Cyalume
Cyalume Technologies Holdings, Inc. (Form: 10-Q, Received: 05/07/2013 06:03:00)

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

(Mark One)  

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2013

 

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                             to                              

 

Commission File Number  000-52247

 

Cyalume Technologies Holdings, Inc.

(Exact name of registrant as specified in its charter)

 

Delaware   20-3200738

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

96 Windsor Street, West Springfield, Massachusetts   01089
(Address of principal executive offices)   (Zip Code)

 

(413) 858-2500

(Registrant's telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  x     No  ¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T ( § 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  x No  ¨     

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of "large accelerated filer", "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act:

 

Large accelerated filer  ¨   Accelerated filer  ¨  

Non-accelerated filer  ¨

(Do not check if a smaller
reporting company)

  Smaller reporting company  x

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  ¨     No  x

 

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: As of May 1, 2013, there were outstanding 20,738,260 shares of the registrant’s Common Stock, par value $.001 per share.

 

 
 

 

Cyalume Technologies Holdings, Inc.

FORM 10-Q

 

INDEX

 

PART I—FINANCIAL INFORMATION  
   
Item 1. Financial Statements  
     
  Condensed Consolidated Balance Sheets as of March 31, 2013 (unaudited) and December 31, 2012 4
     
  Condensed Consolidated Statements of Comprehensive Loss for the three months ended March 31, 2013 and 2012 (unaudited) 5
     
  Condensed Consolidated Statements of Changes in Stockholders' Equity for the three months ended March 31, 2013 (unaudited) 6
     
  Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2013 and 2012 (unaudited) 7
     
  Notes to Condensed Consolidated Financial Statements (unaudited) 8
     
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 16
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk 20
     
Item 4. Controls and Procedures 20
     
PART II—OTHER INFORMATION  
   
Item 1. Legal Proceedings 20
     
Item 1A. Risk Factors 20
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 20
     
Item 3. Defaults Upon Senior Securities 20
     
Item 4. Mine Safety Disclosures 20
     
Item 5. Other Information 20
     
Item 6. Exhibits 21
     
Signatures 22

  

2
 

 

PART I—FINANCIAL INFORMATION

 

The statements contained in this quarterly report on Form 10-Q, including under the section titled "Management's Discussion and Analysis of Financial Condition and Results of Operations" and other sections of this quarterly report, include forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including, without limitation, statements regarding our or our management's expectations, hopes, beliefs, intentions or strategies regarding the future. The words "believe," "may," "will," "estimate," "continue," "anticipate," "intend," "expect," "plan" and similar expressions may identify forward-looking statements, but the absence of these words does not mean that a statement is not forward-looking. The forward-looking statements contained in this quarterly report are based on our current expectations and beliefs concerning future developments and their potential effects on us. There can be no assurance that future developments affecting us will be those that we have anticipated. These forward-looking statements involve a number of risks, uncertainties (some of which are beyond our control) or other assumptions that may cause actual results or performance to be materially different from those expressed or implied by these forward-looking statements. Should one or more of these risks or uncertainties materialize, or should any of our assumptions prove incorrect, actual results may vary in material respects from those projected in these forward-looking statements. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required under applicable securities laws. Unless the content otherwise requires, all references to "we", "us", the “Company" or “Cyalume" in this quarterly report on Form 10-Q refers to Cyalume Technologies Holdings, Inc.

 

3
 

ITEM 1. Financial Statements

 

Cyalume Technologies Holdings, Inc.

Condensed Consolidated Balance Sheets

(in thousands, except shares and per share information)

 

 

    March 31,
2013
(unaudited)
    December 31,
2012
 
Assets                
Current assets:                
Cash   $ 981     $ 2,695  
Accounts receivable, net of allowance for doubtful accounts of $45 and $155, respectively     4,488       3,875  
Inventories, net     9,897       9,597  
Income taxes refundable     203       173  
Deferred income taxes     652       652  
Prepaid expenses and other current assets     522       558  
Total current assets     16,743       17,550  
                 
Property, plant and equipment, net     8,827       9,177  
Goodwill     8,160       8,160  
Other intangible assets, net     19,743       20,190  
Due from related party     4,060       3,972  
Other noncurrent assets     0       28  
Total assets   $ 57,533     $ 59,077  
                 
Liabilities and Stockholders’ Equity                
Current liabilities:                
Line of credit   $ 400     $ 0  
Current portion of notes payable     17,795       9,734  
Accounts payable     2,954       2,934  
Accrued expenses     1,746       2,583  
Current portion of capital lease obligation     14       14  
Derivatives liability     116       169  
Total current liabilities     23,025       15,434  
                 
Notes payable, net of current portion     0       8,394  
Note payable due to related parties     2,100       2,100  
Deferred income taxes     3,568       3,862  
Asset retirement obligation     187       184  
Capital lease obligation, net of current portion     18       22  
Contingent legal obligation     3,851       3,806  
Total liabilities     32,749       33,802  
                 
Commitments and contingencies (Note 9)                
                 
Stockholders' equity:                
Preferred stock, $0.001 par value; 1,000,000 shares authorized, no shares issued or outstanding     0       0  
Common stock, $0.001 par value; 50,000,000 shares authorized; 20,738,260 issued and outstanding     21       21  
Additional paid-in capital     106,224       105,990  
Accumulated deficit     (80,791 )     (80,221 )
Accumulated other comprehensive loss     (670 )     (515 )
Total stockholders’ equity     24,784       25,275  
Total liabilities and stockholders' equity   $ 57,533     $ 59,077  

  

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

4
 

 

Cyalume Technologies Holdings, Inc.

Condensed Consolidated Statements of Comprehensive Loss

(in thousands, except shares and per share information)

(Unaudited)

 

    For the Three     For the Three  
    Months Ended     Months Ended  
    March 31,     March 31,  
    2013     2012  
Revenues   $ 8,086     $ 7,994  
Cost of revenues     4,262       4,365  
Gross profit     3,824       3,629  
                 
Other expenses (income):                
Sales and marketing     1,107       1,242  
General and administrative     2,077       1,950  
Research and development     463       606  
Interest expense, net     580       545  
Interest expense – related party     26       10  
Amortization of intangible assets     437       477  
Change in fair value of contingent consideration     0       317  
Other (income) expenses, net     (37 )     4  
Total other expenses     4,653       5,151  
                 
Loss before income taxes     (829 )     (1,522 )
Benefit from income taxes     (259 )     (533 )
Net loss     (570 )     (989 )
                 
Other comprehensive income (loss), net of tax:                
Foreign currency translation adjustments     (180 )     183  
Unrealized gain on cash flow hedges, net of taxes of $(14) and $(7), respectively     25       9  
Other comprehensive income (loss)     (155 )     192  
Comprehensive loss   $ (725 )   $ (797 )
                 
Net loss per common share:                
Basic   $ (0.03 )   $ (0.05 )
Diluted   $ (0.03 )   $ (0.05 )
                 
Weighted average shares used to compute net loss per common share:                
Basic     20,708,531       18,172,694  
Diluted     20,708,531       18,172,694  

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

5
 

 

Cyalume Technologies Holdings, Inc.

