount of approximately $14,300,000 and estimated offering expenses payable by the Company of approximately $4,800,000, the Company estimates that the net proceeds from the sale of 12,941,176 shares of Class A Common Stock in the primary offering will be approximately $200.9 million (or approximately $237.4 million if the underwriters exercise the overallotment option in full).

• The Company currently intends to use the net proceeds from the offering as follows: (i) a substantial portion for continued investment in research and development activities related to the LumosIQ Platform, including enhancement of the FraudLens, RegConnect, and DataBridge products and development of new modules and capabilities; (ii) a portion for sales and marketing activities to expand the Company's customer base and support international expansion; (iii) a portion for potential strategic acquisitions of complementary businesses, technologies, or assets, although the Company has no present commitments or agreements with respect to any material acquisitions; and (iv) the remainder for working capital and other general corporate purposes.

• The Company does not currently intend to use any portion of the net proceeds to repay amounts outstanding under the Revolving Credit Facility with Ashford National Bank. However, the Company reserves the flexibility to do so in the future depending on market conditions, the Company's cash needs, and other factors. As described elsewhere in this prospectus, the Revolving Credit Facility provides for a $50.0 million commitment, bears interest at SOFR + 275 basis points, matures on June 1, 2024, and had approximately $15.0 million in outstanding borrowings as of March 31, 2022. Borrowings under the Revolving Credit Facility were used for general corporate purposes, including working capital needs.

• The Company cannot specify with certainty all of the particular uses of the net proceeds or the specific amounts that the Company will allocate to each use. Accordingly, the Company's management will retain broad discretion over the allocation of the net proceeds.

See the revised disclosure on page 41 of the Amended DRS.

DIVIDEND POLICY

Comment 15. Please confirm whether the revolving credit facility with Ashford National Bank or any other agreement restricts the Company's ability to pay dividends. See Item 201(c) of Regulation S-K.

Response: The Company acknowledges the Staff's comment and has revised the dividend policy disclosure on page 43 of the Amended DRS to address this point. The revised disclosure now confirms that the Revolving Credit Agreement with Ashford National Bank contains restrictive covenants that limit the Company's ability to pay dividends or make other distributions on its capital stock without the prior written consent of the Lender. Specifically, the Credit Agreement prohibits the Company from declaring or paying any dividend or distribution (whether in cash, stock, or other property) on any shares of the Company's capital stock, other than dividends payable solely in additional shares of common stock, without the prior written consent of Ashford National Bank.

The revised disclosure further states that the Company has never declared or paid any cash dividends on its common stock and does not anticipate paying any cash dividends on its Class A or Class B Common Stock for the foreseeable future. The Company currently intends to retain all available funds and future earnings, if any, to fund the development and growth of its business. Any future determination regarding the declaration and payment of dividends, if any, will be at the discretion of the Company's Board of Directors and will depend on then-existing conditions, including the Company's financial condition, results of operations, contractual restrictions, capital requirements, business prospects, and other factors that the Board of Directors may deem relevant. See the revised disclosure on page 43 of the Amended DRS.

CAPITALIZATION

Comment 16. Please revise the capitalization table to present both actual capitalization and pro forma as adjusted capitalization reflecting the IPO and the conversion of all outstanding preferred stock. See Item 507 of Regulation S-K.

Response: The Company acknowledges the Staff's comment and has revised the capitalization table on page 44 of the Amended DRS to present three columns as follows:

• (i) Actual — the Company's actual capitalization as of December 31, 2021, as reported in the Company's audited consolidated financial statements.

• (ii) Pro Forma — the Company's capitalization on a pro forma basis as of December 31, 2021, giving effect to the automatic conversion of all outstanding shares of the Company's convertible preferred stock (consisting of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, and Series D Preferred Stock, representing an aggregate of 62,400,000 shares of preferred stock) into an aggregate of 62,400,000 shares of Class A Common Stock on a one-for-one basis, which conversion will occur automatically upon the closing of the IPO pursuant to the Company's Amended and Restated Certificate of Incorporation.

• (iii) Pro Forma as Adjusted — the Company's capitalization on a pro forma as adjusted basis as of December 31, 2021, giving effect to (a) the pro forma adjustments described in clause (ii) above and (b) the sale by the Company of 12,941,176 shares of Class A Common Stock in the primary offering at the midpoint of the preliminary estimated public offering price range of $17.00 per share, and the receipt of estimated net proceeds of approximately $200.9 million (after deducting the underwriting discount of approximately $14,300,000 and estimated offering expenses of approximately $4,800,000). The pro forma as adjusted column does not give effect to any exercise of the underwriters' overallotment option.

The revised capitalization table also reflects that the Company's cash and cash equivalents were $94.3 million on an actual basis as of December 31, 2021, and would have been approximately $295.2 million on a pro forma as adjusted basis after giving effect to the pro forma adjustments and the receipt of estimated net proceeds from the primary offering as described above.

The revised capitalization table is presented on page 44 of the Amended DRS and should be read in conjunction with the sections titled "Use of Proceeds," "Selected Consolidated Financial Data," and "Management's Discussion and Analysis of Financial Condition and Results of Operations," and the Company's consolidated financial statements and related notes included elsewhere in the Amended DRS.

Comment 17. Please disclose the total number of fully diluted shares outstanding on a pre-IPO basis, along with the sources of dilution. See Item 507 of Regulation S-K.

Response: The Company acknowledges the Staff's comment and has added disclosure on page 45 of the Amended DRS setting forth the total number of fully diluted shares outstanding on a pre-IPO basis and the sources of potential dilution. The revised disclosure states that, immediately prior to the IPO, the Company's fully diluted shares outstanding totaled approximately 118,200,000 shares, comprised of the following:

The revised disclosure further notes that the 14,800,000 shares authorized under the 2019 Equity Incentive Plan include 11,300,000 shares subject to outstanding stock options with a weighted-average exercise price of $4.82 per share, 3,200,000 shares that remain available for future issuance under the plan, and 300,000 shares reserved for issuance upon exercise of outstanding warrants. The Company has also disclosed that it intends to adopt a 2022 Equity Incentive Plan and a 2022 Employee Stock Purchase Plan in connection with the IPO, as described in greater detail in the "Management and Executive Compensation" section of the Amended DRS. See the revised disclosure on page 45 of the Amended DRS.

DILUTION

Comment 18. Please revise the dilution table to disclose the effective cash cost to the founders and early investors per share, compared to the IPO price to new investors. See Item 506 of Regulation S-K.

Response: The Company acknowledges the Staff's comment and has revised the dilution section on page 46 of the Amended DRS to include a comparison of the effective cash cost per share paid by each category of existing stockholders and the IPO price to new investors. The revised disclosure presents the following comparison at the midpoint of the preliminary estimated public offering price range of $17.00 per share:

The revised dilution section also presents the Company's pro forma net tangible book value per share before the IPO and the pro forma as adjusted net tangible book value per share after giving effect to the receipt of estimated net proceeds from the primary offering, as well as the immediate dilution in net tangible book value per share to new investors purchasing shares in the IPO. See the revised dilution section on page 46 of the Amended DRS.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Comment 19. We note that the MD&A discussion of revenue growth does not quantify the relative contributions of new customer additions versus expansion of existing customer relationships. Please revise the discussion to separately quantify the contributions of (i) new customer acquisitions and (ii) expansion within existing customer accounts (net revenue retention) to total revenue growth. See Item 303(b) of Regulation S-K.

Response: The Company acknowledges the Staff's comment and has revised the MD&A discussion of revenue growth on pages 50-52 of the Amended DRS to provide a more detailed decomposition of the drivers of revenue growth. The revised disclosure now discusses the Company's total revenue growth from $118.6 million in the fiscal year ended December 31, 2020 to $187.4 million in the fiscal year ended December 31, 2021, representing year-over-year growth of approximately 58%. The Company has added the following breakdown and discussion:

• New customer acquisition: The Company added approximately 95 net new enterprise customers during the fiscal year ended December 31, 2021, compared to approximately 70 net new enterprise customers added during the fiscal year ended December 31, 2020. Revenue attributable to new customer acquisitions (defined as customers whose initial subscription contracts commenced during the applicable fiscal year) contributed approximately $36.8 million, or approximately 53%, of the total year-over-year revenue increase of $68.8 million.

• Expansion within existing customer accounts: Revenue growth from existing customers (defined as customers whose initial subscription contracts commenced prior to the applicable fiscal year) contributed approximately $32.0 million, or approximately 47%, of the total year-over-year revenue increase. This growth was driven by customers adding users, expanding usage of existing modules, and adopting additional platform modules such as FraudLens and RegConnect. The Company's dollar-based net revenue retention rate was approximately 127% for the fiscal year ended December 31, 2021, compared to approximately 121% for the fiscal year ended December 31, 2020.

The revised disclosure also provides a similar breakdown for the three months ended March 31, 2022, during which the Company generated total revenue of $54.9 million (compared to $39.2 million for the three months ended March 31, 2021, representing year-over-year growth of approximately 40%), and discusses the relative contributions of new customer additions and expansion of existing customer relationships during that period. See the revised MD&A on pages 50-52 of the Amended DRS.

Comment 20. Please expand your discussion of key business metrics, particularly Annual Recurring Revenue (ARR). We note that the Company reports ARR of $206.8 million as of December 31, 2021 and $219.5 million as of March 31, 2022. Please explain the methodology for calculating ARR and why management believes ARR is a useful metric. See Item 303(b) of Regulation S-K and SEC Release No. 33-10890.

Response: The Company acknowledges the Staff's comment and has expanded the discussion of key business metrics, and ARR in particular, on pages 48-50 of the Amended DRS. The revised disclosure now includes the following:

Definition and Methodology. The Company defines Annual Recurring Revenue, or ARR, as the annualized value of all active subscription contracts as of the measurement date, calculated by taking the total annualized contract value of each active subscription agreement in effect as of the last day of the applicable period. ARR is calculated assuming that each customer's contract will be renewed at the end of its current term at the same annualized contract value, with no cancellations, downgrades, or other changes. ARR includes only recurring subscription revenue and excludes non-recurring revenue such as professional services, implementation fees, and one-time setup charges. Multi-year contracts are included in ARR based on the annualized value of the applicable contract year.

Reported Figures. ARR was $206.8 million as of December 31, 2021, $219.5 million as of March 31, 2022, and $156.4 million as of December 31, 2020.

Reconciliation to GAAP Revenue. The Company has added a discussion explaining the relationship between ARR and GAAP subscription revenue recognized during the applicable periods. Because ARR is a point-in-time metric that reflects the annualized value of contracts in effect as of a given date, whereas GAAP revenue is recognized ratably over the contract term in accordance with ASC 606, the two measures will differ. The Company has included a reconciliation showing the key factors that can cause ARR to differ from annualized GAAP subscription revenue, including the timing of new contract bookings, contract amendments during the period, customer churn, and the impact of multi-year contracts with escalating or declining annual values.

Usefulness to Management and Investors. The revised disclosure explains that management believes ARR is a useful metric for evaluating the Company's business performance because it provides a normalized, forward-looking indicator of the Company's recurring revenue base at a point in time, which management uses to monitor the trajectory of the Company's subscription business, assess the effectiveness of the Company's land-and-expand sales strategy, and support planning and forecasting.

Limitations. The revised disclosure also includes a discussion of the limitations of ARR as a metric, including that ARR does not reflect future cancellations, downgrades, or non-renewals that may occur; does not account for revenue that may be recognized from professional services or other non-recurring sources; and may not be comparable to similarly titled metrics used by other companies. The Company has also noted that ARR is not a recognized measure under GAAP and should not be considered as an alternative to GAAP revenue.

See the revised disclosure on pages 48-50 of the Amended DRS.

Comment 21. We note that the MD&A includes a discussion of "Adjusted EBITDA" as a non-GAAP measure. Please provide the required reconciliation of Adjusted EBITDA to the most directly comparable GAAP measure, which appears to be net loss, with all individual adjustment items clearly labeled. See Regulation G and Item 10(e) of Regulation S-K.

Response: The Company acknowledges the Staff's comment and has provided a detailed reconciliation of Adjusted EBITDA to GAAP net loss on page 53 of the Amended DRS in compliance with Regulation G and Item 10(e) of Regulation S-K. The reconciliation is presented for both the fiscal year ended December 31, 2021 and the fiscal year ended December 31, 2020, as follows:

The Company has ensured that each adjustment item is clearly labeled and individually quantified in the reconciliation table. The restructuring and other non-recurring charges for fiscal year 2021 of $3.9 million consist of $2.1 million in costs related to a workforce reduction undertaken in Q2 2021, $1.3 million in costs associated with the Company's relocation to its current San Francisco headquarters, and $0.5 million in legal fees and settlement costs related to the resolution of a contract dispute with a former customer. See the revised disclosure on page 53 of the Amended DRS.

Comment 22. Please disclose the reasons for presenting Adjusted EBITDA and why each adjustment is appropriate. Please also discuss any limitations of this non-GAAP measure. See Item 10(e)(1)(i) of Regulation S-K.

Response: The Company acknowledges the Staff's comment and has added explanatory disclosure on pages 53-54 of the Amended DRS discussing the reasons for presenting Adjusted EBITDA, the appropriateness of each adjustment, and the limitations of the measure. The revised disclosure includes the following:

Reasons for Presenting Adjusted EBITDA. Management and the Company's Board of Directors use Adjusted EBITDA as a supplemental performance measure to evaluate the Company's core operating performance and trends, to prepare and approve the Company's annual operating budget, and to develop short-term and long-term operating plans. The Company believes that Adjusted EBITDA is useful to investors and analysts in understanding and evaluating the Company's operating results in the same manner as management, and in comparing the Company's operating performance across periods and relative to other companies in the enterprise software industry that also report similar non-GAAP measures.

Appropriateness of Adjustments. The Company excludes stock-based compensation expense because it is a non-cash charge that can vary significantly based on the Company's stock price, the timing and size of equity awards, and changes in Black-Drubeck model assumptions, and management does not consider it reflective of the Company's ongoing core operating performance. Depreciation and amortization are excluded because they represent non-cash charges related to historical capital investments. Interest expense and interest income are excluded because they are related to the Company's capital structure and cash management activities rather than its operating performance. The income tax provision is excluded to facilitate comparison with companies that have different tax situations. Restructuring and other non-recurring charges are excluded because they represent costs that are not expected to be incurred on a recurring basis in the ordinary course of the Company's operations.

Limitations. The Company cautions that Adjusted EBITDA has important limitations as a financial measure and should not be considered in isolation from, or as a substitute for, net loss or other financial measures prepared in accordance with GAAP. Among other limitations: (i) Adjusted EBITDA does not reflect cash expenditures or future requirements for capital expenditures or contractual commitments; (ii) Adjusted EBITDA does not reflect changes in, or cash requirements for, the Company's working capital needs; (iii) Adjusted EBITDA does not reflect interest expense, or the cash requirements necessary to service interest payments on the Company's indebtedness; (iv) although depreciation and amortization are non-cash charges, the underlying assets may need to be replaced in the future, and Adjusted EBITDA does not reflect any cash requirements for such replacements; and (v) other companies in the Company's industry may calculate Adjusted EBITDA or similarly titled measures differently, limiting its usefulness as a comparative measure.

See the revised disclosure on pages 53-54 of the Amended DRS.

Comment 23. Please discuss known trends and events that may affect the Company's future results of operations, including the potential impact of macroeconomic conditions and rising interest rates on demand from financial institution customers. See Item 303(b)(2)(ii) of Regulation S-K.

Response: The Company acknowledges the Staff's comment and has expanded the MD&A trend analysis on pages 55-56 of the Amended DRS to include a more detailed discussion of known trends and events that may affect the Company's future results of operations. The revised disclosure addresses the following:

• Macroeconomic Conditions. The Company has added discussion regarding the potential impact of general macroeconomic uncertainty, including inflationary pressures, supply chain disruptions, and geopolitical events, on enterprise software spending by the Company's financial institution customers. The Company notes that while it has not observed a material decrease in demand to date, prolonged economic uncertainty could lead financial institutions to reduce or defer technology spending, which could adversely affect the Company's ability to acquire new customers and expand existing customer relationships.

• Rising Interest Rates. The Company has added discussion regarding the potential impact of rising interest rates on the Company's customers and the Company's business. On one hand, rising interest rates may increase bank profitability and drive greater investment in technology to improve operational efficiency; on the other hand, higher interest rates may increase borrowing costs for the Company and may lead to broader tightening of financial conditions that could reduce overall technology spending. The Company also notes the impact of rising interest rates on the cost of borrowings under the Revolving Credit Facility (SOFR + 275 basis points), which is a floating-rate facility.

• Regulatory Changes. The Company has discussed the potential impact of evolving regulatory requirements, particularly in the areas of AI/ML governance and data privacy, on the Company's products and on demand from the Company's financial institution customers.

• Continued Growth Indicators. The Company notes that its ARR of $219.5 million as of March 31, 2022 (compared to $206.8 million as of December 31, 2021) suggests continued growth momentum, but acknowledges that past performance may not be indicative of future results and that the factors discussed above introduce meaningful uncertainty into the Company's outlook.

• Customer Acquisition Costs and Contract Renewal Rates. The Company has added discussion of potential trends in customer acquisition costs, noting that the Company's sales cycle for enterprise customers typically ranges from three to nine months and that macroeconomic uncertainty could lengthen sales cycles and increase customer acquisition costs. The Company has also discussed trends in contract renewal rates and the potential impact of macroeconomic conditions on customer retention.

See the revised disclosure on pages 55-56 of the Amended DRS.

Comment 24. Please quantify and discuss the impact of stock-based compensation on the Company's operating results, and provide additional detail regarding the assumptions used for stock-based compensation expense. See Item 303(b) of Regulation S-K and ASC 718.

Response: The Company acknowledges the Staff's comment and has expanded the stock-based compensation discussion in the MD&A section on pages 57-58 of the Amended DRS. The revised disclosure includes the following:

• Quantification. Stock-based compensation expense recognized in the Company's consolidated statements of operations was $12.4 million for the fiscal year ended December 31, 2021 and $7.9 million for the fiscal year ended December 31, 2020, representing an increase of $4.5 million, or approximately 57%, year over year. Stock-based compensation expense for the three months ended March 31, 2022 was $4.1 million, compared to $2.5 million for the three months ended March 31, 2021. The increase in stock-based compensation expense was primarily attributable to (i) the increase in the number of options granted during 2021 and (ii) an increase in the estimated fair value per option granted, driven by a higher estimated common stock fair value at the time of grant.

• Equity Incentive Plan. As of December 31, 2021, the Company's 2019 Equity Incentive Plan had 14,800,000 shares of Common Stock authorized for issuance, of which 11,300,000 shares were subject to outstanding stock options at a weighted-average exercise price of $4.82 per share. The outstanding options had a weighted-average remaining contractual term of approximately 8.2 years.

• Valuation Methodology. The Company estimates the fair value of stock option awards on the date of grant using the Black-Drubeck option-pricing model. The following table presents the weighted-average assumptions used for stock options granted during the fiscal years ended December 31, 2021 and December 31, 2020:

• The expected volatility was estimated based on the historical volatility of the stock prices of comparable publicly traded companies over a period commensurate with the expected term of the options, as the Company does not have sufficient trading history to estimate its own historical volatility. The risk-free interest rate was based on the U.S. Treasury yield curve in effect at the time of grant for instruments with maturities commensurate with the expected term. The expected term was estimated using the simplified method in accordance with SAB Topic 14 (SEC Staff Accounting Bulletin No. 110) because the Company lacks sufficient exercise history to develop a refined estimate. The expected dividend yield was assumed to be zero because the Company has never paid cash dividends and does not anticipate doing so.

See the revised disclosure on pages 57-58 of the Amended DRS.

Comment 25. Please expand the liquidity and capital resources discussion to address the Company's cash runway, expected cash burn rate, and whether the IPO proceeds are necessary to fund the Company's operations for the next 12 months. See Item 303(b) of Regulation S-K.

Response: The Company acknowledges the Staff's comment and has revised the liquidity and capital resources discussion on pages 59-61 of the Amended DRS to address the Company's cash runway, anticipated cash usage, and the role of IPO proceeds in funding operations. The revised disclosure includes the following:

• Cash and Cash Equivalents. As of December 31, 2021, the Company had cash and cash equivalents of $94.3 million. As of March 31, 2022, the Company had cash and cash equivalents of approximately $82.7 million. The decrease in cash during the first quarter of 2022 reflected the Company's continued investment in research and development, sales and marketing activities, and working capital needs.

• Revolving Credit Facility. The Company has access to a $50.0 million revolving credit facility with Ashford National Bank, of which approximately $15.0 million was drawn as of March 31, 2022, leaving approximately $35.0 million of unused borrowing capacity.

• Cash Burn Rate. The Company's net cash used in operating activities was approximately $28.4 million for the fiscal year ended December 31, 2021 and approximately $21.6 million for the fiscal year ended December 31, 2020. The Company expects to continue to incur net operating cash outflows for the foreseeable future as it invests in product development, expands its sales and marketing activities, and grows its organization to support its expanding customer base.

• Cash Runway with Existing Resources. Based on the Company's current business plan and anticipated cash usage, the Company believes that its existing cash and cash equivalents of $94.3 million as of December 31, 2021, together with available borrowing capacity under the Revolving Credit Facility, would be sufficient to fund the Company's operations for at least 12 months from the date of the prospectus, even absent the completion of the IPO. Accordingly, the Company does not believe that the IPO proceeds are strictly necessary to fund operations during the next 12 months.

• Cash Runway with IPO Proceeds. However, if the IPO is completed and the Company receives estimated net proceeds of approximately $200.9 million, management believes that the Company's combined cash resources (approximately $295.2 million on a pro forma as adjusted basis as of December 31, 2021) will be sufficient to fund the Company's operations for at least 24 months, taking into account the Company's planned investments in R&D, sales and marketing, and potential strategic acquisitions.

• Going Concern. The Company's independent registered public accounting firm, Thornfield & Associates LLP, issued an unqualified opinion on the Company's consolidated financial statements for the fiscal year ended December 31, 2021, without a going concern explanatory paragraph. The Company does not believe there is substantial doubt about its ability to continue as a going concern for a period of at least 12 months from the date of the prospectus, based on the Company's existing cash resources and available borrowing capacity.

See the revised disclosure on pages 59-61 of the Amended DRS.

Comment 26. Please discuss the Company's material contractual obligations, including the Brindoval Data Centers LLC agreement and the Ashford National Bank revolving credit facility, in a tabular format. See Item 303(b) of Regulation S-K.

Response: The Company acknowledges the Staff's comment and has added a contractual obligations table on page 62 of the Amended DRS presenting the Company's material contractual obligations as of December 31, 2021. The table is as follows:

The revised disclosure also includes narrative discussion of the material terms of each obligation, including the Brindoval MCSA (5-year term commencing January 15, 2021, with an annual minimum commitment of $8.2 million, subject to annual escalation of 3%), the Ashford Revolving Credit Facility (SOFR + 275 bps, maturing June 1, 2024), and the Company's operating lease for its San Francisco headquarters (approximately 45,000 square feet, with a lease term expiring in 2027). See the revised disclosure on page 62 of the Amended DRS.

BUSINESS

Comment 27. Please provide more specific disclosure regarding the Company's intellectual property, including the number and subject matter of the Company's patents. See Item 101(h)(4) of Regulation S-K.

Response: The Company acknowledges the Staff's comment and has revised the intellectual property discussion in the "Business" section on pages 72-73 of the Amended DRS to include the following additional disclosure:

• Patents. As of the date of the Amended DRS, the Company holds 14 issued U.S. utility patents and has 7 pending U.S. utility patent applications. The issued patents and pending applications relate primarily to the Company's proprietary technologies in the areas of machine learning-based fraud detection algorithms, real-time transaction scoring and anomaly detection methods, natural language processing techniques for regulatory document analysis, and data integration and normalization processes for multi-source financial data. The Company's issued patents have expiration dates ranging from 2036 to 2041.

• Trademarks. The Company holds registrations with the U.S. Patent and Trademark Office for the following trademarks: "Lumos," "Lumos AI," "LumosIQ," and "FraudLens." The Company has additional trademark registrations and pending applications in selected international jurisdictions.

• Material Software Platforms and Products. The Company's principal software platforms and products include: (i) the LumosIQ Platform, the Company's core cloud-based analytics platform; (ii) the FraudLens module, the Company's real-time fraud detection and prevention product; (iii) the RegConnect module, the Company's regulatory compliance analytics product; and (iv) the DataBridge API suite, the Company's set of application programming interfaces that enable customers to integrate the LumosIQ Platform with their existing systems and data sources.

• Trade Secrets and Proprietary Know-How. In addition to its issued patents and trademark registrations, the Company relies on a combination of trade secrets, proprietary know-how, confidentiality agreements, and other contractual protections to safeguard its intellectual property rights in its technology and products.

