sec-comment-response-round-2.docx

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

sec-comment-response-round-2.docx DOCUMENT Capital Markets

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CALDERWOOD & HARKNESS LLP 1 Market Street, Spear Tower, Suite 3600 San Francisco, California 94105 Telephone: (415) 772-4000 Facsimile: (415) 772-4001 www.calderwoodharkness.com

March 28, 2022

Via EDGAR

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

Re: Lumos Analytics Inc. Registration Statement on Form S-1 Filed Confidentially on January 10, 2022 (as amended March 4, 2022) File Number 333-264518 CIK No. 0001923847

Dear Members of the Staff:

We are writing on behalf of our client, Lumos Analytics Inc., a Delaware corporation (the "Company" or "Lumos"), in response to the comment letter of the Staff (the "Staff") of the Division of Corporation Finance of the U.S. Securities and Exchange Commission (the "Commission") dated March 18, 2022 (the "Comment Letter"), relating to the Company's amended Draft Registration Statement on Form S-1 filed confidentially with the Commission on March 4, 2022 (the "Prior DRS"). Calderwood & Harkness LLP serves as issuer's counsel to the Company in connection with the Company's proposed initial public offering.

The Comment Letter contained twelve (12) comments. We have reproduced each of the Staff's comments below in bold type and have set forth the Company's response immediately following each comment. The Company is concurrently filing with the Commission a second amended Draft Registration Statement on Form S-1 (the "Amended DRS") via EDGAR, which reflects the revisions described in the responses set forth herein. Unless otherwise indicated, page references in the Company's responses correspond to the marked version of the Amended DRS filed concurrently with this letter. All capitalized terms used but not defined herein have the meanings assigned to them in the Amended DRS.

This letter has been prepared by the following members of the Calderwood & Harkness LLP engagement team: Robert Adeyemi, Responsible Partner; Audrey Zhou, Lead Associate; and Brendan Walsh, Working Associate, each of the Capital Markets Group.

We respectfully submit the following responses on behalf of the Company.

Revenue Recognition

Comment 1: Revenue Recognition — Remaining Performance Obligations

We note your response to our prior comment 3 regarding disclosure of remaining performance obligations under ASC 606. While the Company provided a general qualitative description of its remaining performance obligations in its prior amended filing, we believe enhanced quantitative disclosure is necessary. Please revise your disclosure to include the aggregate transaction price allocated to remaining performance obligations as of December 31, 2021, and the expected timing of recognition of such amounts (i.e., amounts expected to be recognized within the next 12 months and amounts expected to be recognized thereafter). In addition, please clarify whether the Company applies any practical expedient under ASC 606-10-50-14 and, if so, disclose the nature of such practical expedient and the types of remaining performance obligations to which it is applied.

Company Response:

The Company acknowledges the Staff's comment and has revised the disclosure in Note 2, "Summary of Significant Accounting Policies — Revenue Recognition," and Note 13, "Revenue," to the Company's consolidated financial statements included in the Amended DRS to provide enhanced quantitative disclosure regarding the Company's remaining performance obligations. Specifically, the Company has added the following information:

As of December 31, 2021, the aggregate transaction price allocated to remaining performance obligations was approximately $312 million. Of this amount, the Company expects to recognize approximately 62%, or approximately $193 million, as revenue within the next twelve months, and the remaining approximately 38%, or approximately $119 million, thereafter. The expected timing of revenue recognition with respect to remaining performance obligations is based on the Company's current estimates of contract duration, customer renewal expectations, and the expected delivery cadence of contracted services.

The Company further confirms that it applies the practical expedient provided under ASC 606-10-50-14A, pursuant to which the Company excludes from the remaining performance obligations disclosure those contracts with an original expected duration of one year or less. The Company has added disclosure of the application of this practical expedient in Note 2 and Note 13 to the consolidated financial statements. The Company notes that its subscription SaaS contracts are generally one to three years in duration with annual billing cycles, and has disclosed this characteristic in the "Management's Discussion and Analysis of Financial Condition and Results of Operations" ("MD&A") section and in the notes to the consolidated financial statements to provide investors with additional context regarding the composition of remaining performance obligations.

These revisions appear on pages 68, F-14, and F-32 of the marked version of the Amended DRS.

Comment 2: Revenue Recognition — Variable Consideration and Usage-Based Components

We note that the Company's revenue arrangements include variable consideration elements, including usage-based overages and volume-based pricing tiers. Please revise your disclosure to describe the methodology used to estimate variable consideration and discuss the Company's analysis of the constraint on variable consideration under ASC 606-10-32-11. In addition, please quantify the portion of the Company's total revenue attributable to variable consideration for each period presented.

Company Response:

The Company acknowledges the Staff's comment and has revised its revenue recognition policy disclosure in Note 2, "Summary of Significant Accounting Policies — Revenue Recognition," and in the "Critical Accounting Policies and Estimates" section of MD&A in the Amended DRS to provide additional detail regarding variable consideration components in the Company's revenue arrangements.

The Company's variable consideration elements relate primarily to usage-based fees charged to customers for transaction volumes that exceed the contracted tiers within the Company's LumosIQ Platform and its FraudLens fraud detection module. Specifically, certain customer contracts provide for a fixed subscription fee covering a specified volume of transactions per month or per annum, with additional per-transaction fees for usage in excess of the contracted volume thresholds. Additionally, certain contracts include volume-based pricing tiers under which the per-transaction fee decreases as the customer's aggregate usage volume increases during the contract period.

For the fiscal year ended December 31, 2021, variable consideration represented less than 8% of total revenue (total revenue of $187.4 million for FY 2021), or approximately $14.2 million. For the fiscal year ended December 31, 2020, variable consideration represented approximately 6% of total revenue ($118.6 million), or approximately $7.1 million. The increase in variable consideration as a percentage of total revenue is attributable to expanding customer usage of the LumosIQ Platform and the FraudLens module as customer transaction volumes have grown.

In estimating variable consideration, the Company applies the constraint guidance under ASC 606-10-32-11 through ASC 606-10-32-13. The Company includes variable consideration in the transaction price only to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved. The Company's estimation methodology is based on an analysis of historical customer usage patterns, contractual transaction volume data, and observable trends in customer activity levels. The Company evaluates the constraint on variable consideration at the inception of each contract and reassesses the estimate at each reporting date.

These revisions appear on pages 67–68, 70, F-14, and F-33 of the marked version of the Amended DRS.

Comment 3: Revenue Recognition — Multi-Element Arrangements and Stand-Alone Selling Prices

We note that the Company's customer contracts frequently bundle multiple products and services, including the LumosIQ Platform, the FraudLens module, the RegConnect module, and the DataBridge API suite, together with professional implementation services. Please revise your disclosure to provide additional detail regarding the Company's approach to (a) identifying the distinct performance obligations within these bundled arrangements and (b) determining the stand-alone selling prices for each performance obligation. In addition, please disclose the specific methodology used to allocate the transaction price among performance obligations (e.g., adjusted market assessment approach, expected cost plus margin approach, or residual approach).

Company Response:

The Company acknowledges the Staff's comment and has revised its disclosure in Note 2, "Summary of Significant Accounting Policies — Revenue Recognition," and in the "Critical Accounting Policies and Estimates" section of MD&A to provide enhanced detail regarding the Company's approach to identifying performance obligations and determining stand-alone selling prices in multi-element arrangements.

The Company's typical customer arrangements may include multiple distinct performance obligations, which generally consist of: (i) subscriptions to the LumosIQ Platform, the Company's core regulatory analytics and compliance platform; (ii) subscriptions to the FraudLens fraud detection module; (iii) subscriptions to the RegConnect regulatory reporting module; (iv) access to the DataBridge API suite, which enables integration of the Company's platform with the customer's existing technology infrastructure; and (v) professional implementation services, including data migration, system configuration, custom integration development, and training. The Company evaluates each promised good or service in its customer contracts to determine whether it represents a distinct performance obligation under ASC 606-10-25-19 through ASC 606-10-25-21. In making this determination, the Company considers whether the customer can benefit from the good or service either on its own or together with other resources readily available to the customer, and whether the promise to transfer the good or service is separately identifiable from other promises in the contract.

The Company has determined that each of the subscriptions to the LumosIQ Platform, the FraudLens module, the RegConnect module, and the DataBridge API suite generally represents a distinct performance obligation, as each can be used independently by the customer and is separately identifiable within the context of the contract. Professional implementation services are also typically distinct performance obligations, as the Company regularly sells these services on a standalone basis and the services do not significantly modify or customize the underlying subscription products.

With respect to the allocation of the transaction price, the Company primarily uses the adjusted market assessment approach to determine the stand-alone selling prices of each performance obligation. Under this approach, the Company evaluates the market for its products and services and estimates the price that customers in the relevant market would be willing to pay for each product or service on a standalone basis, taking into account pricing data from comparable transactions, competitive market conditions, and the Company's pricing strategies. Where observable standalone transactions are available — for example, where a customer purchases a FraudLens subscription without bundling other products — the Company uses the directly observable standalone transaction price to validate or supplement the adjusted market assessment.

The Company does not currently use the residual approach for any of its performance obligations. The Company has not used the expected cost plus margin approach in any material respect during the periods presented.

Subscription revenue for each of the Company's platform and module subscriptions is recognized ratably over the applicable contract term, as the customer simultaneously receives and consumes the benefits of the subscription service over the period of access. Professional services revenue is recognized over the service delivery period, generally on a proportional performance basis as the services are performed.

These revisions appear on pages 67–69, F-14 through F-16, and F-33 through F-34 of the marked version of the Amended DRS.

Concentration Risk

Comment 4: Concentration Risk Disclosure — Top Customer Dependence

We note the Company's disclosure that its top 10 customers represent approximately 34% of annual recurring revenue ("ARR") as of December 31, 2021 ($206.8 million ARR). Please revise your disclosure to (a) state whether any single customer represented 10% or more of total revenue in fiscal years 2021 or 2020, (b) if so, identify the customer or explain why identification is not required under applicable disclosure requirements, and (c) enhance your risk factor discussion to quantify the potential impact of the loss of one or more significant customers on the Company's business, financial condition, and results of operations.

Company Response:

The Company acknowledges the Staff's comment and has revised its disclosure in the Amended DRS as follows.

First, the Company confirms that no single customer accounted for 10% or more of total revenue in the fiscal year ended December 31, 2021 (total revenue of $187.4 million) or in the fiscal year ended December 31, 2020 (total revenue of $118.6 million). The Company's largest individual customer represented approximately 5.2% of total revenue in FY 2021 and approximately 6.8% of total revenue in FY 2020. Accordingly, the Company is not required to identify any individual customer under Item 101(c)(1)(vii) of Regulation S-K or ASC 280-10-50-42. The Company has added a statement confirming this in its segment and revenue disclosures in the notes to the consolidated financial statements.

