PRIVILEGED AND CONFIDENTIAL — ATTORNEY WORK PRODUCT
CALDERWOOD & HARKNESS LLP 101 California Street, Suite 4500 San Francisco, California 94111
Matter No.: 1008-00008
MEMORANDUM
TO: Harrison Wexford, Partner
FROM: Naomi Petersen, Associate
DATE: March 15, 2024
RE: Transaction Structuring and Earnout Analysis — Lumos Analytics Inc. Proposed Acquisition of Prismyx Data Solutions LLC
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I. Executive Summary
The purpose of this memorandum is to analyze and recommend the proposed transaction structure, purchase price allocation, earnout mechanics, indemnification framework, and working capital adjustment mechanism for Lumos Analytics Inc.'s ("Lumos" or the "Buyer") proposed acquisition of Prismyx Data Solutions LLC ("Prismyx" or the "Target") at an aggregate deal value of Fifteen Million Dollars ($15,000,000). This memorandum is prepared for your review and guidance as we proceed through the due diligence phase and begin drafting the definitive transaction documentation.
The transaction is proposed to be structured as a forward merger under the Delaware Limited Liability Company Act ("DLLCA") § 18-209, in which Prismyx will merge with and into Prismyx Acquisition Sub LLC ("Merger Sub"), a newly formed wholly owned Delaware limited liability company subsidiary of Lumos, with Merger Sub surviving as a wholly owned subsidiary of Lumos. This structure was selected following an analysis of the available alternatives — including a straight asset purchase and a reverse merger — and provides the most efficient mechanism for transferring all of Prismyx's assets, intellectual property, contractual relationships, and liabilities to the Buyer by operation of law.
The aggregate consideration of $15,000,000 consists of two components: (i) Ten Million Five Hundred Thousand Dollars ($10,500,000) in closing cash consideration, representing approximately seventy percent (70%) of the total deal value, and (ii) up to Four Million Five Hundred Thousand Dollars ($4,500,000) in contingent earnout payments, representing approximately thirty percent (30%) of the total deal value, payable in two equal tranches of $2,250,000 each and tied to PrismLens Net New ARR milestones and founder retention conditions over a thirty (30) month earnout period following closing.
The two Prismyx co-founders — Jonah Eberhardt (holding 55% of the outstanding membership units, or 550 of 1,000 units) and Talia Messina (holding 45% of the outstanding membership units, or 450 of 1,000 units) — are the sole equity holders of Prismyx. Both Eberhardt and Messina will enter into employment agreements with the surviving entity effective as of the closing date and will be subject to non-compete and non-solicitation covenants. Their continued employment is a condition to the earnout payments, creating a "retention earnout" structure designed to align incentives and ensure continued product development leadership through the earnout period.
The indemnification framework provides robust protection for the Buyer. Four Million Five Hundred Thousand Dollars ($4,500,000), representing thirty percent (30%) of the aggregate deal value, will be deposited at closing into an escrow account held by Fenwick Escrow Services LLC, serving as the sole and exclusive source of recovery for standard indemnification claims. The survival period for general representations and warranties is eighteen (18) months from the closing date, with an extended survival period of thirty-six (36) months for fundamental representations. The indemnification structure includes a tipping basket of $150,000 (1% of deal value) and a de minimis threshold of $15,000 per individual claim, with special indemnities (pre-closing tax liabilities, breaches of fundamental representations, and fraud) not subject to the basket or cap limitations.
The working capital adjustment mechanism establishes a target net working capital of Four Hundred Eighty-Five Thousand Dollars ($485,000), based on Prismyx's historical operating levels, with a dollar-for-dollar true-up following closing and a de minimis collar of Twenty-Five Thousand Dollars ($25,000) within which no adjustment will be made.
From a regulatory and third-party consent perspective, a filing under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the "HSR Act") is not required, as the aggregate deal value of $15,000,000 falls below the applicable filing threshold. However, two material approvals must be obtained prior to or at closing: (1) Lumos board approval, including the affirmative vote of at least one Ridgeline Capital Partners, LP ("Ridgeline Capital") designee, as required under the Lumos Stockholders' Agreement for acquisitions exceeding $5,000,000 in value; and (2) the consent of Linden Grove National Bank under the Revolving Credit Agreement dated September 15, 2022. In addition, the change-of-control consent of Ardent Financial Technologies, Inc. — Prismyx's largest customer, representing approximately 31% of revenue — must be obtained under the applicable Master SaaS Agreement.
This memorandum sets forth the detailed analysis supporting these recommendations and addresses the key structuring, commercial, and legal considerations for the engagement team's review.
II. Background
A. The Buyer — Lumos Analytics Inc.
Lumos Analytics Inc. is a Delaware corporation, founded in 2018 and headquartered at 450 Mission Street, Suite 2200, San Francisco, California 94105 (EIN: 83-2941076). Lumos operates a venture-backed software-as-a-service ("SaaS") platform providing AI-driven analytics and data intelligence tools to a customer base primarily consisting of financial institutions, hedge funds, and fintech companies. The company reported annual recurring revenue of approximately Sixty-Two Million Dollars ($62,000,000) for the fiscal year ended December 31, 2023, and employs approximately 215 individuals across its San Francisco headquarters and satellite offices.
Lumos's executive leadership team includes the following key officers:
• Desmond Calloway — Chief Executive Officer
• Priya Subramaniam — Chief Financial Officer
• Margaux Fontaine — General Counsel
The Lumos Board of Directors is composed of five members:
• Desmond Calloway — CEO and Director
• Priya Subramaniam — CFO and Director
• Tobias Prumvane — Director (Ridgeline Capital Partners, LP designee)
• Claire Yeung — Director (Ridgeline Capital Partners, LP designee)
• Franklin Maeda — Independent Director
Ridgeline Capital Partners, LP, a growth-equity fund based at 600 Lexington Avenue, 28th Floor, New York, New York 10022, holds approximately thirty-eight percent (38%) of Lumos's fully diluted equity capital. Ridgeline Capital's general partner is Ridgeline Capital Management LLC, and its Managing Partners, Tobias Prumvane and Claire Yeung, serve on the Lumos Board of Directors as Ridgeline Capital designees. The Lumos Stockholders' Agreement, to which Ridgeline Capital is a party, requires board approval — including the affirmative vote of at least one Ridgeline Capital designee — for any acquisition by Lumos in which the aggregate consideration exceeds $5,000,000. Because the proposed acquisition of Prismyx involves aggregate consideration of $15,000,000, this approval requirement will apply, and we will need to coordinate the scheduling of a board meeting or action by written consent to secure the requisite vote.
