As filed with the Securities and Exchange Commission on [●], 2022
Registration No. 333-[●]
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
LUMOS ANALYTICS INC.
(Exact name of registrant as specified in its charter)
450 Folsom Street, Suite 1200 San Francisco, California 94105 (415) [●]
(Address, including zip code, and telephone number, including area code, of registrant's principal executive offices)
Naomi Feinberg General Counsel & Corporate Secretary Lumos Analytics Inc. 450 Folsom Street, Suite 1200 San Francisco, California 94105 (415) [●]
(Name, address, including zip code, and telephone number, including area code, of agent for service of process)
Copies to:
Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box:
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering:
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering:
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering:
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act.
CALCULATION OF REGISTRATION FEE
(1) Includes (i) 12,941,176 shares of Class A Common Stock to be offered by the registrant, (ii) 3,500,000 shares of Class A Common Stock to be offered by the selling stockholders, and (iii) 2,466,176 shares of Class A Common Stock that may be purchased by the underwriters pursuant to the option to purchase additional shares. See "Underwriting."
(2) Estimated solely for the purpose of computing the amount of the registration fee pursuant to Rule 457(a) under the Securities Act of 1933, as amended. The proposed maximum offering price per share represents the high end of the estimated price range set forth on the cover page of the preliminary prospectus contained herein.
(3) Calculated in accordance with Rule 457(a) at a rate of $92.70 per $1,000,000 of the proposed maximum aggregate offering price.
The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.
The registrant is an "emerging growth company" as defined in Section 2(a) of the Securities Act of 1933, as amended.
EXPLANATORY NOTE
This initial draft of the Registration Statement on Form S-1 of Lumos Analytics Inc. (the "Company") was circulated on December 6, 2021 for internal review among the working group prior to confidential submission to the Securities and Exchange Commission (the "SEC"). This draft is being distributed solely among the Company's officers, directors, legal counsel, and financial advisors for the purpose of facilitating discussion and comment. This draft is not intended for distribution to any other person and does not constitute an offer to sell or a solicitation of an offer to buy any securities.
Bracketed items (denoted by "[●]") and placeholder language throughout this document remain to be completed prior to confidential submission to the SEC. The working group is requested to review and provide comments on all substantive sections at the earliest practicable date. Where financial data has been presented, it reflects the Company's audited consolidated financial statements for the fiscal years ended December 31, 2019, December 31, 2020, and December 31, 2021, which have been audited by Meridian & Howe LLP, an independent registered public accounting firm. Unaudited quarterly data for the three months ended March 31, 2022 has been included for illustrative purposes where indicated and will be updated as appropriate prior to submission. The Company's consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP").
All members of the working group are reminded that the information contained in this draft is confidential and is subject to the confidentiality and non-disclosure obligations previously acknowledged.
The information in this preliminary prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.
SUBJECT TO COMPLETION, DATED [●], 2022
PRELIMINARY PROSPECTUS
LUMOS ANALYTICS INC.
[●] Shares of Class A Common Stock
This is the initial public offering of shares of Class A Common Stock of Lumos Analytics Inc. We are offering 12,941,176 shares of our Class A Common Stock. The selling stockholders identified in this prospectus are offering an additional 3,500,000 shares of our Class A Common Stock. The selling stockholders consist of Velthryn Venture Partners Fund IV, L.P., which is offering 2,000,000 shares, and Arclight Equity Group Fund VII, L.P., which is offering 1,500,000 shares. We will not receive any proceeds from the sale of shares by the selling stockholders.
Prior to this offering, there has been no public market for our Class A Common Stock. We currently estimate that the initial public offering price will be between $16.00 and $18.00 per share.
We have applied to list our Class A Common Stock on the Nasdaq Global Select Market under the ticker symbol "LMSA."
Following this offering, we will have two classes of common stock outstanding: Class A Common Stock and Class B Common Stock. Holders of our Class A Common Stock are entitled to one vote per share. Holders of our Class B Common Stock are entitled to ten votes per share. Following this offering, the co-founders of the Company, Priya Subramanian and Marcus Henley, will hold all outstanding shares of Class B Common Stock, representing approximately 73.5% of the total voting power of all outstanding shares of our common stock. As a result, we will be a "controlled company" within the meaning of the Nasdaq Listing Rules. See "Description of Capital Stock."
We are an "emerging growth company" as defined in Section 2(a) of the Securities Act of 1933, as amended, and are eligible for reduced public company reporting requirements.
The underwriters have been granted a 30-day option to purchase up to 2,466,176 additional shares of our Class A Common Stock at the initial public offering price, less the underwriting discount, solely to cover over-allotments, if any.
Investing in our Class A Common Stock involves a high degree of risk. See "Risk Factors" beginning on page [●].
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
(1) See "Underwriting" for additional information regarding the compensation payable to the underwriters.
Lead Book-Running Manager Pinnacle Securities LLC
Joint Book-Running Manager Whitfield & Company LLC
Co-Manager Graystone Capital Markets Inc.