Second, the Company has enhanced its risk factor disclosure under the heading "Risks Related to Our Business and Industry — Our top 10 customers collectively represent a significant portion of our revenue, and the loss or downsizing of one or more of these customers could adversely affect our business" to provide additional quantitative context. The revised risk factor discloses that the Company's top 10 customers collectively accounted for approximately 34% of ARR as of December 31, 2021 ($206.8 million ARR), and discusses the potential adverse impact on the Company's business, financial condition, and results of operations if one or more of these customers were to fail to renew their subscriptions, significantly reduce their usage, or terminate their agreements. The risk factor notes that the Company's subscription contracts generally have one-to-three-year terms and that the loss of a significant customer or a reduction in their contracted subscription level could result in a material decline in revenue that may not be immediately replaceable.

Third, the Company has enhanced the MD&A trend disclosure to note that customer concentration has declined from approximately 41% (top 10 customers as a percentage of ARR) in FY 2020 to approximately 34% in FY 2021, reflecting the Company's ongoing diversification of its customer base across approximately 340 enterprise customers globally. The Company believes this trend reflects the broadening adoption of its platform across a wider range of financial institutions and regulated enterprises.

These revisions appear on pages 22, 74, F-16, and F-34 of the marked version of the Amended DRS.

Comment 5: Concentration Risk Disclosure — Revenue by Geographic Region and Industry Vertical

Given that the Company primarily serves financial institutions, please revise your disclosure to provide additional information regarding revenue concentration by geographic region and by industry vertical. Please disclose whether any single geographic region or industry vertical represents a material portion of the Company's revenue and add corresponding risk factor disclosure addressing the potential impact of adverse developments in any concentrated region or vertical.

Company Response:

The Company acknowledges the Staff's comment and has added disclosure regarding the geographic and industry vertical composition of the Company's revenue in the MD&A section, the "Business" section, and in the notes to the consolidated financial statements in the Amended DRS.

With respect to geographic concentration, the Company has disclosed that approximately 78% of FY 2021 revenue was derived from customers located in the United States, with the remaining approximately 22% derived from international customers. The Company's international revenue is primarily generated from customers in the United Kingdom (approximately 9% of total revenue), Canada (approximately 6% of total revenue), and member states of the European Union (approximately 5% of total revenue), with the balance from other markets including Australia, Singapore, and Japan. The Company has added a revenue-by-geography table in both MD&A and the disaggregated revenue disclosures in the notes to the consolidated financial statements.

With respect to industry vertical concentration, the Company has disclosed that approximately 65% of FY 2021 revenue was derived from customers in the banking and financial services sector, approximately 20% from customers in the insurance sector, and approximately 15% from customers in other regulated industries, including payments, financial technology companies, and capital markets firms. A corresponding disaggregated revenue table by industry vertical has been added to the notes to the consolidated financial statements and referenced in MD&A.

The Company has added a new risk factor under the heading "Risks Related to Our Business and Industry — Our revenue is concentrated in the United States and in the banking and financial services sector, and adverse regulatory, economic, or competitive developments in these areas could disproportionately impact our business." This risk factor addresses the Company's geographic and industry vertical concentration and discusses the risks associated with potential adverse regulatory changes (such as changes in banking supervision requirements that could reduce demand for the Company's regulatory compliance products), macroeconomic downturns affecting the financial services industry, and competitive dynamics in the financial institution customer segment. The risk factor also notes that the Company's expansion into additional industry verticals and international markets may not occur at a rate sufficient to offset a decline in the Company's core U.S. banking and financial services customer base.

These revisions appear on pages 23, 75–76, 96–97, F-17, and F-35 of the marked version of the Amended DRS.

Non-GAAP Financial Measures

Comment 6: Non-GAAP Financial Measures — Adjusted EBITDA Reconciliation

We refer to our prior comment 7 regarding your presentation of non-GAAP financial measures. We note that your revised Adjusted EBITDA reconciliation begins from operating loss rather than from net loss, which is the most directly comparable GAAP measure. Please revise your Adjusted EBITDA reconciliation to start from net loss. In addition, please (a) clarify and separately quantify each adjustment included in the reconciliation and (b) confirm that no adjustment effectively substitutes an individually tailored revenue recognition or measurement method for a measure calculated in accordance with GAAP. Please refer to Item 10(e) of Regulation S-K, Regulation G, and the Commission's Compliance and Disclosure Interpretations on Non-GAAP Financial Measures, Questions 100.01 et seq.

Company Response:

The Company acknowledges the Staff's comment and has revised the Adjusted EBITDA reconciliation table in both the "Prospectus Summary — Summary Consolidated Financial and Operating Data" section and the MD&A section of the Amended DRS to begin the reconciliation from net loss, which is the most directly comparable GAAP measure.

The revised reconciliation for the fiscal years ended December 31, 2021 and December 31, 2020 is presented as follows (amounts in thousands):

The Company confirms that each adjustment included in the reconciliation is separately quantified and described in the notes accompanying the reconciliation table. The Company further confirms that no adjustment in the Adjusted EBITDA reconciliation substitutes an individually tailored revenue recognition or measurement method for a measure calculated in accordance with GAAP. All adjustments are of the types described in the Commission's Staff guidance on the use of non-GAAP financial measures, including Regulation G, Item 10(e) of Regulation S-K, and the Commission's Compliance and Disclosure Interpretations on Non-GAAP Financial Measures, Questions 100.01 through 100.04. Specifically, the adjustments consist of: (i) interest expense, net, and interest income, which are non-operating items; (ii) income tax provision, which reflects the Company's effective tax rate and does not relate to core operating performance; (iii) depreciation and amortization, which are non-cash charges; (iv) stock-based compensation expense, which is a non-cash charge and may vary based on factors unrelated to operating performance; and (v) one-time restructuring charges incurred in FY 2020 in connection with a workforce reduction that the Company does not expect to recur.

The Company notes that the Adjusted EBITDA figure for FY 2021 has been revised from $(18.7) million as previously presented (when reconciled from operating loss) to $(8.7) million when reconciled from net loss with all adjustments separately quantified. The difference reflects the reclassification of certain items that were previously netted within the operating loss line item and are now presented as separate adjustments.

These revisions appear on pages 15–16 and 72–73 of the marked version of the Amended DRS.

Stock-Based Compensation

Comment 7: Stock-Based Compensation — Fair Value of Common Stock

We note that the Company's most recent private financing round (Series D, August 2020) implied a price per share of $12.50 and that the preliminary IPO price range is $16.00 to $18.00 per share. Please provide enhanced disclosure of the methodology used to determine the fair value of the Company's common stock for purposes of stock-based compensation expense, including a retrospective of estimated fair values of common stock for each quarter in which equity awards were granted from the Series D closing through the filing date. For each period, please (a) disclose the estimated fair value per share, (b) explain the key factors contributing to any increase in fair value from the prior period, and (c) describe the valuation methodologies employed (e.g., independent third-party 409A valuations, option pricing model, probability-weighted expected return method, or hybrid method). In addition, please address the relationship between the most recent estimated fair value and the preliminary IPO price range.

Company Response:

The Company acknowledges the Staff's comment and has added enhanced disclosure in the "Critical Accounting Policies and Estimates — Stock-Based Compensation" section of MD&A and in the "Dilution" section of the Amended DRS.

The Company has provided a quarter-by-quarter retrospective of the estimated fair values of the Company's common stock for each quarter from the Series D closing in August 2020 through the first quarter of 2022, as follows:

The Company engaged Valiant Advisory Group, an independent third-party valuation firm, to prepare valuations of the Company's common stock under Section 409A of the Internal Revenue Code at each of the relevant dates identified above. Each valuation employed a combination of the probability-weighted expected return method ("PWERM") and the option pricing model ("OPM"), with the two approaches blended based on the probability of an IPO scenario versus a scenario in which the Company remained private. As the Company progressed toward the IPO, the probability weighting assigned to the IPO scenario increased from approximately 15% in Q3 2020 to approximately 75% in Q1 2022, which contributed to increases in the estimated fair value per share.

The key factors contributing to the increases in fair value over the periods presented include: (i) strong revenue growth, with total revenue increasing from $118.6 million in FY 2020 to $187.4 million in FY 2021, representing approximately 58% year-over-year growth; (ii) increasing ARR, which reached $206.8 million as of December 31, 2021; (iii) an expanding customer base, growing to approximately 340 enterprise customers as of December 31, 2021; (iv) progress toward IPO readiness, including the July 2021 Board resolution to explore an IPO, the engagement of Pinnacle Securities LLC as lead underwriter, and the confidential submission of the Registration Statement in January 2022; and (v) favorable movement in comparable publicly traded SaaS and fintech company valuation multiples during the relevant periods.

With respect to the relationship between the most recent estimated fair value and the preliminary IPO price range, the Company notes that the spread between the most recent Section 409A valuation ($16.25 per share as of Q1 2022) and the midpoint of the preliminary IPO price range ($17.00 per share) is approximately 4.6%. The Company believes this spread is primarily attributable to two factors: (i) an increased probability weighting of the IPO scenario in the context of the preliminary pricing analysis relative to the Section 409A valuation, and (ii) the removal of the discount for lack of marketability (the "illiquidity discount"), which was applied in the Section 409A valuations to reflect the fact that the Company's shares were not publicly traded at the valuation dates. The illiquidity discount applied in the most recent 409A valuation was approximately 10%. When this discount is removed in contemplation of the IPO (which will provide liquidity to public stockholders), the resulting implied fair value is consistent with the preliminary IPO price range.

These revisions appear on pages 54–57, 70–72, and F-24 through F-26 of the marked version of the Amended DRS.

Comment 8: Stock-Based Compensation — Cheap Stock Analysis

Please provide a detailed cheap stock analysis for all equity awards granted during the 12-month period preceding the initial filing of the Registration Statement (i.e., from January 2021 through January 2022). For each grant, please disclose: (a) the grant date, (b) the number of options granted, (c) the exercise price per share, (d) the estimated fair value of common stock on the grant date, (e) the intrinsic value per share (if any), and (f) the aggregate stock-based compensation expense recorded or to be recorded in connection with such grant.

Company Response:

The Company acknowledges the Staff's comment and has added a table in Note 10, "Stock-Based Compensation," to the consolidated financial statements, with a cross-reference in the "Critical Accounting Policies and Estimates — Stock-Based Compensation" section of MD&A, disclosing all equity grants made during the period from January 2021 through January 2022.

The following table summarizes each equity grant during this period:

The Company confirms that in each case, the exercise price per share of the stock option grant was set at or above the contemporaneous estimated fair value of the Company's common stock on the grant date, as determined pursuant to independent third-party Section 409A valuations prepared by Valiant Advisory Group. Because the exercise price was equal to or exceeded the estimated fair value per share on each respective grant date, there was no intrinsic value at the date of grant, and accordingly no "cheap stock" compensation charge was required for any of the grants listed above.

