Cyalume
Cyalume Technologies Holdings, Inc. (Form: 10-Q, Received: 05/20/2014 06:01:38)

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

(Mark One)  

 

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

 

For the quarterly period ended March 31, 2014

 

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.)

 

910 SE 17 th Street, Suite 300, Fort Lauderdale, Florida   33316
(Address of principal executive offices)   (Zip Code)

 

(413) 858-2500

(Registrant's telephone number, including area code)

 

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

 

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

 

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

 

Large accelerated filer  ¨   Accelerated filer  ¨  

Non-accelerated filer  ¨

(Do not check if a smaller
reporting company)

  Smaller reporting company  x

 

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

 

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: As of May 10, 2014, there were outstanding 21,400,244 shares of the registrant’s Common Stock, par value $.001 per share.

 

 
 

 

  Cyalume Technologies Holdings, Inc.

FORM 10-Q

 

INDEX

 

PART I—FINANCIAL INFORMATION  
   
Item 1. Financial Statements (Unaudited)  
     
  Condensed Consolidated Balance Sheets as of March 31, 2014 (unaudited) and December 31, 2013 3
     
  Condensed Consolidated Statements of Comprehensive Loss for the three months ended March 31, 2014 and 2013 (unaudited) 4
     
  Condensed Consolidated Statements of Changes in Convertible Preferred Stock and Stockholders' Equity for the three months ended March 31, 2014 (unaudited) 5
     
  Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2014 and 2013 (unaudited) 6
     
  Notes to Condensed Consolidated Financial Statements (unaudited) 7
     
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 19
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk 23
     
Item 4. Controls and Procedures 23
     
PART II—OTHER INFORMATION  
   
Item 1. Legal Proceeding 23
     
Item 1A. Risk Factors 23
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 23
     
Item 3. Defaults Upon Senior Securities 23
     
Item 4. Mine Safety Disclosures 23
     
Item 5. Other Information 23
     
Item 6. Exhibits 24
     
Signatures 25

 

1
 

   

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.  

 

2
 

 

ITEM 1. Financial Statements

Cyalume Technologies Holdings, Inc.

Condensed Consolidated Balance Sheets

(in thousands, except shares and per share information)

(Unaudited)

 

    March 31,
2014
    December 31,
2013
 
Assets            
Current assets:            
Cash   $ 658     $ 865  
Accounts receivable, net of allowance for doubtful accounts of $44 and $45, respectively     3,360       3,788  
Inventories, net     10,829       10,782  
Income taxes refundable     115       163  
Deferred income taxes     3,840       3,847  
Prepaid expenses and other current assets     865       463  
Total current assets     19,667       19,908  
                 
Property, plant and equipment, net     7,716       8,001  
Goodwill     7,992       7,992  
Other intangible assets, net     17,497       17,948  
Other noncurrent assets     32       465  
Total assets   $ 52,904     $ 54,314  
Liabilities and Stockholders’ Equity                
Current liabilities:                
Line of credit   $ 2,000     $ 1,600  
Current portion of notes payable     1,906       1,925  
Accounts payable     6,158       6,182  
Accrued expenses     1,905       2,059  
Deferred revenue     82       80  
Income taxes payable     97       97  
Current portion of capital lease obligation     16       15  
Derivatives liability     1       0  
Warrants liability     5,454       6,373  
Deferred rent     83       0  
Contingent legal obligation     4,030       3,986  
Other current liabilities     0       242  
Total current liabilities     21,732       22,559  
                 
Notes payable, net of current portion     14,682       14,969  
Note payable due to related parties     2,100       2,100  
Deferred income taxes     3,828       3,847  
Asset retirement obligation     196       194  
Capital lease obligation, net of current portion     3       7  
Other noncurrent liabilities, net of current portion     98       79  
Total liabilities     42,639       43,755  
                 
Commitments and contingencies (Note 11)                
                 
Series A convertible preferred stock, $0.001 par value; 1,000,000 shares authorized; 123,077 shares issued and outstanding     4,175       4,055  
                 
Stockholders' equity:                
Common stock, $0.001 par value; 100,000,000 shares authorized; 21,157,936 and 20,738,260 issued and outstanding at March 31, 2014 and December 31, 2013, respectively     21       21  
Additional paid-in capital     102,843       102,575  
Accumulated deficit     (96,548 )     (95,874 )
Accumulated other comprehensive loss     (226 )     (218 )
Total stockholders’ equity     6,090       6,504  
Total liabilities and stockholders' equity   $ 52,904     $ 54,314  

  

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

 

3
 

  

Cyalume Technologies Holdings, Inc.

Condensed Consolidated Statements of Comprehensive Loss

(in thousands, except shares and per share information)

(Unaudited)

 

    For the Three     For the Three  
    Months Ended     Months Ended  
    March 31,     March 31,  
    2014     2013  
Revenues   $ 7,269     $ 8,086  
Cost of revenues     4,392       4,262  
Gross profit     2,877       3,824  
                 
Other expenses (income):                
Sales and marketing     954       1,107  
General and administrative     1,919       2,077  
Research and development     375       463  
Interest expense, net     513       580  
Interest expense – related party     106       26  
Amortization of intangible assets     496       437  
Change in warrant liability fair value     (947 )     0  
Other (income) expenses, net     61       (37 )
Total other expenses, net     3,477       4,653  
                 
Loss before income taxes     (600 )     (829 )
Provision for (benefit from) income taxes     74       (259 )
Net loss     (674 )     (570 )
                 
Other comprehensive loss, net of tax:                
Foreign currency translation adjustments     (8 )     (180 )
Unrealized gain on cash flow hedges, net of taxes of $0 and $(14), respectively     0       25  
Other comprehensive loss     (8 )     (155 )
Comprehensive loss   $ (682 )   $ (725 )
                 
Net loss per common share:                
Basic and diluted   $ (0.04 )   $ (0.03 )
                 
Weighted average shares outstanding:                
Basic and diluted     21,004,592       20,708,531  

 

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

  

4
 

 

Cyalume Technologies Holdings, Inc.