The date of this prospectus is [●], 2022.
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PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus. This summary may not contain all the information that is important to you. You should read this entire prospectus carefully, including the sections entitled "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financial statements and the related notes thereto included elsewhere in this prospectus, before making an investment decision. Unless the context otherwise requires, references in this prospectus to "Lumos," "Lumos AI," the "Company," "we," "us," and "our" refer to Lumos Analytics Inc. and its consolidated subsidiaries.
Overview
Lumos Analytics Inc. is a leading cloud-based, artificial intelligence-driven analytics platform purpose-built to serve financial institutions. Our platform enables real-time transaction monitoring, fraud detection, regulatory reporting, and predictive risk modeling for some of the world's most sophisticated financial enterprises, empowering them to make faster, more informed decisions while managing risk and complying with an increasingly complex regulatory landscape.
Our platform processes over 2 billion transactions per month across our global customer base of approximately 340 enterprise clients. Our products are sold on a subscription software-as-a-service ("SaaS") basis, providing us with a predictable, recurring revenue stream. We serve a diverse set of financial institutions, including global banks, insurance companies, asset managers, payment processors, and emerging fintech companies.
We were incorporated in the State of Delaware on March 14, 2016 and began commercial operations on April 1, 2016. Our headquarters are located at 450 Folsom Street, Suite 1200, San Francisco, California 94105.
Our key products include:
• LumosIQ Platform. Our core analytics platform ingests, processes, and analyzes vast quantities of transactional and behavioral data in real-time. LumosIQ serves as the foundation upon which our modular product suite is built, providing our customers with a unified view of their transaction activity and risk posture. The platform's proprietary machine learning models continuously improve through exposure to our growing data network.
• FraudLens. Our advanced machine learning-based fraud detection module identifies and prevents fraudulent transactions in real-time, utilizing patented algorithms that are among the 14 issued U.S. utility patents we hold. FraudLens analyzes hundreds of transaction attributes simultaneously, enabling our customers to detect anomalous patterns with significantly higher accuracy and lower false positive rates than traditional rules-based approaches.
• RegConnect. Our regulatory reporting module automates compliance reporting for major regulatory frameworks applicable to financial institutions. RegConnect enables our customers to generate, validate, and submit regulatory reports with greater speed and accuracy, reducing the manual effort and operational risk associated with compliance.
• DataBridge API Suite. Our open application programming interface ("API") suite enables seamless integration between our platform and our customers' internal systems and third-party applications, facilitating the flow of data across enterprise technology ecosystems.
We have established significant intellectual property protections for our technology. We hold 14 issued U.S. utility patents and have 7 additional patent applications pending with the United States Patent and Trademark Office ("USPTO") in areas related to machine learning-based fraud detection and real-time transaction scoring. Our trademarks, including "Lumos," "Lumos AI," "LumosIQ," and "FraudLens," are registered with the USPTO.
Our Growth
We have experienced rapid growth since our founding. For the fiscal year ended December 31, 2021, we generated total revenue of $187.4 million, representing a 58% increase from $118.6 million for the fiscal year ended December 31, 2020. As of December 31, 2021, our annual recurring revenue ("ARR") was $206.8 million, reflecting the strong momentum in our subscription business.
For the three months ended March 31, 2022 (unaudited), we generated revenue of $54.9 million, compared to $39.2 million for the three months ended March 31, 2021, representing approximately 40% year-over-year growth. As of March 31, 2022, our ARR was $219.5 million. Our gross margin for the fiscal year ended December 31, 2021 was 72.3%, reflecting the scalability of our platform and the efficiency of our cloud-native architecture.
As of December 31, 2021, we employed approximately 1,120 people across our offices in San Francisco, New York, and other locations. Our engineering and product development teams represent the majority of our workforce, reflecting our commitment to continued innovation and platform expansion.
Risk Factors Summary
Investing in our Class A Common Stock involves substantial risks. You should carefully consider all of the information in this prospectus prior to investing in our Class A Common Stock. Some of the more significant risks include the following:
• We have a history of net losses and may not achieve profitability in the future.
• Our top 10 customers represent approximately 34% of our ARR, and the loss of one or more major customers could materially and adversely affect our revenue.
• We face significant competition from larger, well-established enterprise software providers with greater resources, broader brand recognition, and more extensive customer relationships.
• Our dual-class stock structure concentrates voting control with our co-founders, who will control approximately 73.5% of the total voting power of our outstanding common stock following this offering.
• Our business is subject to complex and evolving regulatory requirements applicable to financial services and data privacy.
• We operate in rapidly evolving technology markets, and our failure to innovate could render our products less competitive.
• Macroeconomic uncertainty could adversely affect our business and the trading price of our Class A Common Stock.
For a more complete discussion of the risks and uncertainties associated with our business and this offering, see "Risk Factors" beginning on page [●] of this prospectus.