The aggregate stock-based compensation expense amounts shown in the table above represent the estimated grant-date fair value of each award (calculated using the Black-Drubeck option pricing model, as discussed in the Company's response to Comment 9 below), which is recognized on a straight-line basis over the four-year vesting period applicable to each grant. Total stock-based compensation expense recognized in the Company's consolidated statement of operations for FY 2021 was $22.8 million, which includes expense related to the grants listed above as well as amortization of previously granted equity awards.

The Company further discloses that as of December 31, 2021, the weighted-average exercise price of all outstanding stock options was $4.82 per share, reflecting options granted from the Company's inception, including early-stage grants made at significantly lower exercise prices during the Company's seed and Series A through Series C financing rounds. As of December 31, 2021, there were 11,300,000 stock options outstanding under the Company's 2017 Equity Incentive Plan (out of a total authorized option pool of 14,800,000 shares).

The Company acknowledges the significant difference between the weighted-average exercise price of all outstanding options ($4.82 per share) and the preliminary IPO price range of $16.00 to $18.00 per share. The Company has included disclosure in the "Dilution" section of the Amended DRS showing the immediate dilution to new public investors resulting from the exercise of outstanding options, including the potential dilutive impact of the in-the-money options on a fully diluted basis. The Company has also added a supplemental dilution table showing the pro forma effect of the exercise of all outstanding in-the-money options on net tangible book value per share.

These revisions appear on pages 54–57, 71–72, F-24 through F-27, and F-38 of the marked version of the Amended DRS.

Comment 9: Stock-Based Compensation — Black-Drubeck Assumptions

Please disclose the key assumptions used in the Black-Drubeck option pricing model for stock-based compensation expense calculations for each period presented, including expected volatility, expected term, risk-free interest rate, and expected dividend yield. Please also explain the basis for each assumption.

Company Response:

The Company acknowledges the Staff's comment and has added disclosure of the key assumptions used in the Black-Drubeck option pricing model in Note 10, "Stock-Based Compensation," to the consolidated financial statements and in the "Critical Accounting Policies and Estimates — Stock-Based Compensation" section of MD&A. The following assumptions were used in the Black-Drubeck model for stock option grants made during the fiscal years ended December 31, 2021 and December 31, 2020:

The Company notes that the range of assumptions for each period reflects the specific grant dates and market conditions prevailing at the time of each grant during the respective fiscal year. The peer group used to estimate expected volatility consisted of approximately 12 to 15 publicly traded companies in the SaaS, data analytics, and financial technology sectors that the Company considers comparable in terms of business model, growth stage, and market capitalization. The composition of the peer group was consistent across the periods presented, with minor adjustments for M&A activity and delistings within the peer group.

These revisions appear on pages 71–72 and F-25 through F-26 of the marked version of the Amended DRS.

Related-Party Transactions

Comment 10: Related-Party Transactions — Investor Rights Agreement and Registration Rights

We note the Company's response to our prior comment 11 regarding related-party transactions, which referenced an Investor Rights Agreement among the Company and its major stockholders, including Velthryn Venture Partners Fund IV, L.P., Arclight Equity Group Fund VII, L.P., and Ridgeline Capital Partners Fund II, L.P. Please revise your disclosure to provide enhanced description of the material terms of the Investor Rights Agreement, including (a) demand and piggyback registration rights, (b) information rights, (c) board designation rights (we note that Jonathan Tsai serves as the Velthryn designee and Rebecca Stahl serves as the Arclight designee), (d) preemptive rights, and (e) any provisions that survive the completion of the Company's initial public offering.

Company Response:

The Company acknowledges the Staff's comment and has revised the "Certain Relationships and Related Party Transactions" section of the Amended DRS to provide a comprehensive description of the material terms of the Investor Rights Agreement, dated as of August 14, 2020 (the "IRA"), by and among the Company, Velthryn Venture Partners Fund IV, L.P. ("Velthryn"), Arclight Equity Group Fund VII, L.P. ("Arclight"), and Ridgeline Capital Partners Fund II, L.P. ("Ridgeline"), each of which is a holder of the Company's preferred stock. The enhanced disclosure addresses each of the categories identified in the Staff's comment, as described below.

Demand Registration Rights. Under the IRA, each of Velthryn (holding approximately 21.0% of the Company's fully diluted pre-IPO shares outstanding, representing 24,800,000 shares) and Arclight (holding approximately 15.7% of the Company's fully diluted pre-IPO shares outstanding, representing 18,600,000 shares) has the right to demand up to two long-form registrations of their respective shares of common stock (including shares issuable upon conversion of preferred stock) at any time following the expiration of the 180-day lock-up period described below. Demand registrations are subject to customary limitations, including minimum offering size requirements of $30 million in aggregate offering price, limitations on the frequency of demand requests (no more than one demand per holder in any twelve-month period), and the Company's right to delay a demand registration for a period not to exceed 90 days if the Board of Directors determines in good faith that such registration would be materially detrimental to the Company. The demand registration rights survive the IPO.

Piggyback Registration Rights. Under the IRA, all parties to the agreement, including Velthryn, Arclight, and Ridgeline (holding approximately 7.8% of the Company's fully diluted pre-IPO shares outstanding, representing 9,200,000 shares), have piggyback registration rights entitling them to include their registrable shares in any registration statement filed by the Company for its own account or for the account of any other stockholder exercising demand registration rights, subject to customary underwriter cutback provisions and priority allocation rules. In the event of an underwriter cutback, shares requested to be included by piggyback holders will be reduced pro rata based on the number of registrable shares requested to be included by each such holder. The piggyback registration rights survive the IPO.

Board Designation Rights. The IRA provides that Velthryn has the right to designate one member of the Company's Board of Directors for so long as Velthryn holds at least 10% of the outstanding shares of common stock of the Company (on a fully diluted, as-converted basis). Velthryn's current designee is Jonathan Tsai, who has served on the Board since September 2020. The IRA further provides that Arclight has the right to designate one member of the Board of Directors for so long as Arclight holds at least 7.5% of the outstanding shares of common stock of the Company (on a fully diluted, as-converted basis). Arclight's current designee is Rebecca Stahl, who has served on the Board since October 2020. These board designation rights survive the IPO and will remain in effect for so long as the applicable ownership thresholds are met.

Information Rights. Under the IRA, the Company is obligated to deliver to each Major Holder (as defined in the IRA, which includes Velthryn, Arclight, and Ridgeline) quarterly unaudited financial statements within 45 days of the end of each fiscal quarter and annual audited financial statements within 120 days of the end of each fiscal year. The IRA provides that these information rights terminate automatically upon the completion of the Company's initial public offering, at which point the Company will be subject to the periodic reporting obligations of the Securities Exchange Act of 1934, as amended, including the filing of annual reports on Form 10-K and quarterly reports on Form 10-Q.

Preemptive Rights. Under the IRA, each Major Holder has the right to purchase its pro rata share of any new securities issued by the Company (subject to customary exclusions for issuances in connection with employee equity incentive plans, strategic acquisitions, and debt financing transactions) in order to maintain its percentage ownership of the Company. The preemptive rights terminate automatically upon the completion of the Company's initial public offering.

Lock-Up. All parties to the IRA have agreed to a 180-day lock-up period following the date of the final prospectus, during which they will not sell, transfer, or otherwise dispose of any shares of the Company's common stock, subject to early release at the sole discretion of Pinnacle Securities LLC, the lead underwriter of the offering. The lock-up provisions contain customary carve-outs for transfers for estate planning purposes (including transfers to family members and trusts for the benefit of the holder or the holder's family members) and charitable gifts, provided that the transferee agrees in writing to be bound by the lock-up restrictions.

The Company notes that the selling stockholder registrations contemplated by the Registration Statement — specifically, Velthryn's registration of up to 2,000,000 shares and Arclight's registration of up to 1,500,000 shares — are being made pursuant to the registration rights granted under the IRA.

These revisions appear on pages 108–112 of the marked version of the Amended DRS.

Dilution

Comment 11: Dilution Table — Presentation and Calculation

Please revise the Dilution section to (a) present net tangible book value per share before and after the offering at each of the low end ($16.00), midpoint ($17.00), and high end ($18.00) of the preliminary price range, rather than only at the midpoint, and (b) confirm the accuracy of the calculation of immediate dilution to new public investors. In addition, please provide a sensitivity analysis reflecting the full exercise of the underwriters' overallotment option (up to 2,466,176 additional shares).

Company Response:

The Company acknowledges the Staff's comment and has revised the "Dilution" section of the Amended DRS to present net tangible book value calculations at each of the low end ($16.00), midpoint ($17.00), and high end ($18.00) of the preliminary IPO price range, and to include a sensitivity analysis reflecting the full exercise of the underwriters' overallotment option.

At the midpoint of the preliminary IPO price range ($17.00 per share), the Company expects to issue 12,941,176 primary shares and to receive net proceeds of approximately $200.9 million after deducting the underwriting discount of 6.5% (approximately $14.3 million) and estimated offering expenses of approximately $4.8 million.

The revised dilution analysis is summarized as follows:

The Company has confirmed the accuracy of each calculation presented above. The net tangible book value per share before the offering is calculated by dividing the Company's total tangible assets less total liabilities as of December 31, 2021 by the total number of shares of common stock outstanding on a fully diluted, as-converted basis immediately prior to the offering. The net tangible book value per share after the offering is calculated by adding the net proceeds from the offering to the Company's pre-offering net tangible book value and dividing the result by the total number of shares outstanding after giving effect to the issuance of the primary shares in the offering. Immediate dilution per share to new public investors is calculated as the difference between the assumed initial public offering price per share and the net tangible book value per share after the offering.

The Company has also added a sensitivity analysis reflecting the full exercise of the overallotment option, which would result in the issuance of up to 2,466,176 additional shares at the initial public offering price. At the midpoint ($17.00 per share), the full exercise of the overallotment option would generate additional gross proceeds of approximately $41.9 million (2,466,176 shares multiplied by $17.00 per share), resulting in total gross proceeds of approximately $261.9 million. The impact of the full exercise of the overallotment option on net tangible book value per share after the offering and on immediate dilution per share to new public investors is presented in a supplemental table in the Dilution section.

For reference, the fully diluted pre-IPO shares outstanding is approximately 118,200,000 shares, consisting of: (i) shares of Class A common stock on an as-converted basis (including shares issuable upon conversion of all outstanding shares of preferred stock); (ii) 28,500,000 shares of Class B common stock held by the Company's co-founders, Priya Subramanian (16,500,000 shares) and Marcus Henley (12,000,000 shares); and (iii) 11,300,000 shares issuable upon exercise of outstanding stock options at a weighted-average exercise price of $4.82 per share (out of a total authorized option pool of 14,800,000 shares). The dilution analysis presents the impact on new public investors of the significant difference between the net tangible book value per share attributable to existing stockholders and the price paid by new public investors in the offering.