Condensed Consolidated Statements of Changes in Stockholders' Equity

(in thousands, except shares)

(Unaudited)

 

    Common Stock     Additional           Accumulated
Other
    Total  
    Number
of Shares
    Amount     Paid-In
Capital
    Accumulated
Deficit
    Comprehensive
Loss
    Stockholders’
Equity
 
Balance at December 31, 2012     20,738,260     $ 21     $ 105,990     $ (80,221 )   $ (515 )   $ 25,275  
Share-based compensation     0       0       234       0       0       234  
Net loss     0       0       0       (570 )     0       (570 )
Other comprehensive loss     0       0       0       0       (155 )     (155 )
Balance at March 31, 2013     20,738,260     $ 21     $ 106,224     $ (80,791 )   $ (670 )   $ 24,784  

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

  

6
 

  

Cyalume Technologies Holdings, Inc.

Condensed Consolidated Statements of Cash Flows

(in thousands)

(Unaudited)

 

    For the Three     For the Three  
    Months Ended     Months Ended  
    March 31,     March 31,  
    2013     2012  
Cash flows from operating activities:                
Net loss   $ (570 )   $ (989 )
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:                
Depreciation and amortization of property, plant and equipment     339       341  
Amortization     613       847  
Provision for (recoveries from) bad debts     (109 )     0  
Benefit from deferred income taxes     (289 )     (597 )
Share-based compensation expense     234       261  
Change in fair value of contingent consideration     0       317  
Other non-cash expenses     (12 )     (2 )
Changes in operating assets and liabilities:                
Accounts receivable     (526 )     (382 )
Inventories     (352 )     (889 )
Prepaid expenses and other current assets     31       (33 )
Restricted cash     0       25  
Accounts payable and accrued liabilities     (836 )     1,727  
Income taxes refundable     (34 )     (157 )
Net cash (used in) provided by operating activities     (1,511 )     469  
                 
Cash flows from investing activities:                
Purchases of long-lived assets     (69 )     (319 )
Net cash used in investing activities     (69 )     (319 )
                 
Cash flows from financing activities:                
Net proceeds from line of credit     400       0  
Repayment of  notes payable     (476 )     (476 )
Repayment of related party note payable     0       (250 )
Principal payments on capital lease obligations     (4 )     (7 )
Payments to reacquire and retire common stock     0       (100 )
Payment of debt issuance costs     0       (70 )
Net cash used in financing activities     (80 )     (903 )
                 
Effect of exchange rate changes on cash     (54 )     51  
Net decrease in cash     (1,714 )     (702 )
Cash, beginning of period     2,695       2,951  
Cash, end of period   $ 981     $ 2,249  
                 

  

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

7
 

 

Cyalume Technologies Holdings, Inc.

Notes to Condensed Consolidated Financial Statements

 

1. BASIS OF PRESENTATION

 

We have prepared the accompanying unaudited interim condensed consolidated financial statements in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and the instructions to Form 10-Q and Rule 8-03 of Regulation S-X. Accordingly, these interim condensed consolidated financial statements do not include all of the information and disclosures required by U.S. GAAP for complete financial statements.

 

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the period.

 

These accompanying unaudited interim condensed consolidated financial statements recognize the effects of all subsequent events that provide additional evidence about conditions that existed at March 31, 2013, including the estimates inherent in the process of preparing financial statements.

 

We believe all adjustments (consisting of normal, recurring adjustments) considered necessary for a fair presentation have been included in these interim condensed consolidated financial statements. Operating results for the three-month periods presented are not necessarily indicative of the results that may be expected for any other interim period or for the full year. The consolidated balance sheet at December 31, 2012 has been derived from the audited consolidated financial statements at that date. We suggest that these unaudited interim condensed consolidated financial statements be read in conjunction with the consolidated financial statements and footnotes thereto in our Annual Report on Form 10-K for the year ended December 31, 2012.

 

2. DESCRIPTION OF BUSINESS

 

These consolidated financial statements and footnotes include the financial position and operations of Cyalume Technologies Holdings, Inc. (“Cyalume”), a holding company that is the sole shareholder of Cyalume Technologies, Inc. (“CTI”) and of Cyalume Specialty Products, Inc. (“CSP”). CTI is the sole shareholder of Cyalume Technologies, SAS (“CTSAS”), Cyalume Realty, Inc. (“CRI”) and Combat Training Solutions, Inc. (“CTS”) . All significant intercompany accounts and transactions have been eliminated in consolidation.

 

Our primary focus is providing tactical and training solutions to the military of the U.S. and other countries through both products and services.

 

CTI and CTSAS manufacture and sell chemiluminescent products and reflective and photoluminescent materials to military, ammunition, commercial and public safety markets. CTSAS is located in France and represents us in certain international markets, primarily Europe and the Middle East. CTI sells to customers in all other geographic markets. CTI’s and CTSAS’ business operations constitute the majority, based on revenues and assets, of our consolidated business operations.

 

CSP manufactures and sells specialty chemical products to the defense, pharmaceutical, cosmetic and other markets . CSP’s operations are located in Bound Brook, New Jersey.

 

CRI owns land located in Colorado Springs, Colorado.

 

CTS provides its customers with battlefield effects simulation products while its services include planning and implementing tactical training exercises simulating real-world experiences. These products allow military and law enforcement professionals to maintain operational readiness through safe, live training and hands-on situational exercises.

 

Our business is managed and financial results are reported as one segment. Our CEO, who is our chief operating decision maker, focuses on consolidated results to make strategic and tactical decisions. Our one operating segment consists of four reporting units: Chemical Light (the operations of CTI and CTSAS), Training (the operations of CTS), Specialty Products (the operations of CSP) and Other (the operations of CRI and the parent company Cyalume Technologies Holdings, Inc.).

 

3. NEW ACCOUNTING PRONOUNCEMENTS

 

There are no recently-issued accounting standards that are expected to have a material effect on our financial condition, results of operations or cash flows.

 

8
 

 

Cyalume Technologies Holdings, Inc.