Corporate Information
Lumos Analytics Inc. is a Delaware C-corporation, incorporated on March 14, 2016 under the laws of the State of Delaware. We are qualified to do business in the states of California, New York, Texas, and Illinois. Our registered agent in Delaware is Capitol Registered Agents LLC, 850 New Burton Road, Suite 201, Dover, Delaware 19904.
Our principal executive offices are located at 450 Folsom Street, Suite 1200, San Francisco, California 94105, and our telephone number is (415) [●]. Our website address is www.[lumos].ai. Information contained on, or that can be accessed through, our website is not incorporated by reference into this prospectus, and you should not consider information on our website to be part of this prospectus. We have included our website address in this prospectus solely as an inactive textual reference.
Our IRS Employer Identification Number is 82-3194567.
The Offering
Unless otherwise indicated, the share numbers and other information in this prospectus assume no exercise by the underwriters of their option to purchase additional shares and are based upon the conversion of all outstanding shares of preferred stock into shares of Class A Common Stock upon the closing of this offering and do not include 11,300,000 shares of Class A Common Stock issuable upon the exercise of outstanding stock options at a weighted-average exercise price of $4.82 per share or 3,500,000 shares of Class A Common Stock remaining available for future issuance under our equity incentive plans.
Summary Consolidated Financial Data
The following tables set forth our summary consolidated financial data for the periods and as of the dates indicated. The summary consolidated statements of operations data for each of the fiscal years ended December 31, 2021, 2020, and 2019 have been derived from our audited consolidated financial statements, which have been audited by Meridian & Howe LLP, an independent registered public accounting firm, and are included elsewhere in this prospectus. You should read the following summary consolidated financial data in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financial statements and the related notes thereto included elsewhere in this prospectus.
Consolidated Statements of Operations Data:
Consolidated Balance Sheet Data:
(1) The pro forma column gives effect to the automatic conversion of all outstanding shares of Series A, Series B, Series C, and Series D redeemable convertible preferred stock (62,400,000 shares in the aggregate) into an equivalent number of shares of Class A Common Stock upon the closing of this offering and the adoption of our Amended and Restated Certificate of Incorporation.
(2) The pro forma as adjusted column gives further effect to the issuance and sale by us of 12,941,176 shares of Class A Common Stock in this offering at an assumed initial public offering price of $17.00 per share, the midpoint of the estimated price range set forth on the cover of this prospectus, after deducting the underwriting discount and estimated offering expenses payable by us.
Other Financial Data:
(1) Adjusted EBITDA is a non-GAAP financial measure. See "Management's Discussion and Analysis of Financial Condition and Results of Operations—Non-GAAP Financial Measures" for a reconciliation of Adjusted EBITDA to net loss, the most directly comparable GAAP measure, and a discussion of the limitations of non-GAAP financial measures.
RISK FACTORS
Investing in our Class A Common Stock involves a high degree of risk. You should carefully consider the risks and uncertainties described below, together with all of the other information in this prospectus, including our consolidated financial statements and the related notes thereto, before deciding whether to purchase shares of our Class A Common Stock. If any of the following risks actually occur, our business, financial condition, results of operations, and prospects could be materially and adversely affected. In that event, the trading price of our Class A Common Stock could decline, and you could lose part or all of your investment. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties that we are unaware of, or that we currently believe are not material, may also become important factors that adversely affect our business, financial condition, and results of operations.
Risks Related to Our Business and Industry
We have a history of net losses, and we may not achieve or sustain profitability in the future.
We have incurred net losses in each year since our inception. We incurred net losses of $41.2 million for the fiscal year ended December 31, 2021 and $13.8 million for the three months ended March 31, 2022 (unaudited). As of December 31, 2021, we had an accumulated deficit of $[●]. We expect to continue to incur net losses for the foreseeable future as we continue to invest heavily in research and development, sales and marketing, and general and administrative infrastructure to support our growth and prepare for operations as a public company. These investments may not result in increased revenue or improved operating results in the near term, or at all. We cannot assure you that we will achieve profitability in the future, or that if we do achieve profitability, we will be able to sustain it. If we fail to achieve or sustain profitability, it could have a material adverse effect on our business, financial condition, and the trading price of our Class A Common Stock.
Our business depends on our ability to attract and retain customers, and our top 10 customers represent approximately 34% of our ARR.
As of December 31, 2021, our top 10 customers represented approximately 34% of our ARR. The loss of, or a significant reduction in spending by, one or more of our major customers could materially and adversely affect our revenue and results of operations. Our customers are large financial institutions that are subject to their own business pressures, including budgetary constraints, strategic realignments, mergers and acquisitions, and changes in regulatory requirements. Any of these factors could cause existing customers to reduce their usage of our platform, delay contract renewals, or decline to renew their subscriptions altogether. Furthermore, if any of our major customers experience financial distress or become the subject of bankruptcy or insolvency proceedings, our ability to collect accounts receivable from such customers could be adversely affected. We may not be able to replace the revenue we would lose from the departure of any significant customer, and we may not be able to diversify our customer base quickly enough to mitigate this concentration risk.