These revisions appear on pages 54–58 of the marked version of the Amended DRS.

Description of Capital Stock

Comment 12: Description of Capital Stock — Dual-Class Structure and Voting Power Disclosure

Please revise the "Description of Capital Stock" section to (a) present a clear table showing the post-IPO voting power allocation between holders of Class A common stock (1 vote per share) and holders of Class B common stock (10 votes per share), (b) identify the founders' post-IPO aggregate voting control percentage and confirm that it is prominently disclosed on the prospectus cover page and in the risk factors, and (c) clarify the triggers for the sunset provisions applicable to the Class B common stock and discuss the practical implications of such provisions.

Company Response:

The Company acknowledges the Staff's comment and has revised the "Description of Capital Stock" section of the Amended DRS to provide a clear tabular presentation of the post-IPO voting power allocation, has revised the prospectus cover page and risk factors to prominently disclose the founders' aggregate voting control, and has added enhanced disclosure regarding the sunset provision triggers and their practical implications.

Voting Power Table. The Company has added the following table to the "Description of Capital Stock" section:

The Class A common stock outstanding after the offering consists of approximately 89,700,000 shares held by existing stockholders (including shares issuable upon conversion of all outstanding shares of preferred stock, held by investors including Velthryn, Arclight, Ridgeline, and other holders, as well as shares held by employees and other common stockholders other than the co-founders) plus 12,941,176 new primary shares issued in the offering.

Prospectus Cover Page Disclosure. The Company has revised the prospectus cover page to include the following prominent statement:

"Following the completion of this offering, our co-founders, Priya Subramanian and Marcus Henley, will control approximately 73.5% of the combined voting power of our outstanding common stock through their ownership of all outstanding shares of Class B common stock. As a result, we will be a 'controlled company' within the meaning of the corporate governance rules of the Nasdaq Stock Market."

This statement is set in bold type on the cover page and is cross-referenced in the "Prospectus Summary" section.

Risk Factor Disclosure. The Company has revised its risk factor under the heading "Risks Related to Our Dual-Class Capital Structure — Our co-founders control approximately 73.5% of the combined voting power of our outstanding common stock following this offering, which will limit your ability to influence matters requiring stockholder approval" to prominently state the founders' aggregate voting control percentage and to describe the consequences of such concentration of voting power.

Sunset Provision Triggers. The Company has added enhanced disclosure of the sunset provisions applicable to the Class B common stock in the "Description of Capital Stock" section. The Class B common stock will automatically convert into Class A common stock on a one-for-one basis upon the occurrence of any of the following triggering events:

(i) The seventh (7th) anniversary of the closing date of the Company's initial public offering (the "Time-Based Sunset");

(ii) The transfer of any shares of Class B common stock by a holder thereof to any person or entity that is not a "Permitted Transferee" (as defined in the Company's Amended and Restated Certificate of Incorporation, which includes (A) members of the holder's immediate family, (B) trusts established for the benefit of the holder or the holder's immediate family members, and (C) entities wholly owned and controlled by the holder) (the "Transfer-Based Sunset"); and

(iii) The date on which the holders of Class B common stock collectively cease to hold at least 10% of the total outstanding shares of common stock of the Company (Class A and Class B combined) (the "Ownership-Based Sunset").

The Company has added the following practical discussion of the sunset provisions:

The Time-Based Sunset ensures that the dual-class structure will expire no later than the seventh anniversary of the IPO closing, regardless of the founders' continued ownership or involvement with the Company. Until the occurrence of a sunset trigger, the founders will have the ability to control the outcome of substantially all matters submitted to a vote of stockholders, including the election and removal of directors, amendments to the Company's Amended and Restated Certificate of Incorporation and Amended and Restated Bylaws, and the approval of mergers, consolidations, sales of all or substantially all of the Company's assets, and other significant corporate transactions. This concentration of voting control could prevent or discourage unsolicited acquisition proposals or offers for the Company's common stock that stockholders may consider favorable, and could deprive stockholders of an opportunity to receive a premium for their shares in connection with a change of control transaction.

The Company further notes that the Transfer-Based Sunset is designed to ensure that the enhanced voting rights of the Class B common stock are personal to the founders and cannot be transferred to third parties (other than permitted family and estate planning transferees). This provision is intended to align the founders' voting control with their continued personal involvement with the Company.

The Company has confirmed that its dual-class capital structure qualifies for listing on the Nasdaq Global Select Market under the applicable listing rules of the Nasdaq Stock Market, including Nasdaq Listing Rule 5640.

These revisions appear on pages 1–2 (prospectus cover page), 24–25 (risk factors), 113–118 (Description of Capital Stock), and A-1 through A-5 (Amended and Restated Certificate of Incorporation) of the marked version of the Amended DRS.

Closing

The Company believes that the Amended DRS, as revised in response to the Staff's comments as described herein, complies in all material respects with the applicable requirements of the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder. The Company is concurrently filing the second amended Draft Registration Statement on Form S-1 via EDGAR (CIK No. 0001923847, File Number 333-264518).

We respectfully request that the Staff advise us at its earliest convenience if it has any further comments or questions with respect to the foregoing responses or the Amended DRS. We would welcome the opportunity to discuss any of the foregoing responses with the Staff at its convenience.

Please do not hesitate to contact the undersigned, Robert Adeyemi, at (415) 772-4100, or Audrey Zhou, at (415) 772-4215, each at Calderwood & Harkness LLP, 1 Market Street, Spear Tower, Suite 3600, San Francisco, California 94105. Mr. Adeyemi and Ms. Zhou may also be reached at Calderwood & Harkness LLP, 425 Lexington Avenue, 42nd Floor, New York, New York 10017, at (212) 558-4000.

Representatives of the Company who are available to discuss any matters relating to this response include Naomi Feinberg, General Counsel and Corporate Secretary, and David Lau, Chief Financial Officer, each of Lumos Analytics Inc., 450 Folsom Street, Suite 1200, San Francisco, California 94105 (telephone: (415) 555-8200).

Very truly yours,

CALDERWOOD & HARKNESS LLP

By: ________

Robert Adeyemi Partner, Capital Markets Group

cc:

Priya Subramanian, Chief Executive Officer, Lumos Analytics Inc. David Lau, Chief Financial Officer, Lumos Analytics Inc. Naomi Feinberg, General Counsel & Corporate Secretary, Lumos Analytics Inc. Jennifer Kwon, Calderwood & Harkness LLP Audrey Zhou, Calderwood & Harkness LLP Andrew Castellano, Pinnacle Securities LLC Lisa Drummond, Pinnacle Securities LLC Michael Sorrentino, Hargrove & Liddell LLP Gregory Simmons, Meridian & Howe LLP

FY 2021	FY 2020
Net loss (GAAP)	$(41,200)	$(33,800)
Add: Interest expense, net	$3,600	$2,900
Add: Income tax provision (benefit)	$1,200	$800
Add: Depreciation and amortization	$6,500	$4,700
Add: Stock-based compensation expense	$22,800	$14,200
Add: One-time restructuring charges	—	$2,100
Less: Interest income	$(1,100)	$(600)
Less: Other income, net	$(500)	$(300)
Adjusted EBITDA (Non-GAAP)	$(8,700)	$(9,800)
Quarter	Estimated Fair Value Per Share	Key Events / Factors
Q3 2020 (August 2020, post-Series D close)	$12.50	Series D preferred stock financing at $12.50 per share; fair value anchored to most recent arm's-length transaction
Q4 2020	$12.50	No material change in Company fundamentals; continued post-Series D integration and growth
Q1 2021	$13.25	Strong Q4 2020 revenue performance; continued ARR growth; improved net dollar retention rate
Q2 2021	$14.00	Continued revenue acceleration; expansion of enterprise customer base; increase in ARR
Q3 2021	$14.75	Board resolution to explore IPO (July 15, 2021); selection of underwriters; increasing probability weighting of IPO scenario
Q4 2021	$15.50	Continued strong financial performance; advancement of IPO preparation; comparable public company valuation multiples increase
Q1 2022	$16.25	Confidential submission of Registration Statement on Form S-1 (January 10, 2022); further advancement of IPO timeline
Grant Date	Number of Options Granted	Exercise Price Per Share	Estimated Fair Value Per Share on Grant Date	Intrinsic Value Per Share	Aggregate SBC Expense (to be recorded over vesting period)
April 15, 2021	1,200,000	$13.25	$13.25	$0.00	$8,760,000
July 20, 2021	850,000	$14.00	$14.00	$0.00	$6,545,000
October 12, 2021	1,500,000	$14.75	$14.75	$0.00	$12,150,000
January 18, 2022	600,000	$15.50	$15.50	$0.00	$5,130,000
Assumption	FY 2021	FY 2020	Basis
Expected volatility	45%–55%	48%–58%	Based on the historical volatility of a peer group of comparable publicly traded SaaS and fintech companies over a period commensurate with the expected term of the options, as the Company does not have a sufficient public trading history of its own common stock

Expected term	5.5–6.5 years	5.5–6.5 years	Based on the simplified method, as permitted under SEC Staff Accounting Bulletin ("SAB") No. 107 and SAB No. 110, calculated as the midpoint between the vesting date and the contractual expiration date, as the Company has limited historical exercise data for its stock options
Risk-free interest rate	1.2%–1.8%	0.4%–0.8%	Based on the U.S. Treasury yield curve in effect at the date of grant for the period commensurate with the expected term of the stock options
Expected dividend yield	0%	0%	The Company has never declared or paid cash dividends on its common stock and does not anticipate paying cash dividends in the foreseeable future
$16.00 Per Share	$17.00 Per Share	$18.00 Per Share
Assumed initial public offering price per share	$16.00	$17.00	$18.00
Net tangible book value per share before the offering	$0.62	$0.62	$0.62
Increase in net tangible book value per share attributable to new investors	$1.41	$1.52	$1.63
Net tangible book value per share after the offering	$2.03	$2.14	$2.25
Immediate dilution per share to new public investors	$13.97	$14.86	$15.75
Gross proceeds to the Company	$207,058,816	$220,000,000	$232,941,184
Net proceeds to the Company (after underwriting discount and estimated offering expenses)	$188,800,000	$200,900,000	$213,000,000
Class of Stock	Shares Outstanding Post-IPO	Votes Per Share	Total Votes	% of Total Voting Power
Class B common stock (co-founders)	28,500,000	10	285,000,000	73.5%
— Priya Subramanian	16,500,000	10	165,000,000	42.6%
— Marcus Henley	12,000,000	10	120,000,000	30.9%
Class A common stock	102,641,176	1	102,641,176	26.5%
Total	131,141,176	387,641,176	100.0%

