Cyalume
Cyalume Technologies Holdings, Inc. (Form: 10-K, Received: 03/31/2015 15:47:16)

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

 

FORM 10-K

 

x

Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the fiscal year ended December 31, 2014

 

or

 

¨

Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from – to -

 

Commission File Number 000-52247

 

Cyalume Technologies Holdings, Inc.
(Exact name of registrant as specified in its charter)

 

Delaware   20-3200738
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification No.)

 

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

 

Registrant’s telephone number, including area code: (954) 315-4939

 

Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:

 

Title of class

Common Stock, $0.001 par value

Units consisting of one share of Common Stock and one Common Stock Purchase Warrant

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨   No x

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨   No x

 

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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨

 

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 the 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 Act). Yes ¨  No x

 

The aggregate market value of Common Stock held by non-affiliates of the registrant (10,490,705 shares) based on the last reported sale price of the registrant’s Common Stock on the OTCBB on June 30, 2014, which was the last business day of the registrant’s most recently completed second fiscal quarter, was $1,049,070. For purposes of this computation, all officers, directors, and 10% beneficial owners of the registrant are deemed to be affiliates. Such determination should not be deemed to be an admission that such officers, directors, or 10% beneficial owners are, in fact, affiliates of the registrant.

 

As of March 23, 2015, there were outstanding 21,400,244 shares of the registrant’s Common Stock, par value $.001 per share.

 

 
 

  

CYALUME TECHNOLOGIES HOLDINGS, INC.

ANNUAL REPORT ON FORM 10-K

YEAR ENDED DECEMBER 31, 2014

 

TABLE OF CONTENTS

 

    Page
No.
Part I    
     
Item 1. Business 3
Item 1A. Risk Factors 8
Item 1B. Unresolved Staff Comments 14
Item 2. Properties 14
Item 3. Legal Proceedings 14
Item 4. Mine Safety Disclosures 14
     
Part II    
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 15
Item 6. Selected Financial Data 15
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 16
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 25
Item 8. Financial Statements and Supplementary Data 25
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 25
Item 9A. Controls and Procedures 25
Item 9B. Other Information 25
     
Part III    
Item 10. Directors, Executive Officers and Corporate Governance 26
Item 11. Executive Compensation 31
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 36
Item 13. Certain Relationships and Related Transactions, and Director Independence 38
Item 14. Principal Accounting Fees and Services 39
     
Part IV    
Item 15. Exhibits, Financial Statement Schedules 39
SIGNATURES S-2

 

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PART I

 

The statements contained in this annual report on Form 10-K, including under the section titled "Management's Discussion and Analysis of Financial Condition and Results of Operations" and other sections of this annual 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 annual 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. These risks and uncertainties include, but are not limited to, those factors described in the section titled "Risk Factors." 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.

 

ITEM 1:    BUSINESS

 

General

 

Cyalume Technologies Holdings, Inc. (“we”, “our”, the “Company”) was organized as a blank check company under the laws of the State of Delaware on July 19, 2005. At that time we were named Vector Security Intersect Acquisition Corp. On December 19, 2008, we acquired Cyalume Technologies, Inc. (“CTI”) and changed our corporate name to our current name. CTI is a Delaware corporation formed on March 27, 1997 with headquarters located in West Springfield, Massachusetts. At the date of the acquisition, CTI had one subsidiary, Cyalume Technologies, SAS (“CTSAS”), located in Aix-en-Provence, France. CTI and CTSAS primarily produce an assortment of chemical light and reflective products for the military but also for commercial markets to a much lesser extent.

 

On August 31, 2011, through a wholly-owned subsidiary named Cyalume Specialty Products, Inc. (“CSP”), we acquired substantially all of the assets of JFC Technologies, LLC (“JFC”), a specialty chemical manufacturer. CSP was established as a Delaware corporation on June 15, 2011 and is located in Bound Brook, New Jersey. CSP provides products to the pharmaceutical, military and other markets and has expertise in our chemical light business, for which it is making key chemicals.

 

On December 22, 2011, CTI acquired all of the outstanding common stock of Combat Training Solutions, Inc. (“CTS”), a Colorado corporation established on April 7, 2005, originally located in Colorado Springs, Colorado, but since relocated to West Springfield, Massachusetts. CTS manufactures battlefield effects simulator devices and provides tactical training to the military utilizing such products.

 

Our securities are currently quoted on the Over-The-Counter Bulletin Board (symbol: CYLU).

 

We maintain principal executive offices at 910 SE 17 th Street, Suite 300, Fort Lauderdale, Florida 33316. Our telephone number is (954) 315-4939 . The various reports we file with the SEC, including annual reports on Form 10-K, proxy statements, quarterly reports on Form 10-Q, and current reports on Form 8-K are available on our website ( www.cyalume.com ) free of charge. Our website also contains the charters for the Audit, Nominating and Compensation Committees of the Board of Directors as well as our Code of Conduct and Ethics and our Insider Trading Policy. The documents are also available free of charge from our Corporate Secretary at our executive offices.

 

Overall Approach

 

Our primary focus is providing tactical and training solutions to the military of the United States, 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. We also sell products into the law enforcement, commercial, and other markets. In addition, we provide specialty chemical products to the defense, pharmaceutical, cosmetic and other markets. We employ the following strategies to seek to provide for long-term success.

 

  · Utilizing Patent Protection. We have and expect to continue to pursue patent protection of developed technology and to aggressively defend against violations of our patents.

 

  · Making Environmentally Friendly and Safe to Use Products. Our products are designed to be effective, safe to use and friendly to the environment. Chemicals used in our chemical light products are non-toxic and phthalate free.

 

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  · Increasing Product Diversification. We intend to continue to diversify into additional products and applications utilizing current technology and technology now under development. Product diversification allows us to present a more complete line of products that meet current and projected user needs, as well as reducing dependence on a relatively small number of products for financial and competitive success.

 

  · Continually Improving Products and Performance. We are committed to product improvement and rely on a dedicated in-house team of highly experienced engineers and chemists who are complemented on an as needed basis by third-party expertise.

 

  · Pursuing Strategic Partnering and Acquisitions. We actively seek partners who can help us advance our technologies or introduce products to the market, especially where established partners may help us attain faster market penetration. In addition, we are seeking additional businesses to acquire that will complement our existing products and further strengthen our ability to achieve profitable growth.

 

Products and Services

 

We primarily provide products of two general types: those producing chemical light, including training ammunition; and specialty chemicals.

 

  · Products producing chemical light rely on a chemical reaction known as chemiluminescence. The base product is known as a ‘‘light stick’’ and is typically six inches in length. A light stick is a translucent flexible plastic tube that is partly filled with one chemical ingredient and also with a glass container (‘‘ampoule’’) that contains a complementary reactive chemical. When the tube is bent enough to break the glass ampoule, the chemicals contained within the plastic tube mix and light is generated. Chemiluminescent products come in varying shapes, sizes and functions and provide light in different colors, intensities and durations. These include:

 

  o Light sticks that come in lengths ranging from 1.5 inches to 15 inches and having durations for specified light output that range from 5 minutes to 24 hours. Colors emitted include red, blue, white, yellow, green, orange and infrared.
  o Components to training and tactical ammunition that provide day/night marking and illumination capabilities. Day/night marking rounds increase the effectiveness of weapons training by providing a night-time training ability where, in many cases, one did not exist before. Chemical light munitions are preferable to traditional tracer or training rounds for two reasons. Traditional tracer or pyrotechnic training munitions contain fire-producing elements that can start range fires. Additionally, traditional tracer or pyrotechnic training munitions experience ‘‘duds’’, or unexploded rounds. These unexploded rounds present future safety hazards and must be found and defused. Chemical light training ammunition payloads cannot start range fires and do not represent future safety hazards from unexploded rounds, making their use not only more economical, but safer for military personnel.

 

  · Our specialty chemical products support a wide variety of applications in the pharmaceutical, cosmetic, defense and nutritional supplements industries. Products also include certain components used in the manufacture of our chemical light products.

 

We do not sell products as novelties.

 

We manufacture products in West Springfield, MA; Bound Brook, NJ; and Aix-en-Provence, France.

 

Services we provide, on a very limited basis, include training on the proper utilization of our battlefield effects simulator devices and providing live training exercises. In these exercises we hire and provide “battlefield actors”, people trained to act as insurgents or the indigenous population. The “actors” we hire and train may have lived in the country or speak the language of the country in which the training is simulated to take place, making the training as realistic as possible.

 

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Markets

 

  · Chemical Light

 

Chemical light revenue accounted for approximately 66% of total revenues in 2014 and 61% in 2013. We primarily sell chemiluminescent devices, primarily light sticks in varying colors, lengths and durations of light output, as well as flat chemiluminescent disks and reflective patches and belts. The primary users of these products and services are the U.S. Military and European militaries participating in the NSPA (the “NATO Support Agency”, f/k/a the NATO Maintenance and Supply Agency (“NAMSA”)).

 

Critical events, risks and uncertainties regarding the military market include the continued use by the U.S. and NATO militaries, the ability to remain on the cutting edge of chemical light technology, the ability to generate additional uses of our products by additional militaries around the world, and managing costs to remain competitively priced. There are also uncertainties of future price increases customarily found in the renewal contracts which would affect revenues and results of operations.

 

  · Ammunition

 

Ammunition revenue was negligible in 2014 and 2013. These revenues represent sales of chemiluminescent payloads and components that are incorporated into training ammunition. Ammunition revenues are expected to comprise a significant portion of our revenues in 2015 due to a new contract.

 

Critical events, risks and uncertainties regarding the ammunition market include the expansion and acceptance of the existing products to the United States military and other foreign militaries.

 

  · Training & Simulation

 

Training & simulation revenue accounted for negligible revenues in 2014 and represented approximately 7% of total revenues in 2013. We sell battlefield effects simulator devices and training services.

 

The critical risks and uncertainties in the training & simulation market include the level of budgetary funds available for such products and training; maintaining a stable of products considered relevant to current real world experiences and competitors seeking to expand their markets.

 

  · Specialty Products

 

Through CSP, we provide specialty chemicals to a variety of customers including chemical, defense, cosmetic, nutritional supplement and pharmaceutical companies. For both 2014 and 2013, these revenues represented approximately 32% of total revenues.

 

Critical risks include our ability to continue to provide existing and new products at competitive prices while adding value to our customers that will help distinguish us from competitors.

 

For additional risks refer to Item 1A, Risk Factors.

 

Customers and Concentrations

 

  · Chemical Light: We depend significantly on long-term contracts with two key customers: LC Industries (“LCI”) and NSPA.

 

  · LC Industries

 

We indirectly supply the U.S. Department of Defense (“U.S. DOD”) through a contract with LCI, a manufacturer/distributor and a member of the National Industries for the Blind. LCI, in turn, has a direct contract with the U.S. DOD that operates under the program guidelines of “Ability One”, a federal program that creates jobs for the visually impaired and severely disabled. Under our contract with LCI, we sell components to LCI, which assembles and packages products and then sells/distributes them directly to the U.S. military. Each of the items sold by LCI to the U.S. military is classified by a National Stock Number (“NSN”).

 

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Our contract with LCI was entered into June 1, 2004 and had an initial term of five years, followed by three automatic five-year renewal terms unless the agreement is cancelled. This contract was renewed in both 2009 and 2014 and we currently expect that the contract will renew again in 2019. The contract between LCI and the U.S. military is an IDIQ contract (indefinite demand, indefinite quantity) with fixed prices subject to annual renegotiation. Through our agreement with LCI, we share in any price increases received by LCI. Revenues through LCI accounted for approximately 28% of total revenues in 2014 and 23% in 2013.