Lumos maintains an existing Twenty-Five Million Dollar ($25,000,000) revolving credit facility with Linden Grove National Bank, located at 555 Montgomery Street, San Francisco, California 94111. The relationship manager for this facility is Gregory Olshan. The underlying Revolving Credit Agreement, dated September 15, 2022, includes a negative covenant requiring Lumos to provide notice to and obtain consent from Linden Grove National Bank prior to consummating any permitted acquisition. We anticipate that Lumos may draw on this facility to fund a portion of the closing cash consideration, which further necessitates timely engagement with Mr. Olshan to secure the required bank consent. Our preliminary review of the credit agreement indicates that the proposed acquisition should qualify as a "Permitted Acquisition" under the terms of the facility, subject to satisfaction of the notice and consent conditions and compliance with financial covenants.
Lumos has engaged Bristow Farr Financial Advisory LLC as its financial advisor for this transaction. The engagement is led by Managing Director Arun Padmanabhan. The advisory fee structure consists of a flat fee of One Hundred Fifty Thousand Dollars ($150,000) plus a success fee equal to 0.5% of the aggregate transaction value upon closing, which, based on the $15,000,000 deal value, yields a success fee of Seventy-Five Thousand Dollars ($75,000), for a total estimated advisory fee of Two Hundred Twenty-Five Thousand Dollars ($225,000). Bristow Farr has been engaged to provide valuation support, structuring analysis, and negotiation assistance throughout the transaction process.
Haverford & Keane, CPAs, serves as the independent auditor for the transaction, with Engagement Partner Lorraine Chow leading the financial review engagement. The scope of Haverford & Keane's engagement includes a review of Prismyx's historical financial statements, validation of the working capital target, and post-closing preparation of the final net working capital determination. The estimated engagement fee is approximately Forty-Five Thousand Dollars ($45,000).
B. The Target — Prismyx Data Solutions LLC
Prismyx Data Solutions LLC is a Delaware limited liability company organized in 2020, with its principal place of business at 1414 Walnut Street, Suite 310, Philadelphia, Pennsylvania 19102 (EIN: 86-1537842). Prismyx's registered agent is Capitol Registered Agents, Inc., located at 1209 Orange Street, Wilmington, Delaware 19801.
Prismyx develops, markets, and supports "PrismLens," an analytics plugin suite that integrates with major financial data platforms to provide real-time data visualization, anomaly detection, and predictive trend overlay capabilities. The PrismLens product is delivered on a SaaS subscription basis, and substantially all of Prismyx's revenue is recurring in nature. For the fiscal year ended December 31, 2023, Prismyx reported total revenue of approximately Three Million Eight Hundred Thousand Dollars ($3,800,000), representing entirely recurring SaaS subscription revenue, and earnings before interest, taxes, depreciation, and amortization ("EBITDA") of approximately Six Hundred Twenty Thousand Dollars ($620,000). The company employs approximately twenty-two (22) individuals, primarily consisting of software engineers, data scientists, and customer success personnel.
The equity of Prismyx is held entirely by the two co-founders, with no outside institutional investors:
• Jonah Eberhardt — 55% ownership, holding 550 of 1,000 outstanding membership units
• Talia Messina — 45% ownership, holding 450 of 1,000 outstanding membership units
There are no outstanding options, warrants, convertible instruments, or other rights to acquire membership units in Prismyx, and no phantom equity, profits interests, or other equity-linked compensation arrangements are in place. The simplicity of the capitalization structure is a meaningful benefit for this transaction, as it eliminates the complexity associated with waterfall calculations, option cancellation payments, and multi-class equity distributions that are common in venture-backed acquisitions.
Prismyx's revenue is concentrated among a relatively small number of key customer accounts. The three largest customers and their respective revenue contributions for fiscal year 2023 are as follows:
The concentration of approximately 31% of Prismyx's annual recurring revenue in a single customer — Ardent Financial Technologies, Inc. — represents a notable risk factor. The Master SaaS Agreement between Prismyx and Ardent Financial Technologies includes a change-of-control provision that requires Prismyx to obtain Ardent's prior written consent before effecting a change of control. Failure to obtain this consent prior to closing could result in Ardent having the right to terminate the agreement, which would represent a material adverse impact on the post-closing business. Accordingly, obtaining Ardent's consent is a critical path item and should be commenced promptly following execution of the definitive merger agreement.
Prismyx holds the following intellectual property assets, which are central to the acquisition's strategic rationale:
Patent Application: U.S. Patent Application No. 17/842,316, filed June 14, 2022, entitled "Method and System for Real-Time Anomaly Detection in Financial Data Streams." This application is currently pending before the United States Patent and Trademark Office. The forward merger structure will transfer all rights in this application to the surviving entity by operation of law, avoiding the need for a separate assignment filing, although a confirmatory assignment may be prudent.
Registered Trademarks:
• "PrismLens" — U.S. Trademark Registration No. 6,894,112
• "Prismyx" — U.S. Trademark Registration No. 6,701,488
• Prismyx Prism Logo — U.S. Trademark Registration No. 6,933,201
In addition to its intellectual property portfolio, Prismyx maintains the following material contracts and operational arrangements:
Office Lease: Prismyx leases its principal office space at 1414 Walnut Street, Suite 310, Philadelphia, Pennsylvania 19102, pursuant to a commercial lease agreement that expires on January 31, 2026. Monthly rent under the lease is $8,750, representing an annual rent obligation of $105,000. Our due diligence review of the lease is ongoing, and we will confirm whether the lease contains an assignment or change-of-control provision that would require landlord consent.
Cloud Hosting Agreement: Prismyx utilizes Ridgeway Industries ("Meridian Technologies") as its primary cloud hosting provider, at a current monthly cost of approximately $14,200 (approximately $170,400 annualized). The terms of the Meridian Technologies hosting agreement should be reviewed during due diligence to confirm compliance with data processing and security obligations owed to Prismyx's customers.