Notes to Condensed Consolidated Financial Statements

 

4. INVENTORIES

 

Inventories consist of the following (all amounts in thousands) :

 

    March 31,
2013
    December 31,
2012
 
Raw materials   $ 5,636     $ 6,255  
Work-in-process     2,491       1,530  
Finished goods     1,770       1,812  
    $ 9,897     $ 9,597  

 

5. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

 

The derivative assets and liabilities as of March 31, 2013 in our condensed consolidated balance sheet consist of the following (all amounts in thousands):

 

Derivative Instrument   Balance Sheet Location   Fair Value  
Currency forward contract   Prepaid expenses and other current assets (current assets)   $ 1  
Interest rate swaps   Derivatives liability (current liabilities)     (116 )

   

The derivative liabilities as of December 31, 2012 in our condensed consolidated balance sheet consist of the following (all amounts in thousands):

 

Derivative Instrument   Balance Sheet Location   Fair Value  
Currency forward contract   Derivatives liability (current liabilities)   $ (14 )
Interest rate swaps   Derivatives liability (current liabilities)     (155 )

 

Currency Forward Contracts

 

CTSAS’ functional currency is the Euro. Periodically, CTSAS purchases inventory from CTI, which requires payment in U.S. dollars. Beginning in 2009, and only under certain circumstances, we use currency forward contracts to mitigate CTSAS’ exposure to changes in the Euro-to-U.S. dollar exchange rate upon payment of these inventory purchases. Such currency forward contracts typically have durations of less than six months. We report these currency forward contracts at their fair value. This relationship has not been designated as a hedge and therefore all changes in these currency forward contracts’ fair value are recorded in other (income) expenses, net on our condensed consolidated statement of comprehensive income (loss). At March 31, 2013, we held one such currency forward contract. See Note 10 for a description of how we estimate the fair value of these contracts.

 

Interest Rate Swaps

 

In December 2008, we entered into two pay-fixed, receive-variable, interest rate swaps to reduce exposure to changes in cash payments caused by changes in interest rates on our notes payable with TD Bank, N.A. Both relationships are designated as cash flow hedges and meet the criteria for the shortcut method for assessing hedge effectiveness; therefore, the hedge is assumed to be 100% effective and all changes in the fair value of the interest rate swaps are recorded in comprehensive income (loss). Such changes were due to unrealized gains and losses on the interest rate swaps. These unrealized gains and losses must be reclassified in whole or in part into earnings if, and when, a comparison of the swap(s) and the related hedged cash flows demonstrates that the shortcut method is no longer applicable. We expect these hedges to meet the criteria of the shortcut method for the duration of the hedging relationship, which ends upon maturity of the notes payable with TD Bank, N.A., and therefore, we do not expect to reclassify any portion of these unrealized losses from accumulated other comprehensive loss to earnings in the future. See Note 10 for a description of how we estimate the fair value of these swaps.

 

9
 

 

Cyalume Technologies Holdings, Inc.

Notes to Condensed Consolidated Financial Statements

 

Effect of Derivatives on Statement of Comprehensive Income (Loss)

 

The effect of derivative instruments (a) designated as cash flow hedges and (b) not designated as hedging instruments on our condensed consolidated statement of comprehensive income (loss) for the three months ended March 31, 2013 was as follows (all amounts in thousands):

    Gain (Loss)  
    in AOCL (1)     Reclassified (2)     in Earnings (3)  
Derivatives designated as cash flow hedging relationships:                        
Interest rate swaps, net of taxes of $(14)   $ 25     $ 0     $ 0  
Derivatives not designated as hedging instruments:                        
Forward currency contracts   $ 0     $ 0     $ 15  

 

(1) Amount recognized in accumulated other comprehensive loss (AOCL) (effective portion and net of taxes) during the three months ended March 31, 2013.
(2) Amount of gain (loss) originally recorded in AOCL but reclassified from AOCL into earnings during the three months ended March 31, 2013.
(3) Amount of gain (loss) recognized in earnings on the derivative (ineffective portion and amount excluded from effectiveness testing) reported in other, net in the condensed consolidated statement of comprehensive income (loss) for the three months ended March 31, 2013.

 

The effect of derivative instruments (a) designated as cash flow hedges and (b) not designated as hedging instruments on our condensed consolidated statement of comprehensive income (loss) for the three months ended March 31, 2012 was as follows (all amounts in thousands):

    Gain (Loss)  
    in AOCL (1)     Reclassified (2)     in Earnings (3)  
Derivatives designated as cash flow hedging relationships:                        
Interest rate swaps, net of taxes of $(7)   $ 9     $ 0     $ 0  
Derivatives not designated as hedging instruments:                        
Forward currency contracts   $ 0     $ 0     $ (5 )

 

(1) Amount recognized in accumulated other comprehensive income (loss) (AOCL) (effective portion and net of taxes) during the three months ended March 31, 2012.
(2) Amount of gain (loss) originally recorded in AOCL but reclassified from AOCL into earnings during the three months ended March 31, 2012.
(3) Amount of gain (loss) recognized in earnings on the derivative (ineffective portion and amount excluded from effectiveness testing) reported in other, net in the condensed consolidated statement of comprehensive income (loss) for the three months ended March 31, 2012.

 

6. INCOME TAXES

 

The effective tax rate of 31% for the three months ended March 31, 2013 and the effective tax rate of 35% for the three months ended March 31, 2012 did not differ significantly from the federal statutory rate of 34%.

 

Despite having a net loss for the three months ended March 31, 2013, we believe our net deferred tax assets are realizable due to forecasted taxable income.

 

7. RELATED PARTY TRANSACTION

 

Lease Agreement, Note Payable and Commission Agreement with our Board Member and Employee

 

CSP leases industrial-use property in Bound Brook, New Jersey, U.S.A. from Brook Industrial Park, LLC, an entity that is controlled by an employee of CSP who is also an owner of a significant amount of our common shares and is one of our board members. The lease ends on August 31, 2016, with extension options available, and requires lease payments of $24,000 per month from September 1, 2011 through August 31, 2013; thereafter, the monthly lease payments will be adjusted to reflect the changes of average cost per square foot as reported by Newmark Knight and Frank in their 2nd Quarter New Jersey Industrial Market Report, Average Asking Rate for Somerset County.

 

This same related party controls JFC. In December 2012, we entered into a $2.1 million unsecured promissory note with JFC. The note accrues interest initially at the rate of 5% per annum; that interest rate increases by 1% per month beginning on January 1, 2014, up to a maximum rate of 11% (which increased rate is retroactive to the initial issuance date), and is payable in full on the earlier of June 30, 2014 or upon the refinancing of our existing indebtedness at that time (subject to the availability of at least $5.0 million in available credit after such repayment). Interest on this note totaled $26,000 in the three months ended March 31, 2013. No principal or interest payments have been made on this note.