 

  · NSPA

 

We have a direct contract with NSPA, the administrative services arm serving the non-U.S. NATO countries. NSPA re-awarded the contract to us in November 2013. The base contract period is for three years and NSPA has the option to extend for another two years. The contract contains provisions for pricing escalations. Revenues through NSPA accounted for 13% of total revenues in 2014 and approximately 10% in 2013. Through the NSPA contract, one customer, the UK Ministry of Defense, accounted for approximately 11% of total revenues in 2014.

 

  · Ammunition : No individual customer accounted for sales in either 2014 or 2013 that exceeded 10% of total revenues.

 

  · Training & Simulation : No individual customer accounted for sales in either 2014 or 2013 that exceeded 10% of total revenues.

 

  · Specialty Products: Sales are made to a variety of customers in the various markets served, none of which individually represented more than 10% of total revenues in either 2014 or 2013.  

 

Revenues to customers outside the United States represented approximately 52% and 32% of our total revenues for the years ended December 31, 2014 and 2013, respectively.

 

Sales and Marketing

 

For the chemical light market, we sell primarily through distributors such as NSPA and LCI. We have found this to be an efficient and effective model. Accordingly, we utilize the abilities of distributors who have established key relations with end-users, rather than attempting to sell directly to consumers. The distributors take deliveries from us and then resell our products through their distribution networks to third-party customers, thereby expanding the market for our products at minimal cost to us. In the ammunition market, we generally sell directly to the prime contractor having the direct contract with the military. For our specialty products, we generally sell directly to the manufacturer who produces the final end-product.

 

Competitive Strengths

 

We believe we have many advantages as compared to our competition. For example, we:

· Own more patents in the chemiluminescent light field than any competitor.

 

  · Have active research and development focused on improving existing technologies and developing new ones for which patent protection will be sought.

 

  · Have a wide assortment of products that help meet the needs of major customers.

 

  · Have high quality, high performance products, while many competitors rely on lower priced/lower quality products.

 

Competition

 

For chemical light products for the military, we believe that we have no direct major competitors and that our products are the only ones that currently meet official U.S. and NSPA military specifications. There are several Asian manufacturers, primarily producing novelty products, which attempt to sell their products directly as meeting military specifications. We are not aware of any competitor having submitted quantifiable data to the U.S. DOD or NSPA which demonstrates that the competitors’ products meet current military specifications. In these cases we rely on the appropriate U.S. and NSPA agency offices to inspect and reject such products as being non-compliant. We maintain an active program of monitoring such behavior and bringing any such actions to the attention of the appropriate agency personnel. Nonetheless, we expect competition in this market to continue to increase.

 

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For the ammunition market, the development period for a new product before final testing and acceptance by the military can be many years. We anticipate that, as acceptance of chemical light applications grow in this market, additional competition will emerge as this market represents potentially large revenues. We are defending against this by continuing to invest in technology upgrades in order to attempt to stay ahead of any competitors. In addition, where appropriate, we file patents to protect newly developed technology.

 

In the training & simulation market we compete with a number of firms. We focus on specific niches as a subcontractor to a prime contractor and focus on being flexible and responsive to the prime contractor’s needs.

 

In markets where we compete with our specialty products, we focus on value-added applications utilizing our in-house research and development (“R&D”) expertise to work directly with the customer and generally seek to avoid applications representing pure commodity type sales.

 

Employees

 

As of December 31, 2014, we had 138 full-time employees and 41 on-call part-time employees for participating in training simulations as needed. We operate in local labor markets that provide an adequate supply of labor to compensate for any turnover. We are not party to any collective bargaining agreements, have not experienced any work stoppages and consider our relationship with employees to be sound.

 

Employee Benefits

 

For our U.S. employees, we offer wages and benefits that we consider to be competitive in the markets in which we operate. Benefits include medical, dental, life, and disability insurance coverage, paid vacations and holidays and an employee 401(k) savings plan. CTSAS offers its employees benefits consistent with French law and market conditions.

 

Supply Chain

 

We currently purchase key raw materials, primarily chemicals, plastics, glass and packaging materials from a limited number of suppliers. We generally have long-term relationships with these suppliers. In the event of a disruption in the supply of any of the key items, we have identified alternative sources of supply. A stock of raw materials is kept on hand to continue production in the event of an extended supply disruption, providing us time to find alternative suppliers. Raw materials are not considered to be a scarce commodity and we have not experienced supply disruptions in the past.

 

The CTI West Springfield facility currently purchases most of its materials, including chemicals, plastics and glass, domestically, including a number of chemicals from CSP. The CTSAS Aix-en-Provence facility purchases most of its chemicals from our West Springfield facility after they have been modified for specific applications. CTSAS purchases its glass, plastics and most other materials from within the European community. CSP purchases its raw materials from both domestic and foreign sources.

 

Research and Development

 

We have active research and development groups with full-time chemists and engineers at both the West Springfield and Bound Brook facilities. Additionally, we utilize consultants as needed for specific projects. Our research and development group is focused on maintaining the high level of quality of existing products, developing improvements to existing products, and developing new technologies and products with viable commercial applications. We maintain an active program of soliciting feedback and ideas from end-users of products. We incurred research and development expense of approximately $1.5 million and $1.9 million during the years ended December 31, 2014 and 2013, respectively. Additionally, we incurred approximately $0.2 million and $0.4 million in capitalized costs for filing patents during the years ended December 31, 2014 and 2013, respectively.

 

Intellectual Property

 

We rely on the ability to develop patentable technology to help ensure the commercial success of products and technology. Once patents are issued, we follow an active program of monitoring competitors’ products to attempt to ensure that our intellectual property rights are not violated. We currently hold and maintain more than 50 active and pending U.S. patents. Many of these patents are also registered in various foreign countries. These patents include phthalate free formulations, formulas for creating a more consistent light for longer periods, a bio-degradable light stick, flat disks employing a translucent aluminum pouch instead of an ampoule, and various battlefield effects simulators. We expect to file for additional patents during 2015 and thereafter. Patents typically have a 20-year life from date of filing. We had no key patents expire in 2014 and no key patents are scheduled to expire in 2015. We do not anticipate any near-term decline in sales as a result of any expiring or expired patents. 

 

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Government Regulations

 

We are subject to the jurisdiction of the State Department of the United States under the International Traffic in Arms Regulations (“ITAR”). Specifically, chemical light infrared products, which are exported from the West Springfield facility, are subject to these regulations. We must periodically re-register with the State Department for exporting purposes; our latest renewal that was granted expires June 30, 2015 and is subject to renewal again at that time. We are in good standing with the State Department and the ITAR.

 

In addition, we also maintain appropriate licenses with the Food & Drug Administration (“FDA”), the Drug Enforcement Agency (“DEA”) and, the Bureau of Alcohol, Tobacco, Firearms and Explosives (“ATF”). All such licenses are current and are expected to be renewed at the appropriate time.

 

Environmental

 

We believe that we are in material compliance with all local, state and national environmental regulations under which we are subject to regulation and that all appropriate permits are in place. The cost of compliance with environmental regulations has been and is expected to continue to be negligible.

 

Backlog

 

A significant portion of our revenue is generated under indefinite quantity, fixed-price contracts or arrangements whereby we fulfill orders as they are placed by customers. Once orders are received they are typically fulfilled within three months. As of December 31, 2014 we had total open sales and purchase orders for products that approximated $14.7 million, versus $3.4 million at December 31, 2013. Of this backlog amount, we expect orders of approximately $8.6 million in 2015 and orders of approximately $2.3 million in 2016. The backlog amount increase as of December 31, 2014 versus 2013 was due to ammunition open orders of approximately $11.8 million.

 

Segments

 

We have one segment for financial reporting purposes under accounting principles generally accepted in the United States. Our one operating segment consists of three reporting units.

 

ITEM 1A.    Risk Factors

 

We rely on the U.S. and a limited number of foreign governments for the majority of our revenues. Budget constraints of the U.S. or foreign governments could further reduce revenue or limit revenue growth.

 

Sales for which federal or foreign governments and militaries thereof are the ultimate customer accounted for more than 50% of our business in both 2014 and 2013. Budget reductions, reallocations of existing budgets, or spending constraints affecting military spending could cause significant delays or reductions in the number and value of orders for products, which could reduce revenues.

 

Due to our current level of dependency on the U.S. and NATO country defense agencies for revenues, the loss of business with either would significantly adversely impact us at this time.

 

A large portion of our revenue is derived from a small number of customers.

 

A large percentage of our revenue is typically derived from a small number of customers, and we expect this trend to continue.  For our fiscal year ended December 31, 2014, two customers accounted for approximately 41% of our revenue. We cannot be certain that customers that have accounted for significant revenue in past periods will continue to purchase our products at the same levels, or at all. Accordingly, our revenue and results of operations may vary substantially from period to period. We are also subject to credit risk associated with the concentration of our accounts receivable from our customers. If one or more of our significant customers were to terminate or fail to renew its contract with us, to otherwise cease doing business with us, to significantly reduce or delay its purchases from us or to fail to pay us on a timely basis, our business, financial condition and results of operations could be materially adversely affected.

 

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Failure to obtain and/or maintain required licenses could reduce revenue.

 

A portion of our business depends upon obtaining and maintaining various licenses required, including with the State Department, the FDA, the DEA and the ATF. Failure to obtain or maintain required licenses could result in the termination of certain products being sold.

 

We operate under fixed price contracts with limited annual price escalation features and failure to control costs may reduce profitability.

 

Much of our revenues result from fixed price contracts. Unanticipated increases in the cost of raw materials, labor and overhead could result in less profitability on such contracts. Some raw materials are affected by the prices of other commodities that are not under our control. These include certain chemicals and plastics whose costs are a function of oil prices.

 

Some of our contracts include provisions for annual price escalations, based on benchmarks such as the consumer price index or the producers’ price index. Annual escalations received may or may not correlate to the price changes in the materials and services that we purchase.

 

If we are unable to design, manufacture, and market product offerings in a timely and efficient manner, we may not remain competitive, or growth in revenues could be less than otherwise.

 

Some of our markets are characterized by continuing technological advancement, changes in customer requirements, and evolving product standards. Accordingly, we devote a substantial amount of resources to product development. To compete successfully, we must develop and market new products that provide increasingly higher levels of performance and reliability. Product development is highly uncertain and we cannot guarantee that we will successfully develop new products. Our inability to develop and market these products or to achieve customer acceptance of these products could limit our ability to compete in the market or to grow revenues at satisfactory rates of growth.

 

In addition, we offer a wide variety of products. If the design, manufacturing or marketing of a product, or products, is not successful and we must allocate more resources to ensure the products’ success, it could lower the profitability of the product, or products, or affect customer perceptions as to the quality of the products and services being offered.

 

We purchase the majority of raw materials from a limited number of vendors. A disruption in supply may cause delays in manufacturing.

 

The majority of chemicals, plastics, glass and packaging materials are purchased from a limited number of vendors. Although we have not, we could experience a disruption in supply from any of these vendors that could affect our ability to manufacture finished goods for sale on a timely basis. We attempt to maintain a safety margin of inventory of these raw materials to rely on in the event of a possible disruption and we have identified other vendors from which we believe that we could purchase these items in the event of a disruption from existing vendors. However, safety stock may not be adequate in the event of an extended disruption, and these items may not be available to us from other vendors on favorable terms, or at all.

 

Changes in foreign currency exchange rates could affect financial results .

 

CTI and CTSAS manufacture products in and sell products from the U.S. and France, respectively. Products sold by CTI are priced in U.S. dollars and most raw material components are purchased in U.S. dollars. Products sold by CTSAS are priced predominantly in euros and most of CTSAS’ raw material purchases from third parties are priced in euros. Significant changes in foreign exchange rates will affect reported financial results. For products manufactured by CTI for CTSAS, CTI enters into short-term financial hedges (less than six months in duration) against currency risk relating to the billing and collection of revenues from CTI’s sales to CTSAS. We had no currency forward contracts in place at December 31, 2014.