CALDERWOOD & HARKNESS LLP 1 Market Street, Spear Tower, Suite 3600 San Francisco, California 94105 Telephone: (415) 772-4000 Facsimile: (415) 772-4001 www.calderwoodharkness.com
March 28, 2022
Via EDGAR
Staff of the Division of Corporation Finance Office of Technology U.S. Securities and Exchange Commission 100 F Street, N.E. Washington, D.C. 20549
Re: Lumos Analytics Inc. Registration Statement on Form S-1 Filed Confidentially on January 10, 2022 (as amended March 4, 2022) File Number 333-264518 CIK No. 0001923847
Dear Members of the Staff:
We are writing on behalf of our client, Lumos Analytics Inc., a Delaware corporation (the "Company" or "Lumos"), in response to the comment letter of the Staff (the "Staff") of the Division of Corporation Finance of the U.S. Securities and Exchange Commission (the "Commission") dated March 18, 2022 (the "Comment Letter"), relating to the Company's amended Draft Registration Statement on Form S-1 filed confidentially with the Commission on March 4, 2022 (the "Prior DRS"). Calderwood & Harkness LLP serves as issuer's counsel to the Company in connection with the Company's proposed initial public offering.
The Comment Letter contained twelve (12) comments. We have reproduced each of the Staff's comments below in bold type and have set forth the Company's response immediately following each comment. The Company is concurrently filing with the Commission a second amended Draft Registration Statement on Form S-1 (the "Amended DRS") via EDGAR, which reflects the revisions described in the responses set forth herein. Unless otherwise indicated, page references in the Company's responses correspond to the marked version of the Amended DRS filed concurrently with this letter. All capitalized terms used but not defined herein have the meanings assigned to them in the Amended DRS.
This letter has been prepared by the following members of the Calderwood & Harkness LLP engagement team: Robert Adeyemi, Responsible Partner; Audrey Zhou, Lead Associate; and Brendan Walsh, Working Associate, each of the Capital Markets Group.
We respectfully submit the following responses on behalf of the Company.
Revenue Recognition
Comment 1: Revenue Recognition — Remaining Performance Obligations
We note your response to our prior comment 3 regarding disclosure of remaining performance obligations under ASC 606. While the Company provided a general qualitative description of its remaining performance obligations in its prior amended filing, we believe enhanced quantitative disclosure is necessary. Please revise your disclosure to include the aggregate transaction price allocated to remaining performance obligations as of December 31, 2021, and the expected timing of recognition of such amounts (i.e., amounts expected to be recognized within the next 12 months and amounts expected to be recognized thereafter). In addition, please clarify whether the Company applies any practical expedient under ASC 606-10-50-14 and, if so, disclose the nature of such practical expedient and the types of remaining performance obligations to which it is applied.
Company Response:
The Company acknowledges the Staff's comment and has revised the disclosure in Note 2, "Summary of Significant Accounting Policies — Revenue Recognition," and Note 13, "Revenue," to the Company's consolidated financial statements included in the Amended DRS to provide enhanced quantitative disclosure regarding the Company's remaining performance obligations. Specifically, the Company has added the following information:
As of December 31, 2021, the aggregate transaction price allocated to remaining performance obligations was approximately $312 million. Of this amount, the Company expects to recognize approximately 62%, or approximately $193 million, as revenue within the next twelve months, and the remaining approximately 38%, or approximately $119 million, thereafter. The expected timing of revenue recognition with respect to remaining performance obligations is based on the Company's current estimates of contract duration, customer renewal expectations, and the expected delivery cadence of contracted services.
The Company further confirms that it applies the practical expedient provided under ASC 606-10-50-14A, pursuant to which the Company excludes from the remaining performance obligations disclosure those contracts with an original expected duration of one year or less. The Company has added disclosure of the application of this practical expedient in Note 2 and Note 13 to the consolidated financial statements. The Company notes that its subscription SaaS contracts are generally one to three years in duration with annual billing cycles, and has disclosed this characteristic in the "Management's Discussion and Analysis of Financial Condition and Results of Operations" ("MD&A") section and in the notes to the consolidated financial statements to provide investors with additional context regarding the composition of remaining performance obligations.
These revisions appear on pages 68, F-14, and F-32 of the marked version of the Amended DRS.
Comment 2: Revenue Recognition — Variable Consideration and Usage-Based Components
We note that the Company's revenue arrangements include variable consideration elements, including usage-based overages and volume-based pricing tiers. Please revise your disclosure to describe the methodology used to estimate variable consideration and discuss the Company's analysis of the constraint on variable consideration under ASC 606-10-32-11. In addition, please quantify the portion of the Company's total revenue attributable to variable consideration for each period presented.
Company Response:
The Company acknowledges the Staff's comment and has revised its revenue recognition policy disclosure in Note 2, "Summary of Significant Accounting Policies — Revenue Recognition," and in the "Critical Accounting Policies and Estimates" section of MD&A in the Amended DRS to provide additional detail regarding variable consideration components in the Company's revenue arrangements.
The Company's variable consideration elements relate primarily to usage-based fees charged to customers for transaction volumes that exceed the contracted tiers within the Company's LumosIQ Platform and its FraudLens fraud detection module. Specifically, certain customer contracts provide for a fixed subscription fee covering a specified volume of transactions per month or per annum, with additional per-transaction fees for usage in excess of the contracted volume thresholds. Additionally, certain contracts include volume-based pricing tiers under which the per-transaction fee decreases as the customer's aggregate usage volume increases during the contract period.
For the fiscal year ended December 31, 2021, variable consideration represented less than 8% of total revenue (total revenue of $187.4 million for FY 2021), or approximately $14.2 million. For the fiscal year ended December 31, 2020, variable consideration represented approximately 6% of total revenue ($118.6 million), or approximately $7.1 million. The increase in variable consideration as a percentage of total revenue is attributable to expanding customer usage of the LumosIQ Platform and the FraudLens module as customer transaction volumes have grown.
In estimating variable consideration, the Company applies the constraint guidance under ASC 606-10-32-11 through ASC 606-10-32-13. The Company includes variable consideration in the transaction price only to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved. The Company's estimation methodology is based on an analysis of historical customer usage patterns, contractual transaction volume data, and observable trends in customer activity levels. The Company evaluates the constraint on variable consideration at the inception of each contract and reassesses the estimate at each reporting date.
These revisions appear on pages 67–68, 70, F-14, and F-33 of the marked version of the Amended DRS.
Comment 3: Revenue Recognition — Multi-Element Arrangements and Stand-Alone Selling Prices
We note that the Company's customer contracts frequently bundle multiple products and services, including the LumosIQ Platform, the FraudLens module, the RegConnect module, and the DataBridge API suite, together with professional implementation services. Please revise your disclosure to provide additional detail regarding the Company's approach to (a) identifying the distinct performance obligations within these bundled arrangements and (b) determining the stand-alone selling prices for each performance obligation. In addition, please disclose the specific methodology used to allocate the transaction price among performance obligations (e.g., adjusted market assessment approach, expected cost plus margin approach, or residual approach).
Company Response:
The Company acknowledges the Staff's comment and has revised its disclosure in Note 2, "Summary of Significant Accounting Policies — Revenue Recognition," and in the "Critical Accounting Policies and Estimates" section of MD&A to provide enhanced detail regarding the Company's approach to identifying performance obligations and determining stand-alone selling prices in multi-element arrangements.
The Company's typical customer arrangements may include multiple distinct performance obligations, which generally consist of: (i) subscriptions to the LumosIQ Platform, the Company's core regulatory analytics and compliance platform; (ii) subscriptions to the FraudLens fraud detection module; (iii) subscriptions to the RegConnect regulatory reporting module; (iv) access to the DataBridge API suite, which enables integration of the Company's platform with the customer's existing technology infrastructure; and (v) professional implementation services, including data migration, system configuration, custom integration development, and training. The Company evaluates each promised good or service in its customer contracts to determine whether it represents a distinct performance obligation under ASC 606-10-25-19 through ASC 606-10-25-21. In making this determination, the Company considers whether the customer can benefit from the good or service either on its own or together with other resources readily available to the customer, and whether the promise to transfer the good or service is separately identifiable from other promises in the contract.
The Company has determined that each of the subscriptions to the LumosIQ Platform, the FraudLens module, the RegConnect module, and the DataBridge API suite generally represents a distinct performance obligation, as each can be used independently by the customer and is separately identifiable within the context of the contract. Professional implementation services are also typically distinct performance obligations, as the Company regularly sells these services on a standalone basis and the services do not significantly modify or customize the underlying subscription products.
With respect to the allocation of the transaction price, the Company primarily uses the adjusted market assessment approach to determine the stand-alone selling prices of each performance obligation. Under this approach, the Company evaluates the market for its products and services and estimates the price that customers in the relevant market would be willing to pay for each product or service on a standalone basis, taking into account pricing data from comparable transactions, competitive market conditions, and the Company's pricing strategies. Where observable standalone transactions are available — for example, where a customer purchases a FraudLens subscription without bundling other products — the Company uses the directly observable standalone transaction price to validate or supplement the adjusted market assessment.
The Company does not currently use the residual approach for any of its performance obligations. The Company has not used the expected cost plus margin approach in any material respect during the periods presented.
Subscription revenue for each of the Company's platform and module subscriptions is recognized ratably over the applicable contract term, as the customer simultaneously receives and consumes the benefits of the subscription service over the period of access. Professional services revenue is recognized over the service delivery period, generally on a proportional performance basis as the services are performed.
These revisions appear on pages 67–69, F-14 through F-16, and F-33 through F-34 of the marked version of the Amended DRS.
Concentration Risk
Comment 4: Concentration Risk Disclosure — Top Customer Dependence
We note the Company's disclosure that its top 10 customers represent approximately 34% of annual recurring revenue ("ARR") as of December 31, 2021 ($206.8 million ARR). Please revise your disclosure to (a) state whether any single customer represented 10% or more of total revenue in fiscal years 2021 or 2020, (b) if so, identify the customer or explain why identification is not required under applicable disclosure requirements, and (c) enhance your risk factor discussion to quantify the potential impact of the loss of one or more significant customers on the Company's business, financial condition, and results of operations.
Company Response:
The Company acknowledges the Staff's comment and has revised its disclosure in the Amended DRS as follows.