See the revised disclosure on

CALDERWOOD & HARKNESS LLP Attorneys at Law
1 Market Street, Spear Tower, Suite 3600 San Francisco, California 94105 Telephone: (415) 773-5000 Facsimile: (415) 773-5001 www.calderwoodharkness.com
March 4, 2022
Via EDGAR and Sundial Data Systems
Division of Corporation Finance Office of Technology U.S. Securities and Exchange Commission 100 F Street, N.E. Washington, D.C. 20549
Attention: Ms. Karen Delacroix, Staff Attorney
Mr. Raymond Hicks, Staff Accountant
Re: Lumos Analytics Inc. Draft Registration Statement on Form S-1 Submitted January 10, 2022 CIK No. 0001923847 File Number 333-264518
Dear Ms. Delacroix and Mr. Hicks:
This firm represents Lumos Analytics Inc. ("Lumos" or the "Company"), a Delaware corporation, in connection with the above-referenced Draft Registration Statement on Form S-1 (the "Registration Statement") confidentially submitted to the U.S. Securities and Exchange Commission (the "Commission" or the "SEC") on January 10, 2022 pursuant to Title I, Section 106 of the Jumpstart Our Business Startups Act (the "JOBS Act"). We are writing in response to the comment letter from the staff of the Division of Corporation Finance (the "Staff") dated February 14, 2022 (the "Comment Letter"), which contained 42 comments relating to the Registration Statement.
Concurrently with the filing of this letter, the Company is submitting via EDGAR an amended Draft Registration Statement ("Amendment No. 1 to the DRS" or the "Amended DRS") reflecting the revisions described in the responses set forth below. For the convenience of the Staff, we have reproduced the text of each of the Staff's comments in bold below, followed by the Company's response. Unless otherwise indicated, all page references in this letter are to pages of the Amended DRS. Where the Company has revised disclosure in the Amended DRS in response to a Staff comment, the relevant revised text is reproduced or summarized in the applicable response below.
In addition to the revisions made in response to the Staff's comments, the Company has also revised the Amended DRS to update certain financial and other information, to reflect developments since the date of the original confidential submission, and to make other conforming and editorial changes throughout the document. These additional revisions are reflected in the Amended DRS marked to show changes from the originally submitted Registration Statement, which is being filed concurrently herewith.
Capitalized terms used but not defined herein have the meanings ascribed to them in the Registration Statement.
We are available to discuss any of the responses herein at your convenience. The principal contacts for this matter are Robert Adeyemi, Partner, and Audrey Zhou, Associate, whose contact information appears at the end of this letter.
RESPONSES TO STAFF COMMENTS
PROSPECTUS COVER PAGE
Comment 1. We note that the prospectus cover page refers generally to shares of Class A Common Stock being offered by the Company and certain selling stockholders. Please revise the cover page to clearly state the total number of shares being offered in the primary offering and the secondary offering, and to specify the number of shares being sold by each selling stockholder. See Item 501(b)(2) of Regulation S-K.
Response: The Company acknowledges the Staff's comment and has revised the prospectus cover page of the Amended DRS to provide the requested specificity. The revised cover page now states that the offering consists of:
• 12,941,176 shares of Class A Common Stock to be sold by the Company in a primary offering; and
• 3,500,000 shares of Class A Common Stock to be sold by the selling stockholders in a secondary offering, consisting of (i) 2,000,000 shares to be sold by Velthryn Venture Partners Fund IV, L.P. ("Velthryn") and (ii) 1,500,000 shares to be sold by Arclight Equity Group Fund VII, L.P. ("Arclight").
The total base offering therefore consists of 16,441,176 shares of Class A Common Stock. The Company has also disclosed on the revised cover page that the underwriters have been granted a 30-day overallotment option to purchase up to an additional 2,466,176 shares of Class A Common Stock (representing 15% of the total base offering of 16,441,176 shares) from the Company at the public offering price, less the underwriting discount. The cover page further discloses the preliminary estimated public offering price range of $16.00 to $18.00 per share. The Company has applied to list its Class A Common Stock on the Nasdaq Global Select Market under the ticker symbol "LMSA."
The Company will not receive any of the proceeds from the sale of shares by the selling stockholders. See the revised cover page beginning on page i of the Amended DRS.
Comment 2. Please revise the cover page to disclose the underwriting discount and estimated offering expenses. See Item 501(b)(3) of Regulation S-K.
Response: The Company acknowledges the Staff's comment and has revised the prospectus cover page to include the requested disclosure regarding the underwriting discount and estimated offering expenses. Specifically, the revised cover page now discloses the following:
• The underwriting discount is 6.5% of the public offering price per share.
• At the midpoint of the preliminary estimated public offering price range of $17.00 per share, the underwriting discount on the 12,941,176 shares offered by the Company in the primary offering would be approximately $1.105 per share, or approximately $14,300,000 in the aggregate.
• The estimated net proceeds to the Company from the primary offering, after deducting the underwriting discount, would be approximately $205,700,000 (assuming no exercise of the overallotment option), before deducting estimated offering expenses payable by the Company of approximately $4,800,000.
The revised cover page also identifies Pinnacle Securities LLC as the lead book-running managing underwriter, Whitfield & Company LLC as the joint book-running managing underwriter, and Graystone Capital Markets Inc. as the co-manager for the offering. See the revised cover page beginning on page i of the Amended DRS.
PROSPECTUS SUMMARY
Comment 3. We note that the prospectus summary contains a detailed description of the Company's business and competitive strengths. Please revise the summary to also reference key risks facing the Company, including its history of losses, the uncertainty of its path to profitability, and other material risks. See Item 503(a) of Regulation S-K and Section I.B.1 of SEC Release No. 33-8891.
Response: The Company acknowledges the Staff's comment and has revised the prospectus summary in the Amended DRS to provide a more balanced presentation that references key risks facing the Company alongside its business description and competitive strengths. In particular, the revised prospectus summary now includes a brief discussion of the following risks:
• The Company has incurred net losses since its inception, including a net loss of $(41.2) million for the fiscal year ended December 31, 2021 and a net loss of $(27.8) million for the fiscal year ended December 31, 2020, and the Company may not achieve profitability in the near term or at all.
• The Company operates in a highly competitive market and faces competition from larger, more established enterprise software providers, specialized fintech analytics firms, and financial institutions' proprietary solutions.
• The Company's success depends on its ability to retain and expand relationships with existing enterprise customers and to attract new customers.
• The Company relies on a dual-class common stock structure that concentrates voting control with its co-founders, which may limit the ability of other stockholders to influence corporate matters.
The revised summary also includes a prominent cross-reference directing prospective investors to the "Risk Factors" section beginning on page 21 of the Amended DRS for a more complete discussion of risks that should be considered before investing in the Company's Class A Common Stock. See the revised prospectus summary beginning on page 1 of the Amended DRS.
Comment 4. Please clarify the basis for the Company's statement on page 2 that it "processes over 2 billion transactions per month." Is this metric independently verified? If not, please so state. See Section I.B.1 of SEC Release No. 33-8891.
Response: The Company acknowledges the Staff's comment and has revised the disclosure on page 2 of the Amended DRS to clarify the basis for the transaction volume metric. The revised disclosure now states that the figure of over 2 billion transactions processed per month is based on internal platform data collected and measured by the Company's engineering and operations teams as of December 31, 2021. The metric reflects the aggregate number of discrete data transactions processed through the Company's LumosIQ Platform across its approximately 340 enterprise customers globally during the month of December 2021. The Company has further added qualifying language to state that this transaction volume figure has not been independently audited or verified by a third-party auditor or other independent source. The Company has also added a note that transaction volumes may fluctuate from period to period depending on customer usage patterns, seasonal trends, and changes in the Company's customer base. See the revised disclosure on page 2 of the Amended DRS.
Comment 5. Please clarify the statement on page 3 that Lumos serves "approximately 340 enterprise customers globally." How does the Company define "enterprise customer"? Please also disclose the methodology for arriving at this count. See Section I.B.1 of SEC Release No. 33-8891.
Response: The Company acknowledges the Staff's comment and has revised the disclosure on page 3 of the Amended DRS to include a clear definition of "enterprise customer" and to describe the methodology for arriving at the customer count. Specifically, the Amended DRS now defines "enterprise customer" as any organization that has entered into one or more active subscription agreements with the Company for access to the LumosIQ Platform (including any modules thereof) with an annual contract value ("ACV") of $100,000 or greater as of the applicable measurement date. The Company counts each parent organization as a single enterprise customer, regardless of the number of subsidiaries, divisions, or business units within that organization that may separately utilize the Company's platform.
As revised, the disclosure clarifies that the count of approximately 340 enterprise customers is measured as of December 31, 2021. The Company determines the customer count based on a review of its contract management system as of the applicable measurement date, counting only customers with active (i.e., non-expired and non-terminated) subscription agreements meeting the ACV threshold described above. See the revised disclosure on page 3 of the Amended DRS.
RISK FACTORS
Comment 6. We note that several of the Company's risk factors are generic in nature and do not sufficiently describe risks specific to the Company's business, operations, and financial condition. Please revise your risk factors to include company-specific disclosure throughout, and quantify risks where possible. See Item 105 of Regulation S-K and Section II of SEC Release No. 33-10825.
Response: The Company acknowledges the Staff's comment and has conducted a comprehensive review and revision of the risk factors throughout the Amended DRS to ensure that each risk factor contains company-specific disclosure, concrete examples, and, where feasible and appropriate, quantitative information. The Company has endeavored to tailor each risk factor to describe the specific manner in which the identified risk relates to the Company's business, operations, industry, financial condition, and the offering. Generic language has been removed or replaced with company-specific disclosure throughout the section. Specific revisions to individual risk factors are described in the Company's responses to Comments 7 through 13 below, and the Company respectfully directs the Staff's attention to the revised "Risk Factors" section beginning on page 21 of the Amended DRS for the full text of all revised risk factors.
