Cyalume
Cyalume Technologies Holdings, Inc. (Form: 10-Q, Received: 08/14/2014 16:42:16)

 

 

 

 

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 June 30, 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 August 11, 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  
     
  Condensed Consolidated Balance Sheets as of June 30, 2014 (unaudited) and December 31, 2013 3
     
  Condensed Consolidated Statements of Comprehensive Income (Loss) for the three and six months ended June 30, 2014 and 2013 (unaudited) 4
     
  Condensed Consolidated Statements of Changes in Convertible Preferred Stock and Stockholders' Equity for the six months ended June 30, 2014 (unaudited) 5
     
  Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 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 18
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk 22
     
Item 4. Controls and Procedures 22
     
PART II—OTHER INFORMATION  
   
Item 1. Legal Proceedings 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 23
     
Signatures 24

 

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)

 

    June 30,
2014
(unaudited)
    December 31,
2013
 
Assets                
Current assets:                
Cash   $ 705     $ 865  
Accounts receivable, net of allowance for doubtful accounts of $43 and $44, respectively     3,770       3,788  
Inventories, net     9,629       10,782  
Income taxes refundable     0       163  
Deferred income taxes     3,846       3,847  
Prepaid expenses and other current assets     669       463  
Total current assets     18,619       19,908  
                 
Property, plant and equipment, net     7,332       8,001  
Goodwill     7,992       7,992  
Other intangible assets, net     17,100       17,948  
Other noncurrent assets     60       465  
Total assets   $ 51,103     $ 54,314  
Liabilities and Stockholders’ Equity                
Current liabilities:                
Line of credit   $ 2,250     $ 1,600  
Current portion of notes payable     1,900       1,925  
Accounts payable     4,905       6,182  
Accrued expenses     1,712       2,059  
Deferred revenue     266       80  
Income taxes payable     116       97  
Current portion of capital lease obligation     15       15  
Warrants liability     1,359       6,373  
Deferred rent     81       0  
Contingent legal obligation     1,250       3,986  
Other current liabilities     1       242  
Total current liabilities     13,855       22,559  
                 
Notes payable, net of current portion     14,515       14,969  
Note payable due to related parties     2,100       2,100  
Deferred income taxes     3,846       3,847  
Asset retirement obligation     199       194  
Capital lease obligation, net of current portion     0       7  
Contingent legal obligation, net of current portion     2,825       0  
Other noncurrent liabilities, net of current portion     78       79  
Total liabilities     37,418       43,755  
                 
Commitments and contingencies (Note 10)                
                 
Series A convertible preferred stock, $0.001 par value; 1,000,000 shares authorized; 123,077 shares issued and outstanding     4,300       4,055  
                 
Stockholders' equity:                
Common stock, $0.001 par value; 100,000,000 shares authorized; 21,400,244 and 20,738,260 shares issued and outstanding at June 30, 2014 and December 31, 2013, respectively     21       21  
Additional paid-in capital     102,910       102,575  
Accumulated deficit     (93,276 )     (95,874 )
Accumulated other comprehensive loss     (270 )     (218 )
Total stockholders’ equity     9,385       6,504  
Total liabilities and stockholders' equity   $ 51,103     $ 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 Income (Loss)

(in thousands, except shares and per share information)

(Unaudited)

 

    Three     Three     Six     Six  
    Months Ended     Months Ended     Months Ended     Months Ended  
    June 30, 2014     June 30, 2013     June 30, 2014     June 30, 2013  
Revenues   $ 8,887     $ 9,459     $ 16,156     $ 17,545  
Cost of revenues     5,336       4,974       9,728       9,236  
Gross profit     3,551       4,485       6,428       8,309  
                                 
Other expenses (income):                                
Sales and marketing     911       1,343       1,865       2,450  
General and administrative     1,554       2,619       3,473       4,696  
Research and development     379       597       754       1,060  
Interest expense, net     524       590       1,037       1,170  
Interest expense – related party     117       26       223       52  
Amortization of intangible assets     497       432       993       869  
Change in warrant liability fair value     (4,095 )     0       (5,042 )     0  
Impairment loss on intangible assets     0       875       0       875  
Impairment loss on goodwill     0       168       0       168  
Other expenses, net     291       41       352       4  
Total other expenses, net     178       6,691       3,655       11,344  
                                 
Income (loss) before income taxes     3,373       (2,206 )     2,773       (3,035 )
Provision for (benefit from) income taxes     101       (918 )     175       (1,177 )
Net income (loss)     3,272       (1,288 )     2,598       (1,858 )
                                 
Other comprehensive (loss) income, net of tax:                                
Foreign currency translation adjustments     (44 )     86       (52 )     (94 )
Unrealized gain on cash flow hedges, net of taxes of $0, $(14), $0 and $(28) respectively     0       23       0       48  
Other comprehensive (loss) income     (44 )     109       (52 )     (46 )
Comprehensive income (loss)   $ 3,228     $ (1,179 )   $ 2,546     $ (1,904 )
                                 
Net income (loss)   $ 3,272     $ (1,288 )   $ 2,598     $ (1,858 )
Series A convertible preferred stock dividends     (125 )     0       (245 )     0  
Net income (loss) available to common stockholders   $ 3,147     $ (1,288 )   $ 2,353     $ (1,858 )
                                 
Earnings (net loss) per common share:                                
Basic   $ 0.15     $ (0.06 )   $ 0.11     $ (0.09 )
Diluted   $ 0.10     $ (0.06 )   $ 0.08     $ (0.09 )
Weighted average shares used to compute net earnings (loss) per common share:                                
Basic     21,362,564       20,708,531       21,184,567       20,708,531  
Diluted     32,153,976       20,708,531       29,322,654       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       (53 )     0       0       (53 )
Dividends accrued on Series A convertible preferred stock     0       245       0       0       (245 )     0       0       (245 )
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 to related party     0       0       242,308       0       157       0       0       157  
                                                                 
Shares issued – warrant exercise     0       0       73,009       0       45       0       0       45  
                                                                 
Share-based compensation     0       0       0       0       262       0       0       262  
                                                                 
Net income     0       0       0       0       0       2,598       0       2,598  
                                                                 
Other comprehensive loss     0       0       0       0       0       0       (52 )     (52 )
                                                                 
Balance at June 30, 2014     123,077     $ 4,300       21,400,244     $ 21     $ 102,910     $ (93,276 )   $ (270 )   $ 9,385  

 