Condensed Consolidated Statements of Changes in Convertible Preferred Stock and Stockholders' Equity

(in thousands, except shares)

(Unaudited)

 

    Series A Convertible
Preferred Stock
    Common Stock     Additional           Accumulated
Other
    Total  
    Number
of Shares
    Amount     Number
of Shares
    Amount     Paid-In
Capital
    Accumulated
Deficit
    Comprehensive
Loss
    Stockholders’
Equity
 
Balance at December 31, 2013     123,077     $ 4,055       20,738,260     $ 21     $ 102,575     $ (95,874 )   $ (218 )   $ 6,504  
                                                                 
Series A convertible preferred stock issuance costs     0       0       0       0       (34 )     0       0       (34 )
Dividends accrued on Series A convertible preferred stock     0       120       0       0       (120 )     0       0       (120 )
Reversal of forfeited restricted awards     0       0       (3,333 )     0       0       0       0       0  
Warrants amended in connection with refinancing     0       0       0       0       (72 )     0       0       (72 )
Common stock issuance - payment of contingent consideration liability     0       0       350,000       0       241       0       0       241  
Shares issued – warrant exercise     0       0       73,009       0       45       0       0       45  
Share-based compensation     0       0       0       0       208       0       0       208  
Net loss     0       0       0       0       0       (674 )     0       (674 )
Other comprehensive loss     0       0       0       0       0       0       (8 )     (8 )
Balance at March 31, 2014     123,077     $ 4,175       21,157,936     $ 21     $ 102,843     $ (96,548 )   $ (226 )   $ 6,090  

 

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

  

5
 

   

Cyalume Technologies Holdings, Inc.

Condensed Consolidated Statements of Cash Flows

(in thousands)

(Unaudited)

 

    For the Three     For the Three  
    Months Ended     Months Ended  
    March 31,     March 31,  
    2014     2013  
Cash flows from operating activities:            
Net loss   $ (674 )   $ (570 )
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:                
Depreciation and amortization of property, plant and equipment     374       339  
Amortization     549       613  
Non-cash interest expense     240       0  
Provision for (recoveries from) bad debts     0       (109 )
Deferred income tax benefit     (59 )     (289 )
Share-based compensation expense     208       234  
Change in fair value of derivatives     1       (15 )
Change in fair value of warrant liability     (947 )     0  
Other non-cash expenses     18       3
Changes in operating assets and liabilities:                
Accounts receivable     448       (526 )
Inventories     (49 )     (352 )
Prepaid expenses and other current assets     31       31  
Accounts payable and accrued liabilities     (172 )     (836 )
Accrued interest on note payable to related party     62       0  
Deferred revenue and deferred rent     85       0  
Income taxes payable     48       (34 )
Net cash provided by (used in) operating activities     163       (1,511 )
                 
Cash flows from investing activities:                
Purchases of long-lived assets     (136 )     (69 )
Net cash used in investing activities     (136 )     (69 )
                 
Cash flows from financing activities:                
Net proceeds from line of credit     400       400  
Repayment of  long term notes payable     (487 )     (476 )
Principal payments on capital lease obligations     (3 )     (4 )
Proceeds received from warrant exercise     1       0  
Payment of preferred stock issuance costs     (34 )     0  
Payment in connection with legal settlement agreement     (107 )     0  
Payment of debt issuance and deferred financing costs     (4 )     0  
Net cash used in financing activities     (234 )     (80 )
                 
Effect of exchange rate changes on cash     0       (54 )
Net decrease in cash     (207 )     (1,714 )
Cash, beginning of period     865       2,695  
Cash, end of period   $ 658     $ 981  

  

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

 

6
 

  

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 Fort Lauderdale, Florida.

 

  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 months ended March 31, 2014 are not necessarily indicative of the results that may be expected for any other interim period or for the year ending December 31, 2014. The consolidated balance sheet at December 31, 2013 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, 2013 filed on April 15, 2014.

 

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.

 

Certain prior year amounts have been reclassified to conform to the current year presentation.

 

  3. DESCRIPTION OF BUSINESS

 

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

 

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

 

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

 

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

 

CRI previously owned land located in Colorado Springs, Colorado. The land was transferred in connection with a 2013 legal settlement.

 

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

 

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

 

7
 

 

Cyalume Technologies Holdings, Inc.

Notes to Condensed Consolidated Financial Statements

 

The Company’s consolidated financial statements have been prepared assuming the Company will continue as a going concern. For the three months ended March 31, 2014, the Company had a net loss of approximately $0.7 million, and generated approximately $0.2 million of cash in its operations. As of March 31, 2014, the Company has an accumulated deficit of approximately $96.5 million, total stockholders’ equity of approximately $6.1 million and the Company’s unrestricted cash balance was approximately $0.7 million.

 

Due to uncertainty about the Company’s ability to meet its current operating expenses and current obligations, in their report on our annual financial statements for the year ended December 31, 2013, the Company’s independent registered public accounting firm included an explanatory paragraph regarding the Company’s ability to continue as a going concern. The Company’s current liabilities include approximately $4.0 million relating to a contingent legal obligation (see Note 11).

 

In light of the Company’s results of operations, management has been evaluating various possibilities including but not limited to refinancing or restructuring the Company’s debt, reducing or eliminating operating expenses, and raising additional capital through the issuance of common or 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 the stockholders’ investment in the Company and/or may impact the Company’s stock price.

 

There can be no assurances that the Company will be successful in raising adequate additional financial support. If not, the Company will be required to reduce operations. The Company’s 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 continue as a going concern.

 

 

4. INVENTORIES

 

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

 

    March 31,
2014
    December 31,
2013
 
Raw materials   $ 6,182     $ 6,535  
Work-in-process     2,353       2,185  
Finished goods     2,294       2,062  
    $ 10,829     $ 10,782  

 

  5. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

 

The derivative assets and liabilities as of March 31, 2014 in our condensed consolidated balance sheet consist of the following (all amounts in thousands):

 

Derivative Instrument   Balance Sheet Location   Fair Value  
Currency forward contract   Derivatives liability (current liabilities)   $ (1 )
Interest rate swaps   Derivatives liability (current liabilities)     0  

   

Currency Forward Contracts

 

CTSAS’ functional currency is the Euro. Periodically, CTSAS purchases inventory from CTI, which requires payment in U.S. dollars. Beginning in 2009, and only under certain circumstances, we use currency forward contracts to mitigate CTSAS’ exposure to changes in the Euro-to-U.S. dollar exchange rate upon payment of these inventory purchases. Such currency forward contracts typically have durations of less than six months. The Company reports these currency forward contracts at their fair value. This relationship has not been designated as a hedge and therefore all changes in these currency forward contracts’ fair value are recorded in other (income) expenses, net on our condensed consolidated statement of comprehensive income (loss). At March 31, 2014, we held one such currency forward contract. See Note 12 for a description of how we estimate the fair value of these contracts.