 

10
 

 

Cyalume Technologies Holdings, Inc.

Notes to Condensed Consolidated Financial Statements

 

Management Agreement with our Board Member

 

On October 1, 2009 , we entered into an agreement with Selway Capital, LLC (“Selway”) that provides for (but is not limited to) the following services to be performed by Selway on our behalf:

 

· Strategic development and implementation as well as consultation to our chief executive officer on a regular basis as per his reasonable requests;
· Identify strategic partners with companies with which Selway has relationships and access. In this connection, Selway will focus on building partnerships with companies in Israel, Singapore, India and Europe. The focus will be on the expansion of our munitions business;
· Advise and support us on our investor relations strategy;
· Advise and support our future fund raising, including identifying sources of capital in the United States; and
· Support our mergers and acquisitions strategy and play an active role in our due diligence and analysis.

 

The agreement stipulates that these services would be performed by Yaron Eitan, an employee of Selway and a member of our Board of Directors, with assistance, as needed, from other employees of Selway. The agreement, which expired on October 1, 2012, was extended through December 31, 2013. Under the agreement, we indemnify Selway and Selway indemnifies us against certain losses that could be incurred while carrying out its obligations under the agreement. Per the amendment to extend the agreement, Selway’s compensation for these services is $21,000 per month. We also reimburse Selway for costs incurred specifically on our behalf for these services.

 

8. NET LOSS PER COMMON SHARE

 

Basic loss per common share is computed by dividing net loss by the weighted average number of common shares outstanding. Diluted loss per common share is computed by dividing net loss by the weighted average number of common shares and dilutive potential common share equivalents then outstanding. Potential common share equivalents consist of (i) shares issuable upon the exercise of warrants and options (using the “treasury stock” method), (ii) unvested restricted stock awards (using the “treasury stock” method) and (iii) shares issuable upon conversion of convertible notes using the “if-converted” method.

 

    Three Months Ended March 31,  
    2012     2011  
Basic:                
Net loss (in thousands)   $ (570 )   $ (989 )
Weighted average shares     20,708,531       18,172,694  
Basic loss per common share   $ (0.03 )   $ (0.05 )
Diluted:                
Loss available to common stockholders for diluted net loss per common share (in thousands)   $ (570 )   $ (989 )
Weighted average shares     20,708,531       18,172,694  
Diluted loss per common share   $ (0.03 )   $ (0.05 )

 

The following potentially dilutive common share equivalents were excluded from the calculation of diluted net loss per common share because their effect was antidilutive for each of the periods presented:

 

    Three Months Ended March 31,  
    2013     2012  
Options and warrants     3,011,937       5,089,088  
Restricted stock     26,753       106,394  
Convertible debt     2,666,667       2,666,667  

  

11
 

Cyalume Technologies Holdings, Inc.

Notes to Condensed Consolidated Financial Statements

 

 

9. COMMITMENTS AND CONTINGENCIES

 

Contingent Consideration Liability for the Acquisition of Combat Training Solutions, Inc.

 

On December 22, 2011, CTI entered into a Stock Purchase Agreement (“SPA”) with CTS and the sole stockholder of CTS. Pursuant to the SPA, CTI purchased all of the issued and outstanding capital stock of CTS using a combination of cash, shares of our common stock plus other consideration that is contingent on future financial performance of CTS. The contingent consideration ranges from $0 to $5.75 million and is based on the financial performance of the acquired business during the combined calendar years 2012 and 2013, to be paid after calendar year 2013 when CTS’s financial performance is known. Up to $5.5 million of the contingent payment is based on CTS achieving certain cumulative gross margin thresholds during the calendar years ending December 31, 2012 and 2013. An additional payment of $250,000 in our common stock is contingent upon CTS achieving cumulative gross margin of $6.0 million during calendar years ending December 31, 2012 and 2013. These payments will consist of a combination of cash and our common stock.

 

See Note 10 for an estimate of the fair value of this liability and a description of how we estimate its fair value.

 

Legal

 

Civil Action No. 06-706 in Superior Court of the Commonwealth of Massachusetts

 

On January 23, 2006, before we owned CTI, the former owners of CTI (from whom we purchased CTI) (the “Former Owners”) acquired all of the outstanding capital stock of Omniglow Corporation (the “Transaction”) and changed the name of the company to Cyalume Technologies, Inc. Prior to, or substantially simultaneously with, the Transaction, CTI sold certain assets and liabilities related to Omniglow Corporation’s novelty and retail business to certain former Omniglow Corporation stockholders and management (“the Omniglow Buyers”). This was done because CTI sought to retain only the Omniglow Corporation assets and current liabilities associated with its government, military and safety business. During 2006, CTI and the Omniglow Buyers commenced litigation and arbitration proceedings against one another. Claims include breaches of a lease and breaches of various other agreements between CTI and the Omniglow Buyers. These proceedings are known as Civil Action No. 06-706 in Superior Court of the Commonwealth of Massachusetts (the “Court”).

 

On December 19, 2008, while Civil Action 06-706 was still unresolved, we acquired CTI (the “Acquisition”). According to the Stock Purchase Agreement between the Former Owners and us, the Former Owners retained the responsibility for paying for all costs and liabilities associated with Civil Action No. 06-706.

 

On July 18, 2011, CTI received an Order for Entry of Final Judgment in Civil Action No. 06-706 in which the Court awarded approximately $2.6 million in damages to Omniglow, LLC. Prejudgment interest at the rate of twelve (12%) percent per annum since the filing of the complaint in 2006 will accrue on approximately $1.3 million of the damages. The Court also awarded Omniglow, LLC reimbursement of attorney fees and costs of approximately $235,000, on which interest at the rate of twelve (12%) percent per annum will accrue beginning with the date of the final ruling.

 

On July 12, 2012, the Court issued an Amended Final Judgment and, on September 20, 2012, a Final Judgment. There were no changes to the previously described damage awards. In response, on October 17, 2012, we filed our Notice of Appeal, which was docketed in the Court. On February 15, 2013, the Appellate Court clerk docketed the appeal. Our appeal contains a number of bases for overturning the awards.

 

Although we have appealed the final judgment, we have recorded a contingent legal obligation in the full amount of the final ruling (approximately $3.9 million) on our condensed consolidated balance sheet as of March 31, 2013. Since the Former Owners (i) retained the responsibility for paying the costs and liabilities associated with Civil Action No. 06-706 and (ii) are related parties under U.S. GAAP due to their ownership interest in us and their membership on our board of directors, we have recorded approximately $4.1 million, which includes the $3.9 million contingent legal obligation and other costs we have incurred while litigating Civil Action No. 06-706, as due from related party on our condensed consolidated balance sheet as of March 31, 2013. We believe that the related party receivable is collectible.

 

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Cyalume Technologies Holdings, Inc.

Notes to Condensed Consolidated Financial Statements

 

Arbitration with Former Employee

 

On December 22, 2011, CTI entered into a Stock Purchase Agreement (“SPA”) with CTS and Antonio Colon, the sole stockholder of CTS. Pursuant to the SPA, CTI purchased all of the issued and outstanding capital stock of CTS in return for consideration that included contingent consideration ranging from $0 to $5.75 million, which is based on CTS’ financial performance during the period of January 1, 2012 through December 31, 2013.

 

On June 15, 2012, we received a copy of a demand for arbitration filed by Mr. Colon with the American Arbitration Association. The demand alleges, among other things, that CTI has constructively terminated Mr. Colon’s employment without cause and that Cyalume and CTI have breached certain provisions of the SPA. Mr. Colon seeks, among other things, payment of the maximum potential contingent consideration amount of $5.75 million, payment of salary, wages, bonuses and benefits pursuant to Mr. Colon’s employment agreement with CTI, and reimbursement of his attorneys’ fees and costs related to this matter.

 

Cyalume and CTI consider the allegations in the Demand for Arbitration by Mr. Colon to be without merit and, in addition, the position of Cyalume and CTI is that Mr. Colon was not constructively terminated.

 

On August 17, 2012, Mr. Colon filed a Complaint in Federal Court and on September 11, 2012, he filed to have the arbitration withdrawn. In addition, on September 11, 2012, Mr. Colon chose to cease working for us.

 

CTI filed a Motion to Dismiss the Complaint in Federal Court and to compel the controversy to arbitration before the American Arbitration Association. The District Court for the District of Delaware held a hearing on January 23, 2013, at which it dismissed the Complaint in Federal Court without prejudice and indicated that the arbitration should proceed. This matter, including various counterclaims against Mr. Colon, is now proceeding in arbitration. Hearings have been scheduled for September 2013.

 

Commitments to Related Parties

 

See Note 7 for descriptions of a lease agreement, a commission agreement and a management agreement with related parties.

 

10. FAIR VALUES OF ASSETS AND LIABILITIES

 

Under U.S. GAAP, we are required to record certain financial assets and liabilities at fair value and may choose to record other financial assets and financial liabilities at fair value as well. Also under U.S. GAAP, we are required to record nonfinancial assets and liabilities at fair value due to events that may or may not recur in the future, such as an impairment event. When we are required to record such assets and liabilities at fair value, that fair value is estimated using an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. That fair value is determined based on significant inputs contained in a fair value hierarchy as follows:

 

Level 1 Quoted prices for identical assets or liabilities in active markets to which we have access at the measurement date.
Level 2 Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.
Level 3 Unobservable inputs for the asset or liability.

 

The determination of where assets and liabilities fall within this hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

 

There are three general valuation techniques that may be used to measure fair value, as described below:

 

Market Approach Uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities. Prices may be indicated by pricing guides, sale transactions, market trades, or other sources.
Cost Approach Based on the amount that currently would be required to replace the service capacity of an asset (replacement cost).
Income Approach

Uses valuation techniques to convert future amounts to a single present amount based on current market expectations about the future amounts (includes present value techniques and option-pricing models).

Net present value is an income approach where a stream of expected cash flows is discounted at an appropriate market interest rate.

 

 

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Cyalume Technologies Holdings, Inc.

Notes to Condensed Consolidated Financial Statements

 

Assets and Liabilities Measured at Fair Value on a Recurring Basis

 

Assets and liabilities itemized below were measured at fair value on a recurring basis at March 31, 2013 (all amounts in thousands):

 

    Level 1
Quoted
Prices in
Active
Markets
for
Identical
Assets
    Level 2
Significant
Other
Observable
Inputs
    Level 3
Significant
Unobservable
Inputs
    Assets/
Liabilities
At Fair
Value
 
Interest rate swaps (see Note 5)   (1)   $ 0     $ (116 )   $ 0     $ (116 )
Currency forward contract (see Note 5) (2)     0       1       0       1  
Contingent consideration (see Note 9)   (3)     0       0       0       0  
    $ 0     $ (115 )   $ 0     $ (115 )

 

(1) The fair values of the swaps are determined by discounting the estimated cash flows to be received and paid due to the swaps over the swap’s contractual lives using an estimated risk-free interest rate for each swap settlement date (an income approach).
(2) The fair value of these contracts is determined by multiplying the notional amount of the contract by the difference between (a) the U.S. dollar amount due on the contract at maturity and (b) the foreign exchange rate as of the date the contract is valued (the balance sheet date). Because the contracts typically have a short duration, the value is not discounted using a present value technique (an income approach).
(3) The contingent consideration liabilities’ fair value is determined by calculating the present value of the estimated liability that is expected to be paid in the future (an income approach). We estimated the undiscounted liability we expect to pay in the future by developing various hypothetical scenarios in which the consideration could be earned and weighting those scenarios based on our expectations that those scenarios will actually occur.

 

Assets and liabilities itemized below were measured at fair value on a recurring basis at December 31, 2012 (all amounts in thousands):

 

    Level 1
Quoted
Prices in
Active
Markets
for
Identical
Assets
    Level 2
Significant
Other
Observable
Inputs
    Level 3
Significant
Unobservable
Inputs
    Assets/
Liabilities
At Fair
Value
 
Interest rate swaps (see Note 5)   $ 0     $ (155 )   $ 0     $ (155 )
Currency forward contract (see Note 5)     0       (14 )     0       (14 )
Contingent consideration (see Note 9)     0       0       0       0  
    $ 0     $ (169 )   $ 0     $ (169 )

 

We did not transfer any assets or liabilities between Levels 1, 2 or 3 during the three months ended March 31, 2013. Any such transfer would be based on a review of the inputs used that are significant to the fair value measurement of that asset or liability.

 

We have other financial instruments, such as cash, accounts receivable, due from related party, accounts payable, notes payable and line of credit. We believe the carrying amounts of those assets and liabilities approximate their fair value since we have estimated those carrying amounts to approximate the exit price we would receive to sell these assets or pay to transfer these liabilities to a market participant.

 

Our contingent consideration liability resulting from our acquisition of CTS is our only asset or liability that is measured at fair value on a recurring basis using significant unobservable inputs (Level 3). The fair value of that liability was $0 as of March 31, 2013 and December 31, 2012 and there were no increases or decreases in its fair value during the three months ended March 31, 2013. The only significant unobservable inputs used in the fair value measurement of this liability is the estimated gross margin (revenues less cost of revenues) for the calendar years 2012 and 2013, which was estimated to be $3.0 million as of both March 31, 2013 and December 31, 2012. The maximum payout under this arrangement occurs when the estimated gross margin is $8.5 million; at such an amount, the fair value of this liability would be $4.8 million as of March 31, 2013. As the estimated gross margin was below $6.0 million as of March 31, 2013, the fair value of this liability was $0 as of March 31, 2013.

 

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Cyalume Technologies Holdings, Inc.

Notes to Condensed Consolidated Financial Statements

 

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

 

During the three months ended March 31, 2013, none of our assets or liabilities was measured at fair value on a nonrecurring basis.

 

11. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

 

Cash Paid for Interest and Income Taxes (all amounts in thousands) :

 

    Three Months Ended March 31  
    2013     2012  
Interest   $ 405     $ 450  
Income taxes     66       221  

 

Non-Cash Investing and Financing Activities (all amounts in thousands) :

 

    Three Months Ended March 31,  
    2013     2012  
Adjustment to goodwill acquired and contingent consideration incurred in the acquisition of CTS due to the finalization of the fair value of the contingent consideration   $ 0     $ 166  
Adjustment to goodwill acquired and deferred tax liability incurred in the acquisition of CTS due to the finalization of the fair value of the business combination     0       64  

 

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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

You should read the following discussion of our financial condition and results of operations in conjunction with our interim condensed consolidated financial statements and the accompanying notes to those financial statements included elsewhere in this Quarterly Report on Form 10-Q. This discussion contains forward-looking statements that involve risks and uncertainties. Unless the content otherwise requires, all references to "we", "us", the “Company" or “Cyalume" in this Quarterly Report on Form 10-Q refers to Cyalume Technologies Holdings, Inc.

 

Company Overview

 

We are a global, technology-based manufacturer primarily providing tactical and training solutions to the military of the U.S. and other select countries, through both products and services. We manufacture chemical light, reflective and battlefield effects simulator products while our services include planning and implementing tactical training exercises simulating real world experiences. In addition, and to a lesser extent, we also sell these products into the law enforcement, commercial public safety and other markets. In addition, we provide specialty chemical products to the defense, pharmaceutical, cosmetic and other markets. We do not sell products as novelties.

 

We maintain principal executive offices at 96 Windsor Street, West Springfield, Massachusetts 01089. We have two direct U.S.-based subsidiaries: Cyalume Technologies, Inc. (“CTI”) and Cyalume Specialty Products, Inc. (“CSP”). CTI is located in West Springfield, Massachusetts and CSP is located in Bound Brook, New Jersey . CTI has one non-U.S.-based subsidiary, Cyalume Technologies, SAS (“CTSAS”), located in Aix-en-Provence, France, and two U.S.-based subsidiaries, Cyalume Realty, Inc. (“CRI”) and Combat Training Solutions, Inc. (“CTS”) , based in West Springfield, Massachusetts. We manufacture products in the West Springfield, Bound Brook, and Aix-en-Provence locations.

 

Material Changes in Results of Operations – 3 Months Ended March 31, 2013 versus the 3 Months Ended March 31, 2012

 

Revenues in 2013 and 2012 were as follows:

 

Category ($ in millions)   2013     2012     Change  
Chemical Light   $ 5.4     $ 5.0     $ 0.4  
Ammunition     0.0       0.8       (0.8 )
Training and Simulation     0.5       0.5       0.0  
Specialty Products     2.2       1.7       0.5  
Total   $ 8.1     $ 8.0     $ 0.1  

 

For 2013, Chemical Light revenues increased from the prior year due to increased orders by the U.S Military. There were no ammunition revenues for 2013 as we are in-between contracts for military training rounds utilizing our technology. Production for the next program, the 40mm low-velocity round, is expected to start towards the end of the second quarter / beginning of the third quarter of 2013. Specialty Products revenue grew by approximately 29% over the prior year due to increased sales to existing customers as well as new ones.

 

Cost of goods sold for 2013 of approximately $4.3 million decreased from the prior year amount of $4.4 million primarily due to the absence of amortization of inventory step-up to fair value of approximately $0.3 million related to the purchase accounting effects of our acquisition of CTS, which affected 2012. The gross profit for 2013 was 47.3% versus 45.4% for 2012. Absent the amortization expense in 2012, the gross margin for 2012 would have been 48.7%. The difference between the two gross margins, absent the amortization expense, is due to product mix changes between the years.

 

Sales and marketing expenses for 2013 was approximately $1.1 million versus $1.2 million in 2012, a decrease of approximately $0.1 million that was attributable to the recovery of a receivable that had been previously reserved.

 

General and administrative expenses for 2013 were approximately $2.1 million versus $2.0 million for the prior year, or an increase of approximately $0.1 million. Expenses for 2012 were adversely impacted by the accrual for severance of $0.4 million for the former CEO. Absent this one-time charge, expenses for 2013 would have increased by approximately $0.5 million, due to higher personnel and personnel-related expenses and higher legal expenses associated with the ongoing arbitration case against a former employee.

 

Research and development expenses of approximately $0.5 million for 2013 decreased by approximately $0.1 million from the prior year due to a combination of several reasons, none of which were significant.

 

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The change in fair value of contingent consideration is driven by changes in the fair value of the contingent consideration liabilities that resulted from the acquisitions of CSP and CTS. The decrease in the change in fair value of contingent consideration in 2013 is due to (i) the payment of the CSP-related contingent consideration liability in December 2012 and (ii) the reduction of the CTS-related contingent consideration liability to zero in September 2012, resulting in no change in its fair value since that time. The change in fair value is not expected to fluctuate significantly in the near future.

 

For 2013, we recorded a tax benefit of approximately $0.3 million on a pre-tax loss of $0.8 million yielding an effective rate of 31.2%, which was similar to 2012 where we recorded a tax benefit of $0.5 million on a pre-tax loss of $1.5 million resulting in an effective rate of 35%.

 

Material Changes in Financial Condition – March 31, 2013 versus December 31, 2012

 

Cash was approximately $1.0 million at March 31, 2013, representing a decrease of $1.7 million from December 31, 2013. Combined accrued liabilities and accounts payable decreased by approximately $0.8 million; accounts receivable increased by approximately $0.6 million; and, inventories were higher at March 31 by approximately $0.3 million.