We face significant competition from larger, well-established enterprise software providers and specialized analytics companies.
The market for AI-driven analytics solutions for financial institutions is competitive and rapidly evolving. We compete with a wide range of companies, including large, diversified enterprise software companies, established financial technology providers, and smaller specialized analytics firms. Many of our current and potential competitors have longer operating histories, significantly greater financial, technical, marketing, and other resources, broader and deeper customer relationships, and greater brand recognition than we do. These competitors may be able to respond more quickly to new or emerging technologies and changes in customer requirements, or may be able to devote greater resources to the development, promotion, and sale of their products. They may also be able to offer their products at lower prices or with more favorable terms, potentially making it more difficult for us to attract and retain customers. If we are unable to compete effectively, our market share, revenue, and growth prospects could be materially and adversely affected.
The markets in which we operate are characterized by rapid technological change, and our failure to innovate could render our products less competitive.
The artificial intelligence and machine learning fields are evolving at an extraordinary pace. New technologies, techniques, and methodologies are being developed continuously, and the introduction of products and services embodying new technologies, as well as the emergence of new industry standards, could render our existing products obsolete or less competitive. Our future success depends on our ability to continue to enhance our existing products and to develop new products and features that address the evolving needs of our customers. If we are unable to develop, license, or acquire new technologies, enhance our existing products in a timely manner, or effectively adapt to technological change, our competitive position could be materially harmed. Additionally, the development of new products and enhancements to existing products is complex and uncertain, and we cannot assure you that our research and development efforts will result in commercially successful products or features.
We are dependent on the services of our co-founders, Priya Subramanian and Marcus Henley, and other key personnel.
Our success depends substantially upon the continued services and performance of our co-founders, Priya Subramanian, our Chief Executive Officer and Chair of the Board of Directors, and Marcus Henley, our Chief Technology Officer. Ms. Subramanian and Mr. Henley have been instrumental in developing our business strategy, building our technology, and establishing our customer relationships. The loss of either Ms. Subramanian or Mr. Henley could significantly disrupt our operations and adversely affect our business. We also depend on the continued service of our other senior management team members and key technical personnel. Competition for qualified employees in our industry is intense, particularly for individuals with expertise in artificial intelligence, machine learning, and financial technology. We may not be able to retain our current key employees or attract new key employees, and the loss of key personnel could adversely affect our ability to execute our business strategy and maintain our competitive advantage.
Our platform processes sensitive financial data, and any security breach, data loss, or other compromise of such data could cause reputational and financial harm.
Our platform processes and stores large volumes of sensitive financial data on behalf of our customers, including transaction data, personally identifiable information, and other confidential information. The integrity and security of this data is critical to our business and reputation. We face a constant and evolving threat of cyberattacks, including denial-of-service attacks, ransomware, phishing, social engineering, computer viruses, unauthorized access attempts, and other malicious activities. Although we have implemented security measures and protocols designed to protect our systems and data, these measures may not be sufficient to prevent all security breaches or unauthorized access. Any actual or perceived security breach, unauthorized access to or loss of data, or other data security incident could result in significant legal and financial exposure, regulatory investigations and penalties, loss of customer confidence, and damage to our reputation and brand. We could also be subject to litigation, indemnification obligations to our customers, and other liabilities. The costs of investigating and remediating any security incident, and the potential loss of customers and revenue as a result, could be material.
We depend on Brindoval Data Centers LLC for cloud infrastructure services, and any disruption in such services could adversely affect our platform availability and business.
We rely on Brindoval Data Centers LLC ("Brindoval") for hosting and cloud infrastructure services pursuant to a Master Cloud Services Agreement dated January 15, 2021, with a five-year term and an annual minimum commitment of $8.2 million. Our platform's availability, performance, and reliability depend on the continued availability of Brindoval's infrastructure. Any significant disruption or degradation in Brindoval's services, whether due to hardware or software failure, natural disaster, cyberattack, power outage, or other events, could cause our platform to become unavailable or perform below expected levels, which could adversely affect our customer relationships, reputation, and results of operations. Although our agreement with Brindoval includes certain service level commitments, the remedies available to us may be insufficient to compensate us for any losses we incur in the event of a service disruption. If we need to migrate to an alternative infrastructure provider, the transition could be time-consuming and costly, and we could experience additional disruptions during any such transition.
Our enterprise sales cycles are lengthy and unpredictable, which makes it difficult to predict our future results of operations.
Our target customers are large financial institutions that typically have complex procurement processes, extended evaluation periods, and significant internal approval requirements. As a result, the sales cycle for new customer engagements can be lengthy and unpredictable, often lasting several months or longer. The length and variability of our sales cycles can make it difficult for us to accurately forecast revenue and plan our business accordingly. Additionally, we invest significant time and resources in pursuing potential customer relationships that may not ultimately result in closed transactions, which could adversely affect our operating results and efficiency. Even after a customer has decided to adopt our platform, the implementation and onboarding process can be complex and time-consuming, which may delay the commencement of revenue recognition.