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 Six     For the Six  
    Months Ended     Months Ended  
    June 30,     June 30,  
    2014     2013  
Cash flows from operating activities:                
Net income (loss)   $ 2,598     $ (1,858 )
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:                
Depreciation and amortization of property, plant and equipment     750       682  
Amortization     1,111       1,223  
Non-cash interest expense     490       0  
Deferred income tax benefit     0       (1,234 )
Share-based compensation expense     262       484  
Impairment loss on intangible assets     0       875  
Impairment loss on goodwill     0       168  
Change in fair value of warrant liability     (5,042 )     0  
Other non-cash expenses     8       (8 )
Changes in operating assets and liabilities:                
Accounts receivable     16       (1,587 )
Inventories     1,137       (505 )
Prepaid expenses and other current assets     197       (70 )
Accounts payable and accrued liabilities     (1,494 )     (572 )
Accrued interest on note payable to related party     125       0  
Deferred revenue and deferred rent     267       0  
Income taxes payable     181       79  
Net cash provided by (used in) operating activities     606       (2,323 )
                 
Cash flows from investing activities:                
Purchases of long-lived assets     (256 )     (355 )
Proceeds from disposal of long-lived assets     0       18  
Net cash used in investing activities     (256 )     (337 )
                 
Cash flows from financing activities:                
Net proceeds from line of credit     650       1,700  
Repayment of  long term notes payable     (962 )     (1,171 )
Principal payments on capital lease obligations     (7 )     (6 )
Proceeds received from warrant exercise     1       0  
Payment of preferred stock issuance costs     (53 )     0  
Payment in connection with legal settlement agreement     (107 )     0  
Payment of debt issuance and deferred financing costs     (15 )     0  
Net cash (used in) provided by financing activities     (493 )     523  
                 
Effect of exchange rate changes on cash     (17 )     (26 )
Net decrease in cash     (160 )     (2,163 )
Cash, beginning of period     865       2,695  
Cash, end of period   $ 705     $ 532  

 

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 and six months ended June 30, 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.

 

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.

 

7
 

 

Cyalume Technologies Holdings, Inc.

Notes to Condensed Consolidated Financial Statements

 

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

 

The Company’s consolidated financial statements have been prepared assuming the Company will continue as a going concern. For the six months ended June 30, 2014, the Company had a net income of approximately $2.6 million, and generated approximately $0.6 million of cash in its operations. As of June 30, 2014, the Company had an accumulated deficit of approximately $93.3 million, total stockholders’ equity of approximately $9.4 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 $1.3 million relating to a legal obligation (see Note 10). 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.

 

Management continues to evaluate 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 or may impact the Company’s stock price. On July 30, 2014, the Company entered into a Securities Purchase Agreement with Cova Small Cap Holdings, LLC (“Cova”), Michael G. Barry and Bayonet Capital Fund I, LLC for the purchase of an aggregate of 1,000 units of securities of the Company for an aggregate purchase price of $2.0 million (see Note 14).

 

4. INVENTORIES

 

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

 

    June 30,
2014
    December 31,
2013
 
Raw materials   $ 5,749     $ 6,535  
Work-in-process     1,954       2,185  
Finished goods     1,926       2,062  
    $ 9,629     $ 10,782  

 

8
 

 

Cyalume Technologies Holdings, Inc.

Notes to Condensed Consolidated Financial Statements

 

5. 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 June 30, 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 June 30, 2014, $2.3 million was outstanding on this line of credit and borrowing availability was approximately $483,000.

 

Notes Payable

 

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

 

    June 30,
2014
    December 31,
2013
 
Senior Debt - Term Loan   $ 5,127     $ 6,023  
Senior Debt - Real Estate Loan     1,613       1,679  
Subordinated Term Loan     9,149       8,659  
Promissory Note Payable     968       1,075  
Total     16,857       17,436  
Less: Unamortized debt discount     (442 )     (542 )
Less: Current portion of notes payable, including current portion of unamortized debt discount     (1,900 )     (1,925 )
Notes payable, net of current portion   $ 14,515     $ 14,969  

 

Senior Debt

 

CTI has two loans payable to TD Bank, NA (“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.

 

9
 

 

Cyalume Technologies Holdings, Inc.

Notes to Condensed Consolidated Financial Statements

 

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.

 

6. PREFERRED STOCK AND STOCK WARRANTS

 

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.

 

10
 

 

Cyalume Technologies Holdings, Inc.

Notes to Condensed Consolidated Financial Statements

 

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 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 consolidated statements of comprehensive income (loss).

 

The fair value as of June 30, 2014 and December 31, 2013, respectively, of the Common Warrant was estimated using the Monte Carlo simulation method with the following inputs:

 

    Common
Warrant
June 30,
2014
    Common
Warrant
December 31,
2013
 
Stock price of underlying equity   $ 0.10     $ 0.69  
Exercise price   $ 0.65     $ 0.65  
Expected volatility (standard deviation)     100 %     100 %
Annual risk-free rate     2.45 %     3.04 %
Expected term (time to expiration years)     9.4       9.9  
Number of periods     489       514  
Period interval     0.019       0.019  
Period risk-free rate     0.047 %     0.058 %
Number of simulations     500,000       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 June 30, 2014 and December 31, 2013, respectively, of the Preferred Warrant was estimated using the Black-Scholes pricing model with the following inputs:

 

    Preferred
Warrant
June 30,
2014
    Preferred
Warrant
December 31,
2013
 
Stock price of underlying equity   $ 13.64     $ 32.50  
Exercise price   $ 0.05       0.05  
Expected term (years)     1.25       1.7  
Risk-free interest rate     0.20 %     0.13 %
Estimated dividend yield     None       None  
Volatility     70 %     70 %

 

11
 

 

Cyalume Technologies Holdings, Inc.

Notes to Condensed Consolidated Financial Statements

 

The change in the fair value of the warrants liability during the six months ended June 30, 2014 is as follows (amounts in thousands):

 

    Common
Warrant
    Preferred
Warrant
    JFC Warrant
(see Note 8)
    Subordinated
Term Loan
Warrants (see
Note 5)
    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     (3,611 )     (1,161 )     (8 )     (262 )     (5,042 )
Warrant liability at June 30, 2014   $ 470     $ 836     $ 2     $ 51     $ 1,359  

 

7. INCOME TAXES

 

The effective tax rate for the three months ended June 30, 2014 was approximately 3% and the effective tax rate for the three months ended June 30, 2013 was approximately 42%, compared to the federal statutory rate of 34%. The effective tax rates for the six months ended June 30, 2014 and June 30, 2013 were approximately 6% and 39%, respectively, compared to the federal statutory rate of 34%. During the three and six months ended June 30, 2014, the Company incurred approximately $83,000 and $157,000 of foreign tax expense on CTSAS’ income. The Company continues to have a full valuation allowance against its U.S. deferred tax assets. The Company has a valuation allowance of approximately $5.9 million as of June 30, 2014 against deferred tax assets generated primarily as a result of foreign tax credits and net operating losses.

 

8. 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.

 

12
 

 

Cyalume Technologies Holdings, Inc.

Notes to Condensed Consolidated Financial Statements

 

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. During April 2014, approximately $158,000 of 2013 Selway fees was settled by issuing 242,308 shares of the Company’s common stock.