 

We are subject to various government regulations that could cause delays in the delivery of new products and may subject us to audits or other similar review processes.

 

As a supplier to agencies of various federal, state, local, and foreign governments, we are obligated to comply with a variety of regulations governing operations and the workplace. Unforeseen problems may impact our ability to bring new products to market on a timely basis, secure new contracts or require us to make potentially costly changes to operations which could reduce profitability in order to obtain contracts. Furthermore, some new products will be developed in conjunction with the U.S. Military or the militaries of other nations, which largely dictate the timing of the product development process and over which we have limited control.

 

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Inability to effectively integrate future acquisitions could reduce profitability.

 

During 2011, we acquired two businesses. We may make additional acquisitions in future years, which will require that we effectively and efficiently integrate operations, systems and personnel from those businesses. This process requires, among other things, that we continually evaluate operational and financial systems and controls and enhance those systems and controls as necessary. If we are unable to successfully integrate these acquisitions, it could reduce profitability and detract from future growth opportunities.

 

We are reliant upon key personnel and the loss of these key personnel could result in the deterioration or loss of relationships with certain customers or suppliers, which could result in a loss of business.

 

We depend on the expertise, experience and continued services of senior management and other key employees. Our operations and most decisions concerning the business will be made or significantly influenced by these individuals. The loss of members of senior management or other key employees could result in the deterioration or loss of relationships with certain customers or suppliers, which could result in a loss of business.

 

Revenue, operating results and profitability will fluctuate, which may lead to volatility in the market price of our common stock.

 

Revenue, operating results and profitability have fluctuated both on an annual and quarterly basis and will likely continue to fluctuate. Changes in the mix of products sold and the timing of sales to customers contribute to the possible material variability of revenue, operating results and profitability. Such volatility may not meet the expectations of management, securities analysts or investors, which in turn may contribute to significant fluctuations in the market price of our common stock.

 

Revenue, operating results and profitability may be temporarily reduced by any major redeployment of troops.

 

Many of our military chemiluminescent and reflective products are used both for training and live theater purposes. Any major troop realignments, if significant enough in number, are likely to result in a temporary reduction in overall product consumption until troops are redeployed for training or other live theater applications.

 

We operate in increasingly competitive market segments, which may make it more difficult to successfully bid on future contracts.

 

We expect competition to increase in the future. We also expect that some existing competitors, or potential competitors, will feel increasing pressure to underbid government and commercial projects, in order to deploy their workforces and maintain or step up their activity levels. In addition, government or commercial entities may be compelled to purchasing lower-priced, lower-quality competitor goods due to fiscal constraints. This may make it more difficult to prevail on competitive bids for contracts to the degree we have historically enjoyed, to increase revenue and profitability.

 

Most new contracts or contract renewals will likely be subject to competitive bidding, which adds difficulty to accurately predicting the timing of sales and the allocation of resources.

 

Most governmental agencies and many commercial customers require that their significant contracts be competitively bid. Typically they utilize the ‘‘Request for Proposal’’ (“RFP”) method where several competitors submit their sealed proposals for a particular project, or the ‘‘Request for Qualifications’’ (“RFQ”) process where competitors submit their qualifications for consideration by the customer. Some contracts open for bidding utilize the standard ‘‘Straight Bid’’ process where the detailed specifications for products are published and lenders submit a ‘‘Bid’’ or fixed price, for the contract. Other competitive bidding processes are also utilized. Our success in responding to an RFP, RFQ, Straight Bid, or other competitive bidding process is dependent upon the quality of our estimating process, knowledge of the industry, knowledge of our customers and other factors requiring significant judgment and expertise. Because of the nature of the bidding process, we cannot know if we will be successful on any given bid, which adds difficulty to accurately predicting the timing of sales and the allocation of resources.

 

Our ability to win new contracts and contract renewals depends on factors outside our control, which could limit revenue and profitability growth.

 

Our revenue and profitability growth is generally dependent upon the ability to win new contracts and renewals of existing contracts. This depends on a number of factors we cannot control, including substitution of our products with products based on an alternative technology.

 

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Governmental agencies may investigate and audit our contracts or physical facilities in conjunction with our various licenses and, if any improprieties are found, we may be required to refund revenues, forego anticipated revenues and/or may be subject to penalties and sanctions, including prohibitions on bidding in competitive bidding processes.

 

Governmental agencies generally have the authority to audit and investigate our contracts or licenses with them. As part of that process, some governmental agencies may review our performance on the contract, pricing practices, change orders, and compliance with the terms of the contracts and licenses, and applicable laws, regulations and standards. If the agency determines that we have improperly billed the governmental entity, we could be required to refund revenues, or forego anticipated revenues. If a government audit uncovers improper or illegal activities, or otherwise determines that these activities have occurred, we may be subject to civil and criminal penalties and administrative sanctions, including termination of contracts, forfeitures of profits, suspension of payments, fines and suspension or disqualification from doing business with the government.

 

If we fail to satisfy contractual obligations, our ability to compete for future contracts could be limited.

 

Failure to comply with contract requirements or to meet customer’s performance expectations when fulfilling a contract could injure our reputation, which, in turn, could impact our ability to compete for new contracts. Failure to meet contractual obligations could also result in substantial lost revenues.

 

We have significant payment obligations under a litigation settlement agreement, and if we fail to achieve certain payment dates our total cost to resolve the matter could significantly increase.

 

We settled the litigation relating to contractual disputes with Omniglow, LLC, effective July 30, 2014. Omniglow, LLC purchased the novelty business of CTI’s predecessor on January 23, 2006. Under the settlement agreement, we initially paid $1.25 million plus 625,139 shares of common stock. If we further pay either (i) $1.9 million within 18 months from the effective date or (ii) $2.35 million within 27 months from the effective date, our obligation will be fulfilled. If we do not make the payment under either option (i) or (ii), our remaining obligation then increases to approximately $3.3 million plus interest from the settlement date. While we intend to fulfill the Company’s obligation within the 18 month timeframe, we may not have sufficient available cash, covenants in our debt documents may prevent us from making such payments, or we otherwise may not be able to fulfill such obligation.

 

Our business has substantial indebtedness.

 

We currently have, and will likely continue to have, a substantial amount of indebtedness. Our indebtedness could, among other things, require us to use a large portion of our cash flow from operations to repay and service our debt or otherwise create liquidity problems, limit our flexibility to adjust to market conditions, place us at a competitive disadvantage and expose us to interest rate fluctuations. As of December 31, 2014, we had total debt obligations outstanding of approximately $21.3 million. We expect to obtain the money to pay our expenses and pay the principal and interest on our indebtedness from cash flow from our operations and potentially from other debt or equity offerings. Accordingly, our ability to meet our obligations depends on our future performance and capital raising activities, which will be affected by financial, business, economic and other factors, many of which are beyond our control. If our cash flow and capital resources prove inadequate to allow us to pay the principal and interest on our debt and meet our other obligations, we could face substantial liquidity problems and might be required to restructure or refinance our debt, or dispose of material assets or operations, which we may be unable to do on acceptable terms, and forgo attractive business opportunities. In addition, the terms of our existing or future debt agreements may restrict us from pursuing any of these alternatives.

 

If we fail to meet financial covenants with our lenders, they would be able to declare an event of default.

 

If we were unable to meet the financial covenants specified in loan documents, our lenders would be able to declare an event of default. If an event of default were declared, all debts to the lender could become due and payable immediately, which could result in ceasing operations unless new arrangements were made. While management would negotiate and seek to obtain appropriate waivers or other amendments to cure any such default, there is no assurance management would be successful. In addition, our senior indebtedness is secured by a lien on substantially all of our assets. If the amounts outstanding under our senior debt were accelerated due to an event of default, the lender could proceed against such available collateral by forcing the sale of all or some of these assets.

 

We may not be able to refinance our debt with our lenders, and/or the terms of any financings may not be advantageous to us.

 

Our agreements for both our senior term loans and revolving line of credit, under which we had obligations outstanding of approximately $5.8 million and $2.1 million, respectively, as of December 31, 2014, mature on December 19, 2015. Prior to maturity, we intend to refinance our senior and senior subordinated debt. There is no assurance that management will be successful. Unless the debt is refinanced prior to maturity or the maturity dates are extended, an event of default would occur, allowing the lender to proceed against the Company, including by foreclosing on all of our assets.

 

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We require a significant amount of liquidity to fund our operations, capital expenditures, potential acquisitions and other corporate expenditures.

 

Our ability to fund operations, capital expenditures, acquisitions and other corporate expenditures, including repayment of our indebtedness, depends on our ability to generate cash through future operating performance, which is subject to economic, financial, competitive, legislative, regulatory and other factors. Many of these factors are beyond our control. We cannot ensure that our businesses will generate sufficient cash flow from operations or that future borrowings or other financing will be available to us in an amount sufficient to pay our indebtedness or to fund our other needs.

 

If we are unable to generate sufficient cash flow to fund our needs, we may need to pursue one or more alternatives, such as to:

 

  · reduce or delay planned capital expenditures or investments in our business;
  · seek additional financing or restructure or refinance all or a portion of our indebtedness at or before maturity;
  · sell assets or businesses;
  · sell additional equity; or
  · curtail our operations.

 

Any such actions may materially and adversely affect our future revenue prospects. In addition, we cannot ensure that we will be able to raise additional equity capital, restructure or refinance any of our indebtedness or obtain additional financing on commercially reasonable terms or at all.

 

Because we do not intend to pay dividends on common stock, stockholders will benefit from an investment in our common stock only if it appreciates in value.

 

We have never declared or paid any cash dividends on common stock. We currently intend to retain all future earnings, if any, for use in the operations and expansion of the business. As a result, we do not anticipate paying cash dividends in the foreseeable future. Any future determination as to the declaration and payment of cash dividends will be at the discretion of our Board of Directors and will depend on factors our Board of Directors deems relevant, including among others, results of operations, financial condition and cash requirements, business prospects, and the terms of credit facilities and other financing arrangements. The debt financing arrangements put into place in connection with the acquisition of CTI prohibit CTI from providing us with funds to pay a dividend. Accordingly, realization of a gain on stockholders’ investments will depend on the appreciation of the price of our common stock. There is no guarantee that our common stock will appreciate in value.

 

Our securities are quoted on the Over-the-Counter Bulletin Board, which may limit the liquidity and price of our securities more than if the securities were quoted or listed on the NASDAQ or the AMEX markets.

 

Our securities are quoted on the Over-the-Counter Bulletin Board, a NASD-sponsored and operated inter-dealer automated quotation system. Quotation of our securities on the Over-the-Counter Bulletin Board will limit the liquidity and price of securities more than if the securities were quoted or listed on NASDAQ or AMEX

 

We currently have a small number of beneficial holders, which we believe contributes significantly to limited trading and to limiting the liquidity and price of securities. Furthermore, we believe this contributes to unexpected price volatility.

 

The issuance of shares upon the conversion of our outstanding Series A or Series B preferred stock or the exercise of our outstanding options or warrants may cause immediate and substantial dilution to our existing stockholders.

 

In our November 2013 financing, we issued 123,077 shares of Series A preferred stock outstanding that may be converted into shares of common stock. We also have additional options, warrants and convertible debt outstanding. On July 30, 2014, we issued 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). 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. The issuance of shares upon conversion of the Series A preferred stock, the Series B preferred stock, or outstanding indebtedness and exercise of warrants and options may result in substantial dilution to the interests of other stockholders. We may find it more difficult to raise additional equity capital while our Series A and Series B preferred stock and our warrants are outstanding.

 

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The holders of our Series A preferred stock and Series C preferred stock are entitled to receive dividends.

 

The holders of the Series A preferred stock are entitled to receive cumulative quarterly dividends at a rate of 12% per annum on the liquidation value, payable in cash or, subject to the satisfaction of certain conditions, in paid-in-kind shares. To the extent not paid in cash or by issuance of additional shares of Series A preferred stock on the last day of each calendar quarter, all accrued dividends on any outstanding shares of Series A preferred stock shall accumulate and compound. Holders of the Series C preferred stock are entitled to receive 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; provided that to the extent not paid in cash or by issuance of additional shares of Series C Preferred Stock on the last day of each calendar quarter, all accrued dividends on any outstanding shares of Series C preferred stock shall accumulate and compound. As a result of the payment of dividends, we may be obligated to pay significant sums of money or issue significantly more shares of common stock than our Series A preferred stock would otherwise be convertible into, which could negatively affect our operations or result in the dilution of the holders of our common stock, respectively.

 

Our Series A, Series B and Series C preferred stock have liquidation preferences and redemption requirements that may affect common stock holders.

 

In the event of our dissolution, liquidation, sale or change of control, the holders of our Series C preferred stock would be entitled to receive a liquidation preference in priority over the holders of common stock, as well as over the holders of our Series A and our Series B preferred stock.  Pursuant to the Series C Certificate of Designation, each share of Series C Preferred Stock ranks senior to our common stock, our Series A preferred stock and our Series B preferred stock with respect to payment of dividends and distribution of assets upon liquidation, dissolution or winding up of the Company. Pursuant to the Series B Certificate of Designation, each share of Series B Preferred Stock ranks senior to our common stock and our Series A preferred stock. Therefore, it is possible that holders of common stock will not obtain any proceeds if any such event occurs. In addition, beginning on the fifth anniversaries of both of the closings of the Series A and Series C preferred stock financing transactions, the requisite holders of the Series A and the Series C preferred stock will have the right to elect to cause us to redeem, out of funds legally available therefore, all but not less than all of the then outstanding shares of Series A and Series C preferred stock, respectively, for a price per share equal to the liquidation value for such shares.  

 

The interests of our significant stockholders may not coincide with yours and such stockholders may make decisions with which you may disagree.

 

As of December 31, 2014, Cova Small Cap Holdings, LLC (“Cova”) and US VC Partners, L.P. (“US VC”), holders of our common and preferred stock were entitled to vote a number of shares equal to 24% and 37%, respectively, of our common shares eligible to vote, or, on a combined basis approximately 61%. Both Cova and US VC have a number of officers in common. As a result, these stockholders have substantial influence over all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions. In addition, this concentration of ownership may delay or prevent a change in control of our company and make some future transactions more difficult or impossible without the support of these stockholders. The interests of these stockholders may not coincide with our interests or the interests of other stockholders.

 

We have experienced recurring operating losses and our liquidity has been reduced.

 

For the year ended December 31, 2014, we had a net loss of approximately $7.7 million. As of December 31, 2014, we had an accumulated deficit of approximately $103.6 million and total stockholders’ equity of $0.2 million. Our unrestricted cash balance was approximately $2.4 million at December 31, 2014.

 

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, 2014, the Company’s independent registered public accounting firm included an explanatory paragraph regarding the Company’s ability to continue as a going concern. Our 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. 

 

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ITEM 1B.    UNRESOLVED STAFF COMMENTS

 

None.

 

ITEM 2.    PROPERTIES

 

We own the West Springfield, Massachusetts facility which houses research and development and manufacturing for CTI and CTS products. The facility is located on ten acres of land in an industrial area and has 200,000 square feet of office, manufacturing and warehousing space. There is adequate space available in the facility to accommodate an increase in operations and staffing. There are no known matters of ground contamination or air quality discharges that exceed acceptable limits. The facility is older and contains asbestos, which is consistent with buildings of its era, but there is no known damaged asbestos requiring remediation. The facility is subject to inspections by various environmental agencies from time to time and no significant violations of any environmental standards have been noted during the period of ownership by the current owners. Environmental violations are not believed to represent a material risk. The facility is subject to a mortgage.

 

The facility in Aix-en-Provence, France is also owned by us and houses all foreign operations. The facility has 10,000 square feet of office and manufacturing space sitting on two acres and is in good condition. There are no known environmental violations pertaining to the facility and environmental violations are not believed to represent a material risk.

 

We lease several buildings in Bound Brook, New Jersey, where administrative, manufacturing and research and development activities are housed for CSP. The lease is a market-based lease, for approximately 50,000 square feet of production and office space that was entered into with the acquisition of the assets of JFC Technologies, effective August 31, 2011. The lease ends on August 31, 2016, with extension options available, and requires current lease payments of approximately $30,000 per month from September 1, 2014 through August 31, 2015; thereafter the monthly lease payments will be adjusted to reflect the changes of average cost per square foot as reported by Newmark Knight and Frank in their 2nd Quarter New Jersey Industrial Market Report, Average Asking Rate for Somerset County.

 

Effective March 5, 2013, we entered into a five-year lease for approximately 8,500 square feet of office space in Fort Lauderdale, Florida to house certain executive, sales and administrative personnel and corporate functions. Monthly lease payments are approximately $18,000 and subject to annual escalation.

 

ITEM 3.    LEGAL PROCEEDINGS

 

None. 

 

ITEM 4: MINE SAFETY DISCLOSURES

 

Not applicable.

 

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PART II

 

ITEM 5:    MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

Market Information

 

Our common stock and units are quoted on the Over-the-Counter Bulletin Board under the symbols ‘‘CYLU’’ and ‘‘CYLUU,’’ respectively. The following table sets forth the high and low sales information for our common stock and units for each of the calendar quarters indicated. The Over-the-Counter Bulletin Board quotations reflect inter-dealer prices, are without retail markup, markdowns or commissions, and may not represent actual transactions.

 

    Common Stock     Units  
    High     Low     High     Low  
                         
First quarter 2013   $ 2.70     $ 1.43     $ 3.50     $ 3.50  
Second quarter 2013   $ 2.20     $ 1.57     $ 3.50     $ 3.50  
Third quarter 2013   $ 1.85     $ 0.80     $ 3.50     $ 3.50  
Fourth quarter 2013   $ 0.90     $ 0.45     $ 3.50     $ 3.50  
First quarter 2014   $ 0.94     $ 0.60     $ 3.50     $ 3.50  
Second quarter 2014   $ 0.45     $ 0.08     $ 3.50     $ 3.50  
Third quarter 2014   $ 0.10     $ 0.04     $ 3.50     $ 3.50  
Fourth quarter 2014   $ 0.10     $ 0.05     $ 3.50     $ 3.50  

 

Holders of Common Stock

 

As of March 20, 2015, there were of record 158 holders of common stock and one holder of units.

 

Dividends

 

We have never declared or paid cash dividends on common stock and do not anticipate declaring or paying cash dividends on common stock in the foreseeable future. Payments of future dividends on common stock, if any, will be at the discretion of our Board of Directors after taking into account various factors, including financial condition, operating results, current and anticipated cash needs, plans for expansion and other factors that our Board of Directors may deem relevant. The senior debt financing agreement put into place in connection with the acquisition of CTI, as well the subordinated debt agreement with Granite Creek Partners Agent, LLC prohibit CTI from providing us with funds to pay a dividend.

 

Performance Graph

 

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

 

Recent Sales of Unregistered Securities

 

Other than as previously disclosed in our Quarterly Report on Form 10-Q or our Current Report on Form 8-K, none.

 

Purchases of Equity Securities by the Company and Affiliated Purchasers

 

We did not purchase any equity securities during the fourth quarter of 2014, and we have no publicly announced plans or programs to do so.

 

ITEM 6:    SELECTED FINANCIAL DATA

 

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

 

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ITEM 7:    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Overview

 

In the following discussion, references to “Cyalume”, “we”, “our”, or the “Company” mean Cyalume Technologies Holdings, Inc. and its subsidiaries on a consolidated basis. CTI means Cyalume Technologies, Inc. including its wholly-owned subsidiary Cyalume Technologies, S.A.S. (“CTSAS”), CSP means Cyalume Specialty Products, Inc. and CTS means Combat Training Solutions, Inc. Amounts discussed are generally approximations. During 2011, we acquired two businesses (CTS and JFC Technologies through CSP) that are complementary with our business and growth plans. We continue to consider additional acquisitions that would complement our existing business.

 

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. We also sell products into the law enforcement, commercial/public safety, and other markets. In addition, through CSP, we provide specialty chemical products to the pharmaceutical, defense and other industries.

 

The majority of revenues are derived from sales for the ultimate use by the U.S. Military and various other militaries around the globe. For 2014, there was one direct customer with revenues greater than 10% of our total revenues: LC Industries, which accounted for approximately 28% of total revenues. In the military markets, we have longer-term, fixed-price, indefinite-quantity contracts lasting three to five years. They generally provide higher margins because the products are more technologically advanced, versus some of the commercial markets, where advanced technology/performance is generally not as important and therefore competition is greater, resulting in lower margins. See Item 1: Business for greater detail.

 

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. There are several reasons for this. The majority of our products are similar in each market and based on the same technologies. Thus, management pays attention to individual products as well as individual customers and contracts in terms of pricing and costing. For our largest selling product line, the 6-inch light stick (in its various permutations of color and duration), the manufacturing processes are similar and both our U.S. and European manufacturing plants make these products. Therefore, the 6-inch light sticks can be and are made at both plants and can be produced and shipped from one plant to the other to help meet peak periods of demand. In addition, important functions such as marketing and R&D manage their activities and allocate their resources from a strategic viewpoint and generally not on the basis of where a product is made or to whom it might be sold. Overall, financial performance is evaluated based on the following consolidated items: revenues; gross profit and gross margin; selling/research and development/administrative expenses; and cash flow. Consolidated EBITDA (earnings before interest, taxes, depreciation and amortization) is used as a performance measure of operational cash flows. Consolidated EBITDA is also the key financial performance component for our lenders’ covenant compliance. Product performance is evaluated based on unit cost of production and number of units produced and sold across all markets. All of these measures are evaluated against results for prior periods and against budgets.

 

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 as well as other intangibles such as patents; determining the useful lives of property, plant and equipment and intangible assets; determining asset retirement obligations; and determining the fair value of complex instruments. 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, as discussed in Item 1: Business, providing for the sale of indefinite quantities of products at fixed per unit prices, subject to adjustment for certain economic factors. Revenue under these contracts is recognized when products ordered under the contracts are received by the customer. Whenever costs change, we review the pricing under these contracts to determine whether they require the sale of products at a loss. To date, we have no loss contracts which would require the accrual of future losses in the current financial statements.

 

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

 

Warrants Liability

 

The Company uses fair values as determined by significant unobservable inputs. These estimated values are significant inputs into the Monte Carlo simulation method and the Black Scholes pricing model used to calculate the estimated fair value of common warrants and preferred warrants potentially settleable in cash, which are recorded as warrants liability. The estimated fair value of the Company’s 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 carryforwards expire. We evaluate the recoverability of deferred income tax assets on a quarterly basis. If we determine that it is more likely than not that deferred income tax assets will not be recovered, we establish a valuation allowance against some or all deferred income tax assets.

 

When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefit associated with tax positions taken that exceeds the amount measured as described above, if such a position existed, would be reflected as a liability for unrecognized tax benefits in the accompanying balance sheets along with any associated interest and penalties that would be payable to the taxing authorities upon examination. There were no such positions as of December 31, 2014 or 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 2011, 2012 and 2013 are still open for audit and the 2013 tax return has been selected for examination by the IRS. The tax return for 2014 is expected to be filed under a filing extension prior to September 15, 2015.

 

Goodwill

 

Goodwill is deemed to have an indefinite life and accordingly, is not subject to annual amortization. Goodwill is subject to annual impairment reviews, and, if conditions warrant (a “triggering event”), interim reviews based upon its estimated fair value. 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 exceeds our fair value, further analysis (step 2 of the two-step process) is required to determine the amount, if any, of goodwill impairment. To determine the amount of fair value, we use a discounted cash flow analysis.

 

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Intangible Assets

 

Intangible assets include developed technologies and patents, customer relationships, customer backlog, non-compete agreements and certain trade names and trademarks, which are amortized over their estimated useful lives. The carrying amounts of intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that those carrying amounts may not be recoverable. Additionally, the carrying amounts of non-amortizing intangible assets are reviewed for impairment annually 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 consolidated statements of comprehensive loss in the period the gain or loss occurred. 

 

Recent Accounting Pronouncements

 

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

 

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

 

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 0214-09”). ASU 2014-09 states that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The new standard will be effective for annual and interim periods beginning on or after December 15, 2016, and will be effective for the Company beginning on January 1, 2017. Early adoption is not permitted. The Company is currently evaluating the method of adoption and the potential impact the update may have on our financial position and results of operations.

  

In August 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements – Going Concern (Topic 915): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (“ASU 2014-15”). ASU 2014-15 states that in connection with preparing financial statements for each annual and interim reporting period, an entity’s management should evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued (or within one year after the date that the financial statements are available to be issued when applicable). ASU 2014-15 will be effective for annual and interim periods beginning on or after December 15, 2016, and will be effective for the Company beginning on January 1, 2017. Early adoption is permitted. The Company is currently evaluating the impact, if any, of the adoption of this update.

 

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Results of Operations

 

Overall Perspective : Financial results for 2014 improved slightly from those of 2013. We believe that the uncertainty resulting from the budget setting issues and delays by the U.S. government as well as in Europe, combined with the drawdown and reassignment of military troops in Afghanistan, has had an impact on our business over the last two years. We expect this to continue to affect sales of existing chemical light products in 2015. The delay to 2015 of a new ammunition program that had been expected to commence in 2014 impacted our ammunition sales. We expect to see continued growth in our specialty products business, which has demonstrated growth since its acquisition.

 

Revenues :    Total revenues for 2014 of approximately $33.3 million increased by approximately $1.5 million from 2013 due primarily to increased sales to our largest existing customer, LC Industries, as well as an increase in royalty revenue generated by Specialty Products. The following table depicts annual revenues by sales category. In managing the business, we do not prepare profitability statements or track assets / costs by these categories; the business is operated as a single segment.

 

Category ($ in millions)   2014     2013     Change  
Chemical Light   $ 22.1     $ 19.3     $ 2.8  
Ammunition     0.0       0.1       (0.1 )
Training & Simulation     0.6       2.1       (1.5 )
Specialty Products     10.6       10.3       0.3
Total   $ 33.3     $ 31.8     $ 1.5  

 

The following tables show revenues by quarter by category to help analyze major trends / impacts on the business.

 

2014          Category ($ in millions)   Q1     Q2     Q3     Q4     2014  
Chemical Light   $ 5.0     $ 6.2     $ 5.5     $ 5.4     $ 22.1  
Ammunition     0.0       0.0       0.0       0.0       0.0  
Training & Simulation     0.1       0.2       0.2       0.1       0.6  
Specialty Products     2.2       2.5       2.7       3.2       10.6  
Total   $ 7.3     $ 8.9     $ 8.4     $ 8.7     $ 33.3  

 

2013          Category ($ in millions)   Q1     Q2     Q3     Q4     2013  
Chemical Light   $ 5.4     $ 6.8     $ 3.7     $ 3.4     $ 19.3  
Ammunition     0.0       0.1       0.0       0.0       0.1  
Training & Simulation     0.5       0.1       1.3       0.2       2.1  
Specialty Products     2.2       2.4       2.5       3.2       10.3  
Total   $ 8.1     $ 9.4     $ 7.5     $ 6.8     $ 31.8  

 

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Chemical Light: Revenues of approximately $22.1 million for 2014 were approximately $2.8 million, or 14% above revenues of approximately $19.3 million for 2013 due to increased sales to our largest existing customer, LC Industries.

 

Ammunition: Revenues decreased by approximately $0.1 million 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 & Simulation revenues for 2014 of approximately $0.6 million declined by approximately $1.5 million, or 71%, from the prior year due to fewer CTS devices being purchased.

 

Specialty Products: Revenues of approximately $10.6 million for 2014 were approximately $0.3 million, or 3%, above revenues of approximately $10.3 million for 2013.

 

Gross profit: Gross profit was approximately $13.9 million for 2014 versus $13.8 million for 2013, representing a slight $0.1 million increase. The increase was the result of increased Chemical Light and Specialty Products sales during 2014. The gross margin for 2014 was 41.8% versus 43.5% for 2013. The decrease is attributable to higher unabsorbed production overhead during the first six months of 2014 and also from an increase in inventory reserve charges relating to slow moving items and obsolete goods, including a reserve reflected during 2014 relating to retail-related inventory items.

 

Expenses: Sales and marketing expenses in 2014 of approximately $3.4 million decreased by $1.5 million, or 31%, from the prior year, primarily due to lower sales and marketing payroll expense from a reduction in positions. Additionally, there was a significant decrease in sales and marketing related travel expenses during 2014. General and administrative expenses in 2014 of approximately $5.7 million decreased from 2013 by approximately $5.7 million, or 50%. Of this decrease, approximately $2.5 million was for legal expenses incurred in 2013 in connection with 2013 litigation related expenses. Also contributing to the decrease from the prior year were the 2013 costs associated with the establishment of the corporate office in Florida, such as rent and additional payroll and payroll-related costs from additional personnel assisting with the relocation effort and overlap of existing management positions through the fourth quarter of 2013. Research and development expenses of approximately $1.5 million in 2014 decreased by approximately $0.4 million, or a 19% decrease from 2013.

 

Interest expense, net : Interest expense of approximately $2.4 million decreased by approximately $0.2 million from the prior year. The decrease was primarily attributable to the reduction in the interest rate payable under the Company’s line of credit, a term loan, and a real estate loan, as well as a reduction in the issuance costs that were previously being amortized to interest expense in 2013 prior to the Fourth Amendment to the Amended and Restated Revolving Credit and Term Loan Agreement entered into on November 19, 2013.

 

Amortization of intangible assets : Amortization of intangibles was approximately $1.8 million in both 2014 and 2013.

  

Other loss (income), net : Other loss in 2014 was approximately $0.3 and related to the change in fair value of 625,139 shares of Cyalume stock placed into escrow during 2013. In connection with a legal settlement during July 2014, the 625,139 shares were applied against damages incurred up to the value of the shares upon conversion to cash and were transferred during July 2014.

 

Impairment Charges: During 2014, the Company’s Chemical Light reporting unit recorded a loss on impairment of certain amortizing intangible assets of approximately $9.6 million. See Note 23 within the accompanying Notes to Consolidated Financial Statements for fair value information relating to these assets.

 

During the third quarter of 2014, management conducted an annual review of tangible and intangible assets for impairment. Before assessing whether any of our reporting units’ goodwill was impaired, we first assessed whether any non-goodwill assets were impaired. This assessment determined that the CTI patent asset was impaired by approximately $5.3 million and that CTI trademarks and trade names were impaired by approximately $4.3 million. Therefore, the Company recorded $9.6 million of an impairment loss on these CTI intangible assets during 2014.

 

The “step 1” goodwill impairment assessment for 2014 was performed by comparing the fair value of each reporting unit containing goodwill to those reporting units’ carrying values. Our Chemical Light and Specialty Products reporting units have goodwill assets. Since there are no quoted market prices for our reporting units, the fair value of our reporting units were determined using a discounted present value technique utilizing each reporting unit’s forecasted after-tax cash flows. The “step 1” test determined that the fair value of the both the Chemical Light reporting unit and the Specialty Products reporting unit exceeded its carrying value, and therefore the goodwill did not need to be tested further under what is commonly known as “step 2” of the goodwill impairment assessment.

 

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Under “step 2” of a goodwill impairment assessment, the implied fair value of a reporting unit’s goodwill is compared with the carrying amount of that goodwill. If the carrying amount of the goodwill exceeds the implied fair value of that goodwill, that excess must be recognized as an impairment loss. The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination. The excess of the fair value of the reporting unit over the amounts assigned to its assets and liabilities is the implied amount of a reporting unit’s goodwill. Intangible assets are identified and valued during this process, such as customer relationships, patents, trade names, non-compete agreements, and the Company’s workforce.

 

During the year ended December 31, 2013, we recorded goodwill and intangible asset impairment charges for the following reasons:

 

In connection with our assessment of goodwill impairment during 2013, we first assessed whether any non-goodwill assets were impaired. This assessment determined that the CTS patent asset was impaired by approximately $174,000, CTS trademarks and trade names were impaired by approximately $17,000, CTS customer relationships intangibles were impaired by approximately $650,000 and CTS non-compete agreements were impaired by approximately $34,000. Therefore, we recorded $875,000 of an impairment loss on these CTS intangible assets. In addition to the impairment loss relating to the CTS intangible assets, we also recorded a goodwill impairment loss of $168,000.

 

The “step 1” goodwill impairment assessment for 2013 was performed by comparing the fair value of each reporting unit containing goodwill to those reporting units’ carrying values. Our Chemical Light, Training, and Specialty Products reporting units have goodwill assets. Since there are no quoted market prices for our reporting units, the fair value of our reporting units were determined using a discounted present value technique utilizing each reporting unit’s forecasted after-tax cash flows. The “step 1” test determined that the carrying value of the CTS Training reporting unit exceeded its fair value and therefore, its goodwill needed to be tested further under what is commonly known as “step 2” of the goodwill impairment assessment. CTS did not pass the “step 1” test due to the inability to gain traction with new products and services or attract new customers as initially planned when the reporting unit was acquired in December 2011.

 

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

 

Provision for (benefit from) income taxes: The decrease in pre-tax loss from 2013 to 2014 is due primarily to the decrease in legal fees and general and administrative expenses overall in 2014. We also recorded income from a non-cash change in warrant liability fair value of approximately $4.9 million during 2014. The 2014 intangible impairment loss, as well as a loss on the extinguishment of related party debt, resulted in an overall pre-tax loss of approximately $6.5 million for the year ended December 31, 2014. The effective tax rate for 2014 of (19%) is higher than the 2013 rate of (16.3%). The Company incurred approximately $0.4 million 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 $13.1 million as of December 31, 2014 against deferred tax assets generated primarily as a result of foreign tax credits and net operating losses.

 

Balance Sheet

 

Accounts receivable at December 31, 2014 were approximately $3.6 million, or approximately $0.2 million lower than at the end of 2013. Timing differences for billings and collections account for most of the change.

 

Inventories, net were approximately $7.8 million at December 31, 2014 versus $10.8 million at the end of 2013. The decrease was due to: a) a planned reduction in chemical light product inventory levels, primarily in chemicals due to the transfer of manufacturing to CSP for key chemicals that has resulted in a lesser need for stockpiling for supply chain emergencies; and b) an increase in the reserve for slow moving / obsolete goods of chemical light inventories. Our inventory balances fluctuate from a combination of recent sales activity and the timing of purchases of raw materials. Certain raw materials are purchased only several times a year due to long lead times and the desire to purchase in bulk to minimize costs, while other materials are purchased more frequently.

 

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Property, plant and equipment of approximately $7.1 million at December 31, 2014, decreased from the end of 2013 by approximately $0.9 million due to depreciation in excess of capital additions.

 

Net intangible assets of approximately $6.6 million at December 31, 2014, decreased from the end of 2013 by approximately $11.4 million due to approximately $1.8 of amortization of such assets plus an impairment of approximately $9.6 million of patents and trade name intangible assets.

 

The current portion of notes payable increased to approximately $5.8 million at December 31, 2014, from $1.9 million at the prior year-end as a result of a December 2015 maturity date on our senior debt with TD Bank. 

 

Accounts payable and accrued expenses, combined, were approximately $4.8 million at the end of 2014, representing a decrease of approximately $3.4 million from the prior year-end. The change was primarily due to decrease in legal expenses associated with the arbitration with the former employee that was settled on November 19, 2013.

  

Net current deferred income tax assets decreased at the end of 2014 over the prior year, primarily as a result of the following:

 

  · Decreases in the current asset for non-deductible stock-based compensation tax expense;

  · Decreases in various current accrual reserves.

 

Net non-current deferred income tax liabilities decreased at the end of 2014 over the prior year, primarily as a result of the following:

 

  · A decrease in federal net operating losses as a result of the true up to the federal tax return losses.

 

A valuation allowance of approximately $13.1 million still remains on deferred federal tax assets for the carryforward of net operating losses and foreign tax credits, which we do not anticipate using in the near-term. The utilization of this asset is dependent upon generation of significant revenues from sources outside the U.S. During 2014, we increased the total consolidated valuation allowance from $5.9 million by $7.2 million due to the inability to utilize foreign tax credits and net operating loss carryforwards in the near term. 

 

We had federal net operating loss carryforwards amounting to $7.9 million and $13.3 million at December 31, 2014 and 2013, respectively. The net operating loss carryforward at December 31, 2014 expires in fiscal years 2026 through 2034. Internal Revenue Code Section 382 limits utilization of prior losses to approximately $0.8 million per year. However, it is possible that future changes in ownership could result in changes to the amounts allowed by IRC Section 382 and provide for a lower annual limitation for utilization of losses. State net operating loss carryforwards amounted to $10.3 million and $9.9 million as of December 31, 2014 and 2013, respectively.  

 

We have recorded as of December 31, 2014, a legal obligation of approximately $2.8 million versus approximately $4.0 million at December 31, 2013. The decrease from the prior year relates to the payment of approximately $1.3 million during July of 2014 pursuant to 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.

 

Liquidity and Capital Resources

 

On July 30, 2014, we entered into a Securities Purchase Agreement with Cova Small Cap Holdings, LLC (“Cova”), Bayonet Capital Fund I, LLC and another investor (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 11 of the accompanying Notes to 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 (see Note 9 of the accompanying Consolidated Financial Statements). $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.

 

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On November 19, 2013, we closed on the following financial transactions:

 

(a) we 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 $4,000,003 (or $32.50 per unit), with each security comprising (1) one share of Series A Convertible Preferred Stock of the Company, par value $0.001 per share (the “Series A Preferred Stock”), (2) one common stock warrant (the “Common Stock Warrant”) and (3) one preferred stock warrant (the “Preferred Stock Warrant”). Holders of the Series A Preferred Stock are entitled to cumulative quarterly dividends at a rate of 12% per annum, payable in cash or in kind; provided that to the extent not paid in cash or by issuance of additional Series A Shares on the last day of each calendar quarter (a “Dividend Payment Date”), all accrued dividends on any outstanding shares of Series A Preferred Stock shall accumulate and compound. From and after the fifth anniversary of the closing of the Purchase Agreement (the “Closing”), the Requisite Holders will have the right to elect to cause the Company to redeem all but not less than all of the then outstanding shares of Series A Preferred Stock. From and after the eighth anniversary of the Closing, the Company will have the right to redeem, out of funds legally available therefore, all, but not less than all, of the then outstanding shares of Series A Preferred Stock. The Investor has a number of officers in common with Cova Small Cap Holdings, LLC (“Cova”), a significant stockholder of the Company. Three members of the Board are affiliated with, and designees of, Cova.

 

(b) we entered into a Fourth Amendment (the “Senior Amendment”) to the Amended and Restated Revolving Credit and Term Loan Agreement, dated July 29, 2010 (as subsequently amended, the “Senior Credit Agreement”), by and among the Company and TD Bank, N.A. (“TD Bank”), as administrative agent and lender (the “Lender”). The Senior Amendment extended the maturity date of the indebtedness under the Senior Credit Agreement to December 19, 2015, and changed the interest rate on borrowings to the “Base Rate” (equal to the greater of the prime rate or 3%) plus 3%. There were no changes to the principal balance or monthly principal payments. The Common Stock Warrants and the Preferred Stock Warrants were terminated in connection with the July 2014 financing.

 

(c) we entered into a Fourth Amendment (the “Subordinated Amendment”) to the Subordinated Loan Agreement, dated July 29, 2010 (the “Subordinated Loan Agreement”), by and among the Company, Granite Creek Flexcap I, L.P. (“Granite Creek”), Patriot Capital II, L.P. (“Patriot” and, together with Granite Creek, the “Subordinated Lenders”) and Granite Creek Partners Agent, L.L.C., as administrative agent (the “Administrative Agent”).  The Subordinated Amendment extended the maturity date of the indebtedness under the Senior Loan Agreement to June 30, 2016. Under the Subordinated Amendment the interest rate remains at 11% and is payable monthly through addition to the principal balance outstanding. No cash interest is permitted.

 

(d) we entered into an amended and restated promissory note (the “Restated Note”) with JFC Technologies, LLC (“JFC”), which amended and restated in its entirety the promissory note in the original principal amount of $2,100,000 originally issued by the Company to JFC on December 31, 2012 (the “Original Note”). Pursuant to the terms of the Restated 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 Restated Note is due on the maturity date of December 31, 2016, or earlier 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) or a sale of the Company.

 

As of December 31, 2014, cash was approximately $2.4 million versus $0.9 million as of December 31, 2013. As of December 31, 2014, accumulated deficit was $103.6 million.

 

Due to uncertainty about our ability to meet our current operating expenses and current obligations, in their report on our annual financial statements for the year ended December 31, 2014, our independent registered public accounting firm included an explanatory paragraph regarding our ability to continue as a going concern. Our current portion of notes payable at December 31, 2014 are approximately $5.8 million. 

 

In light of our results of operations, management has been evaluating various possibilities including but not limited to refinancing or restructuring our 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 our existing stockholders, may reduce the value of the stockholders’ investment in the Company or may impact our stock price.

 

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There can be no assurances that we will be successful in raising adequate additional financial support. If not, we would be required to reduce operations. Our 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. 

  

Capital expenditures and payments for intangibles, which totaled approximately $0.8 million in 2014, are expected to increase slightly for 2015. We expect to fund these capital expenditures in 2015 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 December 31, 2014 was 6.25%. The line of credit expires on December 19, 2015. This line of credit is subject to (i) the same restrictive covenants and (ii) the same collateral and guarantees as the senior debt Term Loan and the senior debt Real Estate Loan. At December 31, 2014, approximately $2.1 million was outstanding on this line of credit and borrowing availability was approximately $0.6 million at December 31, 2014. At December 31, 2013, $1.6 million was outstanding on this line of credit and borrowing availability was approximately $0.8 million.

 

CTSAS has lines of credit, for borrowing against receivables, with a combined maximum borrowing capacity of €800,000 (or approximately $972,000 at December 31, 2014). There were no outstanding borrowings at December 31, 2014 or 2013. The lines’ interest rates are variable, based on the Euro Overnight Index Average and the 3-month Euro Interbank Offered Rate. The lines have indefinite termination dates but can be renegotiated periodically. 

 

CTI has two loans payable to TD Bank, a Term Loan and a Real Estate Loan. The Term Loan is payable in monthly principal installments of $148,000 along with monthly interest payments as described below, plus a one-time principal payment of $2.5 million due at maturity in December 2015. The interest rate is Prime plus three percent. The Real Estate Loan is payable in monthly principal installments of $10,000, along with monthly interest payments as described below, plus a one-time principal payment of $1.4 million due at maturity in December 2015. The interest rate is Prime plus three percent.

 

The Subordinated Term Loan with the Subordinated Lenders ranks junior to all debt held by TD Bank but senior to all other remaining long-term debt including existing and future subordinated debt. The total amount outstanding for Granite Creek as of December 31, 2014 was approximately $9.7 million. 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. We have the right to prepay the loan in whole or in part at any time without penalty, but subject to first paying off in full any debt outstanding with TD Bank.

 

Total Notes Payable relating to the Term Loan, the Real Estate Loan and the Subordinated Term Loan, net of debt discounts of $0.3 million, was approximately $15.1 million at December 31, 2014.

 

We were in compliance with our financial covenants as of December 31, 2014. We expect to meet our financial covenants for 2015 and that cash provided by the business will be adequate to meet our needs. Nonetheless, we are exploring raising additional funds by refinancing or restructuring our debt to further improve liquidity.

 

The Company did not pay a dividend in 2014 and has no plans to do so.

 

Off-Balance Sheet Arrangements

 

We did not have any off-balance sheet arrangements during 2014 or 2013.

 

Contractual Obligations

 

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

 

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ITEM 7A.    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 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

Selected Quarterly Financial Data

 

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

 

Financial Statements

 

The information required by this item is shown under Part IV, Item 15 and may be found beginning on page F-1 of this Form 10-K.

 

ITEM 9.    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

 

None.

 

ITEM 9A.    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.

 

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

 

Management's Report on Internal Control over Financial Reporting

 

Management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in the Securities Exchange Act of 1934, as amended. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Management assessed the effectiveness of internal control over financial reporting as of December 31, 2014. In making this assessment, management used the criteria set forth by Internal Control—Integrated Framework - 1992 issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on its assessment using those criteria, management concluded that internal control over financial reporting was effective as of December 31, 2014.

 

As a smaller reporting company, we are not required to obtain an attestation report from our independent registered public accounting firm regarding internal controls over financial reporting.

 

Changes in Internal Control over Financial Reporting

 

We have had no changes in internal control over financial reporting during our last fiscal quarter of 2014 that have materially affected, or are reasonably likely to materially affect, internal control over financial reporting.

 

ITEM 9B.    OTHER INFORMATION

 

None.

 

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PART III

 

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

 

Directors and Executive Officers

 

The following table sets forth certain information with respect to each of our directors and executive officers as of March 26, 2015:

 

Name   Age  

Position with Cyalume and

Principal Occupation

 

Held Office

Since

Yaron Eitan   57   Director and [Vice] Chairman of the Board   2006
Zivi Nedivi   55   President and Chief Executive Officer, Director   2012
Dale Baker   56   Chief Operating Officer   2012
Michael Bielonko   61   Chief Financial Officer & Secretary   2013
James (Jamie) Schleck   45   Director   2011
Ji Ham   39   Director   2013
Jason Epstein   40   Director   2008
Andrew Intrater   52   Director   2009
John G. Meyer, Jr.   69   Director   2011
Thomas G. Rebar   51   Director   2007
Michael Barry   57   Director   2014

 

Background of Officers and Directors

 

Zivi Nedivi has been our President and Chief Executive Officer since April 2, 2012. Mr. Nedivi came to Cyalume from Axiom Investment Advisors, LLC, a hedge fund specializing in currencies where he was a special advisor and acting CEO from 2009 to 2011 and the CEO from 2008 to 2009. Prior to that, from 2006 to 2008, he was the COO of Lumenis Ltd, a global leader in medical and aesthetic lasers and light based technology. Mr. Nedivi was the President and CEO of Kellstrom Aerospace, LLC, an industry leader in the airborne equipment segments of the international aviation services aftermarket and its predecessor company, Kellstrom Industries, from 1990 to 2005. He continues to serve as an observer on Kellstrom Aerospace's board of directors. Prior to his business career, Mr. Nedivi served as an F-15 fighter pilot in the Israeli Air Force, where he attained the rank of Major. He is a graduate of the Israel Air Force Academy and holds a Bachelor's degree in business administration from California Coast University.

 

Dale Baker has been our Chief Operating Officer since September 2012. In the five years prior to joining Cyalume, Mr. Baker was the Chief Executive Officer of Selling Source, LLC and the President of both World Avenue Holdings, LLC and Intrepid Investments, LLC. Mr. Baker has an M.B.A. from Duke University’s The Fuqua School of Business and a B.S. in Mechanical Engineering from Virginia Polytechnic & State University.

  

Michael Bielonko has been our Chief Financial Officer since October 10, 2013. He had been the Company’s Vice President – Finance since April 2013. Prior to that he served as our Chief Financial Officer, Treasurer and Secretary since December 2008 and Chief Financial Officer, Treasurer and Secretary of the Company’s subsidiary CTI since January 2006. Mr. Bielonko has a B.S. and an M.B.A. from the University of Connecticut.

 

James (Jamie) Schleck has been a Director of Cyalume since December 27, 2012. Mr. Schleck served as the President of Cyalume Specialty Products (“CSP”) from September 1, 2011, following the acquisition of his former company, JFC Technologies, LLC (“JFC”) until December 31, 2013. He currently serves as a consultant to CSP. At JFC he served in various capacities including President and CEO for over 17 years. Mr. Schleck is a former Army Officer and is a graduate of the U.S. Army's Airborne, Air Assault and Ranger Schools. Mr. Schleck holds a BS degree from the United States Military Academy, an MBA from Columbia University and an M.Ed from Rutgers University.

 

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Ji Ham has been our Director since December 2013. Mr. Ham is a Principal of Columbus Nova. Mr. Ham joined Columbus Nova in July 2006. Prior to Columbus Nova, Mr. Ham was a founding member of Hudson Capital Advisors, LLC, a financial advisory firm focused on debt and equity private placements and mergers and acquisitions advisory. Prior to Hudson Capital Advisors, Mr. Ham worked in the Leveraged Finance Group at CIBC World Markets Corp where he worked on a variety of debt and equity capital markets transactions, mergers and acquisitions, and merchant banking / private equity investment transactions for Trimaran Capital Partners, CIBC's private equity fund, and its predecessor funds. Mr. Ham received his B.A. in Business Economics with magna cum laude honor from the University of California at Los Angeles. We believe that Mr. Ham’s financial and business experience qualify him to serve as a director.

 

Jason Epstein has been a Director of Cyalume since December 19, 2008 and is also a Director of CTI, a position held since 2007. Mr. Epstein has been a Senior Partner of Columbus Nova since 2002. He is currently a Director of Deerfield Capital Corp. (NASDAQ: DFR), a company engaged in investment management and other investing activities. Mr. Epstein received his B.A. from Tufts University in 1996 and currently serves on the Tufts Board of Overseers. Mr. Epstein is one of Cova’s two designees to the Board of Directors. We believe that Mr. Epstein’s leadership and business experience qualify him to serve as a director.

 

Andrew Intrater has been a Director of Cyalume since September 1, 2009. Mr. Intrater is the CEO and Senior Managing Partner of Columbus Nova and serves on the Executive and Investment Committees for Columbus Nova. Mr. Intrater also serves on the Board of Directors for Deerfield Capital Corp. (NASDAQ: DFR), a company engaged in investment management and other investing activities. Mr. Intrater served on the Board of Directors (2007 – 2011) for HQ Sustainable Maritime Industries, Inc. (AMEX: HQS), an integrated aquaculture and aquatic product processing company, with operations based in China's South Sea. Mr. Intrater completed his B.S. in Chemical Engineering at the Rutgers University College of Engineering and graduate studies in Materials Science at the Columbia University School of Mines. Mr. Intrater is one of Cova’s two designees to the Board of Directors. We believe that Mr. Intrater’s leadership, global and business experience qualify him to serve as a director.

 

John G. Meyer, Jr. has been a Director of Cyalume since June 16, 2011. Mr. Meyer has been since 2003, a Director of The Allied Defense Group, Inc. (OTCQB: ADGI), a multinational defense business, which prior to the sale of substantially all its assets, was focused on the manufacture and sale of ammunition and ammunition related products for use by the U.S. and foreign governments. He was also the Chief Executive Officer of Heckler & Koch, a German small arms manufacturing company, from June 2005 to August 2007; and the Chief Executive Officer of The Allied Defense Group, Inc. from June 2003 to June 2005. Prior to his business career, Mr. Meyer served in the United States Army as its most senior Public Affairs Officer and retiring as a Major General. Mr. Meyer received a Bachelor’s degree from Florida State University and a Masters Degree from Sam Houston State University. Mr. Meyer has proven business acumen, having served as the chief executive officer and director of several defense industry companies and his military background provides the Board with relevant industry experience which qualify him to serve as a director.

 

Thomas G. Rebar has served as a Director of Cyalume since August 6, 2007. Mr. Rebar has been a Partner of SCP Private Equity Management, LLC since 1996. Mr. Rebar is currently a Director of several privately-held companies. Mr. Rebar has served as the chair of our audit committee since January 2009. Mr. Rebar received his B.S. summa cum laude from the University of Scranton and an M.B.A. from New York University Graduate School of Business Administration. Mr. Rebar’s leadership, business and financial experience qualify him to serve as a director.

 

Michael Barry has been a Director of Cyalume since July 30, 2014. Mr. Barry is the President of Prairie Street Capital, has extensive experience as the CEO of industrial distribution businesses as well as in the global sourcing of products. He was the President and COO of Copperfield Chimney Supply, a national million supplier of proprietary chimney and hearth products to retailers and professional contractors.  Mr. Barry was also the President of Woodard, Inc., a $65 million multi-location manufacturer of casual patio furniture to specialty retailers and mass merchants.  Prior to joining Woodard, Mr. Barry was the President and CEO of Intech EDM, an industrial distributor of consumable materials for Electrical Discharge Machining with operations in six countries. Mr. Barry received his BS from Georgetown University and an MBA, with distinction, from The Wharton School.  Mr. Barry is a CTP (“Certified Turnaround Professional”) and a member of the AICPA and the Illinois CPA Society.

 

Meetings and Committees of the Board of Directors

 

During the year ended December 31, 2014, the Board of Directors met 12 times and took action by unanimous written consent on one occasion. All of the directors attended at least 75% of the meetings, except Jason Epstein and James Valentine who resigned May 29, 2014. Each director is expected to participate, either in person or via teleconference, in meetings of our Board of Directors and meetings of committees of our Board of Directors in which each director is a member, and to spend the time necessary to properly discharge such director’s respective duties and responsibilities. We do not have a written policy with regard to directors’ attendance at annual meetings of stockholders; however, all directors are encouraged to attend the annual meeting. The Board of Directors has determined that Messrs. Eitan, Ham, Epstein, Intrater, Meyer, Rebar and Barry, are each independent directors as defined in Rule 4200 of the Nasdaq Marketplace Rules and applicable Securities and Exchange Commission (“SEC”) regulations.

 

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Compensation Committee . On January 13, 2009, the Board of Directors formed a Compensation Committee and adopted a written charter. Serving on the Compensation Committee are Yaron Eitan (chairman), Jason Epstein and John G. Meyer, Jr., each of whom is independent as defined in Rule 5605(a)(2) of the Listing Rules. The Compensation Committee held two meetings during 2014. The charter is available to security holders on our website, www.cyalume.com . The charter sets forth responsibilities, authority and specific duties of the Compensation Committee. The Compensation Committee reviews and recommends to the board the compensation for the CEO and non-employee directors of our Company, and reviews the CEO’s compensation recommendations for all other corporate officers. It also reviews the general policy relating to compensation and benefits for all employees. The Compensation Committee has been designated by the Board of Directors to administer the Cyalume Technologies Holdings, Inc. 2009 Omnibus Securities and Incentive Plan and the Cyalume Technologies Holdings, Inc. 2014 Equity Incentive Plan.

 

Nominating and Corporate Governance Committee . On January 13, 2009, the Board of Directors formed the Nominating and Corporate Governance Committee and adopted a written charter. Thomas Rebar (Chairman) and Andrew Intrater, each of whom is independent as defined in Rule 5605(a)(2) of the Listing Rules, serve on this committee. The Nominating and Corporate Governance Committee’s charter is available to security holders on our website, www.cyalume.com . The Nominating and Corporate Governance Committee did not meet during 2014. The Nominating and Corporate Governance Committee will consider director candidates recommended by security holders. Potential nominees to the Board of Directors are required to have such experience in business or financial matters as would make such nominee an asset to the Board of Directors and may, under certain circumstances, be required to be “independent”, as such term is defined under Rule 5605 of the Listing Rules and applicable SEC regulations. Stockholders wishing to submit the name of a person as a potential nominee to the Board of Directors must send the name, address, and a brief (no more than 500 words) biographical description of such potential nominee to the Nominating and Corporate Governance Committee at the following address: Nominating and Corporate Governance Committee of the Board of Directors, c/o Cyalume Technologies Holdings, Inc., 910 SE 17 th Street, Suite 300, Fort Lauderdale, Florida 33316. Potential director nominees will be evaluated by personal interview, such interview to be conducted by one or more members of the Nominating and Corporate Governance Committee, and/or any other method the Nominating and Corporate Governance Committee deems appropriate, which may, but need not, include a questionnaire. Those suggesting a nominee should include evidence that the writer is a Company stockholder, the name and contact information of the candidate and a statement signed by the candidate that the candidate is willing to be considered for nomination by the committee and wiling to serve as a director, if nominated and elected. The Nominating and Corporate Governance Committee may solicit or receive information concerning potential nominees from any source it deems appropriate. The Nominating and Corporate Governance Committee need not engage in an evaluation process unless (i) there is a vacancy on the Board of Directors, (ii) a director is not standing for re-election, or (iii) the Nominating and Corporate Governance Committee does not intend to recommend the nomination of a sitting director for re-election. A potential director nominee recommended by a security holder will not be evaluated differently from any other potential nominee. Although it has not done so in the past, the Nominating and Corporate Governance Committee may retain search firms to assist in identifying suitable director candidates.

 

The Board does not have a formal policy on Board candidate qualifications. The Board may consider those factors it deems appropriate in evaluating director nominees made either by the Board or stockholders, including judgment, skill, strength of character, experience with businesses and organizations comparable in size or scope to the Company, experience and skill relative to other Board members, and specialized knowledge or experience. Depending upon the current needs of the Board, certain factors may be weighed more or less heavily. In considering candidates for the Board, the directors evaluate the entirety of each candidate’s credentials and do not have any specific minimum qualifications that must be met. “Diversity,” as such, is not a criterion that the Committee considers . The directors will consider candidates from any reasonable source, including current Board members, stockholders, professional search firms or other persons. The directors will not evaluate candidates differently based on who has made the recommendation.

 

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The Company has entered into an investor rights agreement with certain former owners of CTI, a wholly-owned subsidiary of the Company as a result of the acquisition of CTI on December 19, 2008, which allows certain beneficial owners to nominate up to three persons for election to the Board of Directors for so long as a minimum percentage of the Company’s outstanding common stock are owned by such security holders. The terms of the agreement are as follows:

 

(i) the holders of Cova Small Cap Holdings, LLC’s (“Cova”) investment have the right to nominate two persons for election to the Board of Directors as long as Cova owns 5% of the outstanding stock of the Company; and

 

(ii) the holders of Kline Hawkes Pacific Friends Fund, LLC and Kline Hawkes Pacific, L.P. (“Kline Hawkes”) have the right to nominate one person for election to the Board of Directors as long as Kline Hawkes owns 5% of the outstanding common stock of the Company.

 

Andrew Intrater and Jason Epstein are Cova’s current nominees to the Board of Directors. Kline Hawkes does not currently have a nominee to the Board of Directors.

 

The Company is also party to an amendment agreement, dated December 27, 2012, with JFC and James G. Schleck, individually and in his capacity as representative of the members of JFC, pursuant to which, for so long as JFC and/or Mr. Schleck collectively own at least 10% of the total number of outstanding shares of the Company’s common stock, Mr. Schleck has the right to be named by the Company as a nominee for election to the board of directors each time the Company solicits a vote of its stockholders relating to the election of directors.

 

In addition, on November 19, 2013, the Company entered into a Securities Purchase Agreement (the “2013 Purchase Agreement”) with US VC Partners GP, LLC (the “Investor”), pursuant to which it issued 123,077 newly created Series A Convertible Preferred Stock. Until the Investor holds less than 25% of the shares of Series A Preferred Stock purchased by the Investor pursuant to the 2013 Purchase Agreement or 5% of the Common Stock Deemed Outstanding (as defined in the Purchase Agreement), a majority of the outstanding shares of Series A Preferred Stock (which under certain circumstances must include the Investor) (the “Requisite Holders”) are entitled to elect to the Board of Directors the greater of (1) one representative or (2) such greater number of representatives as is proportionate to the total number of directors as is the percentage of the number of shares of Common Stock into which the shares of Series A Preferred Stock are convertible relative to the number of shares of Common Stock Deemed Outstanding; provided that the Requisite Holders shall be entitled to elect no more than two representatives to the Board. Until the later of the date on which (1) the Investor holds less than a majority of the outstanding shares of Series A Preferred Stock and (2) the outstanding shares of Series A Preferred Stock represent (on an as-if converted basis) less than 5% of the number of shares of Common Stock Deemed Outstanding, the Requisite Holders will have certain special voting rights as set forth in the Certificate of Designation. Ji Ham is US VC Partners GP, LLC’s current nominee to the Board of Directors.

 

In addition, on July 30, 2014, the Company entered into a Securities Purchase Agreement (the “2014 Purchase Agreement”) with Cova Small Cap Holdings, LLC (“Cova”), Michael G. Barry and Bayonet Capital Fund I, LLC for the purchase by such investors of an aggregate of 1,000 units of securities of the Company. Pursuant to the terms of the 2014 Purchase Agreement, each of Cova and Mr. Barry will have the right, until such time as its or his “Purchaser Threshold Date” (as defined below), to nominate one individual to the Board of Directors; provided that Cova, together with its affiliates, shall not have the right to nominate, appoint or elect a total of more than three individuals to the Board, pursuant to the 2014 Purchase Agreement and any other agreements or other instruments currently in existence. “Purchaser Threshold Date” means (1) prior to the date that the Company’s Series C Preferred Stock is redeemed in full by the Company in accordance with the terms of the Series C Certificate of Designation, the earlier of the date upon which the applicable investor (together with its affiliates) holds less than 25% of the shares of Series C Preferred Stock purchased by such Investor at the closing of the 2014 Purchase Agreement or 10% of the outstanding Common Stock (on a fully-diluted, as-if converted basis), and (2) after the date that the Series C Preferred Stock is so redeemed in full by the Company, the date upon which the applicable investor (together with its affiliates) holds less than 10% of the outstanding Common Stock (on a fully-diluted, as-if converted basis). On July 30, 2014, Mr. Barry was appointed to the Board, to fill the previously-existing vacancy on the Board, pursuant to this provision.

 

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Executive Committee. On January 13, 2009, the Board of Directors formed an Executive Committee. Yaron Eitan (Chairman), Michael Barry, Ji Ham, Thomas Rebar and Zivi Nedivi serve on this committee. The Executive Committee exercises the powers of the Board between meetings of the full Board of Directors. The Executive Committee met four times during 2014.

 

Audit Committee. The Audit Committee is established in accordance with Section 3(a)(58)(A) of the Securities Exchange Act of 1934. Thomas G. Rebar (Chairman), Michael Barry and Yaron Eitan serve on this committee. The Audit Committee held five meetings during 2014. The Board of Directors has determined that Thomas G. Rebar is an “audit committee financial expert”. The Board of Directors has determined that each of the members of the Audit Committee are independent as defined in Rule 5605(a)(2) of the Listing Rules.

 

The Audit Committee operates under a written charter adopted by the Board of Directors and assists the Board of Directors by overseeing the performance of the independent auditors and the quality and integrity of our internal accounting, auditing and financial reporting practices. The Audit Committee is responsible for retaining and, as necessary, terminating, the independent auditors, annually reviews the qualifications, performance and independence of the independent auditors and the audit plan, fees and audit results, and pre-approves audit and non-audit services to be performed by the auditors and related fees. The Audit Committee charter is available on our website, www.cyalume.com

 

Compensation Committee Interlocks and Insider Participation

 

During 2014, no current or former officer or employee of CTI, CSP or CTS participated in deliberations of Cyalume’s Board of Directors concerning Executive Officer compensation.

 

Board Operations

 

The positions of principal executive officer and chairman of the Board of Directors of the Company are held by different persons. The chairman of the Board of Directors, an independent director, chairs Board of Director and stockholder meetings and participates in preparing their agendas. The chairman of the Board of Directors also calls, plans, and chairs the independent directors’ executive sessions and serves as a focal point for communication between management and the Board of Directors between Board of Director meetings, although there is no restriction on communication between directors and management. We believe that these arrangements afford the independent directors sufficient resources to supervise management effectively, without being overly engaged in day-to-day operations.

 

The Board of Directors is responsible for overall supervision of the Company’s risk oversight efforts as they relate to the key business risks facing the organization. Management identifies, assesses, and manages the risks most critical to the Company’s operations on a day-to-day basis and routinely advises the Board of Directors on those matters as the President/CEO and CFO have access to the Board of Directors, attend regular meetings as well as the audit committee meetings. The Board’s role in risk oversight of the Company is consistent with the Company’s leadership structure, with senior management having responsibility for assessing and managing the Company’s risk exposure, and the Board and its Committees, providing oversight as necessary in connection with those efforts.

 

Section 16(a) Beneficial Ownership Reporting Compliance

 

Section 16(a) of the Exchange Act requires our executive officers, directors and persons who beneficially own more than 10% of a registered class of our equity securities to file with the SEC initial reports of ownership and reports of changes in ownership of our common stock and other equity securities. Such executive officers, directors, and greater than 10% beneficial owners are required by SEC regulation to furnish us with copies of all Section 16(a) forms filed by such reporting persons.

 

Based solely on our review of such forms furnished to us and written representations from certain reporting persons, we believe that all stockholders have complied with all filing requirements applicable to 10% beneficial owners during the year-ended December 31, 2014.

 

Code of Ethics

 

We adopted a code of ethics on January 13, 2009, which is available on our website, www.cyalume.com .

 

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ITEM 11. EXECUTIVE COMPENSATION

 

Overview

Our executive officers are: Zivi Nedivi, who was appointed our Chief Executive Officer on April 2, 2012, Dale Baker, who has been Chief Operating Officer since September 10, 2012 and Michael Bielonko, who has been Chief Financial Officer, Treasurer and Secretary since October 10, 2013.

 

Compensation Philosophy

 

The overriding goal of our executive compensation program is to recruit and retain key executives and motivate them to achieve maximum results. To this end, we design and manage our programs with the following objectives in mind:

 

· Generating significant stockholder value, while practicing good corporate governance,

 

· Maximizing the alignment between our short-term and long-term results and executive pay, and

 

· Providing market-competitive compensation, while considering our financial resources.

 

Administration of Executive Compensation Programs

 

In January 2009, we formed a Compensation Committee of the Board of Directors comprised of three outside, independent Directors which will administer all compensation programs for its officers, key employees, and outside Directors. This Committee works with management to design key compensation policies and programs, as well as sound governance practices, to ensure that our compensation programs reflect best practices and strongly contribute to our growth and success. The named Executive Officers have all entered into employment agreements.

 

The compensation for senior executives is comprised of four elements: a base salary, an annual performance bonus, equity awards and benefits. On March 3, 2009, our Board of Directors adopted the Cyalume Technologies Holdings, Inc. 2009 Omnibus Securities and Incentive Plan (the “2009 Plan”). On October 7, 2014, our Board of Directors adopted the Cyalume Technologies Holdings, Inc. 2014 Equity Incentive Plan (the “2014 Plan”). The 2014 Plan was approved on February 15, 2015. Both the 2009 Plan and the 2014 Plan provide for awards to employees and Directors, and both plans are administered by the Compensation Committee. Awards granted pursuant to the 2009 Plan and the 2014 Plan are described below.

 

In developing salary ranges, potential bonus payouts, equity awards and benefit plans, the Compensation Committee takes into account: 1) competitive compensation among comparable companies and for similar positions in the market, 2) relevant incentives and rewards for senior management for improving stockholder value while building us into a successful company, 3) individual performance, 4) how best to retain key executives, 5) our overall performance, 6) our ability to pay and 7) other relevant factors.

 

All of our executives were involved in decisions relating to their compensation. We believe that executives are fairly compensated.

 

Employment Agreements

 

The following discussion summarizes the material terms of current employment agreements with our Executive Officers: 

 

Zivi Nedivi The Company, CTI and East Shore Ventures, LLC (the “Consultant”), a limited liability company owned by Mr. Nedivi, entered into a services agreement (the “Services Agreement”), effective April 2, 2012, which provided that Mr. Nedivi will serve as the Company’s Chief Executive Officer and member of the Company’s board of directors. The Services Agreement had an initial term of three years. Effective as of February 1, 2015, the Company, CTI, a wholly-owned subsidiary of the Company, and Zivi Nedivi entered into an employment agreement (the “Employment Agreement”), pursuant to which Mr. Nedivi will continue to serve as the Company’s Chief Executive Officer. Mr. Nedivi had previously served in such capacity pursuant to the Services Agreement, which was terminated effective as of February 1, 2015. The material terms of the Employment Agreement are substantially the same as those of the Services Agreement, other than changes to reflect the change from an independent contractor relationship to an employment relationship.

 

Under the Services Agreement, the Consultant earned an annual cash fee of $450,000 (the “Cash Fee”), subject to annual increases at the discretion of the Company’s board. The Cash Fee shall increase ten percent (10%) for every $35,000,000 of revenue growth, calculated based on the Company’s fiscal year. The Consultant shall be eligible for the first such increase when annual revenues total at least $105,000,000. The Consultant is also eligible for bonus consideration based on certain predetermined annual performance targets (“Annual Performance Targets”). If the Company’s performance meets, but does not exceed, the Annual Performance Targets for a given fiscal year, the amount of the bonus for such fiscal year shall equal 140% of the annualized rate of the Cash Fee in effect as of the end of such fiscal year. If the Company’s performance exceeds the Annualized Performance Targets for a given fiscal year, the amount of the bonus for such fiscal year shall equal 140% of the annualized rate of the Cash Fee in effect as of the end of such fiscal year, plus an additional 1% of such annualized rate for each 1% by which the Company’s performance exceeds the Annualized Performance Targets for such fiscal year. If the Company’s performance fails to meet the Annualized Performance Targets for a given fiscal year, the amount of the bonus for such fiscal year shall equal 140% of the annualized rate of the Cash Fee in effect as of the end of such fiscal year, less 2% of such annualized rate for each 1% by which the Company’s performance failed to meet the Annualized Performance Targets for such fiscal year, provided, however, that Consultant shall not be eligible for any bonus for a given fiscal year in which the Company’s performance was less than or equal to 70% of the Annualized Performance Targets for such fiscal year.

 

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The Employment Agreement has an initial term of three years and continues thereafter for successive one-year periods unless and until terminated by either party upon 60 days’ written notice prior to the agreement’s anniversary/expiration date, or until otherwise terminated by either party. Mr. