CALDERWOOD & HARKNESS LLP 1 Market Street, Spear Tower, Suite 3600 San Francisco, California 94105
425 Lexington Avenue, 42nd Floor New York, New York 10017
Telephone: (415) 555-7000 Facsimile: (415) 555-7001 www.calderwoodharkness.com
Matter No. 1008-00002
[__], 2022
Gregory Simmons, CPA Audit Partner Meridian & Howe LLP 555 Mission Street, Suite 2500 San Francisco, California 94105
Re: Request for Comfort Letter — Proposed Initial Public Offering of Class A Common Stock of Lumos Analytics Inc. (SEC File Number 333-264518; CIK 0001923847)
Dear Mr. Simmons:
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I. Introduction and Purpose
Calderwood & Harkness LLP ("we," "C&H," or "issuer's counsel") acts as issuer's counsel to Lumos Analytics Inc., a Delaware corporation ("Lumos" or the "Company"), in connection with the proposed initial public offering (the "Offering") of shares of the Company's Class A Common Stock, par value $0.0001 per share (the "Class A Common Stock"). We are writing to you in that capacity and on behalf of both the Company and the underwriters in connection with the Offering.
The Offering is being underwritten by Pinnacle Securities LLC ("Pinnacle"), acting as representative of the several underwriters, which also include Whitfield & Company LLC ("Whitfield") and Graystone Capital Markets Inc. ("Graystone" and, together with Pinnacle and Whitfield, the "Underwriters"). The Underwriters are represented in connection with the Offering by Hargrove & Liddell LLP ("Hargrove & Liddell"), with Michael Sorrentino serving as lead partner on that engagement.
As you are aware, the Company has filed a Registration Statement on Form S-1 (File Number 333-264518) with the Securities and Exchange Commission (the "SEC"), as amended by Amendment No. 1 thereto filed publicly on April 14, 2022 (the "Registration Statement"). The Registration Statement includes a preliminary prospectus (the "Prospectus") relating to the Offering.
We hereby request, on behalf of the Company and the Underwriters, that Meridian & Howe LLP ("M&H" or the "Firm"), in its capacity as the Company's independent registered public accounting firm, furnish a comfort letter (the "Initial Comfort Letter") in accordance with the professional standards set forth in AU-C Section 920, Letters for Underwriters and Certain Other Requesting Parties, as currently in effect (formerly Statement on Auditing Standards No. 72, "Letters for Underwriters and Certain Other Requesting Parties" ("SAS 72")), as amended and supplemented, including related guidance issued by the American Institute of Certified Public Accountants ("AICPA"). To the extent that any provisions of AU-C Section 920 have been further updated or supplemented by subsequent AICPA guidance or PCAOB standards since the issuance of AU-C Section 920, we request that the Initial Comfort Letter conform to such updated standards as well.
We note that the underwriting agreement to be entered into among the Company, the selling stockholders — Velthryn Venture Partners Fund IV, L.P. ("Velthryn") and Arclight Equity Group Fund VII, L.P. ("Arclight") — and the Underwriters (the "Underwriting Agreement") contemplates the delivery of the Initial Comfort Letter as a condition precedent to the closing of the Offering. Accordingly, the timely preparation and delivery of the Initial Comfort Letter is an essential element of the transaction.
II. Background on the Offering
For your reference and to provide the necessary context for the preparation of the Initial Comfort Letter, we set forth below a summary of the key terms and structure of the Offering.
The Company. Lumos Analytics Inc. is a software analytics company headquartered at 450 Folsom Street, Suite 1200, San Francisco, California 94105. The Company was incorporated in the State of Delaware on March 14, 2016. Lumos provides an enterprise analytics platform that enables organizations to derive real-time insights from large-scale data sets, processing over 2 billion transactions per month for its customer base. As of the date of the most recent information set forth in the Registration Statement, the Company has approximately 340 enterprise customers globally and approximately 1,120 total employees.
Structure of the Offering. The Offering will consist of:
• Approximately 12,941,176 primary shares of Class A Common Stock to be issued and sold by the Company (the "Primary Shares"); and
• Up to 3,500,000 secondary shares of Class A Common Stock to be sold by the selling stockholders (the "Secondary Shares"), consisting of up to 2,000,000 shares to be sold by Velthryn Venture Partners Fund IV, L.P. and up to 1,500,000 shares to be sold by Arclight Equity Group Fund VII, L.P.
The aggregate number of shares in the base offering (excluding the overallotment option) is therefore 16,441,176 shares. In addition, the Underwriters will be granted an option, exercisable within 30 days following the date of the final prospectus, to purchase up to 2,466,176 additional shares of Class A Common Stock from the Company (representing 15% of the total base shares) to cover overallotments, if any (the "Overallotment Option").
Pricing and Proceeds. The preliminary price range for the Offering is $16.00 to $18.00 per share, with a midpoint of $17.00 per share. Based on the midpoint of the preliminary price range:
• Gross proceeds to the Company from the sale of the Primary Shares would be approximately $220,000,000 (12,941,176 shares × $17.00 per share);
• The underwriting discount is 6.5% of the public offering price, resulting in an underwriting discount on the Primary Shares of approximately $14,300,000;
• Net proceeds to the Company, before estimated offering expenses, would be approximately $205,700,000;
• Estimated offering expenses (excluding the underwriting discount) are approximately $4,800,000;
• Net proceeds to the Company, after all expenses, would be approximately $200,900,000; and
• Gross proceeds to the selling stockholders would be approximately $59,500,000 (3,500,000 Secondary Shares × $17.00 per share).
Listing. The Company has applied to list the Class A Common Stock on the Nasdaq Global Select Market under the ticker symbol "LMSA."
Financial Statements. The Registration Statement includes the following financial statements of the Company, all of which were prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP"):
(a) Audited consolidated financial statements for the fiscal years ended December 31, 2019 ("FY 2019"), December 31, 2020 ("FY 2020"), and December 31, 2021 ("FY 2021"), together with the related notes, schedules, and the independent auditor's report thereon issued by M&H; and
(b) Unaudited condensed consolidated financial statements for the three months ended March 31, 2022 ("Q1 2022") and the comparative three-month period ended March 31, 2021 ("Q1 2021"), together with the related notes thereto.
M&H has served as the Company's independent registered public accounting firm and has audited the Company's consolidated financial statements for FY 2019, FY 2020, and FY 2021. M&H's audit reports on those financial statements are included in the Registration Statement.
III. Applicable Professional Standards
We request that the Initial Comfort Letter conform in all respects to the requirements of AU-C Section 920, Letters for Underwriters and Certain Other Requesting Parties, as currently in effect and as may be supplemented by interpretive guidance issued by the AICPA. We acknowledge that AU-C Section 920 supersedes the former SAS 72, and we confirm that AU-C Section 920 shall be the governing professional standard for purposes of this engagement. References in this letter to SAS 72 are included solely for informational purposes and to provide historical context; AU-C Section 920, as currently in effect, shall control.
The Initial Comfort Letter should be addressed to Pinnacle Securities LLC, as representative of the several underwriters named in the Underwriting Agreement, and to Lumos Analytics Inc. We understand that, under AU-C Section 920, the letter may be addressed to the underwriters (or their representative) and to the Company, provided that the requesting parties meet the criteria set forth in the standard. We confirm that each of the addressees is a party contemplated by AU-C Section 920.
In addition, we request that the Initial Comfort Letter include a confirmation that M&H is independent with respect to Lumos within the meaning of (i) the Securities Act of 1933, as amended (the "Securities Act"), and the applicable rules and regulations of the SEC thereunder (including Rule 2-01 of Regulation S-X), and (ii) the rules of the Public Company Accounting Oversight Board (the "PCAOB"), including PCAOB Rule 3520, Auditor Independence, and the related ethics and independence standards adopted by the PCAOB. Such confirmation of independence is a critical component of the comfort letter and is required by the Underwriting Agreement.
IV. Scope of the Initial Comfort Letter
We request that the Initial Comfort Letter address each of the following matters. For ease of reference, we have organized the requested scope into the subsections set forth below.
4.1 Independence
The Initial Comfort Letter should include a statement confirming that M&H is independent with respect to Lumos under the applicable SEC rules and PCAOB standards, both as of the date of the Initial Comfort Letter and throughout each of the audit periods covered by M&H's audit reports included in the Registration Statement (i.e., FY 2019, FY 2020, and FY 2021). This confirmation should address M&H's compliance with all applicable independence requirements, including those relating to financial interests, non-audit services, partner rotation, and other matters addressed by Rule 2-01 of Regulation S-X and the PCAOB independence standards.
4.2 Compliance of Audited Financial Statements with SEC Requirements
The Initial Comfort Letter should include a statement that the audited consolidated financial statements of Lumos for FY 2019, FY 2020, and FY 2021, together with the related notes and financial statement schedules, included in the Registration Statement, comply as to form in all material respects with the applicable accounting requirements of the Securities Act and the related rules and regulations of the SEC, including Regulation S-X. This statement should encompass the form and content requirements of Article 3 of Regulation S-X as applicable to the financial statements of a registrant filing a registration statement on Form S-1, as well as the requirements of Article 5 of Regulation S-X (to the extent applicable to the Company's commercial and industrial financial statements) and any other applicable provisions of Regulation S-X.
4.3 Unaudited Interim Financial Information
The Initial Comfort Letter should include statements regarding the unaudited condensed consolidated financial statements of Lumos for Q1 2022 (the three months ended March 31, 2022) and the comparative period of Q1 2021 (the three months ended March 31, 2021), as included in the Registration Statement. Specifically, we request:
(a) A statement that M&H has performed a review of the unaudited interim financial data in accordance with PCAOB Auditing Standard 4105, Reviews of Interim Financial Information (formerly AU Section 722 / SAS 100, Interim Financial Information), as currently in effect.
(b) A statement providing negative assurance to the effect that nothing came to M&H's attention that caused M&H to believe that any material modifications should be made to the unaudited condensed consolidated financial statements for Q1 2022 and Q1 2021 for such financial statements to conform with U.S. GAAP. This negative assurance should be consistent with the form of negative assurance contemplated by AU-C Section 920 with respect to interim financial information that has been reviewed by the independent auditor.
(c) A statement that the unaudited condensed consolidated financial statements for Q1 2022 and Q1 2021 included in the Registration Statement comply as to form in all material respects with the applicable accounting requirements of the Securities Act and the related rules and regulations of the SEC, including Article 10 of Regulation S-X.
4.4 No Material Adverse Changes (Negative Assurance — "Subsequent Changes" Procedures)
Pursuant to AU-C Section 920, we request that the Initial Comfort Letter include negative assurance regarding the period from March 31, 2022 (the date of the most recent balance sheet included in the Registration Statement) through a date not more than five (5) business days prior to the date of the Initial Comfort Letter (such date, the "Cutoff Date"). We understand that, under the applicable professional standards, negative assurance with respect to subsequent changes cannot extend to the date of the comfort letter itself, and we are requesting that the Cutoff Date be set as close to the date of the Initial Comfort Letter as is practicable under the circumstances.
Specifically, we request that M&H provide negative assurance, based on the procedures described in AU-C Section 920 (including reading of minutes, inquiry of management, and review of available interim financial data), to the following effect:
(a) Total Stockholders' Equity (Deficit). There has been no decrease in total stockholders' equity (deficit) of the Company as compared to the amount shown on the Company's consolidated balance sheet as of March 31, 2022, as set forth in the Registration Statement, except as set forth in or contemplated by the Registration Statement.
(b) Total Long-Term Debt. There has been no increase in total long-term debt of the Company (including, without limitation, amounts drawn under the Ashford National Bank revolving credit facility, which has a total commitment of $50 million and under which approximately $15 million was drawn as of March 31, 2022) as compared to the amounts shown on the Company's consolidated balance sheet as of March 31, 2022, as set forth in the Registration Statement, except as set forth in or contemplated by the Registration Statement.
(c) Cash and Cash Equivalents. There has been no decrease in cash and cash equivalents of the Company from the amount shown on the Company's most recent balance sheet included in the Registration Statement (noting that, as of December 31, 2021, the Company reported cash and cash equivalents of $94.3 million), except as set forth in or contemplated by the Registration Statement.
(d) Revenue and Net Loss. For the period from April 1, 2022 through the Cutoff Date, there were no decreases, as compared to the corresponding period of the preceding year (i.e., the comparable period beginning April 1, 2021), in total revenue, and no increases in net loss, in each case except as set forth in or contemplated by the Registration Statement.
We acknowledge that the foregoing negative assurance is subject to the inherent limitations described in AU-C Section 920, including the fact that the procedures performed for purposes of the subsequent-changes negative assurance do not constitute an audit or a review conducted in accordance with generally accepted auditing standards or PCAOB standards, and accordingly, M&H does not express an opinion or provide any assurance regarding the financial statements or financial data as of any date or for any period subsequent to the most recent financial statements included in the Registration Statement.
4.5 Tables, Statistics, and Other Financial Information — Agreed-Upon Procedures
We further request that M&H perform specified agreed-upon procedures with respect to certain financial information appearing in the Registration Statement (including the Prospectus) that is not directly derived from the audited consolidated financial statements or the reviewed unaudited condensed consolidated financial statements but is of an accounting or financial nature. Such financial information includes, without limitation, financial and statistical data, tables, charts, percentages, ratios, and other quantitative information appearing in various sections of the Prospectus that have been derived from or are based upon the Company's accounting records, financial statements, or internal financial reports.
We have identified the specific items for which we request verification (collectively, the "Circle-Up Items") in Section V below and in the marked copy of the Prospectus that will be attached as Exhibit A to the final version of this letter. We understand that, under AU-C Section 920, the procedures performed with respect to the Circle-Up Items will result in findings reported in the comfort letter rather than any form of assurance or opinion, and that the nature and extent of such procedures will be determined by M&H in its professional judgment, consistent with AU-C Section 920.
V. Circle-Up Items — Specific Financial Data for Verification
Set forth below is a detailed list of the specific financial and statistical figures appearing in the Registration Statement for which we request that M&H perform procedures and confirm accuracy. These items are organized by section of the Prospectus, and the corresponding page references and highlighting will be set forth in the marked copy of the Prospectus to be attached as Exhibit A to the final version of this letter, as well as in the schedule of specific financial figures to be attached as Exhibit B.
5.1 Prospectus Summary
We request that M&H perform procedures to verify the accuracy of the following financial and statistical figures appearing in the Prospectus Summary section of the Registration Statement:
(a) FY 2021 Total Revenue: $187.4 million.
(b) FY 2020 Total Revenue: $118.6 million.
(c) Year-over-year revenue growth, FY 2021 versus FY 2020: 58%.
(d) Annual Recurring Revenue ("ARR") as of December 31, 2021: $206.8 million.
(e) ARR as of March 31, 2022: $219.5 million.
(f) Gross margin for FY 2021: 72.3%.
(g) Net loss for FY 2021: $(41.2) million.
(h) Adjusted EBITDA for FY 2021: $(18.7) million.
(i) Cash and cash equivalents as of December 31, 2021: $94.3 million.
(j) Q1 2022 Total Revenue: $54.9 million.
(k) Q1 2021 Total Revenue: $39.2 million.
(l) Q1 2022 year-over-year revenue growth: 40%.
(m) Q1 2022 Net Loss: $(13.8) million.
(n) Approximately 340 enterprise customers globally.
(o) Over 2 billion transactions processed per month.
(p) Approximately 1,120 total employees.
5.2 Use of Proceeds
We request that M&H perform procedures to verify the accuracy of the following figures appearing in the "Use of Proceeds" section of the Prospectus:
(a) Gross proceeds to the Company of approximately $220,000,000 (at the midpoint of $17.00 per share; 12,941,176 Primary Shares).
(b) Underwriting discount of 6.5%, equaling approximately $14,300,000 on the Primary Shares.
(c) Net proceeds to the Company of approximately $205,700,000 (before estimated offering expenses).
(d) Estimated offering expenses of approximately $4,800,000 (excluding the underwriting discount).
(e) Net proceeds to the Company of approximately $200,900,000 (after all expenses).
(f) Gross proceeds to the selling stockholders of approximately $59,500,000 (3,500,000 Secondary Shares × $17.00 per share).
5.3 Capitalization Table
We request that M&H perform procedures to verify the accuracy and mathematical integrity of the following figures and calculations appearing in the "Capitalization" section of the Prospectus:
(a) Pre-IPO fully diluted shares outstanding: approximately 118,200,000 shares.
(b) Class B Common Stock outstanding: 28,500,000 shares, consisting of 16,500,000 shares held by Priya Subramanian and 12,000,000 shares held by Marcus Henley.
(c) Preferred Stock (Series A through Series D), all of which will convert into Class A Common Stock upon the closing of the Offering: 62,400,000 shares total.
(d) Employee stock option pool: 14,800,000 shares authorized under the Company's 2016 Equity Incentive Plan; 11,300,000 options outstanding at a weighted-average exercise price of $4.82 per share.
(e) Common Stock authorized: 500,000,000 shares of Class A Common Stock, par value $0.0001 per share.
(f) Ashford National Bank revolving credit facility: $50 million total commitment; approximately $15 million drawn as of March 31, 2022; interest rate of Secured Overnight Financing Rate ("SOFR") plus 275 basis points; maturity date of June 1, 2024.
(g) All pro forma adjustments reflected in the capitalization table, including the effect of the automatic conversion of all outstanding shares of Preferred Stock into Class A Common Stock upon the closing of the Offering and the receipt of the estimated net proceeds from the Offering.
5.4 Dilution
We request that M&H perform procedures to verify the accuracy of the following figures and calculations appearing in the "Dilution" section of the Prospectus:
(a) Series D last private round price: $12.50 per share (August 2020 financing).
(b) Post-money valuation at Series D: approximately $1.478 billion ($12.50 per share × 118,200,000 fully diluted shares).
(c) All pro forma net tangible book value per share calculations as presented in the dilution table, including the historical net tangible book value per share, the pro forma net tangible book value per share after giving effect to the Offering, and the increase in net tangible book value per share attributable to new investors.
(d) Dilution to new investors at the midpoint price of $17.00 per share, calculated as the difference between the public offering price per share and the pro forma as adjusted net tangible book value per share after giving effect to the Offering.
5.5 Selected Consolidated Financial Data
We request that M&H perform procedures to verify the accuracy of all line items appearing in the "Selected Consolidated Financial Data" section of the Prospectus, including without limitation:
(a) All revenue, cost of revenue, gross profit, operating expense (including research and development, sales and marketing, and general and administrative expenses), operating loss, interest income (expense), other income (expense), income tax provision, and net loss line items for each of FY 2019, FY 2020, and FY 2021.
(b) All balance sheet line items as of December 31, 2019, December 31, 2020, and December 31, 2021, including cash and cash equivalents, total assets, total current liabilities, total long-term debt, convertible preferred stock, total stockholders' equity (deficit), and working capital.
(c) All per share data, including basic and diluted net loss per share and weighted-average shares used in computing net loss per share, for each of FY 2019, FY 2020, and FY 2021.
(d) Comparative data for Q1 2022 and Q1 2021 appearing in the selected consolidated financial data tables, including revenue, cost of revenue, gross profit, operating expenses, and net loss.
(e) All calculations of period-over-period changes, growth rates, and percentages derived from the selected financial data.
5.6 Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A)
We request that M&H perform procedures to verify the accuracy of all financial figures, percentages, and period-over-period changes referenced throughout the Management's Discussion and Analysis of Financial Condition and Results of Operations section of the Prospectus, including without limitation:
(a) All dollar amounts, percentages, and period-over-period changes cited in the narrative discussions of revenue, cost of revenue, gross profit, and each category of operating expense for FY 2021 versus FY 2020, FY 2020 versus FY 2019, and Q1 2022 versus Q1 2021.
(b) Key performance metrics disclosed in the MD&A, including:
(i) ARR as of each period-end presented;
(ii) Net revenue retention rate (if disclosed);
(iii) Number of customers with ARR greater than $100,000 (if disclosed);
(iv) Gross margin trends for each period presented; and
(v) Any other operational or financial metrics of an accounting nature cited in the MD&A narrative.
(c) Non-GAAP reconciliation: the reconciliation of Adjusted EBITDA of $(18.7) million for FY 2021 from GAAP net loss of $(41.2) million, including each individual reconciling adjustment line item (e.g., stock-based compensation expense, depreciation and amortization, interest expense, income tax provision, and any other items identified in the reconciliation), and confirmation that such reconciling items agree to the Company's underlying books and records and are mathematically accurate.
(d) Concentration disclosure: the statement that the Company's top 10 customers represent approximately 34% of ARR.
(e) All figures appearing in discussions of liquidity and capital resources, including cash flow data and significant contractual obligations.
5.7 Principal and Selling Stockholders
We request that M&H perform procedures to verify the accuracy of the following share ownership and voting power figures appearing in the "Principal and Selling Stockholders" section of the Prospectus:
(a) Velthryn Venture Partners Fund IV, L.P.: 24,800,000 shares (approximately 21.0% of total shares outstanding on a pre-IPO basis).
(b) Arclight Equity Group Fund VII, L.P.: 18,600,000 shares (approximately 15.7% of total shares outstanding on a pre-IPO basis).
(c) Ridgeline Capital Partners Fund II, L.P.: 9,200,000 shares (approximately 7.8% of total shares outstanding on a pre-IPO basis).
(d) Selling stockholder shares: Velthryn — up to 2,000,000 shares; Arclight — up to 1,500,000 shares.
(e) Post-IPO voting power calculations, including the calculation that the founders' combined voting power will be approximately 73.5% (based on 285,000,000 aggregate votes attributable to Class B Common Stock out of approximately 387,641,176 total combined votes across all classes of Common Stock), taking into account the differential voting rights of the Class A Common Stock (one vote per share) and the Class B Common Stock (ten votes per share).
(f) All ownership percentages (pre-IPO and post-IPO) appearing in the principal and selling stockholders table, including beneficial ownership percentages after giving effect to the Offering (both assuming no exercise and assuming full exercise of the Overallotment Option).
5.8 Executive Compensation
We request that M&H perform procedures to verify the accuracy of all financial figures appearing in the executive compensation tables and related narrative disclosure in the "Executive Compensation" section of the Prospectus, including without limitation:
(a) All figures appearing in the Summary Compensation Table for each of the following named executive officers: Priya Subramanian (Chief Executive Officer and Co-Founder), Marcus Henley (President, Chief Technology Officer, and Co-Founder), David Lau (Chief Financial Officer), Tomás Aguilar (Chief Revenue Officer), and Naomi Feinberg (General Counsel and Corporate Secretary).
(b) All figures appearing in any related compensation tables, including the Outstanding Equity Awards at Fiscal Year-End table, the Option Exercises and Stock Vested table, and any other compensation-related tables included in the Prospectus.
(c) Stock-based compensation expense figures disclosed in the executive compensation section or elsewhere in the Prospectus, and confirmation that such figures are consistent with the stock-based compensation expense recorded in the Company's financial statements.
5.9 Certain Relationships and Related-Party Transactions
We request that M&H perform procedures to verify the accuracy of any financial figures appearing in the "Certain Relationships and Related-Party Transactions" section of the Prospectus, including without limitation:
(a) Any financial figures related to transactions between the Company and Velthryn Venture Partners, Arclight Equity Group, or Ridgeline Capital Partners, or their respective affiliates.
(b) Financial terms of the Brindoval Data Centers LLC annual minimum commitment of $8.2 million, to the extent such commitment is described in the related-party transactions section or elsewhere in the Prospectus as a related-party or material contract.
(c) Any other financial figures appearing in the related-party transactions disclosure that are of an accounting or financial nature.
5.10 Material Contracts — Financial Terms
We request that M&H perform procedures to verify the accuracy of the financial terms of the following material contracts as described in the Prospectus:
(a) Ashford National Bank Revolving Credit Facility. Total commitment of $50 million; interest rate of SOFR plus 275 basis points; maturity date of June 1, 2024; approximately $15 million drawn as of March 31, 2022. Procedures should confirm that the foregoing figures are consistent with the Company's books and records, including the executed credit agreement and related amendments.
(b) Brindoval Data Centers LLC Master Cloud Services Agreement. Five-year term commencing January 15, 2021; annual minimum commitment of $8.2 million. Procedures should confirm that the foregoing figures are consistent with the Company's books and records and the executed agreement.
VI. Non-GAAP Financial Measures
In addition to the procedures described in Section 5.6(c) above, we specifically request that M&H perform detailed procedures on the Company's reconciliation of Adjusted EBITDA, a non-GAAP financial measure, to GAAP net loss, as presented in the Prospectus. We note that the Company has included this non-GAAP measure in accordance with Regulation G promulgated under the Securities Exchange Act of 1934, as amended, and the SEC Staff's interpretive guidance regarding the presentation of non-GAAP financial measures in SEC filings, including Compliance & Disclosure Interpretations relating to Non-GAAP Financial Measures.
Specifically, we request that M&H:
(a) Confirm the mathematical accuracy of the reconciliation from GAAP net loss of $(41.2) million for FY 2021 to Adjusted EBITDA of $(18.7) million for FY 2021, including verification that each individual reconciling adjustment line item (e.g., stock-based compensation expense, depreciation and amortization, interest expense (net), income tax provision (benefit), and any other adjustments) is accurately presented and correctly computed.
(b) Confirm that each individual reconciling adjustment line item agrees to, or can be derived from, the Company's books and records, including the audited consolidated financial statements for FY 2021 and/or the Company's general ledger and supporting schedules.
(c) To the extent that the Prospectus includes an Adjusted EBITDA reconciliation for FY 2020, FY 2019, Q1 2022, or Q1 2021, perform the same procedures described in clauses (a) and (b) above with respect to each such reconciliation.
We understand that M&H's procedures with respect to the non-GAAP reconciliation will result in findings to be included in the comfort letter, and that M&H will not be providing any opinion or assurance on the appropriateness of the non-GAAP measure itself or the Company's compliance with Regulation G.
VII. Procedures Relating to the Subsequent Events Period
In connection with the negative assurance regarding subsequent changes described in Section 4.4 above, we request that M&H perform the following procedures, consistent with AU-C Section 920:
(a) Reading of Minutes. M&H is requested to read the minutes of all meetings of the Company's Board of Directors and all committees thereof held after December 31, 2021 through the Cutoff Date. The committees of the Board of Directors whose minutes should be reviewed include:
(i) The Audit Committee, currently chaired by Samuel Adebayo;
(ii) The Compensation Committee, currently chaired by Catherine Mercer; and
(iii) The Nominating and Corporate Governance Committee, currently chaired by Diane Ochoa.
To the extent that minutes of any such meetings have not been prepared as of the date of M&H's procedures, M&H should inquire regarding matters discussed at such meetings that may be relevant to the comfort letter.
(b) Inquiries of Officers and Employees. M&H is requested to make inquiries of certain officers and employees of the Company regarding matters affecting the subsequent-changes negative assurance described in Section 4.4. Such inquiries should be directed to, at a minimum, the following individuals:
(i) David Lau, Chief Financial Officer; and
(ii) Naomi Feinberg, General Counsel and Corporate Secretary.
Inquiries should cover, among other things, whether there have been any changes in the Company's capital stock or long-term debt, any material decreases in stockholders' equity, any material changes in accounting policies or practices, any material contingencies or commitments not previously disclosed, and any other events or developments that could have a material effect on the Company's financial condition or results of operations.
(c) Written Representations from Management. M&H should obtain written representations from the Company's management regarding the period subsequent to the latest financial statements included in the Registration Statement (i.e., subsequent to March 31, 2022). Such representations should cover the matters described in AU-C Section 920 and should be signed by David Lau, Chief Financial Officer, and such other officers as M&H may deem appropriate.
We understand that the procedures described in this Section VII are limited in scope and do not constitute an audit or review of any financial statements or financial data for the subsequent events period. The negative assurance to be provided in the comfort letter is based solely on these limited procedures and is subject to the inherent limitations thereof.
VIII. Bring-Down Comfort Letter
In addition to the Initial Comfort Letter, we request that M&H deliver a bring-down comfort letter (the "Bring-Down Comfort Letter") on the date of the closing of the Offering. The Bring-Down Comfort Letter is a condition precedent to the obligations of the Underwriters to close under the Underwriting Agreement.
The Bring-Down Comfort Letter should:
(a) Be dated as of the closing date of the Offering;
(b) Update the Initial Comfort Letter to a new cutoff date that is not more than five (5) business days before the closing date (the "Updated Cutoff Date");
(c) Confirm that no information has come to M&H's attention during the period from the Cutoff Date (as defined in Section 4.4 above) through the Updated Cutoff Date that would require any modification of the statements and conclusions set forth in the Initial Comfort Letter, or, if such information has come to M&H's attention, describe such information; and
(d) Reaffirm all of the statements, negative assurance, and findings set forth in the Initial Comfort Letter, updated through the Updated Cutoff Date, with such changes as may be necessary to reflect events occurring after the date of the Initial Comfort Letter.
In the event that the Overallotment Option (covering up to 2,466,176 additional shares of Class A Common Stock) is exercised by the Underwriters, we anticipate that an additional bring-down comfort letter may be required on the date of the overallotment closing (the "Overallotment Bring-Down Letter"). The Overallotment Bring-Down Letter should be in the same form as the Bring-Down Comfort Letter, updated to a cutoff date not more than five (5) business days before the overallotment closing date. We will provide further instructions regarding the Overallotment Bring-Down Letter if and when the Overallotment Option is exercised.
For your reference, we note that the Underwriting Agreement provides for a lock-up period of 180 days following the date of the final prospectus, during which certain stockholders, directors, and officers of the Company will be restricted from selling or otherwise disposing of shares of Common Stock. While the lock-up period does not directly affect the timing of the comfort letter deliveries, it is referenced here to provide context regarding the overall closing mechanics and timeline of the Offering.
IX. Timing of Delivery
We request that M&H confirm its availability to deliver the Initial Comfort Letter and the Bring-Down Comfort Letter on the schedule set forth below. The anticipated timeline for the Offering is as follows:
(a) Registration Statement Filing. The Registration Statement on Form S-1 (File Number 333-264518) was initially filed with the SEC, and Amendment No. 1 to the Registration Statement (Form S-1/A) was filed publicly on April 14, 2022. The SEC registration fee of $20,394 has been paid.
(b) Road Show Launch. The preliminary road show is expected to launch on or about April 25, 2022.
(c) Initial Comfort Letter. The Initial Comfort Letter is requested to be delivered on or prior to the date of execution of the Underwriting Agreement, which is anticipated to coincide with the pricing of the Offering. Customarily, the Initial Comfort Letter is dated one (1) business day before the effective date of the Registration Statement or the pricing date, whichever is earlier. We currently anticipate that pricing will occur during the first or second week of May 2022, subject to market conditions.
(d) Bring-Down Comfort Letter. The Bring-Down Comfort Letter is to be delivered on the closing date of the Offering, which is expected to be three (3) to four (4) business days after pricing (T+3 or T+4).
(e) Overallotment Bring-Down Letter (if applicable). If the Overallotment Option is exercised, an additional bring-down letter will be required on the overallotment closing date, which may occur at any time within 30 days of the date of the final prospectus.
We recognize that the foregoing timeline is subject to change based on SEC review, market conditions, and other factors. We will keep M&H informed of any material changes to the anticipated schedule. We request that M&H confirm at its earliest convenience that it is available to deliver the Initial Comfort Letter and the Bring-Down Comfort Letter on the anticipated schedule, and that M&H notify us promptly if any circumstances arise that could delay delivery.
X. Consent and Expert Status
Separate and apart from this comfort letter request, we note that C&H will separately request M&H's written consent to (i) the inclusion of M&H's audit report on the consolidated financial statements of Lumos for FY 2019, FY 2020, and FY 2021 in the Registration Statement and any amendments or supplements thereto, and (ii) the reference to M&H as an "expert" in the Registration Statement, as required by Section 7 of the Securities Act and Item 509 of Regulation S-K.
We acknowledge that M&H's written consent has already been filed as an exhibit to the Registration Statement on Form S-1/A (Amendment No. 1) filed on April 14, 2022. However, we note that if the Registration Statement is further amended (whether in connection with SEC comments, pricing, or otherwise), an updated consent from M&H will need to be filed as an exhibit to each such amendment. We will coordinate with M&H regarding the timing and form of any updated consents as needed.
The consent and the Initial Comfort Letter are separate deliverables and should not be combined in a single document. We request that M&H prepare and deliver the consent separately in a form that is suitable for filing as an exhibit to the Registration Statement.
XI. Coordination with Underwriters' Counsel
We note that Hargrove & Liddell LLP, counsel to the Underwriters, may supplement this request with additional circle-up items, procedural requests, or other matters to be addressed in the Initial Comfort Letter or the Bring-Down Comfort Letter. The Hargrove & Liddell team working on this matter includes Michael Sorrentino (lead partner) and Anika Patel (lead associate). Their contact information is as follows:
Hargrove & Liddell LLP 601 Lexington Avenue New York, New York 10022
Attention: Michael Sorrentino, Partner / Anika Patel, Associate
M&H is requested to coordinate directly with Hargrove & Liddell LLP regarding any additional items identified by the Underwriters or underwriters' counsel. To the extent that Hargrove & Liddell identifies additional circle-up items or requests modifications to the scope of the procedures described in this letter, we will endeavor to provide a consolidated supplemental request to M&H. However, M&H should feel free to communicate directly with Hargrove & Liddell regarding the scope and form of the comfort letter, and to share drafts of the comfort letter with Hargrove & Liddell as appropriate, provided that copies of all correspondence are provided to us as well.
We expect that a working group call will be scheduled among C&H, Hargrove & Liddell, M&H, and the Company's finance team to finalize the circle-up items and discuss any open issues regarding the scope of the comfort letter. We will coordinate the scheduling of this call.
XII. Fees and Expenses
We understand that M&H's aggregate fees for audit, comfort letter, and consent services rendered in connection with the Offering are currently estimated at $680,000. This estimate encompasses (i) M&H's fees for the audit of the Company's consolidated financial statements for FY 2019, FY 2020, and FY 2021 to the extent such audits were performed in connection with or accelerated for purposes of the Offering, (ii) M&H's fees for the preparation and delivery of the Initial Comfort Letter and the Bring-Down Comfort Letter (and any additional bring-down letters that may be required), and (iii) M&H's fees for the delivery of the consent described in Section X above.
All such fees and expenses will be borne by the Company as part of the estimated offering expenses of the Offering. For the avoidance of doubt, M&H's fees are included within the estimated total offering expenses of approximately $4,800,000 referenced in the "Use of Proceeds" section of the Prospectus.
We request that M&H provide an updated fee estimate if the scope of the procedures described in this letter or the number of circle-up items changes materially from those currently contemplated. Any material changes to the fee estimate should be communicated to us and to the Company's Chief Financial Officer, David Lau, promptly upon identification.
XIII. Contact Information
Please direct any questions or correspondence regarding this request to the following individuals:
Issuer's Counsel:
Robert Adeyemi, Partner (Responsible Partner) Audrey Zhou, Associate (Lead Associate) Calderwood & Harkness LLP 1 Market Street, Spear Tower, Suite 3600 San Francisco, California 94105 Telephone: [to be inserted]
Email: [to be inserted]