PRIVILEGED AND CONFIDENTIAL ATTORNEY-CLIENT PRIVILEGE / ATTORNEY WORK PRODUCT
CALDERWOOD & HARKNESS LLP 1 Market Street, Spear Tower, Suite 3600 San Francisco, California 94105
MEMORANDUM
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I. Executive Summary
The purpose of this memorandum is to analyze the legal and practical consequences of the decision by the Board of Directors (the "Board") of Lumos Analytics Inc. ("Lumos" or the "Company"), made at a duly convened meeting held on June 6, 2022, to withdraw the Company's proposed initial public offering (the "IPO") of shares of Class A Common Stock and the related Registration Statement on Form S-1 (SEC File Number 333-264518) (the "Registration Statement") filed with the U.S. Securities and Exchange Commission (the "SEC").
Lumos Analytics Inc. is a Delaware corporation headquartered at 450 Folsom Street, Suite 1200, San Francisco, California 94105. The Company operates a cloud-based, AI-driven analytics platform serving financial institutions on a software-as-a-service subscription model. Lumos initially submitted its Registration Statement on Form S-1 to the SEC on a confidential basis under the JOBS Act on January 10, 2022, and subsequently publicly filed Amendment No. 1 to the Registration Statement on April 14, 2022 (the "S-1/A").
The proposed offering contemplated the sale of 12,941,176 primary shares of Class A Common Stock by the Company and 3,500,000 secondary shares of Class A Common Stock by selling stockholders—consisting of 2,000,000 shares from Velthryn Venture Partners Fund IV, L.P. ("Velthryn") and 1,500,000 shares from Arclight Equity Group Fund VII, L.P. ("Arclight")—at a preliminary price range of $16.00 to $18.00 per share (midpoint of $17.00), targeting approximately $220,000,000 in gross proceeds to the Company. The Class A Common Stock was to be listed on the Nasdaq Global Select Market under the proposed ticker symbol "LMSA."
The underwriting syndicate for the proposed offering comprised Pinnacle Securities LLC ("Pinnacle Securities"), acting as lead book-running manager, Whitfield & Company LLC ("Whitfield"), acting as joint book-running manager, and Graystone Capital Markets Inc. ("Graystone"), acting as co-manager. The underwriting discount was set at 6.5% of the public offering price.
The road show for the proposed offering launched on April 25, 2022. However, the road show was paused on May 9, 2022, on the recommendation of Andrew Castellano of Pinnacle Securities, amid a severe market downdraft concentrated in the technology sector—the Nasdaq Composite Index declined approximately 12% during the month of April 2022 alone, and continued to deteriorate through May and early June. On May 16, 2022, the Board voted to delay pricing and to establish a monitoring window for market conditions. Following continued deterioration and no meaningful improvement in market sentiment for growth-stage technology companies, the Board voted on June 6, 2022, to withdraw the offering in its entirety.
Critically, no securities were sold pursuant to the Registration Statement at any time. The Registration Statement was never declared effective by the SEC, no final prospectus was issued, and the Underwriting Agreement was never executed.
This memorandum addresses the following topics in connection with the withdrawal:
(1) SEC withdrawal mechanics under Rule 477 of the Securities Act of 1933, as amended (the "Securities Act"), including the filing of Form RW;
(2) Preservation of confidential treatment for the Company's prior confidential submissions and related correspondence;
(3) The Company's ability to refile a registration statement in the future, including timing considerations and registration fee offsets;
(4) Nasdaq listing considerations, including the status of the Company's pending listing application;
(5) Contractual obligations arising from or related to the IPO process, including the underwriting mandate, lock-up agreements, investor rights agreements, credit facilities, commercial contracts, insurance, and service provider engagements;
(6) Public disclosure implications, both pre- and post-withdrawal;
(7) Impact on employee equity awards and stock options, including 409A valuation considerations;
(8) Governance implications for board committee structures and corporate organizational documents; and
(9) Strategic considerations for future liquidity events.
Each of these topics is addressed in detail below, followed by a comprehensive list of recommended action items at Section XIII.
II. Factual Background and Timeline
A. Corporate Overview
Lumos Analytics Inc. was incorporated in the State of Delaware on March 14, 2016, under Delaware File Number 6281934. The Company's federal Employer Identification Number is 82-3194567. Lumos is headquartered at 450 Folsom Street, Suite 1200, San Francisco, California 94105.
The Company operates a cloud-based, artificial intelligence-driven analytics platform designed to serve financial institutions. Lumos's core product offering enables customers to derive actionable insights from large-scale transactional and behavioral data through proprietary machine learning algorithms and natural language processing capabilities. The Company's platform operates on a software-as-a-service ("SaaS") subscription model, providing enterprise-grade solutions to banks, insurance companies, asset managers, and other financial services firms. As of the most recent reporting date, Lumos serves approximately 340 enterprise customers and processes in excess of 2 billion transactions per month through its platform.
The Company's executive management team consists of the following individuals:
• Priya Subramanian, Chief Executive Officer, Co-Founder, and Chair of the Board of Directors;
• Marcus Henley, Chief Technology Officer and Co-Founder;
• David Lau, Chief Financial Officer;
• Naomi Feinberg, General Counsel and Corporate Secretary; and
• Tomás Aguilar, Chief Revenue Officer.