Comment 7. We note the risk factor on page 24 regarding customer concentration. Please revise this risk factor to disclose the actual percentage of revenue attributable to the Company's top 10 customers. See Item 105 of Regulation S-K.
Response: The Company acknowledges the Staff's comment and has revised the customer concentration risk factor on page 24 of the Amended DRS to include the requested quantitative disclosure. The revised risk factor now discloses that, as of December 31, 2021, the Company's top 10 customers by Annual Recurring Revenue represented approximately 34% of the Company's total ARR of $206.8 million. The revised disclosure further states that no single customer accounted for more than 10% of total revenue in any of the fiscal years ended December 31, 2021 or December 31, 2020. The Company has also included discussion of the potential impact of the loss of one or more of these significant customers on the Company's revenue and operating results, including the risk that a loss of a significant customer could result in a material decline in ARR and recognized revenue and could adversely affect the Company's growth trajectory and operating margins. See the revised risk factor on page 24 of the Amended DRS.
Comment 8. We note the risk factor on page 28 regarding the dual-class stock structure. Please revise this risk factor to quantify the founders' expected post-IPO voting control. See Item 105 of Regulation S-K.
Response: The Company acknowledges the Staff's comment and has revised the dual-class stock structure risk factor on page 28 of the Amended DRS to include specific quantitative disclosure regarding the co-founders' expected post-IPO voting power. The revised risk factor now discloses the following:
• Following the completion of the IPO, co-founder and Chief Executive Officer Priya Subramanian will hold 16,500,000 shares of Class B Common Stock, and co-founder and Chief Technology Officer Marcus Henley will hold 12,000,000 shares of Class B Common Stock, for an aggregate of 28,500,000 shares of Class B Common Stock.
• Each share of Class B Common Stock is entitled to 10 votes per share, resulting in aggregate Class B voting power of 285,000,000 votes.
• Based on midpoint offering assumptions (i.e., the sale of 12,941,176 shares of Class A Common Stock by the Company, 3,500,000 shares by selling stockholders, and no exercise of the overallotment option), the co-founders are expected to collectively hold approximately 73.5% of the total voting power of the Company's outstanding capital stock immediately following the IPO.
The revised risk factor also discloses the automatic sunset provision applicable to the Class B Common Stock, under 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: (i) the date that is seven years after the closing of the IPO; (ii) the date on which a co-founder transfers any shares of Class B Common Stock to a person or entity that is not a "permitted transferee" as defined in the Company's Amended and Restated Certificate of Incorporation; or (iii) the date on which the co-founders collectively hold fewer than 10% of the total number of shares of Common Stock (Class A and Class B combined) then outstanding. See the revised risk factor on page 28 of the Amended DRS.
Comment 9. Given that the founders will hold more than 50% of the total voting power of the Company's outstanding capital stock following the IPO, please add a risk factor addressing the Company's expected status as a "controlled company" under the Nasdaq listing rules and any corporate governance exemptions upon which the Company intends to rely. See Item 105 of Regulation S-K.
Response: The Company acknowledges the Staff's comment and has added a new risk factor in the Amended DRS addressing the Company's expected status as a "controlled company" under Nasdaq Listing Rule 5615(c). The new risk factor discloses the following:
• Because the co-founders are expected to collectively hold approximately 73.5% of the total voting power of the Company's outstanding capital stock immediately following the IPO, the Company will qualify as a "controlled company" under the Nasdaq listing rules.
• As a controlled company, the Company may elect not to comply with certain corporate governance requirements of the Nasdaq listing rules, including (a) the requirement that a majority of the board of directors be composed of independent directors, (b) the requirement that the Company have a compensation committee composed entirely of independent directors, and (c) the requirement that the Company have a nominating and corporate governance committee composed entirely of independent directors.
• The Company currently intends to rely on the controlled company exemption with respect to the requirement that a majority of its board of directors be composed of independent directors and with respect to the composition of its nominating and corporate governance committee. However, the Company does not currently intend to rely on the controlled company exemption with respect to the composition of its compensation committee, and the Company's Compensation Committee will be composed entirely of independent directors at the time of the IPO.
• If the Company relies on any of these exemptions, investors will not have the same protections afforded to stockholders of companies that are subject to all of the corporate governance requirements of the Nasdaq listing rules.
See the new risk factor on page 30 of the Amended DRS.
Comment 10. We note the risk factor on page 32 regarding competition. Please revise this risk factor to identify the Company's principal competitors or categories of competitors. See Item 105 of Regulation S-K.
Response: The Company acknowledges the Staff's comment and has revised the competition risk factor on page 32 of the Amended DRS to identify the principal categories of competitors that the Company faces. The revised risk factor now discloses that the Company competes with the following categories of competitors:
• Large enterprise software providers — diversified technology companies that have developed or acquired analytics, artificial intelligence, and data management capabilities and offer these capabilities as part of broader enterprise software suites to financial institution customers. These competitors have substantially greater financial, technical, marketing, and distribution resources than the Company.
• Specialized fintech analytics firms — companies that focus specifically on analytics, fraud detection, risk management, or regulatory compliance solutions for the financial services industry and that may compete directly with one or more of the Company's products or platform modules.
• In-house and proprietary solutions — certain large financial institutions have developed, and may continue to develop, proprietary analytics, fraud detection, and risk management platforms internally, which could reduce demand for third-party solutions such as the Company's LumosIQ Platform.
Consistent with the Company's view that the competitive landscape is broad and evolving, and that identifying individual competitors by name in the Registration Statement could convey an inaccurate impression regarding the relative significance of any particular competitor, the Company has not identified specific competitors by name. The Company does not believe such identification is required under Item 105 of Regulation S-K. See the revised risk factor on page 32 of the Amended DRS.
Comment 11. Please add a risk factor addressing the Company's dependence on its cloud infrastructure provider. Please identify the provider, the material terms of the arrangement, and the risks associated with this dependence. See Item 105 of Regulation S-K.
Response: The Company acknowledges the Staff's comment and has added a new risk factor in the Amended DRS addressing the Company's reliance on its primary cloud infrastructure provider. The new risk factor discloses the following:
• The Company's LumosIQ Platform is hosted on cloud infrastructure provided by Brindoval Data Centers LLC ("Brindoval") under a Master Cloud Services Agreement dated January 15, 2021 (the "Brindoval MCSA").
• The Brindoval MCSA has an initial term of five years (expiring January 15, 2026), with an annual minimum commitment of $8.2 million (representing approximately $41.0 million in aggregate minimum payments over the initial term).
• The Company's business depends on the continuous availability and performance of Brindoval's infrastructure. Any significant disruption, including service outages, data breaches, or performance degradation attributable to Brindoval, could adversely impact the Company's ability to serve its customers and could result in customer dissatisfaction, service level agreement credits, reputational harm, and potential loss of customers.
• Although the Brindoval MCSA provides for certain service level commitments and remedies, the Company's recourse in the event of a material service disruption may be limited by the terms of the agreement, including limitations on liability.
• The concentration of the Company's cloud infrastructure with a single provider creates vendor dependency risk. Migrating to an alternative cloud infrastructure provider would be time-consuming, technically complex, and costly, and could result in service disruptions during the transition period.
• The Brindoval MCSA may be terminated by either party under certain circumstances, including material breach that remains uncured after a specified notice period. Termination of the agreement, whether by Brindoval or by the Company, could materially disrupt the Company's operations.
See the new risk factor on page 34 of the Amended DRS.
Comment 12. Please revise the risk factor on page 36 regarding regulatory risk to address specific regulatory frameworks applicable to the Company's customers, particularly financial institutions, and to the Company's platform. See Item 105 of Regulation S-K.
Response: The Company acknowledges the Staff's comment and has substantially revised the regulatory risk factor on page 36 of the Amended DRS. The revised risk factor now addresses the following specific regulatory frameworks and considerations:
• The Company's financial institution customers are subject to extensive regulation by federal and state banking regulators, including the Office of the Comptroller of the Currency, the Federal Reserve Board, the Federal Deposit Insurance Corporation, the Consumer Financial Protection Bureau, and state banking departments. Regulatory requirements applicable to the Company's customers may directly or indirectly affect the Company's business, including requirements related to vendor management, outsourcing, data security, and third-party risk management.
• The Company processes, stores, and transmits data on behalf of its financial institution customers that is subject to various data privacy and security laws and regulations, including the Gramm-Leach-Bliley Act ("GLBA") and its implementing regulations, the California Consumer Privacy Act ("CCPA") as amended by the California Privacy Rights Act ("CPRA"), the New York SHIELD Act, and, with respect to certain international customers, the European Union General Data Protection Regulation ("GDPR") and other international data protection laws. Compliance with these evolving requirements imposes significant costs and operational burdens on the Company.
