Cyalume
Cyalume Technologies Holdings, Inc. (Form: 10-Q, Received: 11/19/2013 11:26:33)

 

 

 

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 September 30, 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 November 1, 2013, there were 20,738,260 shares outstanding 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 September 30, 2013 (unaudited) and December 31, 2012   4
         
    Condensed Consolidated Statements of Comprehensive Loss for the three months ended September 30, 2013 and 2012 (unaudited)   5
         
    Condensed Consolidated Statements of Comprehensive Loss for the nine months ended September 30, 2013 and 2012 (unaudited)   6
         
    Condensed Consolidated Statements of Changes in Stockholders' Equity for the nine months ended September 30, 2013 (unaudited)   7
         
    Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2013 and 2012 (unaudited)   8
         
    Notes to Condensed Consolidated Financial Statements (unaudited)   9
         
Item 2.   Management's Discussion and Analysis of Financial Condition and Results of Operations   20
         
Item 3.   Quantitative and Qualitative Disclosures About Market Risk   25
         
Item 4.   Controls and Procedures   26
         
PART II—OTHER INFORMATION    
     
Item 1.   Legal Proceedings   26
         
Item 1A.   Risk Factors   26
         
Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds   26
         
Item 3.   Defaults Upon Senior Securities   26
         
Item 4.   Mine Safety Disclosures   26
         
Item 5.   Other Information   26
         
Item 6.   Exhibits   27
         
Signatures   28

 

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)

 

    September 30,
2013
(unaudited)
    December 31,
2012
 
Assets            
Current assets:                
Cash   $ 1,607     $ 2,695  
Accounts receivable, net of allowance for doubtful accounts of $41 and $155, respectively     4,242       3,875  
Inventories, net     11,335       9,597  
Income taxes refundable     134       173  
Deferred income taxes     722       652  
Prepaid expenses and other current assets     980       558  
Total current assets     19,020       17,550  
                 
Property, plant and equipment, net     8,604       9,177  
Goodwill     7,992       8,160  
Other intangible assets, net     18,390       20,190  
Due from related party, net     563       3,972  
Other noncurrent assets     0       28  
Total assets   $ 54,569     $ 59,077  
Liabilities and Stockholders’ Equity                
Current liabilities:                
Line of credit   $ 3,600     $ 0  
Current portion of notes payable     16,919       9,734  
Note payable due to related parties     2,100       0  
Accounts payable     5,416       2,934  
Accrued expenses     5,009       2,583  
Deferred revenue     58       0  
Current portion of capital lease obligation     15       14  
Derivatives liability     43       169  
Total current liabilities     33,160       15,434  
                 
Notes payable, net of current portion     0       8,394  
Note payable due to related parties     0       2,100  
Deferred income taxes     722       3,862  
Asset retirement obligation     191       184  
Capital lease obligation, net of current portion     10       22  
Contingent legal obligation     3,941       3,806  
Other noncurrent liabilities     48       0  
Total liabilities     38,072       33,802  
                 
Commitments and contingencies (Note 12)                
                 
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; 100,000,000 shares authorized; 20,738,260 issued and outstanding     21       21  
Additional paid-in capital     106,699       105,990  
Accumulated deficit     (89,883 )     (80,221 )
Accumulated other comprehensive loss     (340 )     (515 )
Total stockholders’ equity     16,497       25,275  
Total liabilities and stockholders' equity   $ 54,569     $ 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  
    September 30,     September 30,  
    2013     2012  
Revenues   $ 7,461     $ 10,095  
Cost of revenues     4,217       6,063  
Gross profit     3,244       4,032  
                 
Other expenses (income):                
Sales and marketing     1,200       1,262  
General and administrative     4,411       1,679  
Research and development     371       441  
Interest expense, net     620       559  
Interest expense – related party     122       2  
Amortization of intangible assets     434       466  
Provision for uncollectible receivable – related party     3,730       0  
Impairment loss on intangible assets     0       281  
Impairment loss on goodwill     0       47,088  
Impairment loss on equipment     0       273  
Legal settlement     2,038       0  
Change in fair value of contingent consideration     0       19  
Other expenses (income), net     45       (31 )
Total other expenses     12,971       52,039  
                 
Loss before income taxes     (9,727 )     (48,007 )
Benefit from income taxes     (1,923 )     (837 )
Net loss     (7,804 )     (47,170 )
                 
Other comprehensive income (loss), net of tax:                
Foreign currency translation adjustments     199       124  
Unrealized gain on cash flow hedges, net of taxes of $(14) and $(14), respectively     22       15  
Other comprehensive income (loss)     221       139  
Comprehensive loss   $ (7,583 )   $ (47,031 )
                 
Net loss per common share:                
Basic and diluted   $ (0.38 )   $ (2.59 )
                 
Weighted average shares used to compute net loss per common share:                
Basic and diluted     20,716,901       18,212,618  

 

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

 

5
 

   

Cyalume Technologies Holdings, Inc.

Condensed Consolidated Statements of Comprehensive Loss

(in thousands, except shares and per share information)

(Unaudited)

 

    For the Nine     For  the Nine  
    Months Ended     Months Ended  
    September 30,     September 30,  
    2013     2012  
Revenues   $ 25,006     $ 27,012  
Cost of revenues     13,453       15,461  
Gross profit     11,553       11,551  
                 
Other expenses (income):                
Sales and marketing     3,650       4,229  
General and administrative     9,107       5,105  
Research and development     1,431       1,424  
Interest expense, net     1,790       1,675  
Interest expense – related party     174       18  
Amortization of intangible assets     1,303       1,420  
Provision for uncollectible receivable – related party     3,730       0  
Impairment loss on intangible assets     875       281  
Impairment loss on goodwill     168       47,088  
Impairment loss on equipment     0       273  
Legal settlement     2,038       0  
Change in fair value of contingent consideration     0       241  
Other expenses (income), net     49       (145 )
Total other expenses     24,315       61,609  
                 
Loss before income taxes     (12,762 )     (50,058 )
Benefit from income taxes     (3,100 )     (1,532 )
Net loss     (9,662 )     (48,526 )
                 
Other comprehensive loss, net of tax:                
Foreign currency translation adjustments     105       (60 )
Unrealized gain on cash flow hedges, net of taxes of $(28) and  $(21), respectively     70       48  
Other comprehensive income (loss)     175       (12 )
Comprehensive loss   $ (9,487 )     (48,538 )
                 
Net loss per common share:                
Basic and diluted   $ (0.47 )   $ (2.67 )
                 
Weighted average shares used to compute net loss per common share:                
Basic and diluted     20,711,352       18,192,805  

 

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

 

6
 

   

Cyalume Technologies Holdings, Inc.

Condensed Consolidated Statements of Changes in Stockholders' Equity

(in thousands, except shares)

(Unaudited)

 

    Common Stock                          
    Number
of Shares
    Amount     Additional
Paid-In
Capital
    Accumulated
Deficit
    Accumulated
Other
Comprehensive
Loss
    Total
Stockholders’
Equity
 
Balance at December 31, 2012     20,738,260     $ 21     $ 105,990     $ (80,221 )   $ (515 )   $ 25,275  
Share-based compensation     0       0       709       0       0       709  
Net loss     0       0       0       (9,662 )     0       (9,662 )
Other comprehensive loss     0       0       0       0       175       175  
Balance at September 30, 2013     20,738,260     $ 21     $ 106,699     $ (89,883 )   $ (340 )   $ 16,497  

  

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

 

7
 

 

Cyalume Technologies Holdings, Inc.

Condensed Consolidated Statements of Cash Flows

(in thousands)

(Unaudited)

 

    For the Nine     For the Nine  
    Months Ended     Months Ended  
    September 30,     September 30,  
    2013     2012  
Cash flows from operating activities:                
Net loss   $ (9,662 )   $ (48,526 )
Adjustments to reconcile net loss to net cash used in operating activities:                
Depreciation of property, plant and equipment     1,030       1,031  
Amortization     1,839       2,044  
Provision for uncollectible receivable – related party     3,730       0  
Deferred income tax benefit     (3,261 )     (1,677 )
Stock-based compensation expense     709       262  
Common stock issuance     0       56  
Change in fair value of contingent consideration     0       241  
Impairment loss on intangible assets     875       281  
Impairment loss on goodwill     168       47,088  
Impairment loss on equipment     0       273  
Legal settlement     2,038       0  
Other non-cash expenses     45       16  
Changes in operating assets and liabilities:                
Accounts receivable     (252 )     (808 )
Inventories     (1,701 )     405  
Prepaid expenses and other current assets     (494 )     54  
Restricted cash     0       (159 )
Accounts payable and accrued liabilities     2,555       1,238  
Deferred revenue     58       0  
Income taxes payable     43       (160 )
Net cash used  in operating activities     (2,280 )     1,659  
                 
Cash flows from investing activities:                
Purchases of long-lived assets     (801 )     (296 )
Proceeds from disposal of long-lived assets     18       0  
Net cash used  in investing activities     (783 )     (296 )
                 
Cash flows from financing activities:                
Net proceeds from line of credit     3,600       900  
Repayment of long-term notes payable     (1,646 )     (1,463 )
Repayment of related party note payable     0       (250 )
Principal payments on capital lease obligations     (11 )     (17 )
Payments to reacquire and retire common stock     0       (131 )
Payment of debt issuance costs     0       (70 )
Net cash provided by (used in) financing activities     1,943       (1,031 )
                 
Effect of exchange rate changes on cash     32       (61 )
Net decrease in cash     (1,088 )     (1,501 )
Cash, beginning of period     2,695       2,951  
Cash, end of period   $ 1,607     $ 1,450  

 

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

 

8
 

 

Cyalume Technologies Holdings, Inc.

Notes to Condensed Consolidated Financial Statements

 

1. ORGANIZATION

 

Cyalume Technologies Holdings, Inc. (the “Company”) was organized as a blank check company under the laws of the State of Delaware on July 19, 2005. At that time, the Company was named Vector Security Intersect Acquisition Corp. On December 19, 2008, the Company acquired Cyalume Technologies, Inc. (“CTI”) and changed the corporate name to the current name. CTI is a Delaware corporation formed on March 27, 1997 with headquarters located in West Springfield, Massachusetts.

 

2. BASIS OF PRESENTATION

 

The accompanying unaudited condensed consolidated financial statements included herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission and in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information. Certain information and note disclosures normally included in annual financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to those rules and regulations. The Company believes that the disclosures made are adequate to make the information presented not misleading. All the adjustments which, in the opinion of management, are considered necessary for a fair presentation of the results of operations for the periods shown are of a normal recurring nature and have been reflected in the unaudited condensed consolidated financial statements. Results from operations for the three and nine months ended September 30, 2013 are not necessarily indicative of the results that may be expected for any other interim period or for the year ending December 31, 2013. The consolidated balance sheet at December 31, 2012 has been derived from the audited consolidated financial statements at that date. The information included in these unaudited interim condensed consolidated financial statements should 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.

 

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. While the Company believes that such estimates are fair when considered in conjunction with the condensed consolidated financial position and results of operations taken as a whole, the actual amount of such estimates, when known, may vary from these estimates.

 

3. DESCRIPTION OF BUSINESS

 

These consolidated financial statements and footnotes include the financial position and operations of Cyalume Technologies Holdings, Inc. (“Cyalume” or the “Company”), 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.

 

9
 

 

Cyalume Technologies Holdings, Inc.

Notes to Condensed Consolidated Financial Statements

 

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.).

 

For the three and nine months ended September 30, 2013, the Company had a net loss of approximately $7.8 million and $9.7 million, respectively, and for the nine months ended September 30, 2013, the Company used approximately $2.3 million of cash in its operating activities. As of September 30, 2013, the Company has an accumulated deficit of approximately $89.9 million and the Company’s unrestricted cash balance was approximately $1.6 million.

 

In light of the Company’s secured notes payable maturing on December 19, 2013 and March 19, 2014, and the Company’s line of credit maturing on December 19, 2013 (see Note 8), management has been evaluating various possibilities, including but not limited to refinancing or restructuring the Company’s debt and raising additional capital through the issuance of common stock, preferred stock, or securities convertible into common stock. These possibilities, to the extent available, may be on terms that result in significant dilution to the Company’s existing stockholders, may reduce the value of stockholders’ investment in the Company or may impact the Company’s stock price. There can be no assurances that the Company will be successful in refinancing or restructuring its debt or raising additional capital. The Company’s condensed consolidated financial statements do not include any adjustments relating to the recoverability of assets and classification of assets and liabilities that might be necessary should the Company be unable to refinance or restructure its debt, or otherwise meet its payment obligations under its existing arrangements.

   

4. IMPAIRMENT CHARGES

 

During the second quarter of 2013, CTS recorded a goodwill impairment loss of $168,000 and a loss on impairment of certain amortizing intangible assets of $875,000. See Note 6 for activity affecting our goodwill asset during the nine months ending September 30, 2013. See Note 13 for fair value information on these assets.

 

During the second quarter of 2013, management conducted an annual review of tangible and intangible assets for impairment. Before assessing whether any of our reporting units’ goodwill was impaired, we first assessed whether any non-goodwill assets were impaired. This assessment determined that the CTS patent asset was impaired by approximately $174,000, CTS trademarks and trade names were impaired by approximately $17,000, CTS customer relationships intangibles were impaired by approximately $650,000 and CTS non-compete agreements were impaired by approximately $34,000. Therefore, the Company recorded $875,000 of an impairment loss on these CTS intangible assets during the second quarter of 2013.

 

The “step 1” goodwill impairment assessment was performed by comparing the fair value of each reporting unit containing goodwill to those reporting units’ carrying values. Our Chemical Light, Training, and Specialty Products reporting units have goodwill assets. Since there are no quoted market prices for our reporting units, the fair value of our reporting units were determined using a discounted present value technique utilizing each reporting unit’s forecasted after-tax cash flows. The “step 1” test determined that the carrying value of the CTS Training reporting unit exceeded its fair value, and therefore its goodwill needed to be tested further under what is commonly known as “step 2” of the goodwill impairment assessment. CTS did not pass the “step 1” test due to the inability to both gain traction with new products and services and attract new customers as initially planned when the reporting unit was acquired in December 2011.

 

Under “step 2” of the goodwill impairment assessment, we compared the implied fair value of CTS Training’s goodwill with the carrying amount of that goodwill. If the carrying amount of the goodwill exceeds the implied fair value of that goodwill, that excess must be recognized as an impairment loss. The implied fair value of goodwill was determined in the same manner as the amount of goodwill recognized in a business combination. The excess of the fair value of the reporting unit over the amounts assigned to its assets and liabilities is the implied amount of the reporting unit’s goodwill. We identified several intangible assets that were valued during this process, including customer relationships, patents, trade names, non-compete agreements, and our workforce. The allocation process was performed only for purposes of goodwill impairment. We determined the fair value of these assets using various discounted cash flow-based methods that utilize assumptions such as the ability of these assets to generate future cash flows, present-value factors, income tax rates and customer attrition rates. The “step 1” calculated fair value of the CTS reporting unit was allocated to the CTS tangible and identifiable intangible assets of the CTS reporting unit at June 30, 2013 based upon the results of the “step 2” analysis, which was a full impairment to the CTS goodwill.

 

10
 

 

Cyalume Technologies Holdings, Inc.

Notes to Condensed Consolidated Financial Statements

 

5. INVENTORIES

 

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

 

    September 30,
2013
(unaudited)
    December 31,
2012
 
Raw materials   $ 6,709     $ 6,255  
Work-in-process     2,574       1,530  
Finished goods     2,052       1,812  
    $ 11,335     $ 9,597  

 

6. GOODWILL

 

Changes in our goodwill asset were as follows during the nine months ended September 30, 2013 (all amounts in thousands):

 

Balance at December 31, 2012 (1)   $ 8,160  
Impairment loss  (see Notes 4 and 13)     (168 )
Balance at September 30, 2013 (2)   $ 7,992  

 

(1) Gross amount of goodwill was $67,704,000 as of December 31, 2012. Accumulated impairment losses were $59,544,000 as of December 31, 2012.

 

(2) Gross amount of goodwill was $67,704,000 as of September 30, 2013. Accumulated impairment losses were $59,712,000 as of September 30, 2013.

 

7. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

 

The derivative liabilities as of September 30, 2013 in our condensed consolidated balance sheet consist of the following (all amounts in thousands):

  

Derivative Instrument   Balance Sheet Location   Fair Value  
Interest rate swaps   Derivatives liability (current liabilities)   $ (43 )
             

 

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 contracts   Derivatives liability (current liabilities)   $ (14 )
Interest rate swaps   Derivatives liability (current liabilities)     (155 )

 

Currency Forward Contracts

 

CTSAS’s 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’s 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 expenses (income), net on our condensed consolidated statement of comprehensive loss. At September 30, 2013, we held no such currency forward contracts. See Note 13 for a description of how we estimate the fair value of these contracts.

 

11
 

 

Cyalume Technologies Holdings, Inc.

Notes to Condensed Consolidated Financial Statements

 

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. (“TD Bank”) 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, 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 13 for a description of how we estimate the fair value of these swaps.