The Board of Directors is currently composed of seven members:
• Priya Subramanian (management director; Co-Founder, CEO, and Board Chair);
• Marcus Henley (management director; Co-Founder and CTO);
• Diane Ochoa (independent director; Managing Director, Ridgeline Capital Partners);
• Samuel Adebayo (independent director);
• Catherine Mercer (independent director; Partner, Arclight Equity Group);
• Jonathan Tsai (investor-designated director; General Partner, Velthryn Venture Partners; designated pursuant to Velthryn's contractual board designation rights under the Investors' Rights Agreement); and
• Rebecca Stahl (investor-designated director; Principal, Arclight Equity Group; designated pursuant to Arclight's contractual board designation rights under the Investors' Rights Agreement).
B. Financing History
Lumos has raised a total of approximately $245 million in venture capital financing through four rounds of preferred stock financing, as summarized below:
The Series D financing round valued the Company at approximately $1.478 billion on a post-money basis, based on a price per share of $12.50 across approximately 118,200,000 fully diluted shares.
As of the date of the most recent capitalization analysis conducted in connection with the IPO process, the Company's total pre-IPO fully diluted share count was approximately 118,200,000 shares. This total includes all outstanding shares of common stock, shares of preferred stock (Series A through Series D), and an employee stock option pool of 14,800,000 shares, of which approximately 11,300,000 options were outstanding at a weighted-average exercise price of $4.82 per share. The remaining 3,500,000 shares in the option pool were reserved for future grants.
C. Key Financial Metrics
The following financial data is drawn from the Company's audited financial statements for the fiscal years ended December 31, 2020 and December 31, 2021, as included in the S-1/A, and from the Company's unaudited financial results for the first quarter of fiscal year 2022 (the quarter ended March 31, 2022), as reflected in the Company's internal financial reporting:
Fiscal Year 2021 (Audited):
• Revenue: $187.4 million (representing 58% year-over-year growth from $118.6 million in fiscal year 2020)
• Annual Recurring Revenue ("ARR"): $206.8 million as of December 31, 2021
• Gross Margin: 72.3%
• Net Loss: $(41.2) million
• Adjusted EBITDA (non-GAAP): $(18.7) million
• Cash and Cash Equivalents: $94.3 million as of December 31, 2021
First Quarter 2022 (Unaudited):
• Revenue: $54.9 million (representing approximately 40% year-over-year growth)
• ARR: $219.5 million as of March 31, 2022
• Net Loss: $(13.8) million
These financial results demonstrate that, notwithstanding the withdrawal of the IPO, the Company continues to experience meaningful revenue growth and expansion of its recurring revenue base. The Company's cash position, while reduced by operating losses and the costs associated with the IPO process, remains substantial and is supplemented by access to the Company's revolving credit facility, as discussed in Section VII.E below.
D. IPO Process Timeline
The following is a detailed chronological summary of key milestones in the Company's IPO process:
At no point during this timeline were any securities sold or allocated pursuant to the Registration Statement. The Registration Statement was never declared effective by the SEC. The Underwriting Agreement among the Company, the selling stockholders, and the underwriters was fully negotiated but was never executed by any party.
III. SEC Withdrawal Mechanics Under Rule 477
A. Overview of Rule 477
Rule 477 under the Securities Act of 1933, as amended, provides the mechanism by which a registrant may withdraw a registration statement that has been filed with the SEC but has not yet become effective. Specifically, Rule 477 permits an issuer to apply to the SEC to withdraw a registration statement or any amendment thereto at any time prior to the effective date of the registration statement, provided that the following conditions are met:
(a) No securities have been sold pursuant to the registration statement or any amendment thereto;
(b) The withdrawal is consistent with the public interest and the protection of investors; and
(c) The registrant files an application on the form prescribed by the SEC, currently Form RW, requesting the withdrawal.
The SEC's consent is required for withdrawal. However, in practice, where no securities have been sold and the registrant has determined not to proceed with the offering for legitimate business reasons—such as adverse market conditions, as is the case here—the SEC Staff routinely grants consent to withdrawal on a relatively expedited basis. The withdrawal process is generally considered ministerial in nature under these circumstances, and the SEC Staff does not typically conduct a substantive review of the reasons for withdrawal beyond confirming that no sales have occurred and that the withdrawal is not being sought in order to evade disclosure obligations or otherwise act contrary to investor interests.
B. Application on Form RW
To effectuate the withdrawal, Lumos will be required to file an application on Form RW with the SEC, referencing the Registration Statement on Form S-1, SEC File Number 333-264518, and the Company's CIK number 0001923847.
Form RW is a relatively brief filing. The required content of Form RW includes the following:
(i) Identification of the registrant: Lumos Analytics Inc., a Delaware corporation;
(ii) The SEC file number of the registration statement to be withdrawn: 333-264518;
(iii) A clear and unequivocal statement that no securities were sold pursuant to the Registration Statement or any amendment thereto;
(iv) A brief statement of the reasons for the withdrawal, which may be stated in general terms. In this case, the Company's stated reason will be that it has determined not to proceed with the offering due to adverse market conditions, and no securities have been sold under the Registration Statement; and
(v) A request that the SEC consent to the withdrawal of the Registration Statement and all amendments thereto, including the S-1/A filed on April 14, 2022.