 

8
 

 

Cyalume Technologies Holdings, Inc.

Notes to Condensed Consolidated Financial Statements

 

Interest Rate Swaps

 

In December 2008, the Company 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 the Term Loan and the Real Estate Loan. Both relationships were designated as cash flow hedges and met 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) as 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. These hedges met the criteria of the shortcut method for the duration of the hedging relationship, which ended on December 19, 2013, and therefore, the Company will not reclassify any portion of these unrealized losses from accumulated other comprehensive loss to earnings in the future.

 

 

Effect of Derivatives on Statement of Comprehensive Income (Loss)

 

The effect of derivative instruments (a) designated as cash flow hedges and (b) not designated as hedging instruments on our condensed consolidated statement of comprehensive income (loss) for the three months ended March 31, 2014 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   $ 0     $ 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 March 31, 2014.
  (2) Amount of gain (loss) originally recorded in AOCL but reclassified from AOCL into earnings during the three months ended March 31, 2014.
  (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 March 31, 2014.

 

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

 

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

 

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

 

9
 

 

Cyalume Technologies Holdings, Inc.

Notes to Condensed Consolidated Financial Statements

 

6. CREDIT LINE AND NOTES PAYABLE

 

Line of Credit

 

The Company has a line of credit with a maximum borrowing capacity of $5.0 million with TD Bank N.A. (“TD Bank”). The amount which may be borrowed from this line of credit is dependent mainly on accounts receivable and inventory balances. Interest is payable monthly and is determined based on (i) the Prime Rate, plus 3%. The line of credit’s interest rate at March 31, 2014 was 6.25%. The line of credit expires on December 19, 2015. This line of credit is subject to (i) the same restrictive covenants and (ii) the same collateral and guarantees as the senior debt Term Loan and the senior debt Real Estate Loan as described below. At March 31, 2014, $2.0 million was outstanding on this line of credit and borrowing availability was approximately $139,000 at March 31, 2014.

 

Notes Payable

 

Outstanding notes payable consist of (all amounts in thousands):

 

      2014       2013  
Senior Debt - Term Loan   $ 5,571     $ 6,023  
Senior Debt - Real Estate Loan     1,644       1,679  
Subordinated Term Loan     8,899       8,659  
Promissory Note Payable     968       1,075  
Total     17,082       17,436  
Less: Unamortized debt discount     (494 )     (542 )
Less: Current portion of notes payable, including current portion of unamortized debt discount     (1,906 )     (1,925 )
Notes payable, net of current portion   $ 14,682     $ 14,969  

 

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 Fourth Amendment to the Amended and Restated Revolving Credit and Term Loan Agreement (the “Senior Amendment”) was entered into on November 19, 2013.

 

The Term Loan is payable in monthly principal installments of $148,000 along with monthly interest payments, plus a one-time principal payment of approximately $2.5 million due at maturity in December 2015. The Real Estate Loan is payable in monthly principal installments of approximately $10,000, along with monthly interest payments, plus a one-time principal payment of $1.4 million due at maturity in December 2015.

 

The TD Bank line of credit, the Term Loan and the Real Estate Loan are senior in payment priority to all other notes payable and lines of credit.

 

Subordinated Term Loan

 

On July 29, 2010 the Subordinated Term Loan of $8.5 million was issued to Granite Creek Partners Agent, LLC (“Granite Creek”) and on November 19, 2013, the Company entered into a Fourth Amendment to the Subordinated Term Loan (the “Subordinated Amendment”) which extended the maturity date to June 30, 2016. Pursuant to the Subordinated Amendment, interest is payable in kind through December 19, 2015 and then payable monthly in cash through the June 30, 2016 maturity date. Interest is payable monthly at a rate of 11% per annum. No principal payments are required until maturity. The Company has the right to prepay the loan in whole or in part at any time without penalty in the event that the TD Bank Senior Debt is repaid. The Subordinated Term Loan ranks junior to all debt held by TD Bank, N.A. 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 Company previously determined that the convertible notes’ conversion feature was not a beneficial conversion feature under U.S. GAAP. Simultaneous with the issuance of the Subordinated Term Loan during 2010, the Company issued warrants (the “Subordinated Term Loan Warrants”) to repay certain costs of obtaining the convertible notes. These warrants allowed the holder to purchase 160,000 shares of common stock at $1.50 per share through July 19, 2018. A portion of the $8.5 million gross proceeds from the issuance of the loan was allocated to the warrants based on the relative fair values of the debt instrument without the warrants and of the warrants themselves at time of issuance. The portion of the proceeds so allocated to the warrants ($207,000) was recorded as a debt discount and an increase to additional paid-in capital on our consolidated balance sheet. The warrant’s fair value was increased by $94,000 in 2012 due to (i) a decrease in the exercise price of the warrants and (ii) an extension of the term of the warrant. The Subordinated Term Loan Warrants were amended again during 2013 in connection with the Senior Amendment described above. An additional amount was added to debt discount and warrant liability during 2013 relating to (i) another decrease in the exercise price of the warrants to $0.01, (ii) an extension of the term of the warrants, and (iii) an increase to the number of shares of common stock that may be purchased upon exercise of the warrants to 455,514 shares of common stock. The debt discount is being amortized to interest expense using the effective interest method over the life of the convertible notes which have a maturity date of June 30, 2016. As a result of the amendment to the warrants, the warrants are no longer indexed to the Company’s stock, are considered a derivative and therefore, are being accounted for as a liability.

 

 

10
 

 

Cyalume Technologies Holdings, Inc.

Notes to Condensed Consolidated Financial Statements

  

7. PREFERRED STOCK

 

Convertible Preferred Stock

 

The Company is authorized to issue 1,000,000 shares of preferred stock with such designations, voting and other rights and preferences as may be determined from time to time by our Board of Directors.

 

On November 19, 2013, the Company entered into a Securities Purchase Agreement (the “Purchase Agreement”) with US VC Partners, L.P. (the “Investor”) for the purchase by the Investor of 123,077 units of securities of the Company for an aggregate purchase price of $4.0 million (or $32.50 per unit). Each security issued is comprised of: 1) one share of Series A Convertible Preferred Stock of the Company, at a par value of $0.001 per share (the “Series A Preferred Stock”); 2) one common stock warrant ( the “Common Warrant”); and 3) one preferred stock warrant (the “Preferred Warrant”).

 

Since the Common Warrant and the Preferred Warrant are not indexed to the Company’s stock, they are derivatives and therefore, are being accounted for as a liability.