Risks Related to Our Regulatory Environment
Our customers operate in a highly regulated industry, and changes in laws and regulations could reduce demand for our products or impose additional compliance burdens on our business.
Our customers are financial institutions that are subject to extensive and evolving laws, regulations, and standards governing their operations, including those related to anti-money laundering, fraud prevention, consumer protection, data privacy, and financial reporting. Our products are designed to assist our customers in complying with many of these regulatory requirements. Changes in the regulatory landscape, including the adoption of new regulations, changes to existing regulations, or changes in the interpretation or enforcement of existing regulations, could reduce demand for our products if they are perceived as no longer meeting the compliance needs of our customers, or could require us to make significant modifications to our platform, which could be costly and time-consuming. Additionally, we ourselves are subject to various laws and regulations governing data privacy, data security, and the collection, use, and transfer of personal information. Failure to comply with applicable laws and regulations could result in regulatory investigations, fines, penalties, and reputational harm.
We face risks related to international operations and cross-border data transfers.
As we expand our international operations, we are subject to the laws and regulations of the jurisdictions in which we operate, including the European Union General Data Protection Regulation ("GDPR") and similar data protection laws in other jurisdictions. These laws impose significant obligations on companies that process personal data, including requirements related to data subject consent, data minimization, data breach notification, and cross-border data transfers. Compliance with these diverse and evolving regulatory requirements is complex and costly, and failure to comply could result in significant fines and penalties. For example, violations of the GDPR can result in fines of up to €20 million or 4% of a company's annual global revenue, whichever is greater. Restrictions on cross-border data transfers could also impede our ability to efficiently serve international customers and could require us to invest in additional data center infrastructure in multiple jurisdictions.
Risks Related to Our intellectual Property
We may not be able to adequately protect our intellectual property, and our intellectual property rights may not provide us with a meaningful competitive advantage.
Our success depends in part on our ability to protect our proprietary technology and intellectual property. We hold 14 issued U.S. utility patents and have 7 patent applications pending with the USPTO. However, there can be no assurance that our pending patent applications will result in issued patents, that the scope of any issued patents will be broad enough to protect our technology, or that our patents will not be challenged, invalidated, or circumvented by third parties. Furthermore, patent protection may not be available for some of the technology and intellectual property we use in our business, and our competitors may independently develop similar or superior technologies. We also rely on trade secrets, proprietary know-how, and confidentiality agreements to protect our intellectual property. However, trade secrets can be difficult to protect, and there is no assurance that our confidentiality agreements will be effective in preventing the unauthorized disclosure or use of our proprietary information. If we are unable to adequately protect our intellectual property, competitors may be able to use our proprietary technology, which could erode our competitive advantage and adversely affect our business.
We may be subject to third-party intellectual property infringement claims, which could be costly and time-consuming to defend.
The technology industry is characterized by the existence of a large number of patents, copyrights, trademarks, trade secrets, and other intellectual property rights. Third parties may assert claims of intellectual property infringement against us, whether or not such claims have merit. Defending against such claims can be costly, time-consuming, and distracting to management, regardless of the outcome. If we are found to have infringed a third party's intellectual property rights, we could be required to pay significant damages, enter into royalty or licensing agreements on unfavorable terms, or redesign our products to avoid infringement, any of which could have a material adverse effect on our business and results of operations.
Risks Related to This Offering and Ownership of Our Class A Common Stock
Our dual-class stock structure concentrates voting control with our co-founders, which will limit your ability to influence the outcome of important transactions, including a change of control.
Following the closing of this offering, our co-founders, Priya Subramanian and Marcus Henley, will hold all outstanding shares of our Class B Common Stock, which entitle the holder to ten votes per share. As a result, Ms. Subramanian and Mr. Henley will collectively control approximately 73.5% of the combined voting power of all outstanding shares of our common stock. Accordingly, Ms. Subramanian and Mr. Henley will have the ability to control the outcome of matters submitted to our stockholders for approval, including the election and removal of directors, amendments to our Amended and Restated Certificate of Incorporation and Bylaws, and any merger, consolidation, or sale of all or substantially all of our assets. This concentration of voting control may discourage, delay, or prevent a change of control that other stockholders may view as beneficial, and could depress the trading price of our Class A Common Stock. In addition, because we will be a "controlled company" under the Nasdaq Listing Rules, we are eligible for, and may rely on, exemptions from certain corporate governance requirements, including the requirements that a majority of our board of directors be independent and that we have a compensation committee and a nominating and corporate governance committee composed entirely of independent directors. Although we have voluntarily elected to comply with the audit committee independence requirements, we may in the future decide to rely on additional controlled company exemptions.
The sunset provisions applicable to our Class B Common Stock may not result in the conversion of Class B Common Stock for an extended period.
Each share of our Class B Common Stock automatically converts into one share of our Class A Common Stock upon the earliest to occur of (i) the seventh anniversary of the closing of this offering, (ii) the transfer of such share to a person or entity that is not a permitted transferee, and (iii) the date on which the co-founders collectively hold less than 10% of the total outstanding shares of our common stock. These sunset provisions may allow our co-founders to maintain their concentrated voting control for up to seven years following the closing of this offering, and potentially longer if no triggering event occurs sooner. During this period, the interests of our co-founders may differ from, or conflict with, the interests of our other stockholders.
Anti-takeover provisions in our organizational documents and under Delaware law could make an acquisition of us more difficult and may prevent attempts by our stockholders to replace or remove our current management.
Our Amended and Restated Certificate of Incorporation and Amended and Restated Bylaws, which will become effective upon the closing of this offering, will contain provisions that could delay or prevent a change of control of our Company. These provisions include:
• a classified board of directors, with members serving staggered three-year terms, such that not all members are elected at the same time;
• no cumulative voting in the election of directors;
• the requirement that directors may be removed only for cause;
• the ability of our board of directors to issue shares of "blank check" preferred stock without stockholder approval, which could be used to dilute the stock ownership of a potential hostile acquirer;
• supermajority vote requirements for certain amendments to our Amended and Restated Certificate of Incorporation and Bylaws;
• advance notice requirements for stockholder proposals and director nominations; and
• an exclusive forum provision designating the Court of Chancery of the State of Delaware as the exclusive forum for certain stockholder disputes.
In addition, we are subject to Section 203 of the Delaware General Corporation Law, which generally prohibits a Delaware corporation from engaging in any business combination with any interested stockholder for a period of three years following the date that the stockholder became an interested stockholder. These anti-takeover provisions, together with the dual-class stock structure described above, could make it more difficult for stockholders or potential acquirers to obtain control of our board of directors or initiate actions that are opposed by our then-current board of directors, including delaying or impeding a merger, tender offer, or proxy contest. These provisions could also discourage potential acquisition proposals and could diminish the opportunities for stockholders to participate in certain tender offers, including tender offers at prices above the then-current market price of our Class A Common Stock.
There has been no prior public market for our Class A Common Stock, and an active trading market may not develop or be sustained.
Prior to this offering, there has been no public market for our Class A Common Stock. Although we have applied to list our Class A Common Stock on the Nasdaq Global Select Market, we cannot assure you that an active trading market for our Class A Common Stock will develop following this offering, or that, if an active trading market does develop, it will be sustained. The initial public offering price of our Class A Common Stock has been determined through negotiations among us, the selling stockholders, and the representative of the underwriters, and may not be indicative of the market price of our Class A Common Stock after this offering. The market price of our Class A Common Stock may decline below the initial public offering price and you may not be able to sell your shares at or above the price you paid.
Broader market conditions and macroeconomic uncertainty could adversely affect the trading price of our Class A Common Stock.
The trading price of our Class A Common Stock is likely to be volatile and could be subject to wide fluctuations in response to various factors, many of which are beyond our control, including general market conditions, economic downturns, changes in interest rates, geopolitical events, and broader technology sector volatility. In particular, the technology sector has experienced significant volatility in recent periods, and the market prices of securities of many technology companies have been subject to dramatic fluctuations that are often unrelated to the operating performance of those companies. These broad market and industry fluctuations, as well as general economic and political conditions, may adversely affect the market price of our Class A Common Stock, regardless of our actual operating performance.
Purchasers in this offering will experience immediate and substantial dilution.
The initial public offering price of our Class A Common Stock is substantially higher than the pro forma net tangible book value per share of our Class A Common Stock. If you purchase shares of our Class A Common Stock in this offering, you will experience immediate and substantial dilution. See "Dilution" for additional information regarding the dilution you will incur in connection with this offering.
Sales of substantial numbers of shares of our Class A Common Stock following the expiration of the 180-day lock-up period could depress our stock price.
All of our directors, executive officers, and stockholders holding more than 1% of our outstanding shares of common stock have agreed with the underwriters to a 180-day lock-up period during which they will not sell, transfer, or otherwise dispose of shares of our common stock, subject to certain exceptions. Upon the expiration of this lock-up period, a substantial number of additional shares of our common stock will become eligible for sale in the public market, which could cause the market price of our Class A Common Stock to decline significantly, even if our business is performing well. The perception in the public market that these shares might be sold could itself depress the market price of our Class A Common Stock. Pinnacle Securities LLC may release all or any portion of the locked-up securities at any time at its sole discretion, and any such release, or the anticipation of any such release, could have an adverse impact on the market price of our Class A Common Stock.
Our management will have broad discretion in the use of the net proceeds from this offering, and we may not use them effectively.