 

9. NET INCOME (LOSS) PER COMMON SHARE

 

Basic income (loss) per common share is computed by dividing net income (loss) available to common stockholders by the basic weighted average number of common shares outstanding. Diluted income (loss) per common share is computed by dividing net income (loss) available to common stockholders 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 instruments using the “if-converted” method.

 

    Three Months Ended June 30,     Six Months Ended June 30,  
    2014     2013     2014     2013  
                         
Numerator (in thousands):                                
Net income (loss)   $ 3,272     $ (1,288 )   $ 2,598     $ (1,858 )
Series A Preferred Stock accrued dividend     (125 )     0       (245 )     0  
Income (loss) available to common stockholders - basic   $ 3,147     $ (1,288 )   $ 2,353     $ (1,858 )
Effect of dilutive securities:                                
Reverse income from liability warrants     (232 )     0       (228 )     0  
Convertible promissory note     30       0       60       0  
Convertible preferred stock     125       0       245       0  
Convertible debt     250       0       0       0  
Income (loss) available to common stockholders - diluted   $ 3,320     $ (1,288 )   $ 2,430     $ (1,858 )
                                 
Denominator:                                
Weighted average shares outstanding - basic     21,362,564       20,708,531       21,184,567       20,708,531  
Effect of dilutive securities:                                
Warrants     432,445       0       445,787       0  
Convertible promissory note     1,538,450       0       1,538,450       0  
Convertible preferred stock     6,153,850       0       6,153,850       0  
Convertible debt     2,666,667       0       0       0  
Weighted average common shares - diluted     32,153,976       20,708,531       29,322,654       20,708,531  
                                 
Income (loss) per common share:                                
Basic   $ 0.15     $ (0.06 )   $ 0.11     $ (0.09 )
Diluted   $ 0.10     $ (0.06 )   $ 0.08     $ (0.09 )

 

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 June 30,     Six Months Ended June 30,  
    2014     2013     2014     2013  
Options     2,986,186       3,310,686       2,986,186       3,310,686  
Restricted stock     0       27,245       0       23,127  
Convertible debt     0       2,666,667       2,666,667       2,666,667  
Warrants     6,153,850       0       6,153,850       0  

  

The Preferred Warrant convertible into 123,077 Shares of Series A Preferred Stock is only exercisable if 2014 earnings fall below a certain threshold. The 123,077 shares of Series A Preferred Stock would be convertible into 6,153,850 shares of the Company’s common stock. Therefore, the underlying 6,153,850 common shares issuable upon conversion of the Series A Preferred Stock relating to the Preferred Warrant have not been included in the computation of diluted income (loss) per common share.

 

13
 

   

Cyalume Technologies Holdings, Inc.

Notes to Condensed Consolidated Financial Statements

 

10. 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.

 

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. On July 1, 2014, CTI filed an Application for Further Appellate Review in the Massachusetts Supreme Judicial Court.

 

The Former Owners (1) previously retained the responsibility for paying the costs and liabilities associated with Civil Action No. 06-706 and (2) 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”). 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 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 June 30, 2014 and at December 31, 2013, respectively, based upon the close price of Cyalume’s stock on June 30, 2014 and December 31, 2013. The value of the Escrowed Shares is included within the prepaid expenses and other current assets line item and approximately $4.1 million of obligations related to this matter is included within the contingent legal obligation line items on the Company’s condensed consolidated balance sheet as of June 30, 2014 and, approximately $1.3 million of which is within current liabilities.

 

On July 10, 2014, the Company entered into a Confidential Settlement Agreement and Mutual Release (the “Omniglow Settlement Agreement”) with the Former Owners and members of management of Omniglow Corporation (collectively, the “Omniglow Buyers”). Pursuant to the Omniglow Settlement Agreement, CTI agreed to either pay the full settlement amount of approximately $4.5 million or satisfy the settlement amount as follows: (i) an initial payment of $250,000, (ii) transfer the 625,139 Escrowed Shares, (iii) payment of $1.0 million in cash within 21 days from the execution of the Omniglow Settlement Agreement (see Note 14) and (iv) additional payments in cash and/or through cooperative marketing credits of $1.9 million if paid within 18 months from the date of the Omniglow Settlement Agreement, or of approximately $2.4 million if paid within 27 months from the date of the Omniglow Settlement Agreement. During July 2014, the Company fulfilled its obligations under items (i), (ii) and (iii) described above.

 

 

14
 

 

Cyalume Technologies Holdings, Inc.

Notes to Condensed Consolidated Financial Statements

 

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 six months ended June 30, 2014.

 

11. FAIR VALUES OF ASSETS AND LIABILITIES

 

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

 

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

 

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

 

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

 

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

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

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

 

15
 

 

 

Cyalume Technologies Holdings, Inc.

Notes to Condensed Consolidated Financial Statements

 

Assets and Liabilities Measured at Fair Value on a Recurring Basis

 

Assets and liabilities itemized below were measured at fair value on a recurring basis at June 30, 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
 
Warrants (see Note 6)   (1)     0       0       (1,359 )     (1,359 )
    $ 0     $ 0     $ (1,359 )   $ (1,359 )

 

(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 Black-Scholes pricing model.

 

The Company did not transfer any assets or liabilities between Levels 1, 2 or 3 during the three and six months ended June 30, 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 and six months ended June 30, 2014, none of our assets or liabilities was measured at fair value on a nonrecurring basis.

 

12. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

 

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

 

    Six Months Ended June 30  
    2014     2013  
Interest   $ 310     $ 820  
Income taxes     171       184  

 

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

 

    Six Months Ended June 30,  
    2014     2013  
Series A Convertible Preferred stock accrued dividend   $ 245     $ 0  
Adjustment to warrant liability 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     241       0  
Issuance of 242,308 shares to Selway     157       0  

 

16
 

  

Cyalume Technologies Holdings, Inc.

Notes to Condensed Consolidated Financial Statements

 

13. NEW ACCOUNTING PRONOUNCEMENTS

 

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

 

In May 2014, the FASB issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”), which supersedes nearly all existing revenue recognition guidance under U.S. GAAP. ASU 2014-09 requires recognition of revenue when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services. ASU 2014-09 defines a five-step process in which judgments and estimates may be required within the revenue recognition process. ASU 2014-09 is effective for annual and interim periods beginning on or after December 15, 2016, permits the use of either a retrospective or a cumulative effect transition method, and early adoption is not permitted. The Company is in the process of evaluating the effect, if any, ASU 2014-09 will have on its consolidated financial statements and related disclosures.

  

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.