 

Upon voluntary or involuntary liquidation, dissolution or winding up of the Company, each holder of Series A Preferred Stock is entitled to a liquidation preference of $32.50 per share, plus any accrued but unpaid dividends, subject to customary adjustments as set forth in the Certificate of Designation (the “Liquidation Value”).

 

Each share of Series A Preferred Stock may be converted at any time at the option of the holder into a number of shares of common stock initially equal to 50 shares of common stock, determined by dividing the Liquidation Value per share of Series A Preferred Stock by the applicable conversion price per share of Series A Preferred Stock. The initial conversion price shall equal $0.65, subject to customary adjustments, including for any accrued but unpaid dividends and pursuant to certain anti-dilution provisions. The Series A Preferred Stock is not subject to mandatory conversion at any time.

 

Dividends on the Series A Preferred Stock accrue (payable in cash or in kind), whether or not declared by the Board and whether or not funds are available for the payment of dividends, at a rate of 12% per annum on the sum of the liquidation preference plus all accrued and accumulated dividends and will be payable quarterly in arrears in a) cash or b) newly issued shares of Series A Preferred Stock having an aggregate liquidation preference equal to the amount of such accrued dividends (“PIK Dividends”) at the option of the Company. All accrued and accumulated dividends on the convertible preferred stock shall be paid prior to and in preference to any other class of securities of the Company.

 

Each share of Series A Preferred Stock will be entitled to a number of votes equal to the number of shares of common stock into which such share is convertible and shall be entitled to vote with holders of outstanding shares of common stock, voting together as a single class, with respect to any and all matters presented to the stockholders of the Company for their action or consideration.

 

The requisite holders of the Series A Preferred Stock will have the right to cause the Company to redeem, out of funds legally available, all but not less than all of the then outstanding shares of Series A Preferred Stock, for a price per share equal to the Liquidation Value of such shares from and after the fifth anniversary of the closing date of the Purchase Agreement. Additionally, the Company will have the right

 

11
 

 

Cyalume Technologies Holdings, Inc.

Notes to Condensed Consolidated Financial Statements

 

to redeem all of the outstanding shares of Series A Preferred Stock from and after the eighth anniversary of the closing date of the Purchase Agreement at a redemption price equal to the Liquidation Value. As a result of the redemption provisions, the Series A Preferred Stock has been classified outside of permanent equity.

 

Common and Preferred Warrants

 

In connection with the Series A Preferred Stock issued on November 19, 2013, the Company also issued a Common Warrant for the purchase of up to 6,153,830 shares of common stock at an exercise price of $0.65 per share. The estimated fair value of the Common Warrants is determined at each balance sheet date and the change in the estimated fair value of the Common Warrant is reflected within the “Change in fair value of warrants liability” within the accompanying statements of comprehensive loss.

 

The fair value as of March 31, 2014 of the Common Warrant is estimated using the Monte Carlo simulation method with the following inputs:

 

 

    Common Warrant  
Stock price of underlying equity   $ 0.61  
Exercise price   $ 0.65  
Expected volatility (standard deviation)     100 %
Annual risk-free rate     2.68 %
Expected term (time to expiration years)     9.6  
Number of periods     502  
Period interval     0.019  
Period risk-free rate     0.051 %
Number of simulations     500,000  

 

In connection with the Series A Preferred Stock issued on November 19, 2013, the Company also issued a Preferred Warrant for the purchase of up to 123,077 shares of Series A Preferred Stock with an exercise price of $0.05 per share. The estimated fair value of the Preferred Warrant is determined at each balance sheet date and the change in the estimated fair value of the Preferred Warrant is reflected within the “Change in fair value of warrants liability” within the accompanying statements of comprehensive loss.

 

The fair value as March 31, 2014 of the Preferred Warrant, the Subordinated Term Loan Warrants and the JFC Warrant are estimated using the Black-Scholes pricing model with the following inputs:

 

    Preferred Warrant  
Stock price of underlying equity   $ 28.76  
Exercise price   $ 0.05  
Expected term (years)     1.5  
Risk-free interest rate     0.29 %
Estimated dividend yield     None  
Volatility     70 %

 

The change in the fair value of the warrants liability during the three months ended March 31, 2014 is as follows (amounts in thousands):

 

    Common
Warrant
    Preferred
Warrant
    JFC Warrant
(see Note 9)
    Subordinated Term Loan Warrants (see Note 6)     Total Warrant
Liability
 
Warrant liability at December 31, 2013   $ 4,081     $ 1,997     $ 54     $ 241     $ 6,373  
Warrants amended in connection with refinancing     0       0       0       72       72  
Warrant exercise     0       0       (44 )     0       (44 )
Change in fair value of warrants     (723 )     (230 )     0       6       (947 )
Warrant liability at March 31, 2014   $ 3,358     $ 1,767     $ 10     $ 319     $ 5,454  

 

12
 

 

Cyalume Technologies Holdings, Inc.

Notes to Condensed Consolidated Financial Statements

 

8. INCOME TAXES

 

The effective tax rate for the three months ended March 31, 2014 was approximately (12%). The effective tax rate for the three months ended March 31, 2013 was approximately 31%, compared to the federal statutory rate of 34%. During the three months ended March 31, 2014, the Company incurred approximately $74,000 of foreign tax expense on CTSAS’ income. The Company continues to have a full valuation allowance against its U.S. deferred tax asset. The Company has a valuation allowance of approximately $5.9 million as of March 31, 2014 against deferred tax assets generated primarily as a result of foreign tax credits and net operating losses.

 

9. RELATED PARTY TRANSACTIONS

 

Financing Arrangements and Agreements with Related Parties

 

In December 2012, the Company entered into a $2,100,000 unsecured promissory note with JFC Technologies, LLC (“JFC”), an entity controlled by James Schleck, a previous employee of CSP who is an owner of a significant amount of the Company’s common shares and is a board member. On November 19, 2013, the unsecured promissory note was amended (the “Amended JFC Note”). Pursuant to the Amended JFC Note, interest accrues on the principal amount at the rate of 12% per annum, retroactive to the date of the original note. The entire principal amount and all accrued interest under the Amended JFC Note is due on the maturity date of December 31, 2016, or upon the refinancing of the Company’s existing indebtedness (subject to the availability of at least $5,000,000 in available credit after such repayment). Pursuant to the Amended JFC Note, up to $1.0 million of the principal amount is convertible, at the option of JFC, into the number of shares of Series A Preferred Stock equal to the portion of the principal amount being converted divided by the conversion price of $32.50 per share (subject to adjustment based on certain changes in capitalization affecting the Series A Preferred Stock). In addition, upon conversion of the first $499,980 of Amended JFC Note principal, JFC would receive: (1) warrants to purchase for each $6.50 of principal amount converted, ten shares of the Company’s common stock, and (2) warrants to purchase for each $32.50 of principal amount converted, one share of Series A Preferred Stock. For the avoidance of doubt, JFC shall not be entitled to receive any warrants upon conversion of any portion of the principal amount in excess of $499,980 in the aggregate.