Prismyx is represented in this transaction by Cartwright, Daugherty & Voss LLP, with offices at 1700 Market Street, Suite 2800, Philadelphia, Pennsylvania 19103. The Seller's legal team is led by Sabrina Delvecchio, Partner, with support from Marcus Greenbaum, Associate. We have had preliminary discussions with Ms. Delvecchio regarding the expected transaction timeline and documentation process, and we anticipate a cooperative, if commercially focused, negotiation dynamic.
C. Strategic Rationale
Lumos's proposed acquisition of Prismyx is driven by a clear product strategy: the PrismLens plugin suite fills a significant gap in Lumos's existing product offering for real-time data visualization and anomaly detection capabilities specifically tailored to financial services clients. While Lumos's core platform provides robust AI-driven analytics and data intelligence tools, it currently lacks a purpose-built, embeddable plugin suite capable of delivering the real-time visualization, anomaly detection, and predictive trend overlay functionality that PrismLens offers. Integrating PrismLens into the Lumos platform would enable Lumos to offer a more comprehensive, end-to-end analytics solution to its existing customer base and would position the combined product offering competitively against established incumbents in the financial data analytics market.
At an aggregate deal value of $15,000,000, the transaction implies a revenue multiple of approximately 3.95x based on Prismyx's 2023 recurring revenue of $3,800,000 ($15,000,000 ÷ $3,800,000 ≈ 3.95x). This multiple is within the range of comparable transactions for growth-stage SaaS companies with strong recurring revenue profiles, albeit on the higher end, reflecting the strategic premium associated with PrismLens's unique capabilities and the competitive dynamics of the acquisition. The 30% earnout component of the consideration effectively reduces the at-risk cash payment at closing to $10,500,000 (representing a closing-date revenue multiple of approximately 2.76x), which provides meaningful downside protection for Lumos in the event that PrismLens does not achieve the projected revenue growth milestones.
The retention of both co-founders — Jonah Eberhardt and Talia Messina — is critical to the successful integration of PrismLens into the Lumos platform and to the continued development and enhancement of the PrismLens technology. The founders possess deep subject-matter expertise in financial data anomaly detection and visualization, and their continued involvement is essential to maintaining customer relationships, driving product innovation, and achieving the earnout milestones. The retention earnout structure is designed to provide strong economic incentives for both founders to remain with the combined organization and to contribute meaningfully to PrismLens revenue growth through the full thirty-month earnout period.
The parties executed a Letter of Intent / Term Sheet on March 1, 2024, establishing the key commercial terms of the proposed transaction on a non-binding basis (other than customary exclusivity, confidentiality, and expense provisions). Due diligence commenced on March 4, 2024 and is expected to continue through March 29, 2024. Subject to the satisfactory completion of due diligence and resolution of any issues identified, the target date for execution of the definitive merger agreement is early April 2024, with an expected closing date of May 22, 2024.
III. Transaction Structure — Forward Merger Under DLLCA § 18-209
A. Choice of Structure: Forward Merger
After careful analysis of the available transaction structures, we recommend structuring the acquisition as a forward merger under DLLCA § 18-209, in which Prismyx (the Target) merges with and into Prismyx Acquisition Sub LLC (the Merger Sub), a newly formed wholly owned Delaware LLC subsidiary of Lumos, with Merger Sub surviving the merger as a wholly owned subsidiary of Lumos.
We considered three primary structural alternatives for the acquisition and evaluated each against the key commercial and legal objectives of the transaction:
Asset Purchase. Under an asset purchase structure, Lumos (or a subsidiary) would acquire specified assets and assume specified liabilities of Prismyx pursuant to an asset purchase agreement. While an asset purchase provides the Buyer with the ability to selectively acquire assets and exclude unwanted liabilities, it presents several significant drawbacks in the context of this transaction. First, an asset purchase would require the individual assignment and transfer of each of Prismyx's contracts, permits, and intellectual property assets. This is particularly problematic with respect to the pending U.S. Patent Application No. 17/842,316, the three registered trademarks, and the numerous customer SaaS subscription agreements, each of which would need to be individually assigned (and, in many cases, with the consent of the counterparty). The administrative burden and risk of consent failures make an asset purchase structure less attractive. Second, an asset purchase raises potential bulk-sale compliance issues under applicable state law. Third, the asset purchase structure does not provide the same clean mechanism for effecting the retention earnout, as the sellers would not automatically transition as employees of the surviving entity by operation of the merger. For these reasons, we do not recommend an asset purchase structure.
Reverse Merger. Under a reverse merger structure, Merger Sub would merge with and into Prismyx, with Prismyx surviving as a wholly owned subsidiary of Lumos. While this structure achieves many of the same benefits as a forward merger — including transfer by operation of law — a reverse merger would result in Prismyx itself (the target entity) surviving the merger. This structure is less preferred because it would result in the surviving entity retaining Prismyx's historical liabilities, including any unknown or contingent liabilities, within the original target entity. A forward merger, by contrast, results in Merger Sub — a clean, newly formed entity with no pre-closing operations — surviving the merger and receiving all of the target's assets and liabilities by operation of law. While the practical distinction is modest (since Merger Sub will assume all liabilities in either structure by operation of law), the forward merger provides a marginally cleaner organizational structure from Lumos's perspective and is the more conventional approach for acquisitions of this type.
Forward Merger (Recommended). The forward merger structure, in which Prismyx merges with and into Merger Sub (which survives as a wholly owned subsidiary of Lumos), provides the following key benefits:
(i) Transfer by Operation of Law. All assets, intellectual property, contracts, permits, and liabilities of Prismyx are transferred to the surviving entity by operation of law, without the need for individual assignment instruments. This is particularly valuable for the transfer of Prismyx's pending patent application (U.S. Patent Application No. 17/842,316) and registered trademarks, which will vest in the surviving entity automatically upon the effective time of the merger. While we would recommend filing a confirmatory assignment with the U.S. Patent and Trademark Office for record-keeping purposes, the transfer itself is effected by the merger.
(ii) Avoidance of Bulk-Sale Issues. A merger under DLLCA § 18-209 is not subject to bulk-sale requirements, eliminating the compliance risk associated with an asset purchase.