 

14. SUBSEQUENT EVENTS

 

On July 30, 2014, the Company entered into a Securities Purchase Agreement with Cova Small Cap Holdings, LLC (“Cova”), Michael G. Barry and Bayonet Capital Fund I, LLC (collectively, the “Investors”) for the purchase of an aggregate of 1,000 units of securities of the Company for an aggregate purchase price of $2.0 million (or $2,000 per unit). The Investors purchased an aggregate of 1,000 units of securities of the Company (the “Units”), with each Unit comprising (1) one share of Series B Convertible Preferred Stock of the Company and (2) one share of Series C Preferred Stock of the Company. Approximately $1.3 million of the net proceeds from the sale of the Units was used to pay a legal settlement amount in connection with the Omniglow Settlement Agreement (see Note 10). Cova is a significant stockholder of the Company. Two members of the Board are affiliated with, and designees of, Cova, and a third member of the Board is a designee of US VC Partners, L.P., which is an affiliate of Cova. Bayonet Capital Fund I, LLC and JFC are controlled by James G. Schleck, a member of the Company’s board of directors, and JFC is also a significant stockholder of the Company. $250,000 of the purchase price paid by Cova for its Units was paid by means of the satisfaction and cancellation in full of the indebtedness of the Company to Cova incurred on July 10, 2014.

 

In connection with the issuance of the Series B Convertible Preferred Stock and the Series C Preferred Stock, US VC Partners, L.P. (the “Series A Investor”) and JFC entered into a Consent and Waiver Agreement with the Company, whereby the Series A Investor agreed to the termination of all of the warrants issued to it in connection with the Series A Preferred Stock. JFC agreed to terminate any right of JFC to receive any warrants otherwise issuable to it upon the conversion of any portion of the JFC Note pursuant to the terms thereof.

 

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

 

You should read the following discussion of our financial condition and results of operations in conjunction with our interim condensed consolidated financial statements and the accompanying notes to those financial statements included elsewhere in this Quarterly Report on Form 10-Q 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 – Three and Six Months Ended June 30, 2014 versus the Three and Six Months Ended June 30, 2013

 

Revenues for 2014 and 2013 were as follows:

    Three Months Ended
June 30,
    Six Months Ended
June 30,
 
Category ($ in millions)   2014     2013     2014     2013  
                         
Chemical Light   $ 6.2     $ 6.8     $ 11.2     $ 12.2  
Ammunition     0.0       0.1       0.0       0.1  
Training and Simulation     0.2       0.1       0.3       0.6  
Specialty Products     2.5       2.4       4.7       4.6  
Total   $ 8.9     $ 9.4     $ 16.2     $ 17.5  

 

Chemical Light revenues decreased for both the three months and six months ended June 30, 2014 from the corresponding prior year periods due to the drawdown of troops from Afghanistan and due to lower spending for our products for training due to budgetary constraints. 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 the three months or the six months ended June 30, 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 during 2015, at which time we expect Ammunition revenue to resume. Training and Simulation revenues for the three months ended June 30, 2014 increased by approximately $0.1 million. Training and Simulation revenues for the six months ended June 30, 2014 decreased by approximately $0.3 million. Specialty Products revenue during the first and second quarters of 2014 increased by approximately $0.1 million and $0.1 million, respectively, compared to the corresponding prior year periods.

 

Cost of goods sold for the second quarter of 2014 of approximately $5.3 million increased from the prior year amount of $5.0 million. Cost of goods sold for the six months ended June 30, 2014 of approximately $9.7 million increased from the prior year amount of $9.2 million. The gross profit for the second quarter of 2014 was approximately 40.0% versus 47.2% for the second quarter of 2013. The gross profit for the six months ended June 30, 2014 was approximately 39.8% versus 47.4% for the six months ended June 30, 2013. This decrease compared to both corresponding prior year periods was largely attributable to a product mix change resulting from a decrease during 2014 in product sales to our largest customer and from increased inventory reserve charges during 2014 for slow moving and obsolete goods.

 

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Sales and marketing expenses for the three and six months ended June 30, 2014 were approximately $0.9 million and $1.9 million, respectively, versus approximately $1.3 million and $2.5 million, respectively, for the corresponding prior year periods. The decrease of approximately $0.4 million for the three months ended June 30, 2014 and the decrease of approximately $0.6 million for the six months ended June 30, 2014 was attributable to a decrease in sales and marketing payroll expenses, as well as a significant decrease in sales and marketing related travel expenses during 2014.

 

General and administrative expenses for the three and six months ended June 30, 2014 were approximately $1.6 million and $3.5 million, respectively, versus approximately $2.6 million and 4.7 million, respectively, for the corresponding prior year periods. This decrease of approximately $1.0 million for the three months ended June 30, 2014 and the decrease of approximately $1.2 million for the six months ended June 30, 2014 was attributable to a decrease in personnel and personnel-related expenses during 2014 and a decrease in legal expenses associated with the previous arbitration case with a former employee, which was settled during 2013.

 

Research and development expenses for the three and six months ended June 30, 2014 were approximately $0.4 million and $0.8 million, respectively, compared to approximately $0.6 million and $1.1 million, respectively, for the corresponding prior year periods. This decline year over year relates to an overall reduction of the number of research and development activities and projects during 2014.

 

During the first and second quarters of 2014, we recorded tax expense of approximately $0.1 million during both quarters, 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 June 30, 2014 against deferred tax assets generated primarily as a result of foreign tax credits and net operating losses. During the three months ended June 30, 2013 we recorded a tax benefit of approximately $0.9 million on a pre-tax loss of $2.2 million resulting in an effective rate of approximately 42%. During the six months ended June 30, 2013, we recorded a tax benefit of approximately $1.2 million on a pre-tax loss of $3.0 million, yielding an effective rate of approximately 39%.

 

Material Changes in Financial Condition – June 30, 2014 versus December 31, 2013

 

Cash was approximately $0.7 million at June 30, 2014, representing a decrease of $0.2 million from December 31, 2013. Combined accrued liabilities and accounts payable decreased by approximately $1.6 million; accounts receivable remained relatively the same at June 30, 2014 compared to December 31, 2013; and, inventories as of June 30, 2014 decreased by approximately $1.2 million.

 

Accounts payable and accrued expenses combined were approximately $6.6 million at June 30, 2014 versus approximately $8.2 million at December 31, 2013, a decrease of approximately $1.6 million due to the payment of prior year accruals and vendor payments. Our line of credit, used to meet temporary working capital needs, was approximately $2.3 million at June 30, 2014 versus approximately $1.6 million at December 31, 2013.

 

The current portion of notes payable was approximately $1.9 million at both June 30, 2014 and December 31, 2013.

 

Liquidity and Capital Resources

 

As of June 30, 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 $0.3 million for both the six months ended June 30, 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 June 30, 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 June 30, 2014, $2.3 million was outstanding on this line of credit and borrowing availability was approximately $483,000 at June 30, 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, 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.

 

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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 June 30, 2014 was $0.10 per share.

  

We were in compliance with the financial covenants related to these loans as of June 30, 2014.

 

We did not pay a dividend in the six months ended June 30, 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.