  

On November 19, 2013, the Company also issued a warrant to JFC to purchase up to 73,009 shares of the Company’s common stock. These warrants have an exercise price of $0.01 and expire on November 19, 2023. The warrant was exercised by JFC during February 2014.

 

The Company also entered into a consulting agreement with James Schleck, effective January 1, 2014, for advisory professional services as assigned by the President and CEO or the Board of Directors of the Company. The initial consulting agreement provided for monthly fees payable to James Schleck of $1,000 monthly and the consulting agreement was amended effective June 1, 2014 to provide for monthly fees in the amount of $10,000 monthly.

 

CSP leases property in Bound Brook, New Jersey, from Brook Industrial Park, LLC, an entity that is controlled by James Schleck. This lease requires monthly lease payments of $30,000 monthly and ends on August 31, 2016, with extension options available.

 

Pursuant to an Amendment Agreement executed during December 2012, the Company was required to issue 350,000 shares of the Company’s common stock to JFC since the Company’s December 2013 common stock closing price was less than $1.75. The Company’s closing price on December 31, 2013 was $0.69 and therefore, the Company recorded approximately $242,000 within other current liabilities during 2013 and the 350,000 shares were issued to JFC on January 31, 2014.

 

Agreement with Board Member

 

On October 1, 2009, the Company entered into an agreement with Selway Capital, LLC (“Selway”) that provided for services to be performed by Selway on our behalf. This agreement was terminated effective March 31, 2014.

 

The agreement previously stipulated 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. Effective January 1, 2014, compensation for these services was $11,000 monthly and approximately $158,000 of 2013 Selway fees included within accrued liabilities within the accompanying condensed consolidated balance sheet at March 31, 2014 was settled in shares of the Company’s stock during April 2014.

 

13
 

 

10. NET LOSS PER COMMON SHARE

 

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

 

    Three Months Ended March 31,  
    2014     2013  
Basic and diluted:            
Net loss (in thousands)   $ (674 )   $ (570 )
Accrued dividend (in thousands)     (120 )     0  
Loss available to common stockholders for basic and diluted loss per common share (in thousands)     (794 )     (570 )
Weighted average shares     21,004,592       20,708,531  
Basic and diluted loss per common share   $ (0.04 )   $ (0.03 )

 

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

 

    Three Months Ended March 31,  
    2014     2013  
Options and warrants     3,012,186       3,011,937  
Restricted stock     0       26,753  
Convertible debt     2,666,667       2,666,667  

 

  11. COMMITMENTS AND CONTINGENCIES

 

Legal

 

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

 

On January 23, 2006, before the Company owned CTI, the former owners of CTI (from whom CTI was purchased) (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, the Company acquired CTI (the “Acquisition”). According to the Stock Purchase Agreement between the Former Owners and the Company, the Former Owners retained the responsibility for paying for all costs and liabilities associated with Civil Action No. 06-706.

 

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

 

14
 

 

Cyalume Technologies Holdings, Inc.

Notes to Condensed Consolidated Financial Statements

 

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, the Company filed a Notice of Appeal and on August 2, 2013, the Company filed a Formal Appeal, which contained a number of bases for overturning the awards. Oral arguments were made by the parties before the Appellate Court during January of 2014. In May 2014, the Company received notice that its appeal of the Final Judgment had been denied. The Company is evaluating its options, which may include further appeals. Interest will continue to accrue on the original damages award until it is paid, including during the time that any further appeals are pending. During 2013, 625,139 shares of the Company’s common stock were placed into escrow which may be applied against any damages up to the value of the shares upon conversion to cash.

 

The Former Owners (i) previously 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 the Company and their membership on the Company’s board of directors. On November 19, 2013, a Release and Escrow Agreement was executed whereby the Company released affiliates of the Former Owners from being obligated on the costs and liabilities associated with Civil Action No. 06-706 in exchange for 625,139 shares of Cyalume stock placed in escrow (the “Escrowed Shares”). The Escrowed Shares provide the Company with a source of recovery with respect to any loss, liability or expenses incurred by the Company in connection with Civil Action No. 06-706. The Company reflected the value of the 625,139 Escrowed Shares at March 31, 2014 and at December 31, 2013, respectively, based upon the close price of Cyalume’s stock on December 31, 2013. The value of the Escrowed Shares is included within the prepaid expenses and other current assets line item and approximately $4.0 million of obligations related to this matter is included within the contingent legal obligation line item on the Company’s condensed consolidated balance sheet as of March 31, 2014 and December 31, 2013.

 

Settlement of Arbitration with Former Employee

 

On December 22, 2011, CTI entered into a Stock Purchase Agreement (“SPA”) with Combat Training Solutions, Inc. (“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. On June 15, 2012, the Company received a copy of a demand for arbitration filed by Mr. Colon with the American Arbitration Association. Management considered the allegations by Mr. Colon to be without merit. On August 17, 2012, Mr. Colon filed suit 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 the Company. 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, and a settlement agreement was signed on November 19, 2013. The executed settlement agreement calls for the Company to make a series of payments over five years to Mr. Colon in the amount of $215,000 annually, for a total of $1,075,000 pursuant to the Promissory Note executed on November 19, 2013. The Company also made a settlement payment of $275,000 on November 20, 2013 and transferred the land located in Colorado (this land was originally acquired by CTI in connection with the 2011 CTS acquisition) to JasperCo, LLC pursuant to the terms of the executed settlement agreement with Antonio Colon. The total legal settlement amount recorded in the Company’s accompanying consolidated statement of comprehensive loss for the twelve months ended December 31, 2013 incurred in connection with settling the matter described above was approximately $2.0 million. Pursuant to the Promissory Note, a principal repayment of approximately $107,000 was made during the three months ended March 31, 2014.

 

12. FAIR VALUES OF ASSETS AND LIABILITIES

 

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

 

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

 

15
 

 

Cyalume Technologies Holdings, Inc.