 

Our accounts receivable increased at March 31 compared to December 31 due to higher sales in the month of March 2013 versus the month of December 2012. Our receivables are generally collected within 30 days, thus revenues recorded in the 30-day period preceding the measurement date significantly influence the reported balances.

 

Our inventory balance as of March 31 increased over the balance at December 31, 2012, by approximately $0.3 million, due primarily to a build up of work-in-process inventory in anticipation of second quarter sales.

 

Accounts payable and accrued expenses combined were approximately $4.7 million at March 31 versus $5.5 million at December 31, a decrease of approximately $0.8 million due to the payment of accrued bonuses and vendor payments. Our line of credit, used to meet temporary working capital needs, was $0.4 million at March 31 versus $0 at December 31.

 

The current portion of notes payable increased by approximately $8.1 million while notes payable (non-current) decreased by $8.4 million, due primarily to the reclassification of our convertible subordinated debt to current as its maturity is now within twelve months of March 31, 2013. See Liquidity and Capital Resources for further discussion.

 

Liquidity and Capital Resources

 

As of March 31, 2013 and December 31, 2012, we had $1.0 million and $2.7 million, respectively, of cash on hand. The major sources and uses of cash during 2013 were all in the normal course of business.

 

Capital expenditures were approximately $0.1 million for the three months ended March 31, 2013, versus $0.3 million during three months ended March 31, 2012. Capital expenditures are expected to increase in during the next several quarters of 2013 to support new equipment purchases for new products. We expect to fund capital expenditures in 2013, exclusive of any acquisitions, from existing cash and operating cash flows.

 

CTI has a line of credit with a maximum borrowing capacity of $5.0 million with TD Bank N.A. (“TD Bank”), used to support working capital needs. The amount we may borrow from this line of credit is dependent mainly on accounts receivable and inventory balances. The line of credit expires on December 19, 2013. At March 31, 2013, there were $0.4 million of outstanding borrowings on this line of credit. At December 31, 2012, there were no outstanding borrowings on this line of credit.

 

CTI has two senior loans payable to TD Bank: a Term Loan and a Real Estate Loan.

 

The Term Loan is payable in monthly principal installments of $148,000 along with monthly interest payments, a scheduled one-time principal payment in June of $0.4 million plus a one-time principal payment for the remaining balance outstanding of $6.3 million, due at maturity in December 2013.

 

The Real Estate Loan is payable in monthly principal installments of $10,000, along with monthly interest payments plus a one-time principal payment of $1.7 million due at maturity in December 2013.

 

On July 29, 2010 we issued a Subordinated Term Loan of $8.5 million to Granite Creek Partners Agent, LLC (“Granite Creek”) that matures March 19, 2014. Interest is payable monthly at a rate of 11% per annum. No principal payments are required until maturity, at which time the entire principal of $8.5 million is due.

 

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Accordingly, during the next twelve months, for the two senior loans we have (i) estimated monthly cash interest payments of $0.4 million, (ii) scheduled monthly principal payments of $1.8 million and (iii) a balance due at maturity of $8.0 million. For the Subordinated Term Loan, for the next twelve months we have monthly cash interest payments of approximately $1.0 million plus a one-time payment due at maturity of $8.5 million.

 

We believe that we will successfully refinance all of the above loans prior to their maturity dates. Additionally, we are actively searching for potential acquisitions that would complement our existing business. Any acquisition could be financed by a combination of cash, equity and/or debt and could include a refinancing of our existing debt.

 

We were in compliance with the financial covenants related to these loans as of March 31, 2013.

 

We did not pay a dividend in the three months ended March 31, 2013 and has no plans to pay a dividend in the future.

 

Other than immaterial operating leases, we did not have any off-balance sheet arrangements during 2013 or 2012.

 

Critical Accounting Policies

 

Use of Estimates

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Estimates are used when accounting for certain items such as reserves for inventory, accounts receivable and deferred tax assets; assessing the carrying value of intangible assets including goodwill; determining the useful lives of property, plant and equipment and intangible assets; determining asset retirement obligations; and determining the fair value of contingent consideration. Estimates are based on historical experience, where applicable, and assumptions that we believe are reasonable under the circumstances. Due to the inherent uncertainty involved with estimates, actual results may differ.

 

Revenue Recognition

 

Revenue from the sale of products or the providing of services is recognized when the earnings process is complete, the amount of recognizable revenue can be determined, the risks and rewards of ownership have transferred to the customer and collectability is reasonably assured. Depending on the terms of the individual sales arrangement with our customer, product sales are recognized at either the shipping point or upon receipt by the customer. Costs and related expenses to manufacture the products are recorded as costs of goods sold when the related revenue is recognized.

 

We have two significant contracts providing for the sale of indefinite quantities of products at fixed per unit prices, subject to adjustment for certain economic factors. Revenue under these contracts is recognized when products ordered under the contracts are received by the customer. Whenever costs change, we review the pricing under these contracts to determine whether they require the sale of products at a loss. To date, we have no loss contracts which would require the accrual of future losses in the current financial statements.

 

We also provide research and development services for customers for which we earn payments that are contingent upon achieving a specific result (“milestones”). We recognize payments upon achieving such milestones as revenue provided the payment is (i) related to past performance, (ii) reasonable relative to all of the deliverables and payment terms within the arrangement with our customer, and (iii) nonrefundable.

 

Income Taxes

 

Deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using enacted tax rates and laws that will be in effect when the differences are expected to reverse. Deferred tax assets are recognized when, based upon available evidence, realization of the assets is more likely than not.

 

In assessing the realization of long-term deferred income tax assets, we consider whether it is more likely than not that the deferred income tax assets will be realized. The realization of deferred income tax assets depends upon future taxable income in years before net operating loss carryforwards expire. We evaluate the recoverability of deferred income tax assets on a quarterly basis. If we determine that it is more likely than not that deferred income tax assets will not be recovered, we establish a valuation allowance against some or all deferred income tax assets.

 

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When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefit associated with tax positions taken that exceeds the amount measured as described above, if such a position existed, is reflected as a liability for unrecognized tax benefits in the accompanying balance sheets along with any associated interest and penalties that would be payable to the taxing authorities upon examination. There were no such positions as of March 31, 2013 or December 31, 2012.

 

We classify interest on tax deficiencies as interest expense and income tax penalties as other expense.  

 

Goodwill

 

Goodwill is deemed to have an indefinite life and accordingly, is not subject to amortization. Goodwill is subject to an annual impairment review, and, if conditions warrant, interim impairment reviews. Impairment charges, if any, are recorded in the period in which the impairment is determined.

 

Intangible Assets

 

Intangible assets include developed technologies and patents, customer relationships, customer backlog, non-compete agreements and certain trade names, which are amortized over their estimated useful lives, and other trademarks and trade names, which are considered to have indefinite useful lives and therefore are not amortized. The carrying amounts of intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that those carrying amounts may not be recoverable. Additionally, the carrying amounts of non-amortizing intangible assets are reviewed for impairment annually every August 31. Costs incurred to register new patents or defend existing patents are capitalized while costs to renew or extend the term of intangible assets are expensed when incurred.

 

Inventories

 

Inventories are stated at the lower of cost (on a first-in first-out (“FIFO”) method) or net realizable value. We periodically review the realizability of inventory. Provisions are recorded for potential obsolescence which requires management’s judgment. Conditions impacting the realizability of inventory could cause actual write-offs to be materially different than provisions for obsolescence .

 

Contingent Consideration

 

We purchased CTS using a combination of cash, common stock and contingent consideration. The contingent consideration represents the present value of payments expected to be made in 2014 to the sellers of the businesses following the achievement of certain financial performance targets in 2012 and 2013. The contingent consideration is updated to fair value at the end of each reporting period.

 

Considerable judgment is applied by management when estimating the fair value of the contingent consideration. The contingent consideration liabilities’ fair value is determined by calculating the present value of the estimated liability that is expected to be paid in the future. This requires the use of (i) estimated future discount rates and (ii) hypothetical scenarios in which the consideration could be earned and weighting those scenarios based on our expectations that those scenarios will actually occur. Such assumptions may not reflect actual future results.

 

Foreign Operations and Currency

 

Accounts of our foreign subsidiary are recorded using their local currency (the euro) as the functional currency. For consolidation, revenues and expenses are converted to U.S. dollars using the average exchange rate for the month in which they were recorded. Assets and liabilities are converted to U.S. dollars using the exchange rate in effect as of the balance sheet date. Equity transactions are converted to U.S. dollars using the exchange rate in effect as of the date of the transaction. Translation gains and losses are reported as a component of accumulated other comprehensive income or loss. Gains and losses resulting from transactions which are denominated in other than the functio nal currencies are reported as other income, net in the statement of comprehensive income (loss) in the period the gain or loss occurred.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

As a smaller reporting company, we are not required to provide information typically disclosed under this item.

 

ITEM 4. CONTROLS AND PROCEDURES

 

Disclosure Controls and Procedures

 

Disclosure controls and procedures are designed to ensure that information required to be disclosed by us in reports filed or submitted under the Securities Exchange Act of 1934 (“Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls include, without limitation, controls and procedures designed to ensure that information required to be disclosed under the Exchange Act is accumulated and communicated to management, including principal executive and financial officers, as appropriate, to allow timely decisions regarding required disclosure. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives.

 

Our management carried out an evaluation, under the supervision of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as of March 31, 2013. Based upon that evaluation, our management, including our Chief Executive Officer and Chief Financial Officer, concluded that the design and operation of our disclosure controls and procedures were effective as of March 31, 2013.

 

Changes in Internal Control over Financial Reporting

 

There was no change in our internal control over financial reporting that occurred during the three months ended March 31, 2013 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

PART II – OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

There have been no material developments in the legal proceedings described in Item 3 “Legal Proceedings” in our Form 10-K for the year ended December 31, 2012.

 

ITEM 1A.    RISK FACTORS

 

As a smaller reporting company, we are not required to provide information typically disclosed under this item.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

Recent Sales of Unregistered Securities and Use of Proceeds from Registered Securities

 

None.

 

Purchases of Equity Securities by the Company and Affiliated Purchasers

 

None.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

None .

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable.

 

ITEM 5. OTHER INFORMATION

 

There were no changes to the procedures by which security holders may recommend nominees to our Board of Directors during the three months ended March 31, 2013.

 

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There is no information to report under this Item in lieu of reporting that information on Form 8-K.

 

ITEM 6.    EXHIBITS

 

Exhibit

Number

  Description
3.1 (1) Amended and Restated Bylaws of the Company. (3.1)
31.1 * Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 * Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 * Certification of Principal Executive Officer and Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS * XBRL Instance Document
101.SCH * XBRL Taxonomy Extension Schema
101.CAL * XBRL Taxonomy Extension Calculation Database
101.DEF * XBRL Taxonomy Extension Definition Linkbase
101.LAB * XBRL Taxonomy Extension Label Linkbase
101.PRE * XBRL Taxonomy Extension Presentation Linkbase
* Filed herewith.

 

(1) Incorporated by reference to the Current Report on Form 8-K dated March 22, 2013 and filed with the Commission March 22, 2013. The number given in parenthesis indicates the corresponding exhibit number in such Form 8-K.

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

  Cyalume Technologies Holdings, Inc.
     
Date: May 6, 2013 By: /s/ Zivi Nedivi
   
    Zivi Nedivi, Chief Executive Officer
     (Principal Executive Officer)

 

Date: May 6, 2013 By: /s/ Michael Pellicci
   
    Michael Pellicci, Chief Financial Officer
     (Principal Financial Officer)

 

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Exhibit 31.1

 

CERTIFICATION

 

I, Zivi Nedivi, certify that:

 

1. I have reviewed this Quarterly Report on Form 10-Q of Cyalume Technologies Holdings, Inc.;

 

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3 Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

 

5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

 

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

 

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

 

Date: May 6, 2013  
  /s/ Zivi Nedivi
 

Zivi Nedivi, Chief Executive Officer

 

 

 

Exhibit 31.2

 

CERTIFICATION

 

I, Michael Pellicci, certify that:

 

1. I have reviewed this Quarterly Report on Form 10-Q of Cyalume Technologies Holdings, Inc.;

 

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

 

5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

 

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

 

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

 

Date: May 6, 2013 /s/ Michael Pellicci
 

Michael Pellicci, Chief Financial Officer

 

 

 

Exhibit 32.1

 

CERTIFICATION

 

Each of the undersigned officers of Cyalume Technologies Holdings, Inc. (the "Company") hereby certifies that, to his knowledge, the Company's Quarterly Report on Form 10-Q to which this certification is attached (the "Report"), as filed with the Securities and Exchange Commission on the date hereof, fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and that the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

Date: May 6, 2013 /s/ Zivi Nedivi
 
 

Zivi Nedivi, Chief Executive Officer

 

(the Principal Executive Officer)

 

Date: May 6, 2013  
  /s/ Michael Pellicci
 
 

Michael Pellicci, Chief Financial Officer

   (the Principal Financial Officer)

 

This certification is being furnished and not filed, and shall not be incorporated into any document for any purpose, under the Securities Exchange Act of 1934 or the Securities Act of 1933.