 

On July 30, 2014, we entered into a Securities Purchase Agreement with Cova Small Cap Holdings, LLC (“Cova”), Michael G. Barry and Bayonet Capital Fund I, LLC (collectively, the “Investors”) for the purchase of an aggregate of 1,000 units of securities of the Company for an aggregate purchase price of $2.0 million (or $2,000 per unit). The Investors purchased an aggregate of 1,000 units of securities of the Company (the “Units”), with each Unit comprising (1) one share of Series B Convertible Preferred Stock of the Company and (2) one share of Series C Preferred Stock of the Company. Each share of Series B Convertible Preferred Stock is initially convertible into 35,713.147 shares of common stock. Holders of the Series C Preferred Stock are entitled to cumulative quarterly dividends at a rate of 12% per annum, calculated based on an assumed price of $2,000 per share, payable in cash or in kind. Approximately $1.3 million of the net proceeds from the sale of the Units was used to pay a legal settlement amount in connection with the Omniglow Settlement Agreement (as described in Note 10 of the accompanying Condensed Consolidated Financial Statements). Cova is a significant stockholder of the Company. Two members of the Board are affiliated with, and designees of, Cova. Bayonet Capital Fund I, LLC and JFC are controlled by James G. Schleck, a member of our board of directors, and JFC is also a significant stockholder of the Company. $250,000 of the purchase price paid by Cova for its Units was paid by means of the satisfaction and cancellation in full of indebtedness of the Company to Cova incurred on July 10, 2014.

 

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. 

 

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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 settle able 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.

 

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 carry forwards 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 June 30, 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.

 

21
 

 

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.

 

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 June 30, 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 June 30, 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 June 30, 2014 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II – OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

As disclosed in the Form 8-K filed by the Company on July 16, 2014, on July 10, 2014, the Company entered into a Confidential Settlement Agreement and Mutual Release (the “Omniglow Settlement Agreement”) with the former owners and members of management of Omniglow Corporation (collectively, the “Omniglow Buyers”), which settled the previously disclosed proceedings known as Civil Action No. 06-706 filed in the Superior Court of the Commonwealth of Massachusetts. Pursuant to the Omniglow Settlement Agreement, CTI agreed to either pay the full settlement amount of approximately $4.5 million or satisfy the settlement amount as follows: (i) an initial payment of $250,000, (ii) transfer the 625,139 Escrowed Shares, (iii) payment of $1.0 million in cash within 21 days from the execution of the Omniglow Settlement Agreement and (iv) additional payments in cash and/or through cooperative marketing credits of $1.9 million if paid within 18 months from the date of the Omniglow Settlement Agreement, or of approximately $2.4 million if paid within 27 months from the date of the Omniglow Settlement Agreement. See Note 10 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

 

ITEM 6.    EXHIBITS

Exhibit

Number

  Description
10.1 * Confidential Settlement Agreement and Mutual Release dated July 10, 2014.
     
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.

 

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SIGNATURES

 

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

 

  Cyalume Technologies Holdings, Inc.
     
Date: August 14, 2014 By: /s/ Zivi Nedivi
     
    Zivi Nedivi, Chief Executive Officer
     (Principal Executive Officer)
     
Date: August 14, 2014 By: /s/ Michael Bielonko
     
    Michael Bielonko, Chief Financial Officer
    (Principal Financial Officer)

 

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Exhibit 10.1

 

CONFIDENTIAL SETTLEMENT AGREEMENT AND MUTUAL RELEASE

 

This Confidential Settlement Agreement and Mutual Release (this “Agreement”), is made July 10 , 2014 (the “Effective Date”), between Cyalume Technologies, Inc., (“Cyalume”) and Cyalume on behalf of Emil Jachmann (“Jachmann”), in the first instance, and Omniglow LLC, (“OmniGlow”), Randye M. Holland and Stanley M. Holland as Trustees of the Randye M. Holland and Stanley M. Holland Trust and the Leemon Family LLC, in the second instance, (individually sometimes referred to as a “Party” and collectively as the “Parties”).

 

RECITALS

 

A. WHEREAS, on January 23, 2006, Cyalume and OmniGlow entered into various written agreements. Subsequently, disputes arose between the Parties and lawsuits were filed.

 

B. WHEREAS, on or about June 29, 2006, OmniGlow, Randye M. Holland and Stanley M. Holland as Trustees of the Randye M. Holland and Stanley M. Holland Trust, the Leemon Family LLC, and Achaian, Inc. filed Civil Action No. 06-706 in the Superior Court of Hampden County, Massachusetts alleging that Cyalume and Jachmann breached agreements and engaged in conduct which caused damage to OmniGlow. Subsequently, Cyalume and Jachmann filed their Answer With Counterclaims denying the Hampden Superior Court civil action allegations and alleging that OmniGlow breached agreements and engaged in conduct which caused damage to Cyalume.

 

C. WHEREAS, on or about October 5, 2006, Cyalume filed Civil Action No. 603512/06 in the New York Supreme Court of New York County alleging, among other things, that OmniGlow and its officers, including Ira Leemon and Stanley Holland, breached agreements which caused damage to Cyalume. Subsequently, on Motion by OmniGlow, that civil action was stayed pending the outcome of Hampden Superior Court Civil Action No. 06-706 in Massachusetts.

 

 
 

 

D. WHEREAS, on July 12, 2012, an Amended Final Judgment was filed in Hampden Superior Court Civil Action No. 06-706 awarding damages to OmniGlow including attorneys’ fees, costs, and prejudgment interest (“Amended Final Judgment”).

 

E. WHEREAS, on or about October 17, 2012, Cyalume, on its and Jachmann’s behalf, filed Defendants’ Notice of Appeal from Hampden Superior Court Civil Action No. 06-706 in the Massachusetts Appeals Court, which assigned the Docket No. 2013-P-0280.

 

F. WHEREAS, on May 14, 2014, the Appeals Court issued its decision in case No. 2013-P-0280, which upheld the July 12, 2012 Amended Final Judgment.

 

G. WHEREAS, on July 1, 2014, Cyalume, on its and Jachmann’s behalf, filed an Application For Further Appellate Review in the Massachusetts Supreme Judicial Court, which application is still pending as Docket No. FAR-22600.

 

H. WHEREAS, the Parties have reached an agreement and wish to settle, compromise and resolve, throughout the universe and in perpetuity, all claims past and present, under the laws of any territory, country or jurisdiction, based on or related to Hampden Superior Court Civil Action No. 06-706, New York Supreme Court Civil Action No. 603512/06, Massachusetts Appeals Court Docket No. 2013-P-0280, and Massachusetts Supreme Judicial Court Docket No. FAR 22600 (collectively hereafter the “Civil Claims”), each Party to bear its own attorneys’ fees and costs.

 

In consideration of the Recitals, the mutual covenants and agreements set forth herein, and other good and valuable consideration, the sufficiency and receipt of which they hereby acknowledge, the Parties agree as follows:

 

2
 

 

1. Recitals . The foregoing Recitals are incorporated into and form a part of this Settlement Agreement.

 

2. No Admissions . This Settlement Agreement is entered into for the purposes of settling disputes between the Parties. Nothing contained in this Settlement Agreement shall be considered an admission of wrongdoing or liability by either party of any kind or nature whatsoever. Each party specifically denies wrongdoing.