Our management will have broad discretion in the application of the net proceeds from this offering, including for any of the purposes described in "Use of Proceeds." You will be relying on the judgment of our management with regard to the use of these net proceeds, and you will not have the opportunity, as part of your investment decision, to assess whether the net proceeds are being used appropriately. The net proceeds may be used for corporate purposes that do not immediately increase our profitability or the value of your investment.
General Risk Factors
Our business is subject to the risks of natural disasters, public health crises, and other events beyond our control.
The occurrence of natural disasters, pandemics, geopolitical conflicts, acts of terrorism, or other catastrophic events could damage or disrupt our operations, harm our customers, and impair our ability to provide our products and services. Such events could also cause general economic instability that could adversely affect demand for our products and services.
Our Amended and Restated Certificate of Incorporation will provide that the Court of Chancery of the State of Delaware is the exclusive forum for certain disputes.
Our Amended and Restated Certificate of Incorporation, which will become effective upon the closing of this offering, will provide that, unless we consent in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware (or, if the Court of Chancery does not have jurisdiction, the federal district court for the District of Delaware) will be the exclusive forum for claims under the Securities Act of 1933, as amended. This exclusive forum provision may limit the ability of our stockholders to bring a claim in a judicial forum that they find favorable for disputes with us or our directors, officers, or employees, which may discourage such lawsuits.
We may face additional tax liabilities.
We are subject to income taxes in the United States and the other jurisdictions in which we operate. Significant judgment is required in determining our provision for income taxes. In the ordinary course of our business, there are many transactions and calculations where the ultimate tax determination is uncertain. Changes in tax laws, regulations, or interpretations, or challenges by tax authorities regarding our tax positions, could result in additional tax liabilities.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). All statements other than statements of historical fact contained in this prospectus, including statements regarding our future results of operations and financial condition, business strategy, planned products and services, future market growth, anticipated trends and challenges in our industry, and our objectives for future operations, are forward-looking statements. In some cases, you can identify forward-looking statements because they contain words such as "anticipate," "believe," "contemplate," "could," "estimate," "expect," "intend," "may," "plan," "potential," "predict," "project," "should," "target," "will," "would," or the negative of these words or other similar terms or expressions.
Forward-looking statements are based on our current expectations and assumptions regarding our business, the economy, and other future conditions. Because forward-looking statements relate to the future, by their nature they are subject to inherent uncertainties, risks, and changes in circumstances that are difficult to predict. Our actual results may differ materially from those contemplated by the forward-looking statements. Important factors that could cause actual results to differ materially from those in the forward-looking statements include, among others:
• our ability to attract new customers and retain and expand our relationships with existing customers;
• our ability to develop, enhance, and market new products and features;
• the impact of competition on our business;
• our ability to manage our growth effectively;
• the effects of cybersecurity incidents or disruptions to our platform;
• the impact of changes in laws and regulations affecting our customers or our business;
• general economic and political conditions, including inflation, recession, interest rate changes, and geopolitical events;
• our ability to protect our intellectual property;
• the effects of our dual-class stock structure on the value and liquidity of our Class A Common Stock;
• our ability to attract and retain qualified employees; and
• other factors described in the section titled "Risk Factors" in this prospectus.
We caution you that the foregoing list may not contain all of the forward-looking statements made in this prospectus. We derive many of our forward-looking statements from our operating budgets and forecasts, which are based upon many detailed assumptions. While we believe that our assumptions are reasonable, we caution that it is very difficult to predict the impact of known factors, and it is impossible for us to anticipate all factors that could affect our actual results.
All written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements contained in this prospectus, including those set forth under the heading "Risk Factors." We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise, except as required by applicable securities laws.
You should read this prospectus and the documents that we reference herein and have filed or will file as exhibits to the Registration Statement of which this prospectus is a part completely and with the understanding that our actual future results may be materially different from what we expect.
MARKET AND INDUSTRY DATA
This prospectus includes market and industry data that we have obtained from third-party sources, including industry publications, research reports, and market surveys, as well as from our own internal estimates and research. Third-party sources generally state that the information they contain has been obtained from sources believed to be reliable. Although we believe that the market and industry data included in this prospectus is generally reliable, such information is inherently imprecise, and we have not independently verified any of the data from third-party sources. While we are not aware of any misstatements regarding the market and industry data presented in this prospectus, such data involves a number of assumptions and limitations, and you are cautioned not to give undue weight to such estimates.
Market and industry data included in this prospectus may also include projections that are based on a number of assumptions. While we believe these projections are based on reasonable assumptions, the projected information is speculative in nature and actual results may differ materially. You should not place undue reliance on these projections.
Information that is based on estimates, forecasts, projections, market research, or similar methodologies is inherently subject to uncertainties, and actual events, amounts, or results may differ materially from those reflected in such information. We take responsibility only for the accuracy of information sourced to our own internal estimates and research.
USE OF PROCEEDS
We estimate that the net proceeds to us from this offering will be approximately $200.9 million (or approximately $223.8 million if the underwriters exercise their option to purchase additional shares in full), based upon an assumed initial public offering price of $17.00 per share, the midpoint of the estimated price range set forth on the cover page of this prospectus, and after deducting the underwriting discount and estimated offering expenses payable by us.
The following table sets forth the calculation of estimated net proceeds to us from this offering:
We will not receive any proceeds from the sale of shares of our Class A Common Stock by the selling stockholders. See "Principal and Selling Stockholders."
A $1.00 increase or decrease in the assumed initial public offering price of $17.00 per share would increase or decrease, as applicable, the net proceeds to us from this offering by approximately $12.1 million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the underwriting discount.
We intend to use the net proceeds from this offering for general corporate purposes, including working capital, continued investment in research and development, and potential strategic acquisitions. We do not have any specific acquisitions planned at this time. We may also use a portion of the net proceeds to repay all or a portion of the outstanding balance under our revolving credit facility with Ashford National Bank, which had an outstanding balance of approximately $15 million as of March 31, 2022, bears interest at a rate of SOFR plus 275 basis points, and matures on June 1, 2024.
We have not yet determined with certainty the manner in which we will allocate the net proceeds from this offering. Accordingly, our management will have broad discretion in the application of the net proceeds, and investors will be relying on the judgment of our management regarding the use of the proceeds. Pending the uses described above, we intend to invest the net proceeds from this offering in short-term, investment-grade, interest-bearing instruments, money market accounts, and U.S. government securities.
Our estimated offering expenses (exclusive of the underwriting discount) are approximately $4,800,000 and include the following:
DIVIDEND POLICY
We have never declared or paid any cash dividends on our capital stock. We do not anticipate paying any cash dividends on our Class A Common Stock or Class B Common Stock in the foreseeable future. We currently intend to retain all available funds and future earnings, if any, for use in the operation and expansion of our business.
Any future determination to pay dividends will be made at the discretion of our board of directors and will depend upon many factors, including our financial condition, results of operations, capital requirements, contractual restrictions, general business conditions, and other factors that our board of directors may deem relevant. In addition, our revolving credit facility agreement with Ashford National Bank contains covenants that restrict our ability to pay dividends and make certain other distributions on our capital stock under certain circumstances. Accordingly, investors must rely on sales of their Class A Common Stock after any price appreciation, which may never occur, as the only way to realize any future gains on their investment.
CAPITALIZATION
The following table sets forth our cash and cash equivalents and capitalization as of December 31, 2021 on:
• an actual basis;
• a pro forma basis, giving effect to (i) the automatic conversion of all outstanding shares of our Series A, Series B, Series C, and Series D redeemable convertible preferred stock (62,400,000 shares in the aggregate) into an equal number of shares of our Class A Common Stock, and (ii) the adoption of our Amended and Restated Certificate of Incorporation, each of which will occur upon the closing of this offering; and
• a pro forma as adjusted basis, giving further effect to the issuance and sale by us of 12,941,176 shares of our Class A Common Stock in this offering at an assumed initial public offering price of $17.00 per share, the midpoint of the estimated price range set forth on the cover page of this prospectus, after deducting the underwriting discount and estimated offering expenses payable by us.
You should read this table in conjunction with "Use of Proceeds," "Selected Consolidated Financial Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations," and our consolidated financial statements and the related notes thereto included elsewhere in this prospectus.
(1) As of December 31, 2021, [●] was outstanding under the revolving credit facility with Ashford National Bank. As of March 31, 2022, approximately $15 million was drawn under this facility. The facility has a total commitment of $50 million, bears interest at SOFR plus 275 basis points, and matures on June 1, 2024.
The share numbers in the table above are based on the number of shares of our common stock outstanding as of December 31, 2021 and exclude:
• 11,300,000 shares of our Class A Common Stock issuable upon the exercise of outstanding stock options under our 2016 Equity Incentive Plan, at a weighted-average exercise price of $4.82 per share;
• 3,500,000 shares of our Class A Common Stock reserved for future issuance under our 2016 Equity Incentive Plan;
• shares of our Class A Common Stock to be reserved for future issuance under our 2022 Equity Incentive Plan, which we plan to adopt in connection with this offering; and
• shares of our Class A Common Stock to be reserved for future issuance under our 2022 Employee Stock Purchase Plan, which we plan to adopt in connection with this offering.
A $1.00 increase or decrease in the assumed initial public offering price of $17.00 per share, the midpoint of the estimated price range set forth on the cover page of this prospectus, would increase or decrease, as applicable, each of cash and cash equivalents, additional paid-in capital, total stockholders' equity (deficit), and total capitalization by approximately $12.1 million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the underwriting discount and estimated offering expenses.
DILUTION
If you invest in our Class A Common Stock in this offering, your ownership interest will be immediately diluted to the extent of the difference between the initial public offering price per share of our Class A Common Stock and the pro forma as adjusted net tangible book value per share of our Class A Common Stock immediately after this offering.