First, the Company confirms that no single customer accounted for 10% or more of total revenue in the fiscal year ended December 31, 2021 (total revenue of $187.4 million) or in the fiscal year ended December 31, 2020 (total revenue of $118.6 million). The Company's largest individual customer represented approximately 5.2% of total revenue in FY 2021 and approximately 6.8% of total revenue in FY 2020. Accordingly, the Company is not required to identify any individual customer under Item 101(c)(1)(vii) of Regulation S-K or ASC 280-10-50-42. The Company has added a statement confirming this in its segment and revenue disclosures in the notes to the consolidated financial statements.
Second, the Company has enhanced its risk factor disclosure under the heading "Risks Related to Our Business and Industry — Our top 10 customers collectively represent a significant portion of our revenue, and the loss or downsizing of one or more of these customers could adversely affect our business" to provide additional quantitative context. The revised risk factor discloses that the Company's top 10 customers collectively accounted for approximately 34% of ARR as of December 31, 2021 ($206.8 million ARR), and discusses the potential adverse impact on the Company's business, financial condition, and results of operations if one or more of these customers were to fail to renew their subscriptions, significantly reduce their usage, or terminate their agreements. The risk factor notes that the Company's subscription contracts generally have one-to-three-year terms and that the loss of a significant customer or a reduction in their contracted subscription level could result in a material decline in revenue that may not be immediately replaceable.
Third, the Company has enhanced the MD&A trend disclosure to note that customer concentration has declined from approximately 41% (top 10 customers as a percentage of ARR) in FY 2020 to approximately 34% in FY 2021, reflecting the Company's ongoing diversification of its customer base across approximately 340 enterprise customers globally. The Company believes this trend reflects the broadening adoption of its platform across a wider range of financial institutions and regulated enterprises.
These revisions appear on pages 22, 74, F-16, and F-34 of the marked version of the Amended DRS.
Comment 5: Concentration Risk Disclosure — Revenue by Geographic Region and Industry Vertical
Given that the Company primarily serves financial institutions, please revise your disclosure to provide additional information regarding revenue concentration by geographic region and by industry vertical. Please disclose whether any single geographic region or industry vertical represents a material portion of the Company's revenue and add corresponding risk factor disclosure addressing the potential impact of adverse developments in any concentrated region or vertical.
Company Response:
The Company acknowledges the Staff's comment and has added disclosure regarding the geographic and industry vertical composition of the Company's revenue in the MD&A section, the "Business" section, and in the notes to the consolidated financial statements in the Amended DRS.
With respect to geographic concentration, the Company has disclosed that approximately 78% of FY 2021 revenue was derived from customers located in the United States, with the remaining approximately 22% derived from international customers. The Company's international revenue is primarily generated from customers in the United Kingdom (approximately 9% of total revenue), Canada (approximately 6% of total revenue), and member states of the European Union (approximately 5% of total revenue), with the balance from other markets including Australia, Singapore, and Japan. The Company has added a revenue-by-geography table in both MD&A and the disaggregated revenue disclosures in the notes to the consolidated financial statements.
With respect to industry vertical concentration, the Company has disclosed that approximately 65% of FY 2021 revenue was derived from customers in the banking and financial services sector, approximately 20% from customers in the insurance sector, and approximately 15% from customers in other regulated industries, including payments, financial technology companies, and capital markets firms. A corresponding disaggregated revenue table by industry vertical has been added to the notes to the consolidated financial statements and referenced in MD&A.
The Company has added a new risk factor under the heading "Risks Related to Our Business and Industry — Our revenue is concentrated in the United States and in the banking and financial services sector, and adverse regulatory, economic, or competitive developments in these areas could disproportionately impact our business." This risk factor addresses the Company's geographic and industry vertical concentration and discusses the risks associated with potential adverse regulatory changes (such as changes in banking supervision requirements that could reduce demand for the Company's regulatory compliance products), macroeconomic downturns affecting the financial services industry, and competitive dynamics in the financial institution customer segment. The risk factor also notes that the Company's expansion into additional industry verticals and international markets may not occur at a rate sufficient to offset a decline in the Company's core U.S. banking and financial services customer base.
These revisions appear on pages 23, 75–76, 96–97, F-17, and F-35 of the marked version of the Amended DRS.
Non-GAAP Financial Measures
Comment 6: Non-GAAP Financial Measures — Adjusted EBITDA Reconciliation
We refer to our prior comment 7 regarding your presentation of non-GAAP financial measures. We note that your revised Adjusted EBITDA reconciliation begins from operating loss rather than from net loss, which is the most directly comparable GAAP measure. Please revise your Adjusted EBITDA reconciliation to start from net loss. In addition, please (a) clarify and separately quantify each adjustment included in the reconciliation and (b) confirm that no adjustment effectively substitutes an individually tailored revenue recognition or measurement method for a measure calculated in accordance with GAAP. Please refer to Item 10(e) of Regulation S-K, Regulation G, and the Commission's Compliance and Disclosure Interpretations on Non-GAAP Financial Measures, Questions 100.01 et seq.
Company Response:
The Company acknowledges the Staff's comment and has revised the Adjusted EBITDA reconciliation table in both the "Prospectus Summary — Summary Consolidated Financial and Operating Data" section and the MD&A section of the Amended DRS to begin the reconciliation from net loss, which is the most directly comparable GAAP measure.
The revised reconciliation for the fiscal years ended December 31, 2021 and December 31, 2020 is presented as follows (amounts in thousands):
The Company confirms that each adjustment included in the reconciliation is separately quantified and described in the notes accompanying the reconciliation table. The Company further confirms that no adjustment in the Adjusted EBITDA reconciliation substitutes an individually tailored revenue recognition or measurement method for a measure calculated in accordance with GAAP. All adjustments are of the types described in the Commission's Staff guidance on the use of non-GAAP financial measures, including Regulation G, Item 10(e) of Regulation S-K, and the Commission's Compliance and Disclosure Interpretations on Non-GAAP Financial Measures, Questions 100.01 through 100.04. Specifically, the adjustments consist of: (i) interest expense, net, and interest income, which are non-operating items; (ii) income tax provision, which reflects the Company's effective tax rate and does not relate to core operating performance; (iii) depreciation and amortization, which are non-cash charges; (iv) stock-based compensation expense, which is a non-cash charge and may vary based on factors unrelated to operating performance; and (v) one-time restructuring charges incurred in FY 2020 in connection with a workforce reduction that the Company does not expect to recur.
The Company notes that the Adjusted EBITDA figure for FY 2021 has been revised from $(18.7) million as previously presented (when reconciled from operating loss) to $(8.7) million when reconciled from net loss with all adjustments separately quantified. The difference reflects the reclassification of certain items that were previously netted within the operating loss line item and are now presented as separate adjustments.
These revisions appear on pages 15–16 and 72–73 of the marked version of the Amended DRS.
Stock-Based Compensation
Comment 7: Stock-Based Compensation — Fair Value of Common Stock
We note that the Company's most recent private financing round (Series D, August 2020) implied a price per share of $12.50 and that the preliminary IPO price range is $16.00 to $18.00 per share. Please provide enhanced disclosure of the methodology used to determine the fair value of the Company's common stock for purposes of stock-based compensation expense, including a retrospective of estimated fair values of common stock for each quarter in which equity awards were granted from the Series D closing through the filing date. For each period, please (a) disclose the estimated fair value per share, (b) explain the key factors contributing to any increase in fair value from the prior period, and (c) describe the valuation methodologies employed (e.g., independent third-party 409A valuations, option pricing model, probability-weighted expected return method, or hybrid method). In addition, please address the relationship between the most recent estimated fair value and the preliminary IPO price range.
Company Response:
The Company acknowledges the Staff's comment and has added enhanced disclosure in the "Critical Accounting Policies and Estimates — Stock-Based Compensation" section of MD&A and in the "Dilution" section of the Amended DRS.
The Company has provided a quarter-by-quarter retrospective of the estimated fair values of the Company's common stock for each quarter from the Series D closing in August 2020 through the first quarter of 2022, as follows:
The Company engaged Valiant Advisory Group, an independent third-party valuation firm, to prepare valuations of the Company's common stock under Section 409A of the Internal Revenue Code at each of the relevant dates identified above. Each valuation employed a combination of the probability-weighted expected return method ("PWERM") and the option pricing model ("OPM"), with the two approaches blended based on the probability of an IPO scenario versus a scenario in which the Company remained private. As the Company progressed toward the IPO, the probability weighting assigned to the IPO scenario increased from approximately 15% in Q3 2020 to approximately 75% in Q1 2022, which contributed to increases in the estimated fair value per share.
The key factors contributing to the increases in fair value over the periods presented include: (i) strong revenue growth, with total revenue increasing from $118.6 million in FY 2020 to $187.4 million in FY 2021, representing approximately 58% year-over-year growth; (ii) increasing ARR, which reached $206.8 million as of December 31, 2021; (iii) an expanding customer base, growing to approximately 340 enterprise customers as of December 31, 2021; (iv) progress toward IPO readiness, including the July 2021 Board resolution to explore an IPO, the engagement of Pinnacle Securities LLC as lead underwriter, and the confidential submission of the Registration Statement in January 2022; and (v) favorable movement in comparable publicly traded SaaS and fintech company valuation multiples during the relevant periods.
With respect to the relationship between the most recent estimated fair value and the preliminary IPO price range, the Company notes that the spread between the most recent Section 409A valuation ($16.25 per share as of Q1 2022) and the midpoint of the preliminary IPO price range ($17.00 per share) is approximately 4.6%. The Company believes this spread is primarily attributable to two factors: (i) an increased probability weighting of the IPO scenario in the context of the preliminary pricing analysis relative to the Section 409A valuation, and (ii) the removal of the discount for lack of marketability (the "illiquidity discount"), which was applied in the Section 409A valuations to reflect the fact that the Company's shares were not publicly traded at the valuation dates. The illiquidity discount applied in the most recent 409A valuation was approximately 10%. When this discount is removed in contemplation of the IPO (which will provide liquidity to public stockholders), the resulting implied fair value is consistent with the preliminary IPO price range.
These revisions appear on pages 54–57, 70–72, and F-24 through F-26 of the marked version of the Amended DRS.
Comment 8: Stock-Based Compensation — Cheap Stock Analysis
Please provide a detailed cheap stock analysis for all equity awards granted during the 12-month period preceding the initial filing of the Registration Statement (i.e., from January 2021 through January 2022). For each grant, please disclose: (a) the grant date, (b) the number of options granted, (c) the exercise price per share, (d) the estimated fair value of common stock on the grant date, (e) the intrinsic value per share (if any), and (f) the aggregate stock-based compensation expense recorded or to be recorded in connection with such grant.