(iii) Continuity of Contractual Relationships. The surviving entity succeeds to all of Prismyx's contractual relationships by operation of law. While certain contracts — most notably the Master SaaS Agreement with Ardent Financial Technologies, Inc. — contain change-of-control provisions that require consent, the underlying contractual relationships are not terminated by the merger absent the exercise of such consent rights. This is an important distinction from an asset purchase, where the failure to obtain an assignment consent would result in the contract not being transferred at all.
(iv) Cleaner Earnout and Employment Structure. The forward merger structure provides a seamless mechanism for the retention earnout and post-closing employment of the founders. Both Eberhardt and Messina will enter into employment agreements with the surviving entity (Prismyx Acquisition Sub LLC) effective as of the closing date, ensuring continuity of the employment relationship and aligning the employment obligations with the earnout conditions.
Both Prismyx and Merger Sub are (or will be) Delaware limited liability companies, and the merger will be governed by Delaware law, providing a well-developed and predictable legal framework for the transaction.
B. Formation of Merger Sub — Prismyx Acquisition Sub LLC
In order to effect the forward merger, Lumos will form Prismyx Acquisition Sub LLC as a wholly owned direct subsidiary organized as a Delaware limited liability company. The key organizational details of Merger Sub are as follows:
• Entity Name: Prismyx Acquisition Sub LLC
• Jurisdiction of Organization: Delaware
• Sole Member: Lumos Analytics Inc.
• Registered Agent: Capitol Registered Agents, Inc., 1209 Orange Street, Wilmington, Delaware 19801
• Employer Identification Number (EIN): 93-4218560
• Purpose: Formed for the sole purpose of effecting the merger contemplated by the Agreement and Plan of Merger; will have no pre-closing operations, assets, or liabilities.
The Certificate of Formation for Prismyx Acquisition Sub LLC should be filed with the Delaware Secretary of State promptly following execution of the definitive merger agreement. The LLC Agreement for Merger Sub will be a simple, single-member LLC agreement designating Lumos as the sole member and manager and authorizing the merger transaction. Following the effective time of the merger, the LLC Agreement will be amended and restated to reflect the operational needs of the surviving entity.
C. Mechanics of the Merger
At the effective time of the merger, as specified in the Certificate of Merger filed with the Delaware Secretary of State, the following actions will occur simultaneously by operation of law:
(i) Prismyx Data Solutions LLC will merge with and into Prismyx Acquisition Sub LLC, with Prismyx Acquisition Sub LLC surviving the merger as a wholly owned subsidiary of Lumos Analytics Inc.
(ii) The separate existence of Prismyx Data Solutions LLC will cease.
(iii) All 1,000 outstanding membership units of Prismyx (consisting of 550 units held by Jonah Eberhardt and 450 units held by Talia Messina) will be cancelled and converted into the right to receive the merger consideration, consisting of (a) the closing cash consideration (subject to the escrow holdback and working capital adjustment) and (b) the contingent earnout payments, in each case allocated pro rata based on each holder's percentage ownership interest.
(iv) All assets, intellectual property, contracts, permits, licenses, and rights of Prismyx will vest in the surviving entity (Prismyx Acquisition Sub LLC) without the need for any further act, deed, or instrument of transfer or assignment.
(v) All liabilities and obligations of Prismyx, whether known or unknown, fixed or contingent, matured or unmatured, will become the liabilities and obligations of the surviving entity.
A Certificate of Merger will be prepared and filed with the Delaware Secretary of State on the closing date, with the effective time specified therein. We will prepare the Certificate of Merger in accordance with the requirements of DLLCA § 18-209(c) and will coordinate with Seller's counsel on the contents of the certificate.
D. Required Approvals
The consummation of the merger requires the following approvals, consents, and notices:
Prismyx Member Approval. DLLCA § 18-209(b) requires that each domestic limited liability company that is a party to a merger approve the merger in accordance with its limited liability company agreement. Because Jonah Eberhardt and Talia Messina together hold 100% of the outstanding membership units of Prismyx, approval can be obtained through the written consent of both founders, without the need for a formal meeting of the members. We anticipate that this approval will be straightforward, as both founders are fully supportive of the transaction and will be signatories to the definitive merger agreement. We expect the member approval to be obtained in early-to-mid May 2024, concurrent with or shortly before the closing.
Lumos Board Approval. Under the Lumos Stockholders' Agreement, any acquisition by Lumos in which the aggregate consideration exceeds $5,000,000 requires the approval of the Lumos Board of Directors, including the affirmative vote of at least one Ridgeline Capital designee (either Tobias Prumvane or Claire Yeung). The proposed acquisition, with aggregate consideration of $15,000,000, exceeds this threshold by a significant margin. We will need to coordinate with Margaux Fontaine, Lumos's General Counsel, to schedule a board meeting or circulate a written consent at the appropriate time in the transaction process. We recommend engaging with Messrs. Prumvane and Yeung early in the process to ensure that Ridgeline Capital is supportive of the transaction and to address any questions or concerns they may have regarding the deal structure, valuation, or earnout mechanics.
Linden Grove National Bank Consent. The Revolving Credit Agreement dated September 15, 2022 between Lumos and Linden Grove National Bank requires Lumos to provide prior notice to and obtain the consent of Linden Grove before consummating any acquisition. We recommend initiating the consent process by contacting Gregory Olshan, Lumos's relationship manager at Linden Grove, promptly following execution of the definitive merger agreement. Based on our preliminary review, we believe the proposed acquisition should qualify as a "Permitted Acquisition" under the credit agreement, subject to satisfaction of the procedural notice and consent requirements and continued compliance with all financial covenants. We will provide Mr. Olshan with a summary of the transaction terms and such financial information as the bank may reasonably require to evaluate the consent request.
Ardent Financial Technologies, Inc. — Change-of-Control Consent. The Master SaaS Agreement between Prismyx and Ardent Financial Technologies, Inc. includes a change-of-control provision requiring Prismyx to obtain Ardent's prior written consent before effecting a change of control of Prismyx. Because the forward merger constitutes a change of control of Prismyx (the membership units of the Target are being cancelled and the Target entity is ceasing to exist), this consent requirement is triggered. Given that Ardent represents approximately 31% of Prismyx's annual recurring revenue ($1,178,000 in 2023 ACV), the failure to obtain this consent would represent a material risk to the post-closing business and could constitute a failure of a closing condition. We recommend commencing outreach to Ardent promptly after signing to allow sufficient time to obtain the consent before the target closing date.
HSR Act Filing. A pre-merger notification filing under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (15 U.S.C. § 18a), is not required for this transaction. The aggregate deal value of $15,000,000 falls below the applicable HSR filing threshold (currently $111.4 million for transactions consummated in 2024, as adjusted annually). Accordingly, no waiting period applies, and this transaction is not subject to antitrust review under the HSR Act.
FIRPTA Withholding. The Foreign Investment in Real Property Tax Act ("FIRPTA") withholding requirements are not applicable to this transaction. Both Sellers — Jonah Eberhardt and Talia Messina — are United States persons within the meaning of Section 7701(a)(30) of the Internal Revenue Code of 1986, as amended (the "Code"), and accordingly, no withholding under FIRPTA Section 1445 is required. We will obtain FIRPTA certificates (affidavits of non-foreign status) from each Seller at closing as a matter of standard practice.
IV. Purchase Price Allocation and Consideration Mechanics
A. Aggregate Deal Value
The aggregate deal value for the proposed acquisition is Fifteen Million Dollars ($15,000,000), composed of two distinct consideration components:
The two-component structure reflects a negotiated allocation of risk between the Buyer and the Sellers. By placing 30% of the total deal value into contingent earnout payments tied to post-closing performance milestones and founder retention, Lumos effectively reduces its at-risk capital commitment at closing while providing the Sellers with the opportunity to receive the full $15,000,000 aggregate consideration if the PrismLens business achieves the projected revenue growth trajectory and both founders remain with the company through the earnout period.
B. Closing Cash Consideration — $10,500,000
The closing cash consideration of Ten Million Five Hundred Thousand Dollars ($10,500,000) will be payable at closing by wire transfer of immediately available funds to accounts designated by the Sellers (or, in the case of the escrow amount, to the escrow account at Fenwick Escrow Services LLC). The closing cash consideration is expected to be funded from a combination of Lumos's available operating cash and, if necessary, draws on the $25,000,000 revolving credit facility with Linden Grove National Bank. The decision regarding the mix of funding sources will be made by Lumos's CFO, Priya Subramaniam, in coordination with Lumos's financial advisor, Bristow Farr Financial Advisory LLC.
The closing cash consideration is allocated pro rata between the two Sellers based on their respective percentage ownership interests in Prismyx:
Of the $10,500,000 in closing cash consideration, Four Million Five Hundred Thousand Dollars ($4,500,000) will be deposited at closing into the indemnification escrow account established at Fenwick Escrow Services LLC, as described in greater detail in Section VI below. This escrow deposit represents a holdback from the Sellers' closing proceeds. The net cash payable directly to the Sellers at closing is therefore $10,500,000 minus $4,500,000, or Six Million Dollars ($6,000,000), allocated as set forth in the table above.
Each Seller's respective entitlement to the escrowed funds (to the extent not applied to indemnification claims) is proportionate to that Seller's ownership percentage. Upon the release of the escrow funds in accordance with the escrow agreement, each Seller will receive its pro rata share of the remaining escrow balance, together with any accrued interest and earnings thereon.
C. Reconciliation of Total Maximum Consideration
The following table reconciles the total maximum consideration payable to each Seller under the proposed transaction:
This reconciliation demonstrates that if all earnout milestones are fully achieved, both founders remain employed through the full earnout period, and no indemnification claims reduce the escrow, each Seller will receive total consideration proportionate to that Seller's 55%/45% ownership split, up to the full $15,000,000 aggregate deal value. The maximum consideration to Eberhardt is $8,250,000, and the maximum consideration to Messina is $6,750,000.
V. Earnout Mechanics
A. Overview
Up to Four Million Five Hundred Thousand Dollars ($4,500,000) in aggregate earnout payments will be payable to the Sellers, contingent upon the achievement of specified PrismLens Net New ARR milestones during a thirty (30) month earnout period following the closing date. The aggregate earnout is structured as two equal tranches of Two Million Two Hundred Fifty Thousand Dollars ($2,250,000) each, corresponding to two consecutive earnout measurement periods.
The earnout is structured as a "retention earnout," meaning that payment of each earnout tranche to a given Seller is individually conditioned on that Seller's continued employment by Lumos (or its subsidiary) through the end of the applicable earnout measurement period. This dual-trigger structure — requiring both achievement of an ARR milestone and continued employment — is designed to align the economic incentives of the founders with Lumos's post-closing business objectives, ensuring that both founders remain actively engaged in growing PrismLens revenue throughout the earnout period.
The earnout payments will be allocated between the two Sellers in the same 55%/45% pro rata ratio as the closing cash consideration.
B. Earnout Period 1 (Months 1–15 Post-Closing)
The first earnout measurement period ("Earnout Period 1") commences on the closing date and ends on the date that is fifteen (15) months after the closing date. Assuming an expected closing date of May 22, 2024, Earnout Period 1 would conclude on or about August 22, 2025.
ARR Milestone: PrismLens Net New ARR must equal or exceed Two Million Two Hundred Thousand Dollars ($2,200,000) during Earnout Period 1.
Payment Amount (if 100% Achieved): Two Million Two Hundred Fifty Thousand Dollars ($2,250,000), allocated as follows:
• Jonah Eberhardt (55%): $2,250,000 × 55% = $1,237,500
• Talia Messina (45%): $2,250,000 × 45% = $1,012,500
Partial Achievement — Linear Interpolation: The earnout structure includes a partial achievement mechanism to address scenarios in which the ARR milestone is not fully achieved but meaningful progress has been made. Specifically, if PrismLens Net New ARR during Earnout Period 1 equals or exceeds seventy-five percent (75%) of the $2,200,000 target (i.e., $1,650,000) but is less than one hundred percent (100%) of the target, the earnout payment for the period will be determined by pro rata linear interpolation between 50% and 100% of the tranche amount. The interpolation operates as follows:
• At 75% achievement ($1,650,000 Net New ARR): 50% of the tranche ($1,125,000) is payable.
• At 100% achievement ($2,200,000 Net New ARR): 100% of the tranche ($2,250,000) is payable.
• Between 75% and 100% achievement: The payout scales linearly between 50% and 100% of the tranche amount.
• Below 75% achievement (less than $1,650,000 Net New ARR): No earnout payment is payable for the period ($0).
This floor-and-interpolation mechanism ensures that the Sellers receive meaningful earnout compensation for substantial (but not complete) achievement of the milestone while providing Lumos with protection against paying earnout consideration for periods of underperformance. The 75% floor was selected based on negotiation dynamics and reflects a reasonable threshold below which the earnout payment should not be triggered.
C. Earnout Period 2 (Months 16–30 Post-Closing)
The second earnout measurement period ("Earnout Period 2") commences on the date immediately following the end of Earnout Period 1 and ends on the date that is thirty (30) months after the closing date. Assuming an expected closing date of May 22, 2024, Earnout Period 2 would conclude on or about November 22, 2026.
ARR Milestone: PrismLens Net New ARR must equal or exceed Three Million Five Hundred Thousand Dollars ($3,500,000) on a cumulative basis from the closing date through the end of Earnout Period 2.
Payment Amount (if 100% Achieved): Two Million Two Hundred Fifty Thousand Dollars ($2,250,000), allocated as follows:
• Jonah Eberhardt (55%): $2,250,000 × 55% = $1,237,500
• Talia Messina (45%): $2,250,000 × 45% = $1,012,500
Partial Achievement — Linear Interpolation: The same pro rata linear interpolation mechanism applies to Earnout Period 2. Specifically:
• At 75% cumulative achievement ($2,625,000 cumulative Net New ARR): 50% of the tranche ($1,125,000) is payable.
• At 100% cumulative achievement ($3,500,000 cumulative Net New ARR): 100% of the tranche ($2,250,000) is payable.
• Between 75% and 100% achievement: The payout scales linearly between 50% and 100% of the tranche amount.
• Below 75% cumulative achievement (less than $2,625,000 cumulative Net New ARR): No earnout payment is payable for the period ($0).
The use of a cumulative Net New ARR metric for Earnout Period 2 — measured from the closing date through the end of the second period, rather than solely during the second period — is intentional and serves to prevent "gaming" scenarios in which revenue recognized during Earnout Period 1 is shifted into Earnout Period 2 (or vice versa) to optimize earnout payments. The cumulative measurement also provides a more holistic view of total PrismLens revenue growth over the full thirty-month earnout period.
D. Retention Condition / Employment Requirement
Each Founder's share of the earnout payments is individually conditioned on that Founder's continued employment by Lumos Analytics Inc. (or its subsidiary, Prismyx Acquisition Sub LLC) through the end of the applicable earnout measurement period. This employment condition operates independently for each Founder, meaning that one Founder's departure from employment does not affect the other Founder's entitlement to earnout payments (subject to achievement of the ARR milestones).
The employment condition is subject to the following termination scenarios:
Voluntary Resignation (Without Good Reason) or Termination for Cause. If a Founder voluntarily resigns from employment (other than for "good reason," as defined in the applicable employment agreement) or is terminated by Lumos or its subsidiary for "cause" (as defined in the applicable employment agreement) prior to the end of an earnout measurement period, that Founder forfeits the applicable earnout tranche and any subsequent earnout tranche. The forfeited amount is not reallocated to the other Founder and is simply not payable.
Termination Without Cause or Resignation for Good Reason (Acceleration). If Lumos or its subsidiary terminates a Founder's employment without "cause," or if a Founder resigns from employment for "good reason," the employment condition for both the current earnout period and any subsequent earnout period is deemed satisfied (i.e., the employment condition is accelerated). In such event, the applicable Founder's share of the earnout payment(s) remains payable based on actual performance against the ARR milestones — the acceleration relates solely to the employment condition and does not guarantee payment of the earnout if the ARR milestones are not achieved.
This acceleration provision is critical to the commercial balance of the earnout structure. Without it, Lumos could theoretically terminate one or both Founders without cause shortly before the end of an earnout period, thereby avoiding payment of earned-out consideration even if the ARR milestones had been fully achieved. The acceleration provision eliminates this moral hazard and ensures that the Founders bear only the risks they can control — their own voluntary decision to remain employed and the revenue performance of the PrismLens business.
The definitions of "cause" and "good reason" in the employment agreements will need to be carefully drafted and negotiated with Seller's counsel. We recommend standard market definitions that include mutual protections: "cause" should be limited to material breach, conviction of a felony, willful misconduct, and similar egregious conduct; "good reason" should include material diminution of duties or compensation, relocation beyond a specified distance (we recommend 50 miles), and material breach by the employer.
E. Interaction with Founder Employment Agreements
Each Founder will enter into an Employment Agreement with Prismyx Acquisition Sub LLC (as the surviving entity) effective as of the closing date. The key terms of the proposed employment agreements are as follows:
Jonah Eberhardt:
• Title: Vice President of Plugin Engineering
• Base Salary: $275,000 per annum
• Annual Bonus Target: 25% of base salary ($68,750), based on achievement of individual and company performance objectives to be established by Lumos management
• Employment Commitment: 30 months, aligned with the full earnout period
Talia Messina:
• Title: Vice President of Data Visualization
• Base Salary: $260,000 per annum
• Annual Bonus Target: 25% of base salary ($65,000), based on achievement of individual and company performance objectives to be established by Lumos management
• Employment Commitment: 30 months, aligned with the full earnout period
Both employment agreements will include the following restrictive covenants and intellectual property provisions:
Non-Competition. Each Founder will be subject to a non-competition covenant for a period of twenty-four (24) months following the termination of employment, restricting the Founder from engaging in, or being employed by or providing services to, any business that competes with Lumos in the data analytics plugin space for financial services. The geographic scope of the non-compete should be negotiated but is expected to be nationwide, given the SaaS delivery model and the national and international reach of the financial services customer base.
Non-Solicitation. Each Founder will be subject to a non-solicitation covenant for a period of twenty-four (24) months following the termination of employment, restricting the Founder from (i) soliciting or hiring any employee of Lumos or its subsidiaries and (ii) soliciting or diverting any customer or prospective customer of Lumos or its subsidiaries.
Invention Assignment and Work-for-Hire. Each employment agreement will include comprehensive invention assignment and work-for-hire provisions ensuring that all intellectual property, inventions, developments, improvements, and works of authorship created by the Founder during the course of employment or using Lumos resources are and remain the sole and exclusive property of Lumos (or its subsidiary). These provisions are critical to ensuring that all post-closing intellectual property developed by the Founders vests in Lumos.
Severance. Upon termination of employment by Lumos or its subsidiary without "cause" or resignation by the Founder for "good reason," the Founder will be entitled to severance consisting of (i) twelve (12) months of base salary continuation and (ii) reimbursement of COBRA premiums for the duration of the salary continuation period, in each case subject to the Founder's execution and non-revocation of a general release of claims in a form reasonably satisfactory to Lumos.
The thirty-month employment commitment period is intentionally aligned with the full earnout period, ensuring that both Founders are incentivized to remain with the organization through the conclusion of the earnout. The non-compete and non-solicitation covenants provide an additional two years of post-employment protection, creating a combined period of approximately fifty-four months (thirty months of employment plus twenty-four months of post-employment restrictive covenants) during which the Founders are restricted from competing with or soliciting from Lumos.
F. Drafting and Negotiation Considerations
Based on our experience with earnout structures in comparable transactions, we anticipate the following key drafting and negotiation issues:
Definition of "PrismLens Net New ARR." The precise definition of the earnout metric is the single most important drafting issue in the earnout provisions and the most common source of post-closing disputes in transactions with earnout consideration. We recommend defining "PrismLens Net New ARR" to include only net new annual recurring revenue attributable to the PrismLens product suite (as distinct from Lumos's existing product offerings), calculated as the sum of (i) new annual subscription revenue from new customers that subscribe to PrismLens after the closing date, plus (ii) expansion revenue from existing customers that increase their PrismLens subscription commitment above a defined pre-closing baseline, minus (iii) churn (i.e., revenue lost from customers that cancel or do not renew their PrismLens subscriptions), minus (iv) downgrades (i.e., revenue reduction from customers that reduce their PrismLens subscription commitment below the pre-closing baseline). Importantly, the definition should clearly address the treatment of upsells on pre-closing contracts that exceed a defined baseline, to avoid double-counting revenue that was already reflected in the pre-closing ARR base. The pre-closing ARR baseline should be established as of the closing date by mutual agreement.
Buyer's Operating Covenants During the Earnout Period. We anticipate that Seller's counsel, Cartwright, Daugherty & Voss LLP, will seek a covenant requiring Lumos to use "commercially reasonable efforts" (or a similar standard) to operate the PrismLens business in a manner designed to achieve the earnout milestones. From the Buyer's perspective, a broad efforts covenant of this nature could significantly constrain Lumos's post-closing operational flexibility, including its ability to make strategic decisions regarding pricing, product roadmap, resource allocation, and customer targeting. We recommend resisting a general "efforts" covenant and instead including a more narrowly tailored covenant providing that (i) Lumos will operate the PrismLens business in the ordinary course consistent with past practice during the earnout period, and (ii) Lumos will not take any action in bad faith for the primary purpose of reducing or avoiding earnout payments. This formulation provides the Sellers with protection against deliberate manipulation of the earnout results while preserving Lumos's ability to manage the combined business in its sole business judgment.
Dispute Resolution for Earnout Calculations. We recommend including a clear dispute resolution mechanism in the merger agreement for disputes regarding the calculation of PrismLens Net New ARR and the resulting earnout payments. The mechanism should provide for (i) delivery by Lumos of a detailed calculation of Net New ARR within a specified period (we recommend sixty (60) days) following the end of each earnout measurement period, (ii) a review period for the Sellers (we recommend thirty (30) days) to review the calculation and raise objections, (iii) a good-faith negotiation period to resolve any disputes (we recommend fifteen (15) business days), and (iv) if the parties are unable to resolve the dispute, submission to an independent accounting firm for final, binding determination. While Haverford & Keane, CPAs, serves as the engagement auditor for the transaction, we recommend designating a neutral independent accounting firm (to be mutually agreed upon) as the dispute arbiter, to avoid potential conflicts of interest arising from Haverford & Keane's relationship with the Buyer.
VI. Indemnification Structure
A. General Framework
The merger agreement will include a comprehensive indemnification framework providing for mutual indemnification between the parties. The Sellers (Jonah Eberhardt and Talia Messina, jointly and severally) will indemnify the Buyer and its affiliates, directors, officers, employees, agents, successors, and assigns (the "Buyer Indemnified Parties") against all losses, damages, liabilities, costs, and expenses (including reasonable attorneys' fees and expenses) arising from or related to any breach of the Sellers' representations, warranties, covenants, or agreements in the merger agreement. Conversely, the Buyer will indemnify the Sellers and their respective heirs, executors, administrators, successors, and assigns (the "Seller Indemnified Parties") against all losses arising from or related to any breach of the Buyer's representations, warranties, covenants, or agreements in the merger agreement.
The joint and several liability of the Sellers is appropriate given the simplicity of the capitalization structure (only two equity holders), the relatively equal ownership split (55%/45%), and the fact that both Sellers are actively involved in the management and operations of the Target and have equal access to information underlying the representations and warranties.
B. Indemnification Cap
The aggregate liability of the Sellers for indemnification claims (other than claims for Special Indemnities, as discussed below) is capped at Four Million Five Hundred Thousand Dollars ($4,500,000), representing thirty percent (30%) of the aggregate deal value. This cap is equal to the amount of the indemnification escrow deposit, consistent with the escrow-as-exclusive-remedy structure described in Section VI.F below. The cap amount of $4,500,000 reflects a negotiated balance between the Buyer's desire for meaningful indemnification protection and the Sellers' interest in limiting post-closing liability exposure. A 30% cap is within the market range for transactions of this size, though it is on the higher end; we anticipate that Seller's counsel may seek to negotiate this down, and we should be prepared to defend the 30% level based on the risk profile of the target (including customer concentration, pending patent application, and limited operating history).
C. Basket (Deductible)
The indemnification structure includes a tipping basket (as distinguished from a true deductible) in the amount of One Hundred Fifty Thousand Dollars ($150,000), representing one percent (1%) of the aggregate deal value. The tipping basket operates as follows: the Buyer may not assert any indemnification claim until the aggregate amount of all qualifying losses exceeds $150,000. Once the aggregate losses exceed $150,000, the Buyer is entitled to recover the full amount of such losses from dollar one — not merely the amount in excess of the basket. This tipping basket structure is more favorable to the Buyer than a true deductible (where only losses in excess of the threshold are recoverable) and reflects market norms for transactions of this type.