 

Effect of Derivatives on Statement of Comprehensive 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 loss for the three months ended September 30, 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)   $ 22     $ 0     $ 0  
Derivatives not designated as hedging instruments:                        
Forward currency contracts   $ 0     $ 0     $ (1 )

 

  (1) Amount recognized in accumulated other comprehensive loss (AOCL) (effective portion and net of taxes) during the three months ended September 30, 2013.
  (2) Amount of gain (loss) originally recorded in AOCL but reclassified from AOCL into earnings during the three months ended September 30, 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 loss for the three months ended September 30, 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 loss for the nine months ended September 30, 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 $(42)   $ 70     $ 0     $ 0  
Derivatives not designated as hedging instruments:                        
Forward currency contracts   $ 0     $ 0     $ 14  

 

  (1) Amount recognized in accumulated other comprehensive loss (AOCL) (effective portion and net of taxes) during the nine months ended September 30, 2013.
  (2) Amount of gain (loss) originally recorded in AOCL but reclassified from AOCL into earnings during the nine months ended September 30, 2013.
  (3) Amount of gain (loss) recognized in earnings on the derivative (ineffective portion and amount excluded from effectiveness testing) reported in other expenses (income), net in the condensed consolidated statement of comprehensive loss for the nine months ended September 30, 2013.

 

 

12
 

 

Cyalume Technologies Holdings, Inc.

Notes to Condensed Consolidated Financial Statements

 

8. DEBT

 

Line of Credit

CTI has a line of credit with a maximum borrowing capacity of $5.0 million with 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 September 30, 2013, there were $3.6 million of outstanding borrowings on this line of credit. At December 31, 2012, there were no outstanding borrowings on this line of credit.

 

Senior Debt

CTI has two loans payable to TD Bank: a Term Loan and a Real Estate Loan, that were originally entered into on December 19, 2008, and which were amended twice during 2012 to modify certain financial and non-financial covenants required by these loans.

 

The Term Loan is payable in monthly principal installments of $148,000 along with monthly interest payments, plus a one-time principal payment of $6.7 million due at maturity on December 19, 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 on December 19, 2013.

 

Subordinated Term Loan

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 beginning September 1, 2010 at a rate of 11% per annum. No principal payments are required until maturity. We have the right to prepay the loan in whole or in part at any time without penalty. The Subordinated Term Loan ranks junior to all debt held by TD Bank, but senior to all other remaining long-term debt including existing and future subordinated debt. The Subordinated Term Loan is convertible at any time by Granite Creek into 2,666,667 shares of common stock at a conversion price of approximately $3.19 per share. No portion of the Subordinated Term Loan has been converted to our common stock. The convertible notes’ conversion feature is not a beneficial conversion feature under U.S. GAAP.

 

Outstanding notes payable, excluding a note payable to a related party described in Note 10, consist of (all amounts in thousands):

 

    September 30,     December 31,  
    2013
(unaudited)
    2012  
Senior Debt - Term Loan   $ 6,967     $ 8,519  
Senior Debt - Real Estate Loan     1,709       1,804  
Subordinated Term Loan     8,500       8,500  
Total     17,176       18,823  
Less: Unamortized debt issuance costs     (257 )     (695 )
Less: Current portion of notes payable, including current portion of unamortized debt discount     (16,919 )     (9,734 )
Notes payable, net of current portion   $ 0     $ 8,394  

 

Debt issuance costs are amortized to interest expense using the effective interest method over the life of the loan.

 

9. INCOME TAXES

 

The effective tax rates for the three months ended September 30, 2013 and September 30, 2012 were approximately 20% and 2%, respectively, compared to the federal statutory rate of 34%. The effective tax rates for the nine months ended September 30, 2013 and September 30, 2012 were approximately 24% and 3%, respectively, compared to the federal statutory rate of 34%. The Company increased its valuation allowance during the three and nine months ended September 30, 2013 by approximately $1.8 million due to management’s assessment that it is more likely than not that a portion of certain deferred tax assets may not be realized. The Company has a valuation allowance of approximately $5.7 million as of September 30, 2013 against deferred tax assets generated primarily as a result of foreign tax credits. The 2012 effective rate differed from the statutory rate primarily due to the 2012 goodwill impairment.

 

13
 

 

Cyalume Technologies Holdings, Inc.

Notes to Condensed Consolidated Financial Statements

 

10. RELATED PARTY TRANSACTIONS

 

Lease Agreement, Note Payable and Board Member Management Agreement

 

Lease Agreement and Note Payable

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 were adjusted to reflect the changes of average cost per square foot as reported by Newmark Knight and Frank in their 2nd Quarter 2013 New Jersey Industrial Market Report, Average Asking Rate for Somerset County to approximately $30,000 per month beginning September 1, 2013.

 

This same related party controls JFC Technologies, LLC (“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. If payments have not begun on the unsecured promissory note by December 31, 2013, the interest rate increases by 1% per month beginning on January 1, 2014, up to a maximum rate of 11% (the increased rate is retroactive to the initial issuance date for a total maximum interest expense amount of $346,500 through the maturity date). The unsecured promissory note is payable in full on the earlier of June 30, 2014 or upon the refinancing of our existing indebtedness (subject to the availability of at least $5.0 million in available credit after such repayment). Interest expense at the maximum rate of 11% retroactive to the initial issuance date on this note totaled approximately $173,000 in the nine months ended September 30, 2013. No principal or interest payments have been made on this note.

 

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.

 

  11. 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.

 

14
 

 

Cyalume Technologies Holdings, Inc.

Notes to Condensed Consolidated Financial Statements

 

    Three Months Ended September 30,     Nine Months Ended  September 30,  
    2013     2012     2013     2012  
Basic and diluted:                                
Net loss (in thousands)   $ (7,804 )   $ (47,170 )   $ (9,662 )   $ (48,526 )
Weighted average shares     20,716,901       18,212,618       20,711,352       18,192,805  
Basic and diluted loss per common share   $ (0.38 )   $ (2.59 )   $ (0.47 )   $ (2.67 )

 

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 September 30,     Nine Months Ended September 30,  
    2013     2012     2013     2012  
Options and warrants     3,226,186       2,479,937       3,226,186       1,033,833  
Restricted stock     23,024       50,321       22,704       72,784  
Convertible debt     2,666,667       2,666,667       2,666,667       2,666,667  

 

12. 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. This payment will consist of a combination of cash and our common stock. An additional payment of $250,000 of our common stock is contingent upon CTS achieving cumulative gross margin of $6.0 million during calendar years ending December 31, 2012 and 2013.

 

See Note 13 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.

 

15
 

 

Cyalume Technologies Holdings, Inc.

Notes to Condensed Consolidated Financial Statements

 

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 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 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 and on August 2, 2013, we filed our Formal Appeal. Our appeal contains a number of bases for overturning the awards.

 

Although we have appealed the final judgment, we previously recorded a contingent legal obligation in the full amount of the final ruling (approximately $3.9 million). 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, the Company recorded approximately $4.3 million, which includes the $3.9 million contingent legal obligation and other costs incurred while litigating Civil Action No. 06-706, within due from related party, net on the condensed consolidated balance sheet as of September 30, 2013. This due from related party, net amount is offset by an allowance of approximately $3.7 million as of September 30, 2013, which is recorded on the provision for uncollectible receivable – related party line item on the Company’s condensed consolidated statements of comprehensive loss. The overall due from related party, net amount is approximately $563,000 as of September 30, 2013. In connection with certain financial transactions being negotiated by the Company, management expects a modification to an indemnification agreement limiting the collectible amount of this related party receivable to approximately $563,000.  

 

Arbitration with Former Employee

 

On December 22, 2011, CTI entered into the 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’s 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 had constructively terminated Mr. Colon’s employment without cause and that Cyalume and CTI had 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 considered the allegations in the Demand for Arbitration by Mr. Colon to be without merit and, in addition, the position of Cyalume and CTI was 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. On September 23, 2013, the parties entered into an agreement to resolve this matter, the terms of which call for the Company to make a series of payments over five years to Mr. Colon and to transfer a property located in Colorado Springs, CO to Mr. Colon. The property was originally acquired by the Company at the time of the CTS acquisition on December 22, 2011.

 

Commitments to Related Parties

 

See Note 10 for descriptions of a lease agreement, a note payable and a management agreement with related parties.

 

16
 

 

Cyalume Technologies Holdings, Inc.

Notes to Condensed Consolidated Financial Statements

 

13. FAIR VALUE

 

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.

 

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 September 30, 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 7)   (1)   $ 0     $ (43 )   $ 0     $ (43 )
    $ 0     $ (43 )   $ 0     $ (43 )

 

(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).

 

17
 

 

Cyalume Technologies Holdings, Inc.

Notes to Condensed Consolidated Financial Statements

 

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 7)   $ 0     $ (155 )   $ 0     $ (155 )
Currency forward contract (see Note 7)     0       (14 )     0       (14 )
    $ 0     $ (169 )   $ 0     $ (169 )

 

We did not transfer any assets or liabilities between Levels 1, 2 or 3 during the nine months ended September 30, 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 September 30, 2013 and December 31, 2012 and there were no increases or decreases in its fair value during the nine months ended September 30, 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 cumulative calendar years 2012 and 2013, which was estimated to be $3.0 million as of December 31, 2012 and $2.0 million as of September 30, 2013. 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 $5.0 million as of September 30, 2013. Because the estimated cumulative gross margin was well below $6.0 million as of September 30, 2013, the fair value of this liability was $0 as of September 30, 2013.

 

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

 

During the second quarter of 2013, the following assets, all of which are Level 3 assets, were identified as impaired and were adjusted to their fair values (in thousands of dollars) (see also Notes 4 and 6):

 

    Cyalume Reporting Unit (1)   Loss Recognized     Fair Value  
Goodwill (2)   Training   $ 168     $ 0  
Patents   (3)   Training     174       17  
Trademarks and trade name   (4)   Training     17       0  
Non-compete agreements   (5)   Training     34       0  
Customer Relationships   (6)   Training     650       60  

 

  (1) We are managed as one operating segment with 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.). Both Chemical Lights’ goodwill and Specialty Products’ goodwill was not considered to be impaired and our Other reporting unit does not have a goodwill asset.

 

  (2) The fair value of the impaired goodwill asset was determined calculating the excess of the fair value of the reporting unit over the fair values assigned to its assets and liabilities and utilized present value techniques utilizing each reporting unit’s forecasted after-tax cash flows.

 

  (3) The fair value of the impaired patent asset was determined using the “relief from royalty” method, which calculates the present value of a stream of estimated future royalty payments that an entity would be willing to pay in order to utilize the patents, net of estimated income taxes (an income approach).

 

18
 

 

  Cyalume Technologies Holdings, Inc.

Notes to Condensed Consolidated Financial Statements

 

  (4) The fair value of the impaired trademarks and trade names asset was determined using the “relief from royalty” method, which calculates the present value of a stream of estimated future royalty payments that an entity would be willing to pay in order to utilize the trademarks and trade names, net of estimated income taxes (an income approach).

 

  (5) The fair value of the impaired non-compete agreement asset was determined using the “comparative business valuation” method, which compares the present value of two streams of the reporting unit’s estimated future cash flows; one stream assuming the non-compete agreements are in place and the other stream assuming the agreements are not in place (an income approach).

 

  (6) The fair value of the customer relationships was determined using a multi-period excess earning method (an income approach), with key inputs being estimated customer attrition rates, revenue growth rates and a risk-adjusted discount rate.

 

 

14. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

 

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

 

    Nine Months Ended
September 30,
 
    2013     2012  
Interest   $ 1,250     $ 1,346  
Income taxes     120       345  

 

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

 

    Nine Months Ended
September 30,
 
    2013     2012  
Litigation award payable accounted for as a receivable due from related party   $ 134     $ 134  
Adjustment to the fair value of warrants issued in July 2010 in conjunction with issuance of subordinated term loan     0       94  
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  
Adjustment to CTS goodwill due to the reduction of its deferred tax liability associated with the impairment of identified intangible assets     0       183  

 

 

15. 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.

 

19
 

 

 

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 and in conjunction with our Annual Report on Form 10-K for the fiscal year ended December 31, 2012. 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.

 

Impairment Charges

 

During the quarter ended June 30, 2013, CTS recorded a goodwill impairment loss of $168,000 and a loss on impairment of certain amortizing intangible assets of $875,000. See Note 6 in our Notes to Condensed Consolidated Financial Statements for activity affecting our goodwill asset during the nine months ending September 30, 2013. See Note 13 for fair value information on these assets.

 

During the second quarter of 2013, management conducted an annual review of tangible and intangible assets for impairment. Before assessing whether any of our reporting units’ goodwill was impaired, we first assessed whether any non-goodwill assets were impaired. This assessment determined that the CTS patent asset was impaired by approximately $174,000, CTS trademarks and trade names were impaired by approximately $17,000, CTS customer relationships intangibles were impaired by approximately $650,000 and CTS non-compete agreements were impaired by approximately $34,000. Therefore, the Company recorded $875,000 of an impairment loss on these CTS intangible assets during the three months ended June 30, 2013.

 

The “step 1” goodwill impairment assessment was performed by comparing the fair value of each reporting unit containing goodwill to those reporting units’ carrying values. Our Chemical Light, Training, and Specialty Products reporting units have goodwill assets. Since there are no quoted market prices for our reporting units, the fair value of our reporting units were determined using a discounted present value technique utilizing each reporting unit’s forecasted after-tax cash flows. The “step 1” test determined that the carrying value of the CTS Training reporting unit exceeded its fair value, and therefore its goodwill needed to be tested further under what is commonly known as “step 2” of the goodwill impairment assessment. CTS did not pass the “step 1” test due to the inability to both gain traction with new products and services and attract new customers as initially planned when the reporting unit was acquired in December 2011.

 

Under “step 2” of the goodwill impairment assessment, we compared the implied fair value of CTS Training’s goodwill with the carrying amount of that goodwill. If the carrying amount of the goodwill exceeds the implied fair value of that goodwill, that excess must be recognized as an impairment loss. The implied fair value of goodwill was determined in the same manner as the amount of goodwill recognized in a business combination. The excess of the fair value of the reporting unit over the amounts assigned to its assets and liabilities is the implied amount of the reporting unit’s goodwill. We identified several intangible assets that were valued during this process, including customer relationships, patents, trade names, non-compete agreements, and our workforce. The allocation process was performed only for purposes of goodwill impairment. We determined the fair value of these assets using various discounted cash flow-based methods that utilize assumptions such as the ability of these assets to generate future cash flows, present-value factors, income tax rates and customer attrition rates. The “step 1” calculated fair value of the CTS reporting unit was allocated to the CTS tangible and identifiable intangible assets of the CTS reporting unit at June 30, 2013 based upon the results of the “step 2” analysis, which was a full impairment to the CTS goodwill.

  

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Material Changes in Results of Operations – 3 Months Ended September 30, 2013 versus the 3 Months Ended September 30, 2012

 

Revenues during the third quarter of 2013 and 2012 were as follows:

 

Category ($ in millions)   2013     2012     Change  
Chemical Light   $ 3.7     $ 6.8     $ (3.1 )
Ammunition     0.0       0.5       (0.5 )
Training and Simulation     1.3       0.7       0.6  
Specialty Products     2.5       2.1       0.4  
Total   $ 7.5     $ 10.1     $ (2.6 )

 

During the third quarter of 2013, Chemical Light revenues decreased by approximately $3.1 million compared to the comparable period of the prior year, primarily due to sequestration and the U.S. government shutdown, and as a result of increased orders by our primary distributor that supplies the U.S. Military occurring during the month of June 2013. These orders included several large stocking orders which were placed during the second quarter in anticipation of military demand expected during the third quarter. Ammunition revenue for 2013 is lower than the prior year as we are in between contracts for military training rounds utilizing our technology. Production for the next program, the 40mm low-velocity round, is now expected to start during the second half of 2014. The completion of the contracting process between the Military and the prime contractor is taking longer than anticipated. Specialty Products revenue grew by approximately $0.4 million over the prior year due to increased sales to existing customers as well as sales to new customers.

 

Cost of goods sold during the third quarter of 2013 and the third quarter of 2012 was approximately $4.2 and $6.0 million. The drop in gross profit was primarily attributable to the decrease in sales versus the prior period. The gross margin for the third quarter of 2013 was 43.5% versus 39.9% for the third quarter of 2012. The increase in gross margin during 2013 is due to higher-margin product mix changes between the years.

 

Sales and marketing expenses during the third quarter of 2013 were approximately $1.2 million versus $1.3 million for the third quarter of 2012, a slight decrease that was attributable primarily to a decline in travel expense incurred.

 

General and administrative expenses for the third quarter of 2013 were approximately $4.4 million versus $1.7 million for the prior year, or an increase of approximately $2.7 million. A large component of this increase was due to approximately $1.7 million of additional legal fees and consulting expenses incurred in connection with a legal settlement, as discussed in Note 12 of our Notes to Condensed Consolidated Financial Statements. We also incurred approximately $0.5 million of non-recurring refinancing related costs during the three months ended September 30, 2013. Incremental transition expenses for our corporate office move to Florida includes additional rent and office related expenses, as well as incremental travel and personnel related expenses for additional management positions added, which in some cases will overlap with existing management positions until the end of the year. These incremental transition expenses also contribute to the increase in general and administrative expenses over the same period of the prior year. 

 

Research and development expenses were approximately $0.4 million for both the third quarter of 2013 and 2012.

 

Provision for uncollectible receivable - related party relates to a previously recorded contingent legal obligation (approximately $3.9 million). We previously recorded a related party receivable for approximately $4.3 million, which includes the $3.9 million contingent legal obligation and other costs incurred while litigating Civil Action No. 06-706, within due from related party, net on the Condensed Consolidated Balance Sheet as of September 30, 2013. This due from related party, net amount is offset by an allowance of approximately $3.7 million as of September 30, 2013 as recorded on the Company’s provision for uncollectible receivable – related party line item on the Condensed Consolidated Statements of Comprehensive Loss.  The overall due from related party, net amount is approximately $563,000 as of September 30, 2013.  In connection with certain financial transactions being negotiated and which we expect to become effective, we expect a modification to an indemnification agreement limiting the collectible amount of this related party receivable to approximately $563,000.

 

On September 23, 2013, we entered into an agreement to resolve the legal matter “Arbitration with Former Employee”, described in Note 12 of our Notes to Condensed Consolidated Financial Statements, the terms of which call for us to make a series of payments over five years and to transfer a property located in Colorado Springs, CO. The property was originally acquired by the Company at the time of the CTS acquisition on December 22, 2011 and the total legal settlement amount is approximately $2.0 million, as recorded within our Condensed Consolidated Statements of Comprehensive Loss for the three months ended September 30, 2013.

 

During the third quarter of 2013, we recorded a tax benefit of approximately $1.9 million on a pre-tax loss of $9.7 million yielding an effective rate of approximately 20%. During the third quarter of 2012, we recorded a tax benefit of $0.8 million on a pre-tax loss of $48.0 million resulting in an effective rate of approximately 2%. The lower effective rate for the three months ended September 30, 2013, as compared to the federal statutory rate of 34%, relates primarily to the benefit from income taxes not being impacted by the provision for the uncollectible related party receivable and the legal settlement amount recorded. The lower effective tax rate during the three months ended September 30, 2012 is primarily the result of the benefit from income taxes not being impacted by the impairment loss recognized during the third quarter of 2012. 

 

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Material Changes in Results of Operations – 9 Months Ended September 30, 2013 versus the 9 Months Ended September 30, 2012

 

Revenues for the nine months ended September 30, 2013 of $25.0 million decreased by approximately $2.0 million over the prior year, as shown in the following table.

 

Category ($ in millions)   2013     2012     Change  
Chemical Light   $ 15.9     $ 16.9     $ (1.0 )
Ammunition     0.1       2.1       (2.0 )
Training and Simulation     1.9       2.1       (0.2 )
Specialty Products     7.1       5.9       1.2  
Total   $ 25.0     $ 27.0     $ (2.0 )

 

During the nine months ended September 30, 2013, Chemical Light revenues slightly decreased compared to the comparable period of the prior year primarily as a result of decreased orders by the Company’s largest customer base. Ammunition revenue for 2013 is lower than the prior year 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 during the second half of 2014. Specialty Products revenue grew by approximately $1.2 million over the prior year due to increased sales to existing customers as well as sales to new customers.

 

Cost of goods sold for 2013 of approximately $13.4 million decreased from the prior year amount of $15.4 million, primarily as a result of decreased sales.

 

Sales and marketing expenses during 2013 were approximately $3.7 million versus $4.2 million for the nine months ended September 30, 2012, a decrease of approximately $0.6 million. Approximately $0.4 million of this difference relates to severance for two former sales executives during 2012 and approximately $0.1 million relates to the recovery of a receivable that had been previously reserved.

 

General and administrative expenses for the nine months ended September 30, 2013 were approximately $9.1 million versus $5.1 million for the prior year, or an increase of approximately $4.0 million. A large component of this increase was due to approximately $2.5 million of additional legal fees and consulting expenses incurred in connection with a legal settlement, as discussed in Note 12 of our Notes to Condensed Consolidated Financial Statements. We also incurred approximately $0.5 million of non-recurring refinancing related costs, in addition to incremental transition expenses for our corporate office move to Florida. These incremental transition expenses include additional rent and office related expenses, as well as incremental travel and personnel related expenses for additional management positions added, which in some cases will overlap with existing management positions until the end of the year.

 

Research and development expenses were approximately $1.4 million for both the nine months ended September 30, 2013 and 2012.

 

Provision for uncollectible receivable - related party relates to a previously recorded contingent legal obligation (approximately $3.9 million). We previously recorded a related party receivable for approximately $4.3 million, which includes the $3.9 million contingent legal obligation and other costs incurred while litigating Civil Action No. 06-706, within due from related party, net on the Condensed Consolidated Balance Sheet as of September 30, 2013. This due from related party, net amount is offset by an allowance of approximately $3.7 million as of September 30, 2013 as recorded on the Company’s provision for uncollectible receivable – related party line item on the Condensed Consolidated Statements of Comprehensive Loss.  The overall due from related party, net amount is approximately $563,000 as of September 30, 2013.  In connection with certain financial transactions being negotiated, we expect a modification to an indemnification agreement limiting the collectible amount of this related party receivable to approximately $563,000.

 

On September 23, 2013, we entered into an agreement to resolve a legal matter, the terms of which call for us to make a series of payments over five years and to transfer a property located in Colorado Springs, CO. The property was originally acquired by the Company at the time of the CTS acquisition on December 22, 2011 and the total legal settlement amount is approximately $2.0 million, as recorded within our Condensed Consolidated Statements of Comprehensive Loss for the three months ended September 30, 2013.

 

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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. There was no change in the value of contingent consideration during the nine months ended September 30, 2013. The prior year change in the fair value of contingent consideration of approximately $0.2 million related to (i) the settlement 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.

 

During the nine months ended September 30, 2013, we recorded a tax benefit of approximately $3.1 million on a pre-tax loss of $12.8 million yielding an effective rate of approximately 24%. During the nine months ended September 30, 2012, we recorded a tax benefit of $1.5 million on a pre-tax loss of $50.1 million resulting in an effective rate of approximately 3%. 

 

Material Changes in Financial Condition –September 30, 2013 versus December 31, 2012

 

Cash was approximately $1.6 million at September 30, 2013, representing a decrease of approximately $1.1 million from December 31, 2012. Combined accrued liabilities and accounts payable increased by approximately $4.9 million; accounts receivable increased by approximately $0.4 million; inventories were higher at September 30, 2013 by approximately $1.7 million.

 

Our accounts receivable increased at September 30, 2013 compared to December 31, 2012 due to orders placed during September of 2013. Our receivables are generally collected within 30 days, thus revenues recorded in the 30-day period preceding the balance sheet date significantly influence the reported balances.

 

Our inventory balance as of September 30, 2013 increased over the balance at December 31, 2012 by approximately $1.7 million, due primarily to an increase of raw materials inventory and manufacturing variances from under-absorbed overhead due to lower production.

 

Accounts payable and accrued expenses combined were approximately $10.4 million at September 30, 2013 versus $5.5 million at December 31, 2012, an increase of approximately $4.9 million, primarily due to additional legal costs of approximately $2.5 million and a legal settlement of approximately $2.0 million relating to the “Arbitration with Former Employee” as described in Note 12 of the accompanying Condensed Consolidated Financial Statements. The amount outstanding under our line of credit, used to meet temporary working capital needs, was $3.6 million at September 30, 2013 versus $0 at December 31, 2012.

 

The current portion of notes payable (excluding related party notes payable) increased by approximately $7.2 million while non-current notes payable (excluding related party notes payable) decreased by $8.4 million, due primarily to the reclassification of our convertible subordinated debt to the current line item as its maturity is now within twelve months of September 30, 2013. See Liquidity and Capital Resources for further discussion of our notes payable.

 

Liquidity and Capital Resources

 

As of September 30, 2013 and December 31, 2012, we had $1.6 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. At September 30, 2013, we had a net working capital deficit of approximately $14.1 million, compared to net working capital of approximately $2.1 million at December 31, 2012, since the maturity of our debt is within twelve months of September 30, 2013. Our accumulated deficit amounts to approximately $89.9 million at September 30, 2013.

 

Capital expenditures were approximately $0.8 and $0.3 million for the nine months ended September 30, 2013 and 2012. We expect to fund capital expenditures for the remainder of 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 September 30, 2013, there were $3.6 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, plus a one-time principal payment of $6.7 million due at maturity on December 19, 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 on December 19, 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.

 

In conjunction with the refinancing of our debt, the lenders have waived the covenant requirements for September 30, 2013.

 

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For the three and nine months ended September 30, 2013, we had a net loss of approximately $7.8 million and $9.7 million, respectively, and for the nine months ended September 30, 2013, we used approximately $2.3 million of cash in our operating activities.

 

In light of our secured notes payable maturing on December 19, 2013 and March 19, 2014, and our line of credit maturing on December 19, 2013 as described above, management has been evaluating various possibilities, including but not limited to refinancing or restructuring our debt and raising additional capital through the issuance of common stock, preferred stock, or securities convertible into common stock. These possibilities, to the extent available, may be on terms that result in significant dilution to our existing stockholders, may reduce the value of stockholders’ investment in the Company or may impact our stock price. There can be no assurances that we will be successful in refinancing or restructuring our debt or raising additional capital. Our Condensed Consolidated Financial Statements do not include any adjustments relating to the recoverability of assets and classification of assets and liabilities that might be necessary should we be unable to refinance or restructure our debt, or otherwise meet its payment obligations under its existing arrangements.

 

We did not pay a dividend during the first nine months of 2013 and we have 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.

 

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 positionstaken 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 September 30, 2013 or December 31, 2012.

 

24
 

 

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. 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. 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 and as of September 30, 2013, that fair value is at zero.

 

Considerable judgment has been 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 functional currencies are reported as other income, net in the statement of comprehensive income (loss) in the period the gain or loss occurred.

 

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.

 

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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 September 30, 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 September 30, 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 September 30, 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

 

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. On September 23, 2013, the parties entered into an agreement to resolve this matter, the terms of which call for the Company to make a series of payments over five years to Mr. Colon and to transfer a property located in Colorado Springs, CO to Mr. Colon. The property was originally acquired by the Company at the time of the CTS acquisition on December 22, 2011.

 

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

 

None.

 

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ITEM 6. EXHIBITS

 

Exhibit
Number
  Description
10.1 (1)   Employment Agreement between Cyalume Technologies, Inc. and Michael J. Pellicci, dated April 29, 2013.
10.2 (1)   Amendment to Amended and Restated Employment Agreement between Cyalume Technologies, Inc. and Michael Bielonko, dated April 29, 2013.
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 from an exhibit to the Current Report on Form 8-K filed by the Registrant on May 1, 2013.

 

27
 

  

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: November 19, 2013   By: /s/ Zivi Nedivi
      Zivi Nedivi, Chief Executive Officer
      (Principal Executive Officer)
       
Date: November 19, 2013   By: /s/ Michael Bielonko
      Michael Bielonko, Chief Financial Officer
      (Principal Financial Officer and Principal Accounting Officer)

   

28
 

 

Exhibit Index

 

Exhibit
Number
  Description
10.1 (1)   Employment Agreement between Cyalume Technologies, Inc. and Michael J. Pellicci, dated April 29, 2013.
10.2 (1)   Amendment to Amended and Restated Employment Agreement between Cyalume Technologies, Inc. and Michael Bielonko, dated April 29, 2013.
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 from an exhibit to the Current Report on Form 8-K filed by the Registrant on May 1, 2013.

 

29

 

 

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: November 19, 2013  
  /s/ Zivi Nedivi
  Zivi Nedivi, Chief Executive Officer

 

 

 

 

Exhibit 31.2

 

CERTIFICATION

 

I, Michael Bielonko, 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: November 19, 2013 /s/ Michael Bielonko
  Michael Bielonko, 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: November 19, 2013   /s/ Zivi Nedivi
    Zivi Nedivi, Chief Executive Officer
    (the Principal Executive Officer)
     
Date: November 19, 2013    
    /s/ Michael Bielonko
    Michael Bielonko, 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.