• The Company's FraudLens fraud detection and predictive risk modeling products rely on machine learning and artificial intelligence algorithms. The regulatory landscape for AI/ML applications in financial services is rapidly evolving, with increasing attention from regulators regarding the explainability, fairness, bias, and transparency of algorithmic decision-making. New regulations or guidance in these areas could require the Company to modify its products or restrict certain product functionalities, which could adversely affect the Company's business and results of operations.
See the revised risk factor on page 36 of the Amended DRS.
Comment 13. Please add a risk factor addressing the Company's revolving credit facility and any restrictive covenants thereunder. See Item 105 of Regulation S-K.
Response: The Company acknowledges the Staff's comment and has added a new risk factor in the Amended DRS addressing the Company's revolving credit facility. The new risk factor discloses the following:
• On June 1, 2021, the Company entered into a Revolving Credit Agreement (the "Credit Agreement") with Ashford National Bank (the "Lender"), providing for a revolving credit facility with a commitment amount of $50.0 million (the "Revolving Credit Facility"). Borrowings under the Revolving Credit Facility bear interest at a rate equal to the Secured Overnight Financing Rate ("SOFR") plus 275 basis points. The Revolving Credit Facility matures on June 1, 2024.
• As of March 31, 2022, the Company had approximately $15.0 million in outstanding borrowings under the Revolving Credit Facility.
• The Credit Agreement contains affirmative and negative covenants that, among other things, restrict the Company's ability to (i) incur additional indebtedness, (ii) grant liens on assets, (iii) make acquisitions, investments, or capital expenditures above specified thresholds, (iv) pay dividends or make other distributions on capital stock, (v) enter into transactions with affiliates, (vi) sell or transfer assets, and (vii) amend certain material agreements. The Credit Agreement also requires the Company to maintain compliance with specified financial covenants, including a minimum liquidity covenant and a minimum ARR growth rate covenant.
• The Credit Agreement contains customary events of default, including cross-default provisions with other material indebtedness. A breach of any covenant or an event of default under the Credit Agreement could result in acceleration of all outstanding borrowings, which would adversely affect the Company's liquidity and financial condition.
See the new risk factor on page 38 of the Amended DRS.
USE OF PROCEEDS
Comment 14. We note that the use of proceeds disclosure on page 41 states that the Company intends to use the net proceeds from this offering for "general corporate purposes, including working capital, R&D investment, and potential strategic acquisitions." Please provide more specific disclosure regarding the Company's planned allocation of net proceeds, to the extent practicable. In particular, please disclose whether any portion of the net proceeds will be used to repay amounts outstanding under the Company's revolving credit facility with Ashford National Bank. If the Company is unable to identify specific uses, please provide additional information regarding the terms of the facility. See Item 504 of Regulation S-K.
Response: The Company acknowledges the Staff's comment and has revised the use of proceeds section on page 41 of the Amended DRS to provide additional specificity regarding the Company's planned allocation of net proceeds. The revised disclosure now states as follows:
• At the midpoint of the preliminary estimated public offering price range of $17.00 per share and after deducting the underwriting discount of approximately $14,300,000 and estimated offering expenses payable by the Company of approximately $4,800,000, the Company estimates that the net proceeds from the sale of 12,941,176 shares of Class A Common Stock in the primary offering will be approximately $200.9 million (or approximately $237.4 million if the underwriters exercise the overallotment option in full).
• The Company currently intends to use the net proceeds from the offering as follows: (i) a substantial portion for continued investment in research and development activities related to the LumosIQ Platform, including enhancement of the FraudLens, RegConnect, and DataBridge products and development of new modules and capabilities; (ii) a portion for sales and marketing activities to expand the Company's customer base and support international expansion; (iii) a portion for potential strategic acquisitions of complementary businesses, technologies, or assets, although the Company has no present commitments or agreements with respect to any material acquisitions; and (iv) the remainder for working capital and other general corporate purposes.
• The Company does not currently intend to use any portion of the net proceeds to repay amounts outstanding under the Revolving Credit Facility with Ashford National Bank. However, the Company reserves the flexibility to do so in the future depending on market conditions, the Company's cash needs, and other factors. As described elsewhere in this prospectus, the Revolving Credit Facility provides for a $50.0 million commitment, bears interest at SOFR + 275 basis points, matures on June 1, 2024, and had approximately $15.0 million in outstanding borrowings as of March 31, 2022. Borrowings under the Revolving Credit Facility were used for general corporate purposes, including working capital needs.
• The Company cannot specify with certainty all of the particular uses of the net proceeds or the specific amounts that the Company will allocate to each use. Accordingly, the Company's management will retain broad discretion over the allocation of the net proceeds.
See the revised disclosure on page 41 of the Amended DRS.
DIVIDEND POLICY
Comment 15. Please confirm whether the revolving credit facility with Ashford National Bank or any other agreement restricts the Company's ability to pay dividends. See Item 201(c) of Regulation S-K.
Response: The Company acknowledges the Staff's comment and has revised the dividend policy disclosure on page 43 of the Amended DRS to address this point. The revised disclosure now confirms that the Revolving Credit Agreement with Ashford National Bank contains restrictive covenants that limit the Company's ability to pay dividends or make other distributions on its capital stock without the prior written consent of the Lender. Specifically, the Credit Agreement prohibits the Company from declaring or paying any dividend or distribution (whether in cash, stock, or other property) on any shares of the Company's capital stock, other than dividends payable solely in additional shares of common stock, without the prior written consent of Ashford National Bank.
The revised disclosure further states that the Company has never declared or paid any cash dividends on its common stock and does not anticipate paying any cash dividends on its Class A or Class B Common Stock for the foreseeable future. The Company currently intends to retain all available funds and future earnings, if any, to fund the development and growth of its business. Any future determination regarding the declaration and payment of dividends, if any, will be at the discretion of the Company's Board of Directors and will depend on then-existing conditions, including the Company's financial condition, results of operations, contractual restrictions, capital requirements, business prospects, and other factors that the Board of Directors may deem relevant. See the revised disclosure on page 43 of the Amended DRS.
CAPITALIZATION
Comment 16. Please revise the capitalization table to present both actual capitalization and pro forma as adjusted capitalization reflecting the IPO and the conversion of all outstanding preferred stock. See Item 507 of Regulation S-K.
Response: The Company acknowledges the Staff's comment and has revised the capitalization table on page 44 of the Amended DRS to present three columns as follows:
• (i) Actual — the Company's actual capitalization as of December 31, 2021, as reported in the Company's audited consolidated financial statements.
• (ii) Pro Forma — the Company's capitalization on a pro forma basis as of December 31, 2021, giving effect to the automatic conversion of all outstanding shares of the Company's convertible preferred stock (consisting of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, and Series D Preferred Stock, representing an aggregate of 62,400,000 shares of preferred stock) into an aggregate of 62,400,000 shares of Class A Common Stock on a one-for-one basis, which conversion will occur automatically upon the closing of the IPO pursuant to the Company's Amended and Restated Certificate of Incorporation.
• (iii) Pro Forma as Adjusted — the Company's capitalization on a pro forma as adjusted basis as of December 31, 2021, giving effect to (a) the pro forma adjustments described in clause (ii) above and (b) the sale by the Company of 12,941,176 shares of Class A Common Stock in the primary offering at the midpoint of the preliminary estimated public offering price range of $17.00 per share, and the receipt of estimated net proceeds of approximately $200.9 million (after deducting the underwriting discount of approximately $14,300,000 and estimated offering expenses of approximately $4,800,000). The pro forma as adjusted column does not give effect to any exercise of the underwriters' overallotment option.
The revised capitalization table also reflects that the Company's cash and cash equivalents were $94.3 million on an actual basis as of December 31, 2021, and would have been approximately $295.2 million on a pro forma as adjusted basis after giving effect to the pro forma adjustments and the receipt of estimated net proceeds from the primary offering as described above.
The revised capitalization table is presented on page 44 of the Amended DRS and should be read in conjunction with the sections titled "Use of Proceeds," "Selected Consolidated Financial Data," and "Management's Discussion and Analysis of Financial Condition and Results of Operations," and the Company's consolidated financial statements and related notes included elsewhere in the Amended DRS.
Comment 17. Please disclose the total number of fully diluted shares outstanding on a pre-IPO basis, along with the sources of dilution. See Item 507 of Regulation S-K.
Response: The Company acknowledges the Staff's comment and has added disclosure on page 45 of the Amended DRS setting forth the total number of fully diluted shares outstanding on a pre-IPO basis and the sources of potential dilution. The revised disclosure states that, immediately prior to the IPO, the Company's fully diluted shares outstanding totaled approximately 118,200,000 shares, comprised of the following:
The revised disclosure further notes that the 14,800,000 shares authorized under the 2019 Equity Incentive Plan include 11,300,000 shares subject to outstanding stock options with a weighted-average exercise price of $4.82 per share, 3,200,000 shares that remain available for future issuance under the plan, and 300,000 shares reserved for issuance upon exercise of outstanding warrants. The Company has also disclosed that it intends to adopt a 2022 Equity Incentive Plan and a 2022 Employee Stock Purchase Plan in connection with the IPO, as described in greater detail in the "Management and Executive Compensation" section of the Amended DRS. See the revised disclosure on page 45 of the Amended DRS.
DILUTION
Comment 18. Please revise the dilution table to disclose the effective cash cost to the founders and early investors per share, compared to the IPO price to new investors. See Item 506 of Regulation S-K.