 

3. Settlement Payment . Cyalume shall either:

 

a. pay the settlement amount of $4,547,851.47 (“Settlement Amount”); OR

 

b. make an initial good faith payment of $250,000 to OmniGlow on July 10, 2014, by wire transfer to: “CitiBank, Acct. No. 35354087, ABA No. 021000089.” Within 21 days from the execution of this Agreement, Cyalume shall make an additional down payment of One Million Dollars ($1,000,000.00) payable Six Hundred Twenty-five Thousand Dollars ($625,000.00) to Stanley Holland by wire transfer to “Wells Fargo, Acct. No. 0264433509, ABA No. 121000248” and Three Hundred Seventy-five Thousand Dollars ($375,000.00) to OmniGlow by wire transfer. In addition, within 14 days from the execution of this Agreement, Cyalume shall transfer 625,139 shares of Cyalume stock, one-half to Holland and one-half to OmniGlow. Further, Cyalume may fully satisfy the remaining balance due on the Settlement Amount by either making additional payments by cash and/or through cooperative manufacturing credits of (i) One Million Nine Hundred Thousand Dollars ($1,900,000.00) in cash or credits if paid and received by OmniGlow within eighteen (18) months from the Effective Date of this Agreement, or (ii) Two Million Three Hundred Fifty Thousand Dollars ($2,350,000.00) in cash or credits if paid and received by OmniGlow within twenty seven (27) months from the Effective Date of this Agreement. If Cyalume fails to fully satisfy the payment obligation on the Settlement Amount through 2(b)(i) or 2(b)(ii), then after twenty seven (27) months from the Effective Date, any balance remaining from the Settlement Amount will be due and payable plus accrued interest at simple interest rate of 10% per annum (“Interest Rate”) on the unpaid balance (Settlement Amount less all payments made from the Effective Date forward) from the Effective Date until paid in full and OmniGlow can use all available remedies to obtain payment of any balance. In order to avoid any confusion regarding the interest calculation described in the preceding sentence, an example is provided as follows for illustration purposes only: From the Effective Date, the remaining balance would be $4,297,851.47, reflecting $250,000 good faith payment to OmniGlow. This remaining balance will accrue interest at the Interest Rate until next payment. Upon payment of an additional $1,000,000 by Cyalume, the remaining balance will be reduced to $3,297,851.47 and this remaining balance will accrue interest at the Interest Rate from the date of the $1,000,000 payment until further payments and so and so forth until the Settlement Amount is fully satisfied through the payment options included herein.

 

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4. Standstill and Stay of Enforcement of Amended Final Judgment. So long as Cyalume is in compliance with its obligations in this Agreement and not otherwise in breach of this Agreement, OmniGlow, Randye M. Holland and Stanley M. Holland as Trustees of the Randye M. Holland and Stanley M. Holland Trust and the Leemon Family LLC shall take no action in connection with the Amended Final Judgment unless and until Cyalume files a petition in bankruptcy; or Cyalume makes an assignment for the benefit of creditors; or a court appoints a receiver, custodian or trustee for Cyalume or its assets; or an actual petition in bankruptcy is commenced; or Cyalume files for dissolution or a court dissolves Cyalume; or Cyalume completely or substantially ceases operations; or Cyalume Defaults on any substantial bank loan or line of credit that is not cured or waived or otherwise becomes subject to forbearance within 90 days. OmniGlow, Randye M. Holland and Stanley M. Holland as Trustees of the Randye M. Holland and Stanley M. Holland Trust, and the Leemon Family LLC further agree to stay any and all proceedings concerning the Civil Claims and Amended Final Judgment. To the extent any Court(s) require(s) filings codifying the standstill and/or stay agreements contemplated by this paragraph, the Parties shall file same jointly.

 

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5. Satisfaction of Amended Final Judgment . Within three (3) business days of Cyalume’s satisfaction of paragraph 3 above, OmniGlow, Randye M. Holland and Stanley M. Holland as Trustees of the Randye M. Holland and Stanley M. Holland Trust and the Leemon Family LLC, and Achaian, Inc. shall file with the Hampden Superior Court, a document indicating that Cyalume and Jachmann have satisfied the amounts due under the Amended Final Judgment in full .

 

6. Cooperative Agreements .

 

a. OmniGlow and Cyalume acknowledge and agree that cooperative agreements may be mutually beneficial. OmniGlow and Cyalume will endeavor to enter into a cooperative manufacturing and chemical supply agreement at mutually agreeable terms.

 

b. If both OmniGlow and Cyalume are able to identify and mutually agree upon realizable cost savings (“Cost Savings”), OmniGlow and Cyalume will endeavor to enter into one or more cooperative manufacturing agreements, subject to mutual agreement on terms by the Parties. Cost Savings is defined as Cyalume’s all-in manufacturing cost per product less OmniGlow’s comparable manufacturing cost. The products to be chosen for the cooperative manufacturing will be at Cyalume’s sole discretion. If OmniGlow and Cyalume mutually agree to proceed with one or more cooperative manufacturing agreements, then the Cost Savings will be shared between the Parties as follows: (i) 80/20 for OmniGlow and Cyalume, respectively, until OmniGlow receives what it is owed in Section 3 above, and (ii) 50/50 for OmniGlow and Cyalume, respectively, thereafter. The initial term for the cooperative agreements between the parties will be 3 years with any extension to be mutually agreed upon in writing prior to the expiration of three (3) years.

 

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c. If both OmniGlow and Cyalume are able to identify and mutually agree upon chemistry that Cyalume has available or can supply to OmniGlow, Cyalume and OmniGlow will endeavor to enter into a chemical supply agreement at mutually agreeable terms.

 

d. In the event that OmniGlow and Cyalume are not able to reach a mutual agreement contemplated by this paragraph, neither party will be subject to any liability from any failure to reach a mutually satisfactory cooperative agreements .

 

7. Non-Competition .

 

a. All existing non-compete agreements that Cyalume and all its affiliates and subsidiaries are currently bound to will be terminated.

 

b. If Cyalume and OmniGlow are able to reach a mutual cooperative agreements for the manufacturing of products and supply of chemistry, then Cyalume and OmniGlow will endeavor to agree upon a reasonable non-competition agreement

 

c. In the event that OmniGlow and Cyalume are not able to reach a mutually agreeable non-competition agreement contemplated by this paragraph, neither party will be subject to any liability from any failure to reach such agreement.