Notes to Condensed Consolidated Financial Statements

 

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 March 31, 2014 (all amounts in thousands):

 

    Level 1
Quoted
Prices in
Active
Markets
for
Identical
Assets
    Level 2
Significant
Other
Observable
Inputs
    Level 3
Significant
Unobservable
Inputs
    Assets/
(Liabilities)
At Fair
Value
 
Interest rate swaps (see Note 5)   (1)   $ 0     $ 0     $ 0     $ 0  
Currency forward contract (see Note 5) (2)     0       (1 )     0       (1 )
Warrants (see Note 7)   (3)     0       0       (5,454 )     (5,454 )
    $ 0     $ (1 )   $ (5,454 )   $ (5,455 )

 

  (1) The fair values of the swaps are determined by discounting the estimated cash flows to be received and paid due to the swaps over the swap’s contractual lives using an estimated risk-free interest rate for each swap settlement date (an income approach).
  (2) The fair value of these contracts is determined by multiplying the notional amount of the contract by the difference between (a) the U.S. dollar amount due on the contract at maturity and (b) the foreign exchange rate as of the date the contract is valued (the balance sheet date). Because the contracts typically have a short duration, the value is not discounted using a present value technique (an income approach).
  (3) The Company has classified its warrants liability which could be potentially settled in cash within Level 3 because the fair values are determined using significant unobservable inputs into the Black-Scholes pricing model.
     

16
 

  

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, 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
 
Warrants (see Note 7)   (1)   $ 0     $ 0     $ (6,373 )   $ (6,373 )

 

  (1) The Company has classified its warrants liability which could be potentially settled in cash within Level 3 because the fair values are determined using significant unobservable inputs into the Monte Carlo simulation method and the Black-Scholes pricing model.

 

The Company did not transfer any assets or liabilities between Levels 1, 2 or 3 during the three months ended March 31, 2014. 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.

 

The Company has other financial instruments, such as cash, accounts receivable, other current assets, accounts payable, notes payable and a line of credit. The Company believes the carrying amounts of those assets and liabilities approximate their fair value since the Company has 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.

  

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

 

During the three months ended March 31, 2014, none of our assets or liabilities were remeasured at fair value on a nonrecurring basis.

 

13. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

 

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

 

    Three Months Ended March 31  
    2014     2013  
Interest   $ 154     $ 405  
Income taxes     37       66  

 

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

 

    Three Months Ended March 31,  
    2014     2013  
Series A Convertible Preferred stock in-kind dividend   $ 120     $ 0  
Adjustment to warrant liability to fair value upon warrant exercise     44       0  
Issuance of 350,000 shares to JFC in connection with settling a contingent consideration liability resulting from the acquisition of CSP     242       0  

 

17
 

    

 Cyalume Technologies Holdings, Inc.

Notes to Condensed Consolidated Financial Statements

 

 

14. NEW ACCOUNTING PRONOUNCEMENTS

 

The following are recent accounting pronouncements that have affected our consolidated financial statements or may affect them in the future.

 

In July 2013, the FASB issued Accounting Standards Update No. 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carry-forward, a Similar Tax Loss, or a Tax Credit Carry-forward Exists (“ASU 2013-11”) to clarify that an unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss (“NOL”) carry-forward, a similar tax loss, or a tax credit carry-forward, with some allowed exceptions. ASU 2013-11 does not impose any new recurring disclosure requirements because it does not affect the recognition or measurement of uncertain tax positions. ASU 2013-11 is effective for fiscal years beginning after December 15, 2013. The adoption of ASU 2013-11 did not have a material impact on our financial position or results of operations. 

 

18
 

 

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, 2013. 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 910 SE 17 th Street, Suite 300, Fort Lauderdale, Florida 33316. We have two direct U.S.-based subsidiaries: Cyalume Technologies, Inc. (“CTI”) and Cyalume Specialty Products, Inc. (“CSP”). CTI is located in West Springfield, Massachusetts and CSP is located in Bound Brook, New Jersey. CTI has one non-U.S.-based subsidiary, Cyalume Technologies, SAS (“CTSAS”), located in Aix-en-Provence, France, and two U.S.-based subsidiaries, Cyalume Realty, Inc. (“CRI”) and Combat Training Solutions, Inc. (“CTS”), based in West Springfield, Massachusetts. We manufacture products in the West Springfield, Bound Brook, and Aix-en-Provence locations.

 

Material Changes in Results of Operations – 3 Months Ended March 31, 2014 versus the 3 Months Ended March 31, 2013

 

Revenues in 2014 and 2013 were as follows:

 

Category ($ in millions)   2014     2013     Change  
Chemical Light   $ 5.0     $ 5.4     $ (0.4 )
Ammunition     0.0       0.0       0  
Training and Simulation     0.1       0.5       (0.4 )
Specialty Products     2.2       2.2       0  
Total   $ 7.3     $ 8.1     $ (0.8 )

 

During the first quarter of 2014, Chemical Light revenues decreased from the first quarter of 2013 due to the drawdown of troops from Afghanistan, the budget sequestration and government shutdown in the U.S., and budgetary issues in both the U.S. and other countries contributed to the decline in revenues. As much of the Chemical Light revenue comes from indefinite demand/indefinite quantity contracts, we do not have direct insight into patterns of demand/consumption. There were no Ammunition revenues for 2014 as we are in-between contracts for military training rounds utilizing our technology and there has been a delay of a new program utilizing our chemiluminescence technology. A new contract for 40mm low-velocity training ammunition is expected to result in production starting no earlier than the second half of 2014, at which time we expect Ammunition revenue to resume. Training & Simulation revenues for the first quarter of 2014 declined by $0.4 million due to fewer CTS devices being purchased. Specialty Products revenue during the first quarter of 2014 remained relatively flat compared to the first quarter of 2013.

 

Cost of goods sold for the first quarter of 2014 of approximately $4.4 million slightly increased from the prior year amount of $4.3 million. The gross profit for the first quarter of 2014 was approximately 40.0% versus 47.3% for the first quarter of 2013. This decrease was largely attributable to a product mix change resulting from a decrease during the quarter in product sales to our largest customer. 

 

Sales and marketing expenses for the first quarter of 2014 was approximately $1.0 million versus $1.1 million in the first quarter of 2013, a decrease of approximately $0.1 million that was attributable to a decrease in sales and marketing payroll expenses.

 

General and administrative expenses for the first quarter of 2014 were approximately $1.9 million versus $2.1 million for the prior year, or a decrease of approximately $0.3 million. Expenses for 2013 were adversely impacted by higher personnel and personnel-related expenses and higher legal expenses associated with the previous arbitration case with a former employee, which was settled during 2013.