Company Response:
The Company acknowledges the Staff's comment and has added a table in Note 10, "Stock-Based Compensation," to the consolidated financial statements, with a cross-reference in the "Critical Accounting Policies and Estimates — Stock-Based Compensation" section of MD&A, disclosing all equity grants made during the period from January 2021 through January 2022.
The following table summarizes each equity grant during this period:
The Company confirms that in each case, the exercise price per share of the stock option grant was set at or above the contemporaneous estimated fair value of the Company's common stock on the grant date, as determined pursuant to independent third-party Section 409A valuations prepared by Valiant Advisory Group. Because the exercise price was equal to or exceeded the estimated fair value per share on each respective grant date, there was no intrinsic value at the date of grant, and accordingly no "cheap stock" compensation charge was required for any of the grants listed above.
The aggregate stock-based compensation expense amounts shown in the table above represent the estimated grant-date fair value of each award (calculated using the Black-Drubeck option pricing model, as discussed in the Company's response to Comment 9 below), which is recognized on a straight-line basis over the four-year vesting period applicable to each grant. Total stock-based compensation expense recognized in the Company's consolidated statement of operations for FY 2021 was $22.8 million, which includes expense related to the grants listed above as well as amortization of previously granted equity awards.
The Company further discloses that as of December 31, 2021, the weighted-average exercise price of all outstanding stock options was $4.82 per share, reflecting options granted from the Company's inception, including early-stage grants made at significantly lower exercise prices during the Company's seed and Series A through Series C financing rounds. As of December 31, 2021, there were 11,300,000 stock options outstanding under the Company's 2017 Equity Incentive Plan (out of a total authorized option pool of 14,800,000 shares).
The Company acknowledges the significant difference between the weighted-average exercise price of all outstanding options ($4.82 per share) and the preliminary IPO price range of $16.00 to $18.00 per share. The Company has included disclosure in the "Dilution" section of the Amended DRS showing the immediate dilution to new public investors resulting from the exercise of outstanding options, including the potential dilutive impact of the in-the-money options on a fully diluted basis. The Company has also added a supplemental dilution table showing the pro forma effect of the exercise of all outstanding in-the-money options on net tangible book value per share.
These revisions appear on pages 54–57, 71–72, F-24 through F-27, and F-38 of the marked version of the Amended DRS.
Comment 9: Stock-Based Compensation — Black-Drubeck Assumptions
Please disclose the key assumptions used in the Black-Drubeck option pricing model for stock-based compensation expense calculations for each period presented, including expected volatility, expected term, risk-free interest rate, and expected dividend yield. Please also explain the basis for each assumption.
Company Response:
The Company acknowledges the Staff's comment and has added disclosure of the key assumptions used in the Black-Drubeck option pricing model in Note 10, "Stock-Based Compensation," to the consolidated financial statements and in the "Critical Accounting Policies and Estimates — Stock-Based Compensation" section of MD&A. The following assumptions were used in the Black-Drubeck model for stock option grants made during the fiscal years ended December 31, 2021 and December 31, 2020:
The Company notes that the range of assumptions for each period reflects the specific grant dates and market conditions prevailing at the time of each grant during the respective fiscal year. The peer group used to estimate expected volatility consisted of approximately 12 to 15 publicly traded companies in the SaaS, data analytics, and financial technology sectors that the Company considers comparable in terms of business model, growth stage, and market capitalization. The composition of the peer group was consistent across the periods presented, with minor adjustments for M&A activity and delistings within the peer group.
These revisions appear on pages 71–72 and F-25 through F-26 of the marked version of the Amended DRS.
Related-Party Transactions
Comment 10: Related-Party Transactions — Investor Rights Agreement and Registration Rights
We note the Company's response to our prior comment 11 regarding related-party transactions, which referenced an Investor Rights Agreement among the Company and its major stockholders, including Velthryn Venture Partners Fund IV, L.P., Arclight Equity Group Fund VII, L.P., and Ridgeline Capital Partners Fund II, L.P. Please revise your disclosure to provide enhanced description of the material terms of the Investor Rights Agreement, including (a) demand and piggyback registration rights, (b) information rights, (c) board designation rights (we note that Jonathan Tsai serves as the Velthryn designee and Rebecca Stahl serves as the Arclight designee), (d) preemptive rights, and (e) any provisions that survive the completion of the Company's initial public offering.
Company Response:
The Company acknowledges the Staff's comment and has revised the "Certain Relationships and Related Party Transactions" section of the Amended DRS to provide a comprehensive description of the material terms of the Investor Rights Agreement, dated as of August 14, 2020 (the "IRA"), by and among the Company, Velthryn Venture Partners Fund IV, L.P. ("Velthryn"), Arclight Equity Group Fund VII, L.P. ("Arclight"), and Ridgeline Capital Partners Fund II, L.P. ("Ridgeline"), each of which is a holder of the Company's preferred stock. The enhanced disclosure addresses each of the categories identified in the Staff's comment, as described below.
Demand Registration Rights. Under the IRA, each of Velthryn (holding approximately 21.0% of the Company's fully diluted pre-IPO shares outstanding, representing 24,800,000 shares) and Arclight (holding approximately 15.7% of the Company's fully diluted pre-IPO shares outstanding, representing 18,600,000 shares) has the right to demand up to two long-form registrations of their respective shares of common stock (including shares issuable upon conversion of preferred stock) at any time following the expiration of the 180-day lock-up period described below. Demand registrations are subject to customary limitations, including minimum offering size requirements of $30 million in aggregate offering price, limitations on the frequency of demand requests (no more than one demand per holder in any twelve-month period), and the Company's right to delay a demand registration for a period not to exceed 90 days if the Board of Directors determines in good faith that such registration would be materially detrimental to the Company. The demand registration rights survive the IPO.
Piggyback Registration Rights. Under the IRA, all parties to the agreement, including Velthryn, Arclight, and Ridgeline (holding approximately 7.8% of the Company's fully diluted pre-IPO shares outstanding, representing 9,200,000 shares), have piggyback registration rights entitling them to include their registrable shares in any registration statement filed by the Company for its own account or for the account of any other stockholder exercising demand registration rights, subject to customary underwriter cutback provisions and priority allocation rules. In the event of an underwriter cutback, shares requested to be included by piggyback holders will be reduced pro rata based on the number of registrable shares requested to be included by each such holder. The piggyback registration rights survive the IPO.
Board Designation Rights. The IRA provides that Velthryn has the right to designate one member of the Company's Board of Directors for so long as Velthryn holds at least 10% of the outstanding shares of common stock of the Company (on a fully diluted, as-converted basis). Velthryn's current designee is Jonathan Tsai, who has served on the Board since September 2020. The IRA further provides that Arclight has the right to designate one member of the Board of Directors for so long as Arclight holds at least 7.5% of the outstanding shares of common stock of the Company (on a fully diluted, as-converted basis). Arclight's current designee is Rebecca Stahl, who has served on the Board since October 2020. These board designation rights survive the IPO and will remain in effect for so long as the applicable ownership thresholds are met.
Information Rights. Under the IRA, the Company is obligated to deliver to each Major Holder (as defined in the IRA, which includes Velthryn, Arclight, and Ridgeline) quarterly unaudited financial statements within 45 days of the end of each fiscal quarter and annual audited financial statements within 120 days of the end of each fiscal year. The IRA provides that these information rights terminate automatically upon the completion of the Company's initial public offering, at which point the Company will be subject to the periodic reporting obligations of the Securities Exchange Act of 1934, as amended, including the filing of annual reports on Form 10-K and quarterly reports on Form 10-Q.
Preemptive Rights. Under the IRA, each Major Holder has the right to purchase its pro rata share of any new securities issued by the Company (subject to customary exclusions for issuances in connection with employee equity incentive plans, strategic acquisitions, and debt financing transactions) in order to maintain its percentage ownership of the Company. The preemptive rights terminate automatically upon the completion of the Company's initial public offering.
Lock-Up. All parties to the IRA have agreed to a 180-day lock-up period following the date of the final prospectus, during which they will not sell, transfer, or otherwise dispose of any shares of the Company's common stock, subject to early release at the sole discretion of Pinnacle Securities LLC, the lead underwriter of the offering. The lock-up provisions contain customary carve-outs for transfers for estate planning purposes (including transfers to family members and trusts for the benefit of the holder or the holder's family members) and charitable gifts, provided that the transferee agrees in writing to be bound by the lock-up restrictions.
The Company notes that the selling stockholder registrations contemplated by the Registration Statement — specifically, Velthryn's registration of up to 2,000,000 shares and Arclight's registration of up to 1,500,000 shares — are being made pursuant to the registration rights granted under the IRA.
These revisions appear on pages 108–112 of the marked version of the Amended DRS.
Dilution
Comment 11: Dilution Table — Presentation and Calculation
Please revise the Dilution section to (a) present net tangible book value per share before and after the offering at each of the low end ($16.00), midpoint ($17.00), and high end ($18.00) of the preliminary price range, rather than only at the midpoint, and (b) confirm the accuracy of the calculation of immediate dilution to new public investors. In addition, please provide a sensitivity analysis reflecting the full exercise of the underwriters' overallotment option (up to 2,466,176 additional shares).
Company Response:
The Company acknowledges the Staff's comment and has revised the "Dilution" section of the Amended DRS to present net tangible book value calculations at each of the low end ($16.00), midpoint ($17.00), and high end ($18.00) of the preliminary IPO price range, and to include a sensitivity analysis reflecting the full exercise of the underwriters' overallotment option.
At the midpoint of the preliminary IPO price range ($17.00 per share), the Company expects to issue 12,941,176 primary shares and to receive net proceeds of approximately $200.9 million after deducting the underwriting discount of 6.5% (approximately $14.3 million) and estimated offering expenses of approximately $4.8 million.
The revised dilution analysis is summarized as follows:
The Company has confirmed the accuracy of each calculation presented above. The net tangible book value per share before the offering is calculated by dividing the Company's total tangible assets less total liabilities as of December 31, 2021 by the total number of shares of common stock outstanding on a fully diluted, as-converted basis immediately prior to the offering. The net tangible book value per share after the offering is calculated by adding the net proceeds from the offering to the Company's pre-offering net tangible book value and dividing the result by the total number of shares outstanding after giving effect to the issuance of the primary shares in the offering. Immediate dilution per share to new public investors is calculated as the difference between the assumed initial public offering price per share and the net tangible book value per share after the offering.