Recommendation: We recommend that Lumos file Form RW with the SEC promptly following Board authorization, with a target filing date of June 10, 2022, or as soon as practicable thereafter. The filing should be made via EDGAR. The filing may be signed by any officer of the Company authorized to do so pursuant to the resolutions adopted by the Board at the June 6, 2022 meeting. Based on our discussions with Naomi Feinberg, we understand that the Board's June 6, 2022 resolutions authorized any officer to take all actions necessary to effectuate the withdrawal, including the filing of Form RW.
SEC Processing Timeline: Based on our experience with similar filings, the SEC Staff typically processes applications for withdrawal on Form RW within a period of 5 to 15 business days following filing. During this processing interval, the Registration Statement remains on file with the SEC but remains non-effective. Upon the SEC's granting of consent to withdrawal, an order of withdrawal is issued and becomes publicly available on EDGAR.
C. Confirmation That No Securities Were Sold
A critical prerequisite to the filing of Form RW, and to the SEC's granting of consent to withdrawal, is the confirmation that no securities were sold pursuant to the Registration Statement. We have conducted a preliminary review and are not aware of any circumstances suggesting that any sales occurred. However, prior to filing Form RW, we recommend obtaining formal written confirmations from the following parties:
(i) Pinnacle Securities LLC (Lisa Drummond, Head of Equity Capital Markets): Written confirmation that no indications of interest were converted to sales, no conditional commitments to purchase shares were made by any investor, no shares were allocated to any investor, and no shares were sold or delivered pursuant to the Registration Statement or any preliminary prospectus;
(ii) Whitfield & Company LLC (Derek Kaplan): Written confirmation to the same effect; and
(iii) Graystone Capital Markets Inc. (Hannah Morales): Written confirmation to the same effect.
In addition, we note the following with respect to investor interactions that occurred prior to the decision to withdraw:
• Testing-the-Waters Meetings: The TTW meetings that commenced on April 18, 2022, were conducted pursuant to Section 5(d) of the Securities Act, as added by the JOBS Act, and were limited to communications with qualified institutional buyers ("QIBs") as defined in Rule 144A under the Securities Act and institutional accredited investors ("IAIs") as defined in Rule 501 of Regulation D. These TTW communications did not constitute "offers to sell" within the meaning of Section 5(a) of the Securities Act for purposes of the prohibition on pre-effective offers, and no binding commitments or indications of interest convertible to binding commitments were solicited or accepted during these meetings.
• Road Show Presentations: The road show presentations that commenced on April 25, 2022 and were paused on May 9, 2022, were accompanied by or preceded by delivery of the preliminary prospectus (the "Red Herring") to each participating investor, in compliance with Section 5(b)(1) of the Securities Act. No binding commitments to purchase shares were solicited or accepted during the road show. The road show consisted of presentations to prospective investors regarding the Company's business, financial performance, and growth prospects, and did not involve the execution of any purchase agreements, subscription agreements, or similar instruments.
Based on the foregoing, we are confident that the requirement under Rule 477 that no securities were sold pursuant to the Registration Statement has been and will be satisfied. Nevertheless, the formal written confirmations from the underwriting syndicate members described above should be obtained and maintained in the permanent files for this matter as a matter of best practice and as evidence supporting the representations made in Form RW.
D. Effect of Withdrawal on Filing Fee
At the time of the public filing of the S-1/A on April 14, 2022, the Company paid an SEC registration fee of $20,394. This fee was calculated based on the maximum aggregate offering price of $220,000,000 (representing 12,941,176 primary shares plus 3,500,000 secondary shares at the high end of the preliminary price range of $18.00 per share, adjusted for rounding), multiplied by the then-applicable SEC registration fee rate of $92.70 per $1,000,000 of securities registered.
Under Rule 457(p) of the Securities Act, registration fees paid in connection with a registration statement that is subsequently withdrawn (and under which no securities were sold) may be applied as an offset against the filing fee for a new registration statement filed within five years of the date of the initial fee payment, provided that:
(i) The registrant references the prior filing and the fees previously paid in the new registration statement; and
(ii) The amount of the fee offset does not exceed the amount of the fees previously paid.
Accordingly, the $20,394 registration fee paid by Lumos is eligible for offset against the filing fee for any new registration statement filed by the Company within five years of the date of payment (i.e., on or before approximately April 14, 2027).
Recommendation: The Company should preserve complete records of the fee payment, including the EDGAR filing receipt and any related correspondence, for use in claiming the fee offset in connection with a future registration statement filing. We will maintain copies of these records in the matter file. Given the rapidly increasing SEC fee rates in recent years, while the absolute dollar amount is modest, recovering this offset as a matter of procedure is prudent.
IV. Preservation of Confidential Treatment
A. Status of Confidential DRS Submissions
During the course of the IPO process, the Company made three confidential draft registration statement submissions to the SEC Division of Corporation Finance, each pursuant to Section 6(e) of the Securities Act (as amended by Title I of the Jumpstart Our Business Startups Act of 2012 (the "JOBS Act")) and in accordance with applicable SEC guidance regarding confidential submission of draft registration statements by emerging growth companies:
(i) January 10, 2022: Initial confidential DRS submission;
(ii) March 4, 2022: First amended confidential DRS submission (filed in response to the SEC Staff's first comment letter dated February 14, 2022); and
(iii) March 28, 2022: Second amended confidential DRS submission (filed in response to the SEC Staff's second comment letter dated March 18, 2022).