 

8. Settlement and Release of Civil Claims .

 

a. Upon receipt of the full amount due under paragraph 3 above, OmniGlow, Randye M. Holland and Stanley M. Holland as Trustees of the Randye M. Holland and Stanley M. Holland Trust and the Leemon Family LLC and their respective successors and assigns, officers, directors, members, stockholders, partners, agents, servants, employees, insurers, attorneys and representatives release, acquit and forever discharge Cyalume and all of its successors and assigns, officers, directors, members, stockholders, partners, agents, servants, employees, insurers, attorneys and representatives from any and all disputes, damages, actions, liabilities, attorneys’ fees, costs, demands and any other claims, including the Civil Claims, known or unknown, suspected or unsuspected, arising out of, relating to or in any way connected with the Civil Claims and Amended Final Judgment (collectively, the “Cyalume Released Claims”), but not the obligations in or arising from this Agreement.

 

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b. Upon execution of this Agreement, Cyalume and its successors and assigns, officers, directors, members, stockholders, partners, agents, servants, employees, insurers, attorneys and representatives release, acquit and forever discharge OmniGlow, Randye M. Holland and Stanley M. Holland as Trustees of the Randye M. Holland and Stanley M. Holland Trust, and the Leemon Family LLC and all of their respective successors and assigns, officers, directors, members, stockholders, partners, agents, servants, employees, insurers, attorneys, and representatives from any and all disputes, damages, actions, liabilities, attorneys’ fees, costs, demands and any other claims, including the Civil Claims, known or unknown, suspected or unsuspected, arising out of, relating to or in any way connected with the Civil Claims (collectively, the “Omniglow Released Claims”), but not the obligations in or arising from this Agreement. Further, this provision has no impact on claims made by Cyalume in New York Supreme Court Civil Action No. 603512/06 against any defendants (other than OmniGlow, Ira Leemon and Stanley Holland). Cyalume’s claims in that suit against the defendants (other than OmniGlow, Ira Leemon and Stanley Holland). survive this Agreement.

 

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9. Ira Leemon’s Indemnification of Cyalume and Jachmann.

 

Ira Leemon agrees to hold harmless and indemnify Cyalume and Jachmann of and from any claims, demands, disputes, suits and / or causes of action asserted by Achaian against them, and any related costs (including their attorneys’ fees and action / litigation related expenses), damages and / or other liabilities.

10. Representations and Warranties of Cyalume.

 

As of the Effective Date, Cyalume represents and warrants to OmniGlow, Randye M. Holland and Stanley M. Holland as Trustees of the Randye M. Holland and Stanley M. Holland Trust and the Leemon Family LLC that:

 

a. Cyalume has full power, authority and capacity to execute and deliver this Agreement (including on behalf of Jachmann) and consummate the transactions contemplated by this Agreement;

 

b. when duly executed and delivered, this Agreement shall constitute the legal, valid and binding obligation of Cyalume and shall be enforceable against Cyalume in accordance with its terms;

 

c. the execution and delivery of this Agreement by Cyalume does not, and the consummation of the transactions contemplated hereby will not constitute a default under or a violation or breach of, or result in the acceleration of any obligation under, any provision of any contract or other instrument to which Cyalume is a party;

 

Cyalume has not created or permitted any security interest to exist in connection with the OmniGlow Released Claims (as defined in paragraph 8 above) including the Civil Claims, has not sold or transferred the OmniGlow Released Claims including the Civil Claims, has not mortgaged, pledged, or otherwise encumbered the OmniGlow Released Claims including the Civil Claims, and has the sole and absolute right to release, extinguish and discharge the OmniGlow Released Claims including the Civil Claims, and will not file any application, petition, appeal or take any action to amend, modify, or discharge the Amend Final Judgment (other than those appellate filings already a matter or record).

 

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11. Representations and Warranties of OmniGlow, Randye M. Holland and Stanley M. Holland as Trustees of the Randye M. Holland and Stanley M. Holland Trust, the Leemon Family LLC, and Achaian, Inc.

 

As of the Effective Date, OmniGlow, Randye M. Holland and Stanley M. Holland as Trustees of the Randye M. Holland and Stanley M. Holland Trust and the Leemon Family LLC represent and warrant to Cyalume and Jachmann that:

 

a. They have full power, authority and capacity to execute and deliver this Agreement and consummate the transactions contemplated by this Agreement;

 

b. when duly executed and delivered, this Agreement shall constitute the legal, valid and binding obligation of each of them and shall be enforceable against each of them in accordance with its terms;

 

c. the execution and delivery of this Agreement by them does not, and the consummation of the transactions contemplated hereby will not constitute a default under or a violation or breach of, or result in the acceleration of any obligation under, any provision of any contract or other instrument to which they are a party;

 

d. they have not created or permitted any security interest to exist in connection with the Cyalume Released Claims (as defined in paragraph 8 above) including the Civil Claims and the Amended Final Judgment, have not sold or transferred the Cyalume Released Claims including the Civil Claims and the Amended Final Judgment, have not mortgaged, pledged, or otherwise encumbered the Cyalume Released Claims including the Civil Claims and the Amended Final Judgment, and have the sole and absolute right to release, extinguish and discharge the Cyalume Released Claims including the Civil Claims and Amended Final Judgment.

 

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12. No Inducement . None of the Parties, nor any of their respective attorneys, officers, agents, directors, or employees, or any of them, has made any promise, representation, or warranty whatsoever, express or implied, to induce any other Party to execute this Agreement, and the Parties acknowledge that they have not executed this Agreement in reliance upon any promise, representation or warranty other than those which appear in this instrument. Without limiting the foregoing, no representation or warranty, express or implied, is made by Cyalume or OmniGlow regarding the tax consequences of this Agreement. Cyalume and OmniGlow each expressly acknowledges that it is solely responsible for any tax payment obligations resulting from payments under paragraph 3 above, any additional interest or late payment charges, and/or this Agreement.

 

13. Confidentiality. The Parties and their employees, agents, boards / board members and attorneys agree that this Agreement and its terms are and shall be kept confidential by the Parties and their employees, agents, boards / board members and attorneys. Except as set forth above; and except to the extent reasonably necessary to enforce the Agreement; or to the extent that either of the Parties reasonably believes it is required by law to disclose certain of the terms of this Agreement; or to the extent that either of the Parties is required to disclose the terms of its individual settlement to the taxing authorities, preparers or others with respect to tax matters; or to the extent required by subpoena or other order of a court or government body of competent jurisdiction, the terms and conditions of this Agreement, including the amounts of payment, shall remain confidential and shall not be disclosed. To the extent required by subpoena or other written order, rule, or regulation of a court or government body of competent jurisdiction, the party being compelled to provide the information will notify the other party via their counsel of record within five (5) business days of receipt of the subpoena or written order.

 

14. Non-Disparagement. The Parties agree that none of them will make nor cause to be made any statements that disparage, defame or intentionally damage the reputation of each other (or any members, managers, officers, directors, employees, agents, representatives, predecessors and successors in interests, stockholders, investors, affiliates, parents, subsidiaries, servants, boards / board members or attorneys of the other, where applicable).