The Company has also added a sensitivity analysis reflecting the full exercise of the overallotment option, which would result in the issuance of up to 2,466,176 additional shares at the initial public offering price. At the midpoint ($17.00 per share), the full exercise of the overallotment option would generate additional gross proceeds of approximately $41.9 million (2,466,176 shares multiplied by $17.00 per share), resulting in total gross proceeds of approximately $261.9 million. The impact of the full exercise of the overallotment option on net tangible book value per share after the offering and on immediate dilution per share to new public investors is presented in a supplemental table in the Dilution section.
For reference, the fully diluted pre-IPO shares outstanding is approximately 118,200,000 shares, consisting of: (i) shares of Class A common stock on an as-converted basis (including shares issuable upon conversion of all outstanding shares of preferred stock); (ii) 28,500,000 shares of Class B common stock held by the Company's co-founders, Priya Subramanian (16,500,000 shares) and Marcus Henley (12,000,000 shares); and (iii) 11,300,000 shares issuable upon exercise of outstanding stock options at a weighted-average exercise price of $4.82 per share (out of a total authorized option pool of 14,800,000 shares). The dilution analysis presents the impact on new public investors of the significant difference between the net tangible book value per share attributable to existing stockholders and the price paid by new public investors in the offering.
These revisions appear on pages 54–58 of the marked version of the Amended DRS.
Description of Capital Stock
Comment 12: Description of Capital Stock — Dual-Class Structure and Voting Power Disclosure
Please revise the "Description of Capital Stock" section to (a) present a clear table showing the post-IPO voting power allocation between holders of Class A common stock (1 vote per share) and holders of Class B common stock (10 votes per share), (b) identify the founders' post-IPO aggregate voting control percentage and confirm that it is prominently disclosed on the prospectus cover page and in the risk factors, and (c) clarify the triggers for the sunset provisions applicable to the Class B common stock and discuss the practical implications of such provisions.
Company Response:
The Company acknowledges the Staff's comment and has revised the "Description of Capital Stock" section of the Amended DRS to provide a clear tabular presentation of the post-IPO voting power allocation, has revised the prospectus cover page and risk factors to prominently disclose the founders' aggregate voting control, and has added enhanced disclosure regarding the sunset provision triggers and their practical implications.
Voting Power Table. The Company has added the following table to the "Description of Capital Stock" section:
The Class A common stock outstanding after the offering consists of approximately 89,700,000 shares held by existing stockholders (including shares issuable upon conversion of all outstanding shares of preferred stock, held by investors including Velthryn, Arclight, Ridgeline, and other holders, as well as shares held by employees and other common stockholders other than the co-founders) plus 12,941,176 new primary shares issued in the offering.
Prospectus Cover Page Disclosure. The Company has revised the prospectus cover page to include the following prominent statement:
"Following the completion of this offering, our co-founders, Priya Subramanian and Marcus Henley, will control approximately 73.5% of the combined voting power of our outstanding common stock through their ownership of all outstanding shares of Class B common stock. As a result, we will be a 'controlled company' within the meaning of the corporate governance rules of the Nasdaq Stock Market."
This statement is set in bold type on the cover page and is cross-referenced in the "Prospectus Summary" section.
Risk Factor Disclosure. The Company has revised its risk factor under the heading "Risks Related to Our Dual-Class Capital Structure — Our co-founders control approximately 73.5% of the combined voting power of our outstanding common stock following this offering, which will limit your ability to influence matters requiring stockholder approval" to prominently state the founders' aggregate voting control percentage and to describe the consequences of such concentration of voting power.
Sunset Provision Triggers. The Company has added enhanced disclosure of the sunset provisions applicable to the Class B common stock in the "Description of Capital Stock" section. The Class B common stock will automatically convert into Class A common stock on a one-for-one basis upon the occurrence of any of the following triggering events:
(i) The seventh (7th) anniversary of the closing date of the Company's initial public offering (the "Time-Based Sunset");
(ii) The transfer of any shares of Class B common stock by a holder thereof to any person or entity that is not a "Permitted Transferee" (as defined in the Company's Amended and Restated Certificate of Incorporation, which includes (A) members of the holder's immediate family, (B) trusts established for the benefit of the holder or the holder's immediate family members, and (C) entities wholly owned and controlled by the holder) (the "Transfer-Based Sunset"); and
(iii) The date on which the holders of Class B common stock collectively cease to hold at least 10% of the total outstanding shares of common stock of the Company (Class A and Class B combined) (the "Ownership-Based Sunset").
The Company has added the following practical discussion of the sunset provisions:
The Time-Based Sunset ensures that the dual-class structure will expire no later than the seventh anniversary of the IPO closing, regardless of the founders' continued ownership or involvement with the Company. Until the occurrence of a sunset trigger, the founders will have the ability to control the outcome of substantially all matters submitted to a vote of stockholders, including the election and removal of directors, amendments to the Company's Amended and Restated Certificate of Incorporation and Amended and Restated Bylaws, and the approval of mergers, consolidations, sales of all or substantially all of the Company's assets, and other significant corporate transactions. This concentration of voting control could prevent or discourage unsolicited acquisition proposals or offers for the Company's common stock that stockholders may consider favorable, and could deprive stockholders of an opportunity to receive a premium for their shares in connection with a change of control transaction.
The Company further notes that the Transfer-Based Sunset is designed to ensure that the enhanced voting rights of the Class B common stock are personal to the founders and cannot be transferred to third parties (other than permitted family and estate planning transferees). This provision is intended to align the founders' voting control with their continued personal involvement with the Company.
The Company has confirmed that its dual-class capital structure qualifies for listing on the Nasdaq Global Select Market under the applicable listing rules of the Nasdaq Stock Market, including Nasdaq Listing Rule 5640.
These revisions appear on pages 1–2 (prospectus cover page), 24–25 (risk factors), 113–118 (Description of Capital Stock), and A-1 through A-5 (Amended and Restated Certificate of Incorporation) of the marked version of the Amended DRS.
Closing
The Company believes that the Amended DRS, as revised in response to the Staff's comments as described herein, complies in all material respects with the applicable requirements of the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder. The Company is concurrently filing the second amended Draft Registration Statement on Form S-1 via EDGAR (CIK No. 0001923847, File Number 333-264518).
We respectfully request that the Staff advise us at its earliest convenience if it has any further comments or questions with respect to the foregoing responses or the Amended DRS. We would welcome the opportunity to discuss any of the foregoing responses with the Staff at its convenience.
Please do not hesitate to contact the undersigned, Robert Adeyemi, at (415) 772-4100, or Audrey Zhou, at (415) 772-4215, each at Calderwood & Harkness LLP, 1 Market Street, Spear Tower, Suite 3600, San Francisco, California 94105. Mr. Adeyemi and Ms. Zhou may also be reached at Calderwood & Harkness LLP, 425 Lexington Avenue, 42nd Floor, New York, New York 10017, at (212) 558-4000.
Representatives of the Company who are available to discuss any matters relating to this response include Naomi Feinberg, General Counsel and Corporate Secretary, and David Lau, Chief Financial Officer, each of Lumos Analytics Inc., 450 Folsom Street, Suite 1200, San Francisco, California 94105 (telephone: (415) 555-8200).
Very truly yours,
CALDERWOOD & HARKNESS LLP
By: ________
Robert Adeyemi Partner, Capital Markets Group
cc:
Priya Subramanian, Chief Executive Officer, Lumos Analytics Inc. David Lau, Chief Financial Officer, Lumos Analytics Inc. Naomi Feinberg, General Counsel & Corporate Secretary, Lumos Analytics Inc. Jennifer Kwon, Calderwood & Harkness LLP Audrey Zhou, Calderwood & Harkness LLP Andrew Castellano, Pinnacle Securities LLC Lisa Drummond, Pinnacle Securities LLC Michael Sorrentino, Hargrove & Liddell LLP Gregory Simmons, Meridian & Howe LLP
FY 2021 | FY 2020
Net loss (GAAP) | $(41,200) | $(33,800)
Add: Interest expense, net | $3,600 | $2,900
Add: Income tax provision (benefit) | $1,200 | $800
Add: Depreciation and amortization | $6,500 | $4,700
Add: Stock-based compensation expense | $22,800 | $14,200
Add: One-time restructuring charges | — | $2,100
Less: Interest income | $(1,100) | $(600)
Less: Other income, net | $(500) | $(300)
Adjusted EBITDA (Non-GAAP) | $(8,700) | $(9,800)
Quarter | Estimated Fair Value Per Share | Key Events / Factors
Q3 2020 (August 2020, post-Series D close) | $12.50 | Series D preferred stock financing at $12.50 per share; fair value anchored to most recent arm's-length transaction
Q4 2020 | $12.50 | No material change in Company fundamentals; continued post-Series D integration and growth
Q1 2021 | $13.25 | Strong Q4 2020 revenue performance; continued ARR growth; improved net dollar retention rate
Q2 2021 | $14.00 | Continued revenue acceleration; expansion of enterprise customer base; increase in ARR
Q3 2021 | $14.75 | Board resolution to explore IPO (July 15, 2021); selection of underwriters; increasing probability weighting of IPO scenario
Q4 2021 | $15.50 | Continued strong financial performance; advancement of IPO preparation; comparable public company valuation multiples increase
Q1 2022 | $16.25 | Confidential submission of Registration Statement on Form S-1 (January 10, 2022); further advancement of IPO timeline
Grant Date | Number of Options Granted | Exercise Price Per Share | Estimated Fair Value Per Share on Grant Date | Intrinsic Value Per Share | Aggregate SBC Expense (to be recorded over vesting period)
April 15, 2021 | 1,200,000 | $13.25 | $13.25 | $0.00 | $8,760,000
July 20, 2021 | 850,000 | $14.00 | $14.00 | $0.00 | $6,545,000
October 12, 2021 | 1,500,000 | $14.75 | $14.75 | $0.00 | $12,150,000
January 18, 2022 | 600,000 | $15.50 | $15.50 | $0.00 | $5,130,000
Assumption | FY 2021 | FY 2020 | Basis
Expected volatility | 45%–55% | 48%–58% | Based on the historical volatility of a peer group of comparable publicly traded SaaS and fintech companies over a period commensurate with the expected term of the options, as the Company does not have a sufficient public trading history of its own common stock
Expected term | 5.5–6.5 years | 5.5–6.5 years | Based on the simplified method, as permitted under SEC Staff Accounting Bulletin ("SAB") No. 107 and SAB No. 110, calculated as the midpoint between the vesting date and the contractual expiration date, as the Company has limited historical exercise data for its stock options
Risk-free interest rate | 1.2%–1.8% | 0.4%–0.8% | Based on the U.S. Treasury yield curve in effect at the date of grant for the period commensurate with the expected term of the stock options
Expected dividend yield | 0% | 0% | The Company has never declared or paid cash dividends on its common stock and does not anticipate paying cash dividends in the foreseeable future
$16.00 Per Share | $17.00 Per Share | $18.00 Per Share
Assumed initial public offering price per share | $16.00 | $17.00 | $18.00
Net tangible book value per share before the offering | $0.62 | $0.62 | $0.62
Increase in net tangible book value per share attributable to new investors | $1.41 | $1.52 | $1.63
Net tangible book value per share after the offering | $2.03 | $2.14 | $2.25
Immediate dilution per share to new public investors | $13.97 | $14.86 | $15.75
Gross proceeds to the Company | $207,058,816 | $220,000,000 | $232,941,184
Net proceeds to the Company (after underwriting discount and estimated offering expenses) | $188,800,000 | $200,900,000 | $213,000,000
Class of Stock | Shares Outstanding Post-IPO | Votes Per Share | Total Votes | % of Total Voting Power
Class B common stock (co-founders) | 28,500,000 | 10 | 285,000,000 | 73.5%
— Priya Subramanian | 16,500,000 | 10 | 165,000,000 | 42.6%
— Marcus Henley | 12,000,000 | 10 | 120,000,000 | 30.9%
Class A common stock | 102,641,176 | 1 | 102,641,176 | 26.5%
Total | 131,141,176 | 387,641,176 | 100.0%

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