In addition to the basket, the indemnification provisions will include a mini-basket or de minimis threshold of Fifteen Thousand Dollars ($15,000) per individual claim. Any individual loss or series of related losses that does not exceed $15,000 will not be counted toward the $150,000 aggregate basket and will not be indemnifiable. This de minimis threshold serves to filter out trivial or immaterial claims and reduces the administrative burden of the indemnification process.
D. Survival Periods
The representations and warranties in the merger agreement will survive the closing for the following periods:
General Representations and Warranties: Eighteen (18) months from the closing date. General representations and warranties include those relating to the Target's business operations, financial statements, material contracts, employees, compliance with laws, litigation, environmental matters, and similar operational matters. The 18-month survival period is consistent with market practice for transactions of this size and aligns with the escrow release date.
Fundamental Representations: Thirty-six (36) months from the closing date. Fundamental representations include those relating to (i) organization and good standing, (ii) authority and enforceability, (iii) capitalization and title to membership units, (iv) title to assets, (v) tax matters, and (vi) brokers and finders. The extended 36-month survival period for fundamental representations reflects the heightened importance of these representations and the potentially catastrophic nature of a breach (e.g., a defect in title to the membership units or a failure of authority to consummate the merger).
No indemnification claim may be asserted with respect to a representation or warranty after the expiration of the applicable survival period, except to the extent that a claim notice has been delivered prior to the expiration of such period, in which case the claim will survive until final resolution.
E. Special Indemnities
Certain categories of indemnification claims are designated as "Special Indemnities" and are not subject to the basket, cap, or survival period limitations described above. The Special Indemnities include:
(i) Pre-Closing Tax Liabilities. The Sellers will provide a special indemnity for all tax liabilities of Prismyx arising from or attributable to taxable periods (or portions thereof) ending on or before the closing date. This indemnity is not subject to the $150,000 basket or the $4,500,000 cap, reflecting the principle that pre-closing tax obligations are the exclusive responsibility of the Sellers and should be fully borne by them without limitation.
(ii) Breaches of Fundamental Representations. Losses arising from any breach of a fundamental representation are not subject to the basket or the cap, consistent with market practice for transactions in which the fundamental representations go to the core of the target's existence, authority, and ownership.
(iii) Fraud. Losses arising from fraud (including intentional misrepresentation) by either Seller are not subject to the basket, cap, or survival period limitations. Claims for fraud survive indefinitely and are recoverable without regard to the aggregate cap.
For Special Indemnity claims under categories (i) and (ii), recovery is first from the escrow fund, and if the escrow fund is insufficient to satisfy the claim (whether because the escrow balance has been depleted by prior claims or because the Special Indemnity claim exceeds the remaining escrow balance), the Buyer may recover the deficiency directly from the Sellers. For fraud claims, recovery may be sought directly from the Sellers without regard to the escrow fund.
F. Exclusive Remedy
The indemnification escrow fund ($4,500,000, as described in Section VII below) will serve as the sole and exclusive source of recovery for all standard (non-Special Indemnity) indemnification claims asserted by the Buyer. The Buyer will not be permitted to bring direct claims against the Sellers for any breach of general (non-fundamental) representations and warranties; rather, the Buyer's sole recourse for such claims will be against the escrowed funds. This exclusive remedy structure provides the Sellers with certainty regarding their maximum exposure for standard indemnification claims and ensures that the Sellers' post-closing financial position (with respect to the closing cash consideration already received) is not subject to clawback or recoupment, other than through the escrow mechanism.
The exclusive remedy limitation does not apply to (i) claims for Special Indemnities (pre-closing tax liabilities, breaches of fundamental representations, and fraud), which may be recovered from the escrow and, if the escrow is insufficient, directly from the Sellers, as described above; or (ii) claims for specific performance or injunctive relief, including with respect to the enforcement of the non-compete and non-solicitation covenants.
VII. Escrow Mechanics
A. Escrow Deposit
At closing, Four Million Five Hundred Thousand Dollars ($4,500,000) will be deposited into an escrow account established with Fenwick Escrow Services LLC, located at 3 Park Plaza, Suite 1100, Irvine, California 92614 (Escrow Officer: Dana Whitford). The escrow deposit is funded from the closing cash consideration and represents a holdback from the Sellers' gross closing proceeds, as described in Section IV.B above. The escrow deposit will be governed by a tri-party Escrow Agreement among the Buyer, the Sellers (or their designated representative), and Fenwick Escrow Services LLC, to be executed simultaneously with the merger agreement and delivered at closing.
The Escrow Agreement will set forth the terms and conditions governing the deposit, administration, investment, claims procedures, and release of the escrowed funds, consistent with the indemnification provisions of the merger agreement.
B. Claims Procedures
The Escrow Agreement and the indemnification provisions of the merger agreement will establish detailed claims procedures for the assertion and resolution of indemnification claims against the escrow fund. The proposed claims procedures are as follows:
(i) Claim Notice. Lumos (as the Buyer) shall deliver written notice of any indemnification claim (a "Claim Notice") to both Fenwick Escrow Services LLC and the Sellers (or their designated representative). Each Claim Notice shall specify (a) the nature of the claim, including a reasonably detailed description of the facts giving rise to the claim, (b) the specific representations, warranties, covenants, or agreements alleged to have been breached, and (c) the estimated amount of the claim (to the extent then determinable).
(ii) Response Period. The Sellers shall have thirty (30) business days following receipt of a Claim Notice (the "Response Period") to deliver a written objection to the claim. If the Sellers do not deliver a written objection within the Response Period, the claim shall be deemed accepted, and Fenwick Escrow Services LLC shall release the claimed amount from the escrow fund to the Buyer.
(iii) Dispute Resolution. If the Sellers timely deliver a written objection disputing all or any portion of a claim, the parties shall attempt to resolve the dispute by good-faith negotiation for a period of fifteen (15) business days. If the dispute is not resolved within such period, either party may submit the dispute to a court of competent jurisdiction in the State of Delaware for resolution. Fenwick Escrow Services LLC shall not release any disputed funds from escrow until the dispute is resolved by mutual agreement