Under the applicable SEC guidance for confidential submissions, these draft registration statements were not publicly available on EDGAR during the period of confidential review. However, the confidential treatment of these submissions was superseded upon the Company's public filing of Amendment No. 1 to the Registration Statement (the S-1/A) on April 14, 2022. Pursuant to SEC rules and guidance, at the time of the public filing, the SEC made all prior confidential DRS submissions publicly available on EDGAR. Accordingly, these confidential submissions are now part of the public record and are accessible to any member of the public through the SEC's EDGAR filing system.
B. Impact of Withdrawal on Public Filings
The withdrawal of the Registration Statement pursuant to Rule 477 does not result in the removal of any previously filed documents from EDGAR. Specifically:
• The publicly filed S-1/A (Amendment No. 1, filed April 14, 2022) will remain publicly accessible on EDGAR indefinitely, even after the SEC grants consent to the withdrawal of the Registration Statement.
• Form RW, upon filing, and the SEC's order consenting to withdrawal, once granted, will also become publicly available on EDGAR and will be associated with the Company's EDGAR filing history under CIK 0001923847.
• All prior confidential DRS submissions that were made publicly available at the time of the public filing of the S-1/A will likewise remain publicly accessible.
As a practical consequence, all of the Company's financial data, business descriptions, risk factors, descriptions of material contracts, executive compensation disclosure, beneficial ownership tables, and other substantive disclosures contained in the S-1/A and in the prior confidential submissions remain publicly available. Competitors, customers, prospective customers, current and former employees, potential acquirers, journalists, and other stakeholders will continue to have access to this information. This is an unavoidable consequence of the public filing and cannot be remedied by the withdrawal.
With respect to confidential treatment requests for specific exhibits filed under the Registration Statement, we note that if any confidential treatment orders were obtained from the SEC for redacted portions of material contracts—such as the Master Cloud Services Agreement with Brindoval Data Centers LLC or the Strategic Partnership Agreement with Nordwell Financial Technologies Inc.—those confidential treatment orders remain in effect and are unaffected by the withdrawal. We should confirm with the Company's records whether any such confidential treatment orders were, in fact, obtained.
SEC Comment Letter Correspondence: A significant issue concerns the public availability of the SEC Staff's comment letters issued to the Company and the Company's response letters. The SEC comment letters (dated February 14, 2022, containing 42 comments, and March 18, 2022, containing 12 comments) and the Company's response letters (dated March 4, 2022 and March 28, 2022) are subject to public release under the SEC's EDGAR system and the Freedom of Information Act ("FOIA"). Under the SEC's current practice, comment letters and response letters are typically made publicly available on EDGAR approximately 20 business days after the completion of the SEC Staff's review—which, in the ordinary course, occurs upon effectiveness of the registration statement or, in the case of a withdrawn filing, upon the SEC's granting of consent to withdrawal.
This correspondence contains detailed discussions of a number of matters that may be competitively sensitive, including the Company's revenue recognition methodology, its calculation of ARR, its presentation and reconciliation of non-GAAP financial measures (particularly Adjusted EBITDA), its cheap stock analysis and stock-based compensation valuation methodology, its customer concentration data (with the top 10 customers representing approximately 34% of ARR as of the most recent reporting period), and its proposed dual-class capital structure. The disclosure of this correspondence may provide competitors, customers, and other third parties with insight into the Company's financial reporting practices, valuation judgments, and areas of focus for the SEC Staff.
Recommendation: We recommend that the Company and its advisors carefully assess the sensitivity of the information contained in the SEC comment correspondence. If the Company determines that certain information in the correspondence is competitively sensitive and should not be publicly disclosed, the Company may submit a FOIA confidential treatment request to the SEC seeking to prevent or delay the public release of all or portions of the correspondence. Such requests are evaluated by the SEC on a case-by-case basis, and the Company would bear the burden of demonstrating that the information qualifies for confidential treatment under Exemption 4 of FOIA (trade secrets and confidential commercial or financial information). We note that the SEC has historically been somewhat skeptical of FOIA confidential treatment requests with respect to comment letter correspondence, but such requests have been granted in cases where the information is genuinely proprietary and its disclosure would cause competitive harm. We are prepared to assist with the preparation and filing of such a request if the Company elects to proceed.
V. Ability to Refile a Registration Statement
A. General Principles
The withdrawal of the Registration Statement under Rule 477 does not preclude Lumos from filing a new registration statement with the SEC at any future date. There is no regulatory "cooling-off" period, penalty, or other restriction imposed by the SEC on issuers that withdraw registration statements under Rule 477. The Company retains the full right to access the public capital markets at any time it deems appropriate.
Any subsequent filing would constitute a new Registration Statement on Form S-1 (or, if the Company becomes eligible in the future, on Form S-1 using a "short form" approach or on another available form), and would receive a new SEC file number. The new registration statement would be subject to a de novo review by the SEC Division of Corporation Finance, although, as discussed below, the review may be streamlined to the extent that prior comments were fully resolved and the Company's disclosure framework has not materially changed.
The S-1/A as filed on April 14, 2022, can serve as a strong foundation and starting point for any future registration statement, as the substantial majority of the Company's business description, risk factors, legal disclosures, and governance provisions will remain relevant, subject to updating. However, any new filing would require substantive revisions in at least the following areas:
(i) Financial Statements: The financial statements included in the S-1/A will become stale under the requirements of Regulation S-X. Under Rule 3-12 of Regulation S-X, audited annual financial statements are generally considered stale 134 days after the end of the fiscal year, and interim financial statements must be updated to cover the most recently completed fiscal quarter. Accordingly, a new filing would need to include updated audited financial statements (for fiscal year 2022, assuming a filing in 2023) and updated interim financial statements.
(ii) Material Developments: The new filing would need to reflect all material developments in the Company's business, operations, competitive landscape, regulatory environment, and financial condition occurring since the date of the S-1/A, including any new material contracts, customer gains or losses, changes in key personnel, product developments, cybersecurity incidents, litigation, or other events that would be required to be disclosed.
(iii) Risk Factors and MD&A: Risk factors and management's discussion and analysis of financial condition and results of operations would need to be updated to reflect current conditions, including the impact of the IPO withdrawal itself and any changes in the Company's growth trajectory or financial performance.
(iv) Capital Structure Changes: Any changes in the Company's capital structure—including new financing rounds, stock option grants, exercises, or forfeitures, changes in the option pool, or amendments to the terms of existing preferred stock—would need to be reflected.
(v) Updated Price Range: The preliminary price range in any new filing would need to reflect then-current market conditions, comparable company valuations, and the results of any updated valuation analyses.
B. Timing Considerations for Refiling
The timing of any future refiling will be a matter of strategic judgment for the Company and its Board, informed by market conditions and the Company's financial performance. From a practical standpoint, the following considerations bear on the timing of a potential refiling:
• Refiling Within 12 Months (by April 2023): If the Company elects to refile within approximately 12 months of the withdrawal, substantial portions of the S-1 disclosure can be recycled with relatively modest updating, significantly reducing the time, effort, and cost of the refiling process. Financial statements for fiscal year 2021 (already audited by Meridian & Howe LLP) would still form part of the historical financial presentation, supplemented by audited financial statements for fiscal year 2022 and any required interim periods.
• Refiling Beyond 12 Months: If the Company does not refile within 12 months, the preparation effort increases materially. The fiscal year 2021 financial statements would remain part of the historical presentation (as SEC rules generally require three years of audited income statement and cash flow data and two years of audited balance sheet data for domestic registrants), but the more recent financial periods would need to be fully audited or reviewed. Comfort letter procedures with Meridian & Howe LLP (Gregory Simmons, Audit Partner) would need to be restarted from the beginning, as prior comfort work would be considered stale.
• SEC Review Process: The SEC Division of Corporation Finance is unlikely to impose any penalty or heightened scrutiny on the Company's future filing as a result of the withdrawal. The SEC Staff will review any new filing on its own merits. However, to the extent that comments raised in the prior review cycle (the 42 comments in the first comment letter and 12 comments in the second comment letter) were fully resolved and the Company's disclosures in the relevant areas remain substantially consistent, the new review process may be abbreviated. The Staff may focus its review on new or materially changed disclosures rather than revisiting issues that were previously addressed to the Staff's satisfaction.
C. Registration Fee Offset Under Rule 457(p)
As discussed in Section III.D above, the $20,394 registration fee paid by the Company in connection with the S-1/A filing on April 14, 2022, is available for offset against the filing fee for a new registration statement filed within five years of the initial payment date, in accordance with Rule 457(p) under the Securities Act. The Company should reference the prior filing (SEC File Number 333-264518) and the fee previously paid in any future registration statement to claim this offset. We have flagged this for tracking in the matter file.
VI. Nasdaq Listing Considerations
A. Status of Listing Application
In connection with the proposed IPO, Lumos submitted a listing application to the Nasdaq Stock Market LLC for the listing of its Class A Common Stock on the Nasdaq Global Select Market under the proposed ticker symbol "LMSA." The listing application was submitted as part of the customary IPO process and was reviewed by Nasdaq Listing Qualifications staff in parallel with the SEC's review of the Registration Statement.
The listing application was not approved and will not become effective absent the consummation of the IPO. Nasdaq listing approval is conditioned upon, among other things, the satisfaction of initial listing standards (including share distribution, market capitalization, financial condition, and corporate governance requirements), which are measured at the time of listing. Because the IPO did not close, these conditions have not been and cannot be met, and the listing application will lapse.
With respect to listing fees, the Company had budgeted $295,000 for the initial listing fee payable to Nasdaq upon the listing of the Class A Common Stock. We should confirm with the Company whether any portion of this fee was prepaid or deposited in advance and, if so, whether any refund or credit against a future listing application is available. We recommend contacting Nasdaq Listing Qualifications to address this point and to formally withdraw the pending listing application.
B. Future Listing
The withdrawal of the IPO and the lapse of the pending listing application do not prejudice the Company's ability to submit a new listing application to Nasdaq (or to the New York Stock Exchange, or any other national securities exchange) in connection with a future offering or direct listing. A new listing application would be required and would be reviewed on its own merits at the time of submission.
In the interim, we recommend that the Company maintain compliance with Nasdaq's financial and governance listing standards to the extent practicable, particularly if a future IPO is contemplated within the next 12 to 24 months. Key areas of focus include:
• Maintenance of an independent audit committee with at least three members, including at least one member who qualifies as an "audit committee financial expert" under SEC rules;
• Maintenance of a majority-independent board of directors (or progress toward that goal);
• Adoption or maintenance of a code of conduct and ethics applicable to all directors, officers, and employees; and
• Compliance with Nasdaq's financial listing standards (minimum equity, minimum market value of publicly held shares, and other applicable thresholds).
While the Company is not required as a private company to comply with these standards, doing so will facilitate a more efficient listing process in the future and demonstrate to potential investors and to Nasdaq that the Company has maintained an appropriate corporate governance framework.
VII. Contractual Obligations and Termination of Agreements
The IPO process involved the negotiation, and in some cases the execution, of numerous agreements and engagement letters. The withdrawal of the IPO triggers the need to review the status, surviving obligations, and termination provisions of each of these arrangements. We address each in turn below.
A. Underwriting Agreement
The Underwriting Agreement among Lumos Analytics Inc. (as issuer), Velthryn Venture Partners Fund IV, L.P. and Arclight Equity Group Fund VII, L.P. (as selling stockholders), and Pinnacle Securities LLC (as representative of the several underwriters, including Whitfield & Company LLC and Graystone Capital Markets Inc.) was fully negotiated and drafted through multiple rounds of revision during the IPO process. However, the Underwriting Agreement was never executed by any party. Execution of the Underwriting Agreement was to occur in connection with the pricing of the IPO, which did not take place.
Because the Underwriting Agreement was not signed, no binding obligations exist between the Company, the selling stockholders, and the underwriters with respect to the purchase, sale, or underwriting of any shares of Class A Common Stock. The customary provisions of the Underwriting Agreement—including the firm commitment to purchase shares, the over-allotment option, the underwriter's indemnification obligations, and the representations and warranties of the issuer and selling stockholders—are not operative.
However, the engagement letters and mandate letters entered into between the Company and the underwriters at the time of, or in connection with, the September 22, 2021 organizational meeting may contain provisions that survive the termination or non-consummation of the offering. These provisions typically include the following:
(i) Expense Reimbursement: Mandate letters frequently obligate the issuer to reimburse the underwriters (or the lead underwriter on behalf of the syndicate) for certain out-of-pocket expenses incurred in connection with the offering, regardless of whether the offering is completed. Such reimbursable expenses may include road show costs, travel expenses, legal fees of underwriters' counsel (Hargrove & Liddell LLP), and other disbursements.
(ii) Indemnification for Road Show Activities: Some mandate letters include indemnification provisions in favor of the underwriters and their affiliates, directors, officers, employees, and agents for losses, claims, damages, or liabilities arising out of or related to the road show or other marketing activities conducted in connection with the offering.
(iii) Right of First Refusal / Right of First Offer for Future Offerings: Certain mandate letters grant the lead underwriter a right of first refusal or right of first offer with respect to the Company's next equity or equity-linked offering. These provisions, if present, may have a specified duration (often 12 to 24 months from the date of the mandate letter or from the date of termination of the engagement) and could constrain the Company's ability to engage alternative underwriters for a future offering.
(iv) Tail Provisions: Similarly, some mandate letters provide that the underwriter is entitled to a specified fee or compensation if the Company completes an offering within a defined "tail" period (often 12 to 18 months) following the termination of the engagement, to the extent that the offering involves investors introduced to the Company by the underwriter during the engagement.
Recommendation: We strongly recommend that the engagement letters and mandate letters with Pinnacle Securities LLC and Whitfield & Company LLC be reviewed in detail to identify any surviving obligations, including expense reimbursement, ROFR/ROFO, tail provisions, and indemnification obligations. To the extent such provisions exist, we recommend negotiating a clean termination and release with each underwriter that addresses all surviving obligations, limits the Company's exposure, and provides clarity with respect to the Company's freedom to engage in future capital markets transactions. Graystone Capital Markets Inc., as co-manager, should also be included in this review, though co-manager mandate letters are typically less extensive in scope.
B. Lock-Up Agreements
In connection with the proposed IPO, form lock-up agreements were prepared providing for a 180-day lock-up period following the date of the final prospectus, during which the Company's directors, executive officers, and stockholders holding more than 1% of the Company's outstanding shares would be restricted from selling, transferring, pledging, or otherwise disposing of shares of Company common stock or securities convertible into or exercisable for common stock, subject to customary exceptions. The lock-up agreements were to be executed in favor of Pinnacle Securities LLC, as representative of the underwriters, and were to be delivered as a condition to closing of the IPO.
We need to confirm the execution status of the lock-up agreements. In the ordinary course, lock-up agreements are typically executed by the lock-up signatories during the road show period and delivered to the underwriters in advance of pricing. Given that the road show launched on April 25, 2022 and was paused on May 9, 2022, it is possible that some or all of the lock-up agreements were executed during this window.
However, even if the lock-up agreements were executed, they contain conditions precedent that are tied to the consummation of the IPO. Specifically, the lock-up period by its terms commences on "the date of the final prospectus"—and because no final prospectus was issued and the IPO did not close, the lock-up period never commenced. Accordingly, the lock-up agreements should be void or terminable by their terms, as the conditions precedent to their effectiveness were never satisfied.
Recommendation: Notwithstanding the foregoing analysis, we recommend obtaining a written release from Pinnacle Securities LLC (as the beneficiary of the lock-up agreements) expressly confirming that the lock-up agreements are terminated and of no further force or effect, and that Pinnacle Securities does not claim any rights under the lock-up agreements. This is a prudent measure to eliminate any ambiguity and to ensure that the Company's stockholders are not subject to any residual transfer restrictions. The early release provisions contained in the lock-up agreements—granting Pinnacle Securities sole discretion to release any lock-up signatory, and providing carve-outs for estate planning transfers and charitable gifts—become moot upon the termination of the lock-up agreements.
C. Investor Rights Agreements
The Company is a party to an Amended and Restated Investors' Rights Agreement, an Amended and Restated Voting Agreement, and an Amended and Restated Right of First Refusal and Co-Sale Agreement (collectively, the "Investor Agreements"), entered into among the Company, its founders (Priya Subramanian and Marcus Henley), and its institutional investors—Velthryn Venture Partners Fund IV, L.P., Arclight Equity Group Fund VII, L.P., and Ridgeline Capital Partners Fund II, L.P.—as amended and restated in connection with each successive financing round (most recently in connection with the Series D financing round completed on August 24, 2020).
The Investor Agreements contain a number of provisions that were designed to terminate upon the occurrence of a "Qualified IPO" or "IPO Closing" (as defined therein). Because the proposed IPO was not consummated and the Registration Statement is being withdrawn, no "Qualified IPO" or "IPO Closing" has occurred. Accordingly, the following provisions of the Investor Agreements remain in full force and effect:
(i) Registration Rights: The demand registration rights, piggyback registration rights, and Form S-3 registration rights granted to the institutional investors under the Investors' Rights Agreement remain operative. The institutional investors retain the right to demand that the Company file a registration statement covering the resale of their shares at a future date, subject to the terms and conditions of the agreement.
(ii) Information Rights: The information rights provisions—requiring the Company to provide audited annual financial statements, unaudited monthly and quarterly financial statements, budgets, and other financial information to investors holding specified minimum ownership thresholds—remain in effect. These rights would have terminated upon an IPO, at which point public reporting obligations would have provided a substitute source of information.
(iii) Preemptive Rights: Preemptive rights (also referred to as "pro rata participation rights" or "rights of first offer") in favor of the institutional investors, granting them the right to participate pro rata in future equity financings by the Company, remain in full force and effect.
(iv) Board Designation Rights: Under the Voting Agreement, Velthryn Venture Partners is entitled to designate one member to the Company's Board of Directors (currently Jonathan Tsai), and Arclight Equity Group is entitled to designate one member to the Board (currently Rebecca Stahl). These designation rights remain operative and will continue until they expire or terminate by their own terms (typically upon specified dilution thresholds or upon an IPO).
(v) Anti-Dilution Protections: The anti-dilution provisions applicable to the Company's outstanding preferred stock (Series A through Series D), including weighted-average and full-ratchet anti-dilution adjustments (as applicable to each series), remain intact. These protections would have been extinguished upon the automatic conversion of preferred stock to common stock that was to occur in connection with the IPO.
(vi) Right of First Refusal and Co-Sale Rights: The right of first refusal and co-sale (tag-along) rights in favor of the institutional investors with respect to proposed transfers of shares by the founders and other key holders remain operative.
The continued applicability of the Investor Agreements is a significant practical consequence of the withdrawal. The Company's institutional investors retain the full suite of protective rights, governance rights, and economic rights that they bargained for in connection with each financing round, and these rights will remain in place until the occurrence of a qualifying liquidity event or other termination event defined in the agreements.
Recommendation: We recommend that the Company circulate a notice to the counsel for each institutional investor (Velthryn Venture Partners, Arclight Equity Group, and Ridgeline Capital Partners) confirming the withdrawal of the Registration Statement and the ongoing applicability of the Investor Agreements and all rights, preferences, and protections thereunder. This communication should be coordinated with Naomi Feinberg and should be drafted in a manner that is factual, measured, and does not include forward-looking statements regarding the timing or likelihood of a future liquidity event.
D. Selling Stockholder Arrangements
As noted above, the proposed offering included a secondary component: Velthryn Venture Partners Fund IV, L.P. was registered to sell up to 2,000,000 shares of Class A Common Stock, and Arclight Equity Group Fund VII, L.P. was registered to sell up to 1,500,000 shares of Class A Common Stock. The arrangements for these secondary sales were incorporated into the terms of the (unexecuted) Underwriting Agreement and were conditioned on the consummation of the IPO.
No separate selling stockholder agreements were executed outside the framework of the Underwriting Agreement. Accordingly, the arrangements for secondary sales lapse entirely with the withdrawal of the offering, and no further action is required with respect to the selling stockholder arrangements, other than as may be required under the Investor Agreements (addressed in Section VII.C above).
E. Revolving Credit Facility — Ashford National Bank
Lumos maintains a revolving credit facility (the "Credit Facility") with Ashford National Bank, pursuant to a credit agreement dated June 1, 2021, in the aggregate principal amount of $50,000,000. The Credit Facility bears interest at a rate of the Secured Overnight Financing Rate ("SOFR") plus 275 basis points and matures on June 1, 2024. As of March 31, 2022, approximately $15,000,000 was drawn under the Credit Facility, leaving approximately $35,000,000 of available borrowing capacity.
We have reviewed the credit agreement and note the following:
• The withdrawal of the IPO does not constitute an event of default or trigger a mandatory prepayment obligation under the Credit Facility. The credit agreement does not contain a financial covenant or condition that is tied to the consummation of an IPO or the maintenance of a public filing or listing.
• However, the credit agreement contains affirmative covenants requiring the Company to provide notice to the lender of "material corporate events" or "material changes in business plans" within a specified period (typically 10 to 30 days) following the occurrence of such events. The withdrawal of a proposed IPO may be reasonably interpreted as a material corporate event triggering this notification requirement.
• In addition, the credit agreement may contain representations regarding the accuracy and completeness of information provided to the lender. The Company should ensure that any prior communications to Ashford National Bank regarding the IPO timeline or anticipated receipt of IPO proceeds are updated to reflect the withdrawal.
Recommendation: We recommend that the Company provide timely notice to Ashford National Bank's loan administration department regarding the withdrawal of the IPO, as required under the affirmative covenants of the Credit Facility. The notice should be factual and should not contain forward-looking statements regarding future IPO plans. We are available to assist with the drafting of this notification.
F. Material Commercial Contracts
We have reviewed the Company's material commercial contracts to assess whether the withdrawal of the IPO triggers any notification requirements, termination rights, or other consequences under these agreements.
• Master Cloud Services Agreement with Brindoval Data Centers LLC: Dated January 15, 2021, with a five-year initial term and a minimum annual commitment of $8.2 million. This agreement does not contain any provisions conditioned on the Company's public or private status, does not include change-of-control provisions that would be triggered by an IPO (or the withdrawal thereof), and is unaffected by the withdrawal.
• Strategic Partnership Agreement with Nordwell Financial Technologies Inc.: Dated March 30, 2021, with a three-year initial term. We have reviewed this agreement and do not believe it contains any provisions conditioned on the Company's public company status. However, we recommend that the Company confirm that no counterparty notification is required under any change-of-control, material event, or "key person" clause in this agreement.
Recommendation: Confirm that no counterparty notifications are required under change-of-control, material event, or similar clauses in the Company's other material commercial contracts. The withdrawal of an IPO is generally not considered a "change of control" under standard commercial contract provisions, but each agreement should be reviewed on its own terms to confirm.
G. D&O Insurance
In anticipation of the IPO, the Company had been in the process of procuring a public-company directors' and officers' liability insurance policy with Terrace Hill Insurance Group Ltd. (acting through its U.S. operating subsidiary, Terrace Hill Insurance Company of America). The proposed policy parameters included:
• Aggregate limit: $30,000,000
• Tail coverage: 6 years
• Estimated annual premium: approximately $2,400,000
The D&O policy was not bound. The binding of the policy was contingent on the pricing and closing of the IPO. Because the IPO did not price or close, no policy was issued, no premium was paid, and no coverage is in effect under this proposed policy.
Recommendation: The Company should contact Julia Brennan at Terrace Hill Insurance Group to formally terminate the insurance application and binder process. In addition, the Company should confirm that its existing private-company D&O liability insurance policy remains in full force and effect and should review the adequacy of that policy's coverage limits in light of the Company's current operations, board composition, and risk profile. If the Company anticipates a future IPO within the next 12 to 24 months, it may be advisable to begin preliminary discussions with insurance brokers regarding public-company D&O policy options at that time.
H. Transfer Agent
In connection with the proposed IPO, the Company negotiated a proposed engagement of Broadleaf Transfer Services Inc. as transfer agent and registrar for the Class A Common Stock. The budgeted setup fee for this engagement was approximately $25,000.
If the engagement agreement with Broadleaf was executed, we recommend reviewing the termination provisions of that agreement and providing notice of termination. If the engagement was still in the negotiation or documentation phase and was not yet executed, no further action is required with respect to Broadleaf.
Recommendation: Confirm the execution status of the Broadleaf Transfer Services engagement agreement and take appropriate action to terminate or conclude the engagement, as applicable.
I. Financial Printer / EDGAR Agent
Hennessy Consulting Group LLC (Martin Royce, contact) was engaged to provide EDGAR filing, typesetting, and financial printing services in connection with the IPO. Hennessy provided these services throughout the drafting, filing, and road show phases of the IPO process.
The estimated cost of services rendered by Hennessy through the date of the withdrawal is approximately $185,000. We recommend confirming that Hennessy has submitted final invoices for all services rendered and that the Company settles these invoices promptly. No ongoing obligations to Hennessy exist following the withdrawal, other than payment for services already rendered.
VIII. Public Disclosure Obligations
A. Pre-Withdrawal Public Disclosures
As discussed in Section IV.B above, the publicly filed S-1/A (Amendment No. 1, filed April 14, 2022) contains extensive disclosures regarding the Company's business, financial condition, results of operations, risk factors, executive compensation, beneficial ownership, capital structure, corporate governance, and material contracts. These disclosures were prepared in accordance with the requirements of the Securities Act and Regulation S-K and were subject to SEC Staff review and comment. The S-1/A represents a comprehensive snapshot of the Company as of its filing date and includes audited financial statements for fiscal years 2020 and 2021, as well as unaudited interim financial data.