Response: The Company acknowledges the Staff's comment and has revised the dilution section on page 46 of the Amended DRS to include a comparison of the effective cash cost per share paid by each category of existing stockholders and the IPO price to new investors. The revised disclosure presents the following comparison at the midpoint of the preliminary estimated public offering price range of $17.00 per share:
The revised dilution section also presents the Company's pro forma net tangible book value per share before the IPO and the pro forma as adjusted net tangible book value per share after giving effect to the receipt of estimated net proceeds from the primary offering, as well as the immediate dilution in net tangible book value per share to new investors purchasing shares in the IPO. See the revised dilution section on page 46 of the Amended DRS.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Comment 19. We note that the MD&A discussion of revenue growth does not quantify the relative contributions of new customer additions versus expansion of existing customer relationships. Please revise the discussion to separately quantify the contributions of (i) new customer acquisitions and (ii) expansion within existing customer accounts (net revenue retention) to total revenue growth. See Item 303(b) of Regulation S-K.
Response: The Company acknowledges the Staff's comment and has revised the MD&A discussion of revenue growth on pages 50-52 of the Amended DRS to provide a more detailed decomposition of the drivers of revenue growth. The revised disclosure now discusses the Company's total revenue growth from $118.6 million in the fiscal year ended December 31, 2020 to $187.4 million in the fiscal year ended December 31, 2021, representing year-over-year growth of approximately 58%. The Company has added the following breakdown and discussion:
• New customer acquisition: The Company added approximately 95 net new enterprise customers during the fiscal year ended December 31, 2021, compared to approximately 70 net new enterprise customers added during the fiscal year ended December 31, 2020. Revenue attributable to new customer acquisitions (defined as customers whose initial subscription contracts commenced during the applicable fiscal year) contributed approximately $36.8 million, or approximately 53%, of the total year-over-year revenue increase of $68.8 million.
• Expansion within existing customer accounts: Revenue growth from existing customers (defined as customers whose initial subscription contracts commenced prior to the applicable fiscal year) contributed approximately $32.0 million, or approximately 47%, of the total year-over-year revenue increase. This growth was driven by customers adding users, expanding usage of existing modules, and adopting additional platform modules such as FraudLens and RegConnect. The Company's dollar-based net revenue retention rate was approximately 127% for the fiscal year ended December 31, 2021, compared to approximately 121% for the fiscal year ended December 31, 2020.
The revised disclosure also provides a similar breakdown for the three months ended March 31, 2022, during which the Company generated total revenue of $54.9 million (compared to $39.2 million for the three months ended March 31, 2021, representing year-over-year growth of approximately 40%), and discusses the relative contributions of new customer additions and expansion of existing customer relationships during that period. See the revised MD&A on pages 50-52 of the Amended DRS.
Comment 20. Please expand your discussion of key business metrics, particularly Annual Recurring Revenue (ARR). We note that the Company reports ARR of $206.8 million as of December 31, 2021 and $219.5 million as of March 31, 2022. Please explain the methodology for calculating ARR and why management believes ARR is a useful metric. See Item 303(b) of Regulation S-K and SEC Release No. 33-10890.
Response: The Company acknowledges the Staff's comment and has expanded the discussion of key business metrics, and ARR in particular, on pages 48-50 of the Amended DRS. The revised disclosure now includes the following:
Definition and Methodology. The Company defines Annual Recurring Revenue, or ARR, as the annualized value of all active subscription contracts as of the measurement date, calculated by taking the total annualized contract value of each active subscription agreement in effect as of the last day of the applicable period. ARR is calculated assuming that each customer's contract will be renewed at the end of its current term at the same annualized contract value, with no cancellations, downgrades, or other changes. ARR includes only recurring subscription revenue and excludes non-recurring revenue such as professional services, implementation fees, and one-time setup charges. Multi-year contracts are included in ARR based on the annualized value of the applicable contract year.
Reported Figures. ARR was $206.8 million as of December 31, 2021, $219.5 million as of March 31, 2022, and $156.4 million as of December 31, 2020.
Reconciliation to GAAP Revenue. The Company has added a discussion explaining the relationship between ARR and GAAP subscription revenue recognized during the applicable periods. Because ARR is a point-in-time metric that reflects the annualized value of contracts in effect as of a given date, whereas GAAP revenue is recognized ratably over the contract term in accordance with ASC 606, the two measures will differ. The Company has included a reconciliation showing the key factors that can cause ARR to differ from annualized GAAP subscription revenue, including the timing of new contract bookings, contract amendments during the period, customer churn, and the impact of multi-year contracts with escalating or declining annual values.
Usefulness to Management and Investors. The revised disclosure explains that management believes ARR is a useful metric for evaluating the Company's business performance because it provides a normalized, forward-looking indicator of the Company's recurring revenue base at a point in time, which management uses to monitor the trajectory of the Company's subscription business, assess the effectiveness of the Company's land-and-expand sales strategy, and support planning and forecasting.
Limitations. The revised disclosure also includes a discussion of the limitations of ARR as a metric, including that ARR does not reflect future cancellations, downgrades, or non-renewals that may occur; does not account for revenue that may be recognized from professional services or other non-recurring sources; and may not be comparable to similarly titled metrics used by other companies. The Company has also noted that ARR is not a recognized measure under GAAP and should not be considered as an alternative to GAAP revenue.
See the revised disclosure on pages 48-50 of the Amended DRS.
Comment 21. We note that the MD&A includes a discussion of "Adjusted EBITDA" as a non-GAAP measure. Please provide the required reconciliation of Adjusted EBITDA to the most directly comparable GAAP measure, which appears to be net loss, with all individual adjustment items clearly labeled. See Regulation G and Item 10(e) of Regulation S-K.
Response: The Company acknowledges the Staff's comment and has provided a detailed reconciliation of Adjusted EBITDA to GAAP net loss on page 53 of the Amended DRS in compliance with Regulation G and Item 10(e) of Regulation S-K. The reconciliation is presented for both the fiscal year ended December 31, 2021 and the fiscal year ended December 31, 2020, as follows:
The Company has ensured that each adjustment item is clearly labeled and individually quantified in the reconciliation table. The restructuring and other non-recurring charges for fiscal year 2021 of $3.9 million consist of $2.1 million in costs related to a workforce reduction undertaken in Q2 2021, $1.3 million in costs associated with the Company's relocation to its current San Francisco headquarters, and $0.5 million in legal fees and settlement costs related to the resolution of a contract dispute with a former customer. See the revised disclosure on page 53 of the Amended DRS.
Comment 22. Please disclose the reasons for presenting Adjusted EBITDA and why each adjustment is appropriate. Please also discuss any limitations of this non-GAAP measure. See Item 10(e)(1)(i) of Regulation S-K.
Response: The Company acknowledges the Staff's comment and has added explanatory disclosure on pages 53-54 of the Amended DRS discussing the reasons for presenting Adjusted EBITDA, the appropriateness of each adjustment, and the limitations of the measure. The revised disclosure includes the following:
Reasons for Presenting Adjusted EBITDA. Management and the Company's Board of Directors use Adjusted EBITDA as a supplemental performance measure to evaluate the Company's core operating performance and trends, to prepare and approve the Company's annual operating budget, and to develop short-term and long-term operating plans. The Company believes that Adjusted EBITDA is useful to investors and analysts in understanding and evaluating the Company's operating results in the same manner as management, and in comparing the Company's operating performance across periods and relative to other companies in the enterprise software industry that also report similar non-GAAP measures.
Appropriateness of Adjustments. The Company excludes stock-based compensation expense because it is a non-cash charge that can vary significantly based on the Company's stock price, the timing and size of equity awards, and changes in Black-Drubeck model assumptions, and management does not consider it reflective of the Company's ongoing core operating performance. Depreciation and amortization are excluded because they represent non-cash charges related to historical capital investments. Interest expense and interest income are excluded because they are related to the Company's capital structure and cash management activities rather than its operating performance. The income tax provision is excluded to facilitate comparison with companies that have different tax situations. Restructuring and other non-recurring charges are excluded because they represent costs that are not expected to be incurred on a recurring basis in the ordinary course of the Company's operations.
Limitations. The Company cautions that Adjusted EBITDA has important limitations as a financial measure and should not be considered in isolation from, or as a substitute for, net loss or other financial measures prepared in accordance with GAAP. Among other limitations: (i) Adjusted EBITDA does not reflect cash expenditures or future requirements for capital expenditures or contractual commitments; (ii) Adjusted EBITDA does not reflect changes in, or cash requirements for, the Company's working capital needs; (iii) Adjusted EBITDA does not reflect interest expense, or the cash requirements necessary to service interest payments on the Company's indebtedness; (iv) although depreciation and amortization are non-cash charges, the underlying assets may need to be replaced in the future, and Adjusted EBITDA does not reflect any cash requirements for such replacements; and (v) other companies in the Company's industry may calculate Adjusted EBITDA or similarly titled measures differently, limiting its usefulness as a comparative measure.
See the revised disclosure on pages 53-54 of the Amended DRS.
Comment 23. Please discuss known trends and events that may affect the Company's future results of operations, including the potential impact of macroeconomic conditions and rising interest rates on demand from financial institution customers. See Item 303(b)(2)(ii) of Regulation S-K.
Response: The Company acknowledges the Staff's comment and has expanded the MD&A trend analysis on pages 55-56 of the Amended DRS to include a more detailed discussion of known trends and events that may affect the Company's future results of operations. The revised disclosure addresses the following:
• Macroeconomic Conditions. The Company has added discussion regarding the potential impact of general macroeconomic uncertainty, including inflationary pressures, supply chain disruptions, and geopolitical events, on enterprise software spending by the Company's financial institution customers. The Company notes that while it has not observed a material decrease in demand to date, prolonged economic uncertainty could lead financial institutions to reduce or defer technology spending, which could adversely affect the Company's ability to acquire new customers and expand existing customer relationships.
• Rising Interest Rates. The Company has added discussion regarding the potential impact of rising interest rates on the Company's customers and the Company's business. On one hand, rising interest rates may increase bank profitability and drive greater investment in technology to improve operational efficiency; on the other hand, higher interest rates may increase borrowing costs for the Company and may lead to broader tightening of financial conditions that could reduce overall technology spending. The Company also notes the impact of rising interest rates on the cost of borrowings under the Revolving Credit Facility (SOFR + 275 basis points), which is a floating-rate facility.
• Regulatory Changes. The Company has discussed the potential impact of evolving regulatory requirements, particularly in the areas of AI/ML governance and data privacy, on the Company's products and on demand from the Company's financial institution customers.
• Continued Growth Indicators. The Company notes that its ARR of $219.5 million as of March 31, 2022 (compared to $206.8 million as of December 31, 2021) suggests continued growth momentum, but acknowledges that past performance may not be indicative of future results and that the factors discussed above introduce meaningful uncertainty into the Company's outlook.
• Customer Acquisition Costs and Contract Renewal Rates. The Company has added discussion of potential trends in customer acquisition costs, noting that the Company's sales cycle for enterprise customers typically ranges from three to nine months and that macroeconomic uncertainty could lengthen sales cycles and increase customer acquisition costs. The Company has also discussed trends in contract renewal rates and the potential impact of macroeconomic conditions on customer retention.
See the revised disclosure on pages 55-56 of the Amended DRS.
Comment 24. Please quantify and discuss the impact of stock-based compensation on the Company's operating results, and provide additional detail regarding the assumptions used for stock-based compensation expense. See Item 303(b) of Regulation S-K and ASC 718.
Response: The Company acknowledges the Staff's comment and has expanded the stock-based compensation discussion in the MD&A section on pages 57-58 of the Amended DRS. The revised disclosure includes the following:
• Quantification. Stock-based compensation expense recognized in the Company's consolidated statements of operations was $12.4 million for the fiscal year ended December 31, 2021 and $7.9 million for the fiscal year ended December 31, 2020, representing an increase of $4.5 million, or approximately 57%, year over year. Stock-based compensation expense for the three months ended March 31, 2022 was $4.1 million, compared to $2.5 million for the three months ended March 31, 2021. The increase in stock-based compensation expense was primarily attributable to (i) the increase in the number of options granted during 2021 and (ii) an increase in the estimated fair value per option granted, driven by a higher estimated common stock fair value at the time of grant.
• Equity Incentive Plan. As of December 31, 2021, the Company's 2019 Equity Incentive Plan had 14,800,000 shares of Common Stock authorized for issuance, of which 11,300,000 shares were subject to outstanding stock options at a weighted-average exercise price of $4.82 per share. The outstanding options had a weighted-average remaining contractual term of approximately 8.2 years.
• Valuation Methodology. The Company estimates the fair value of stock option awards on the date of grant using the Black-Drubeck option-pricing model. The following table presents the weighted-average assumptions used for stock options granted during the fiscal years ended December 31, 2021 and December 31, 2020:
• The expected volatility was estimated based on the historical volatility of the stock prices of comparable publicly traded companies over a period commensurate with the expected term of the options, as the Company does not have sufficient trading history to estimate its own historical volatility. The risk-free interest rate was based on the U.S. Treasury yield curve in effect at the time of grant for instruments with maturities commensurate with the expected term. The expected term was estimated using the simplified method in accordance with SAB Topic 14 (SEC Staff Accounting Bulletin No. 110) because the Company lacks sufficient exercise history to develop a refined estimate. The expected dividend yield was assumed to be zero because the Company has never paid cash dividends and does not anticipate doing so.
See the revised disclosure on pages 57-58 of the Amended DRS.
Comment 25. Please expand the liquidity and capital resources discussion to address the Company's cash runway, expected cash burn rate, and whether the IPO proceeds are necessary to fund the Company's operations for the next 12 months. See Item 303(b) of Regulation S-K.
Response: The Company acknowledges the Staff's comment and has revised the liquidity and capital resources discussion on pages 59-61 of the Amended DRS to address the Company's cash runway, anticipated cash usage, and the role of IPO proceeds in funding operations. The revised disclosure includes the following:
• Cash and Cash Equivalents. As of December 31, 2021, the Company had cash and cash equivalents of $94.3 million. As of March 31, 2022, the Company had cash and cash equivalents of approximately $82.7 million. The decrease in cash during the first quarter of 2022 reflected the Company's continued investment in research and development, sales and marketing activities, and working capital needs.
• Revolving Credit Facility. The Company has access to a $50.0 million revolving credit facility with Ashford National Bank, of which approximately $15.0 million was drawn as of March 31, 2022, leaving approximately $35.0 million of unused borrowing capacity.
• Cash Burn Rate. The Company's net cash used in operating activities was approximately $28.4 million for the fiscal year ended December 31, 2021 and approximately $21.6 million for the fiscal year ended December 31, 2020. The Company expects to continue to incur net operating cash outflows for the foreseeable future as it invests in product development, expands its sales and marketing activities, and grows its organization to support its expanding customer base.
• Cash Runway with Existing Resources. Based on the Company's current business plan and anticipated cash usage, the Company believes that its existing cash and cash equivalents of $94.3 million as of December 31, 2021, together with available borrowing capacity under the Revolving Credit Facility, would be sufficient to fund the Company's operations for at least 12 months from the date of the prospectus, even absent the completion of the IPO. Accordingly, the Company does not believe that the IPO proceeds are strictly necessary to fund operations during the next 12 months.
• Cash Runway with IPO Proceeds. However, if the IPO is completed and the Company receives estimated net proceeds of approximately $200.9 million, management believes that the Company's combined cash resources (approximately $295.2 million on a pro forma as adjusted basis as of December 31, 2021) will be sufficient to fund the Company's operations for at least 24 months, taking into account the Company's planned investments in R&D, sales and marketing, and potential strategic acquisitions.
• Going Concern. The Company's independent registered public accounting firm, Thornfield & Associates LLP, issued an unqualified opinion on the Company's consolidated financial statements for the fiscal year ended December 31, 2021, without a going concern explanatory paragraph. The Company does not believe there is substantial doubt about its ability to continue as a going concern for a period of at least 12 months from the date of the prospectus, based on the Company's existing cash resources and available borrowing capacity.
See the revised disclosure on pages 59-61 of the Amended DRS.
Comment 26. Please discuss the Company's material contractual obligations, including the Brindoval Data Centers LLC agreement and the Ashford National Bank revolving credit facility, in a tabular format. See Item 303(b) of Regulation S-K.
Response: The Company acknowledges the Staff's comment and has added a contractual obligations table on page 62 of the Amended DRS presenting the Company's material contractual obligations as of December 31, 2021. The table is as follows:
The revised disclosure also includes narrative discussion of the material terms of each obligation, including the Brindoval MCSA (5-year term commencing January 15, 2021, with an annual minimum commitment of $8.2 million, subject to annual escalation of 3%), the Ashford Revolving Credit Facility (SOFR + 275 bps, maturing June 1, 2024), and the Company's operating lease for its San Francisco headquarters (approximately 45,000 square feet, with a lease term expiring in 2027). See the revised disclosure on page 62 of the Amended DRS.
BUSINESS
Comment 27. Please provide more specific disclosure regarding the Company's intellectual property, including the number and subject matter of the Company's patents. See Item 101(h)(4) of Regulation S-K.
Response: The Company acknowledges the Staff's comment and has revised the intellectual property discussion in the "Business" section on pages 72-73 of the Amended DRS to include the following additional disclosure:
• Patents. As of the date of the Amended DRS, the Company holds 14 issued U.S. utility patents and has 7 pending U.S. utility patent applications. The issued patents and pending applications relate primarily to the Company's proprietary technologies in the areas of machine learning-based fraud detection algorithms, real-time transaction scoring and anomaly detection methods, natural language processing techniques for regulatory document analysis, and data integration and normalization processes for multi-source financial data. The Company's issued patents have expiration dates ranging from 2036 to 2041.
• Trademarks. The Company holds registrations with the U.S. Patent and Trademark Office for the following trademarks: "Lumos," "Lumos AI," "LumosIQ," and "FraudLens." The Company has additional trademark registrations and pending applications in selected international jurisdictions.
• Material Software Platforms and Products. The Company's principal software platforms and products include: (i) the LumosIQ Platform, the Company's core cloud-based analytics platform; (ii) the FraudLens module, the Company's real-time fraud detection and prevention product; (iii) the RegConnect module, the Company's regulatory compliance analytics product; and (iv) the DataBridge API suite, the Company's set of application programming interfaces that enable customers to integrate the LumosIQ Platform with their existing systems and data sources.
• Trade Secrets and Proprietary Know-How. In addition to its issued patents and trademark registrations, the Company relies on a combination of trade secrets, proprietary know-how, confidentiality agreements, and other contractual protections to safeguard its intellectual property rights in its technology and products.
See the revised disclosure on