 

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15. Entire Agreement . This Agreement constitutes the entire agreement and understanding between the Parties concerning the subject matter hereof and supersedes any and all prior or contemporaneous agreements, understandings or negotiations, whether written or oral, between the Parties that refer or relate to this Agreement. This Agreement can be modified only in a writing executed by the Parties that expressly states that it is a modification of this Agreement. No provision hereof may be waived unless in writing and signed by the Party whose rights are thereby waived. Waiver of one provision hereof shall not be deemed to be a waiver of any other provision hereof.

 

16. Binding on Successors and Others . This Agreement is and shall be binding upon and inure to the benefit of the Parties hereto and their respective officers, directors, shareholders, members, divisions, parent companies, subsidiary companies, affiliated companies, agents, employees, representatives, attorneys, relatives, spouses, beneficiaries, heirs, executors, administrators, assigns, predecessors in interest, successors in interest and all other persons and entities released hereunder.

 

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17. Attorneys’ Fees. Each Party to this Agreement shall be responsible for its own attorneys’ fees and costs incurred in connection with Hampden Superior Court Civil Action No. 06-706, New York Supreme Court Civil Action No. 603512/06, Massachusetts Appeals Court Docket No. 2013-P-0280 and Massachusetts Supreme Judicial Court Docket No. FAR 22600, including without limitation, the negotiation and execution of this Agreement.

 

18. Governing Law and Forum . This Agreement and the obligations and rights of the Parties hereunder shall be governed by, and construed in accordance with, the laws of the Commonwealth of Massachusetts (regardless of any conflict of laws principles). Subject to the applicable law, the Parties agree that a final determination/ruling in any JAMS arbitration (as provided for in paragraph 26) arising out of or relating to this Agreement shall be conclusive and may be enforced in any other jurisdiction within or outside the United States by suit on the final determination/ruling, a certified copy of which final determination/ruling shall be conclusive evidence thereof and the amount of its indebtedness, or by such other means provided by law.

 

19. Tax Consequences; No Representations or Warranties . The Parties each acknowledges and agrees that it shall separately be responsible for any tax obligations or consequences resulting from the terms or enforcement of the terms of this Agreement. The Parties acknowledge and agree that they have not made any representations or warranties concerning the tax obligations or consequences arising out of this Agreement and that there are no representations or warranties of any kind concerning the tax obligations or consequences arising out of this Agreement.

 

20. Independent Advice of Counsel. The Parties each represents that it has carefully read this Agreement, knows its contents, and understands that its terms are contractual and not mere recitals. The Parties further represent that each has had the advice of counsel of its choosing and has signed this Agreement freely and voluntarily; and has not been influenced to any extent whatsoever in doing so by any representations, statements or promises made other than as set forth in this Agreement.

 

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21. Construction and Interpretation. The headings of the paragraphs of this Agreement are for convenience of reference only and shall not affect the meaning or interpretation of this Agreement or any provision hereof. The use of the neuter form herein shall be deemed to include the masculine and feminine forms, as the context may require. The terms “and,” “or” and “and/or” shall be construed conjunctively, disjunctively, or both, as necessary to give the provisions of this Agreement their broadest and most inclusive scope. The Parties acknowledge, warrant and represent that the Parties and their counsel have each participated in the drafting of this Agreement and each provision hereof, that the Agreement shall be construed as a whole according to its fair meaning, and that the Agreement shall not be construed or interpreted against any Party because a provision or the Agreement as a whole was purportedly prepared, drafted or requested by such party.

 

22. Implementation. The Parties agree to execute such other documents, if any, and to provide reasonable cooperation as necessary to carry out the intent of this Agreement. Each Party hereto agrees that such party will not take any action which would interfere with the performance of this Agreement by any other Party hereto or which would adversely affect any of the rights or benefits provided herein.

 

23. Authority. Each individual signing this Agreement warrants and represents that he or she has full right, power, legal capacity and authority to execute this Agreement on behalf of the Party on whose behalf he or she so signs, that he or she is acting within the scope of such authority with the full knowledge and consent of such Party, and that no further approval or consent of any person, board of directors, partner or other entity is necessary for him or her to execute this Agreement and bind the Party to the terms of the Agreement.

 

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24. Counterparts. This Agreement may be executed in one or more counterparts (including multiple signature pages), each of which shall be deemed an original and all of which shall be deemed one instrument. Facsimile and photocopy signatures shall be binding and effective and shall have the same force and effect as original signatures. True and correct copies may be used in lieu of the original.

 

25. Fees and Costs of Enforcement . Should any Party retain an attorney for the purpose of enforcing or construing this Agreement, in any JAMS arbitration, enforcement proceeding or legal proceeding whatsoever, that Party shall be entitled to receive from the non-prevailing Party reimbursement for all reasonable attorneys’ fees and all reasonable costs, including but not limited to service of process, filing fees, court and court reporter costs, investigative costs, expert witness fees, and reimbursement for all reasonable attorneys’ fees and all reasonable costs shall be included in any final determination or final order issued in the subject arbitration, enforcement action or legal proceeding.

 

26. Dispute Resolution . The Parties agree to resolve any dispute arising from this Agreement by arbitration in Springfield, Massachusetts in the English language before a single arbitrator in accordance with the then current Streamlined Arbitration Rules of JAMS, and judgment on the award rendered by the arbitrator may be entered in the United States District Court of the District of Massachusetts. The Parties will pay equal shares of the arbitrator’s fees and any administrative fees but will otherwise bear their own expenses. The arbitrator will have discretion to award any damages available under applicable law. Except for any stenographer and the arbitrator, attendance at the arbitration will be limited to the Parties and their counsel and witnesses. Except as necessary for purposes of an action to enforce, modify, or vacate the arbitration award, the subject matter of the arbitration, all documents and other information submitted to the arbitrators, including any transcript of the proceedings and any award, will be treated as Confidential Information.

  

* * SIGNATURES ON FOLLOWING PAGE * *

 

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IN WITNESS WHEREOF, the Parties hereto have signed this Agreement as of the date and at the place first above written.

 

CYALUME TECHNOLOGIES INC.   OMNIGLOW, LLC
         
By: /s/ Zivi Nedivi   By: /s/ Ira Leemon
         
Name: Zivi Nedivi   Name: Ira Leemon
         
Title: Chief Executive Officer   Title: President
         
RANDYE M. HOLLAND AND   THE LEEMON FAMILY LLC
STANLEY M. HOLLAND TRUST      
         
By: /s/ Stanley M. Holland   By: /s/ Ira Leemon
         
Title: Trustee, Stanley M. Holland   Title: Manager
         
By: /s/ Randye Holland      
         
Title: Trustee, Randye Holland      
         
IRA LEEMON, INDIVIDUALLY      
         
/s/ Ira Leemon      

 

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Exhibit 31.1

 

CERTIFICATION

 

I, Zivi Nedivi, certify that:

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Date: August 14, 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: August 14, 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: August 14, 2014 /s/ Zivi Nedivi
   
  Zivi Nedivi, Chief Executive Officer
  (the Principal Executive Officer)
Date: August 14, 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.