 

Research and development expenses of approximately $0.4 million for the first quarter of 2014 decreased slightly by approximately $0.1 million from the prior year.

 

19
 

 

During the three months ended March 31, 2014, we recorded tax expense of approximately $0.1 million on foreign income generated by our CTSAS subsidiary. We continue to have a full valuation allowance against our U.S. deferred tax asset due to management’s assessment that it is more likely than not that a portion of certain deferred tax assets may not be realized. We have a valuation allowance of approximately $5.9 million as of March 31, 2014 against deferred tax assets generated primarily as a result of foreign tax credits and net operating losses. During the three months ended March 31, 2013 we recorded a tax benefit of $0.3 million on a pre-tax loss of $0.8 million resulting in an effective rate of 31.2%.

 

Material Changes in Financial Condition – March 31, 2014 versus December 31, 2013

 

Cash was approximately $0.7 million at March 31, 2014, representing a decrease of $0.2 million from December 31, 2013. Combined accrued liabilities and accounts payable decreased by approximately $0.2 million; accounts receivable decreased by approximately $0.4 million; inventories increased by approximately $0.1 million.

 

Our accounts receivables slightly decreased at March 31, 2014 compared to December 31, 2013 due to timing differences of payments. Our receivables are generally collected within 30 days, thus revenues recorded in the 30-day period preceding the measurement date significantly influence the reported balances.

  

Accounts payable and accrued expenses combined were approximately $8.1 million at March 31, 2014 versus approximately $8.2 million at December 31, 2013, a decrease of approximately $0.2 million due to the payment of accrued bonuses and vendor payments. Our line of credit, used to meet temporary working capital needs, was approximately $2.0 million at March 31, 2014 versus approximately $1.6 million at December 31.

 

The current portion of notes payable was approximately $1.9 million at both March 31, 2014 and December 31, 2013.

 

 

Liquidity and Capital Resources

 

As of March 31, 2014 and December 31, 2013, we had $0.7 million and $0.9 million, respectively, of cash on hand. The major sources and uses of cash during 2014 were all in the normal course of business.

 

Capital expenditures were approximately $0.1 million for both the three months ended March 31, 2014 and 2013. We expect to fund capital expenditures for the remainder of 2014 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”). The amount which may be borrowed from this line of credit is dependent mainly on accounts receivable and inventory balances. Interest is payable monthly and is determined based on (i) the Prime Rate, plus 3%. The line of credit’s interest rate at March 31, 2014 was 6.25%. The line of credit expires on December 19, 2015. This line of credit is subject to (i) the same restrictive covenants and (ii) the same collateral and guarantees as the senior debt Term Loan and the senior debt Real Estate Loan. At March 31, 2014, $2 million was outstanding on this line of credit and borrowing availability was approximately $139,000 at March 31, 2014. At December 31, 2013, $1.6 million was outstanding on this line of credit and borrowing availability was approximately $840,000.

 

The Term Loan is payable in monthly principal installments of $148,000 along with monthly interest payments as described below, plus a one-time principal payment of approximately $2.5 million due at maturity in December 2015.

 

The Real Estate Loan is payable in monthly principal installments of approximately $10,000, along with monthly interest payments as described below, plus a one-time principal payment of $1.4 million due at maturity in December 2015.

 

On July 29, 2010 the Subordinated Term Loan of $8.5 million was issued to Granite Creek Partners Agent, LLC (“Granite Creek”) and on November 19, 2013, the Company entered into a Fourth Amendment to the Subordinated Term Loan (the “Subordinated Amendment”) which extended the maturity date to June 30, 2016. Pursuant to the Subordinated Amendment, interest is payable in kind through December 19, 2015 and then payable monthly in cash through the June 30, 2016 maturity date. Interest is payable monthly at a rate of 11% per annum. No principal payments are required until maturity. The Company has the right to prepay the loan in whole or in part at any time without penalty in the event that the TD Bank Senior Debt is repaid. The Subordinated Term Loan ranks junior to all debt held by TD Bank, N.A. 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 Company’s common stock’s closing market price on March 31, 2014 was $0.61 per share.

  

20
 

  

Simultaneous with the issuance of the Subordinated Term Loan during 2010, we issued warrants to repay certain costs of obtaining the convertible notes. These warrants allow the holder to purchase 160,000 shares of common stock at $1.50 per share through July 19, 2018. A portion of the $8.5 million gross proceeds from the issuance of the loan was allocated to the warrants based on the relative fair values of the debt instrument without the warrants and of the warrants themselves at time of issuance. The portion of the proceeds so allocated to the warrants ($207,000) was recorded as a debt discount and an increase to additional paid-in capital on our consolidated balance sheet. The warrant’s fair value was increased in 2012 due to (i) a decrease in the exercise price of the warrants and (ii) an extension of the term of the warrant. The warrants were amended again during 2013 in connection with the Senior Amendment described above. An additional amount was added to debt discount and warrant liability during 2013 relating to (i) another decrease in the exercise price of the warrants to $0.01, (ii) an extension of the term of the warrants, and (iii) an increase to the number of shares of common stock that may be purchased upon exercise of the warrants to 455,514 shares of common stock that may be purchased. The debt discount is being amortized to interest expense using the effective interest method over the life of the convertible notes which have a maturity date of June 30, 2016. As a result of the amendment to the warrants, the warrants are no longer indexed to the Company’s stock, are considered a derivative and therefore, are being accounted for as a liability.

 

We were in compliance with the financial covenants related to these loans as of March 31, 2014.

 

We did not pay a dividend in the three months ended March 31, 2014 and we do not intend to pay a common dividend in the future. We are accruing dividends in connection with the Series A Convertible Preferred Stock issued on November 19, 2013.

 

Other than immaterial operating leases, we did not have any off-balance sheet arrangements during 2014 or 2013.

 

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. Additionally, if the right of return is granted to the buyer in a product sale, revenue is deferred until enough historical customer data is available to reasonably estimate returns and related costs. 

 

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.

 

Warrants Liability

 

The Company uses fair values as determined by significant unobservable inputs. These estimated values are significant inputs into the Monte Carlo simulation method and the Black Scholes pricing model used to calculate the estimated fair value of common warrants and preferred warrants potentially settleable in cash, which are recorded as warrants liability. The estimated fair value of the common warrants and the preferred warrants are determined at each balance sheet date and the change in the estimated fair value of the warrants is reflected within the Company’s statements of comprehensive loss. 

 

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.

 

21
 

 

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 positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefit associated with tax positions taken that exceeds the amount measured as described above, if such a position existed, would be reflected as a liability for unrecognized tax benefits in the accompanying balance sheets along with any associated interest and penalties that would be payable to the taxing authorities upon examination. There were no such positions as of March 31, 2014 or December 31, 2013.

 

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

 

In February 2012, we completed an audit by the IRS of our tax returns for the years 2008 and 2009. There were no adjustments to those tax returns. Tax returns filed for the years 2010, 2011 and 2012 are still open for audit. The tax return for 2013 is expected to be filed under a filing extension prior to September 15, 2014.

 

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.

 

We perform the traditional two-step process for assessing goodwill for impairment.. The first step of the two-step process requires a comparison of our estimated fair value for each reporting unit versus our carrying (book) value. If our carrying value exceeded our fair value, further analysis (step 2 of the two-step process) is required to determine the amount, if any, that our goodwill was impaired. To determine the amount of fair value, we used a discounted cash flow analysis.

 

Intangible Assets

 

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

 

Inventories

 

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

 

 

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 loss in the period the gain or loss occurred.

 

22
 

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

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

 

ITEM 4. CONTROLS AND PROCEDURES

 

Disclosure Controls and Procedures

 

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

 

Our management carried out an evaluation, under the supervision of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as of March 31, 2014. Based upon that evaluation, our management, including our Chief Executive Officer and Chief Financial Officer, concluded that the design and operation of our disclosure controls and procedures were effective as of March 31, 2014.

 

Changes in Internal Control over Financial Reporting

 

There was no change in our internal control over financial reporting that occurred during the three months ended March 31, 2014 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

 

During the quarter ended March 31, 2014, there were no material developments in the legal proceedings described in Item 3 “Legal Proceedings” in our Form 10-K for the year ended December 31, 2013. In May 2014, the Company received notice that its appeal of the Final Judgment entered against the Company on September 12, 2012 in Civil Action No. 06-706 in the Superior Court of the Commonwealth of Massachusetts, had been denied. The Company is evaluating its options, which may include further appeals. Interest will continue to accrue on the original damages award until it is paid, including during the time that any further appeals are pending. Please see Note 11 to the Notes to Condensed Consolidated Financial Statements contained elsewhere in this quarterly report for more information regarding Civil Action No. 06-706.

 

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

 

The information contained in Item 1 of Part II of this quarterly report is incorporated in this Item by reference.

 

23
 

 

ITEM 6.    EXHIBITS

 

Exhibit

Number

  Description
10.1 * Amendment to Consulting Agreement between Cyalume Specialty Products, Inc. and James G. Schleck
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.
         

  

24
 

 

SIGNATURES

 

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

 

  Cyalume Technologies Holdings, Inc.
     
Date: May 19, 2014 By: /s/ Zivi Nedivi
     
    Zivi Nedivi, Chief Executive Officer
     (Principal Executive Officer)

 

Date: May 19, 2014 By: /s/ Michael Bielonko
     
    Michael Bielonko, Chief Financial Officer
     (Principal Financial Officer)

 

25

 

 

 

 

CONSULTING AGREEMENT AMENDMENT #1

 

Exhibit 10.1

 

This CONSULTING AGREEMENT AMENDMENT (the “ Amendment ”) is made and entered into as of June 1, 2014 and effective on June 1, 2014 (the “ Effective Date ”) and it amends the previous CONSULTING AGREMENT dated January 1 st 2014 by and between Cyalume Specialty Products, Inc., a Delaware corporation (the “ Company ”), and James G. Schleck (“ Consultant ”).

 

RECITALS

 

WHEREAS , Consultant has previously been employed by the Company; and

 

WHEREAS , the Company desires to engage Consultant to perform certain advisory consulting services specified herein and Consultant desires to be engaged as an independent contractor in accordance with the terms and conditions set forth in this Agreement.

 

NOW , THEREFORE , in consideration of the mutual covenants and agreements contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and intending to be legally bound, the parties agree to amend the Agreement as follows:

 

1.                   Scope of Services and Responsibilities of Consultant . – Section (c) to be replaced as follows:

 

(c) Consultant shall provide the Consulting Services on a non-exclusive basis, subject to the restrictions set forth herein, including without limitation those set forth in Section 5 of this Agreement.

 

2.                   Compensation for the Consulting Services .

 

(a) In consideration of the Consulting Services performed by Consultant, the Company agrees to pay to Consultant $10,000 per month payable monthly in arrears.

 

(b) The Company shall pay or reimburse Consultant for all reasonable and necessary expenses incurred by him in connection with the performance of his duties hereunder in accordance with the policies and procedures of the Company as in effect from time to time; provided that: (a) Consultant obtains the Company’s prior written consent for any expense in excess of $1,000; and (b) Consultant provides the Company with such documentary evidence as shall be reasonably required by the Company.

 

 

3.                   Independent Contractor Status . NO CHANGE

 

4.                   Duration and Termination of Engagement . NO CHANGE

 

5.                   Confidential Information; Non-Competition and Non-Solicitation . NO CHANGE

 

6.                   Benefits. NO CHANGE

 

 
 

 

7.                  Stock Option Award . NO CHANGE

 

8.                  Inventions . NO CHANGE

 

9.                  Remedies for Breach . NO CHANGE

 

10.               Waiver . NO CHANGE

 

11.               Governing Law . NO CHANGE

 

12.               Waiver of Jury Trial . NO CHANGE

 

13.               Notices . NO CHANGE

 

14.               Miscellaneous . NO CHANGE

 

  

 

IN WITNESS WHEREOF , the parties hereto have caused this Consulting Agreement to be executed as of the date first set forth above.

 

 

  CYALUME SPECIALTY PRODUCTS, INC.  
       
       
       
  By: /s/ Zivi Nedivi  
    Name:  Zivi Nedivi  
    Title: Chief Executive Officer  
       
       
       
       
  /s/ James G. Schleck  
  JAMES G. SCHLECK  

 

 

2

 

 

Exhibit 31.1

 

CERTIFICATION

 

I, Zivi Nedivi, certify that:

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Date: May 19, 2014  
  /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: May 19, 2014 /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: May 19, 2014 /s/ Zivi Nedivi
   
  Zivi Nedivi, Chief Executive Officer
  (the Principal Executive Officer)

 

Date: May 19, 2014  
  /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.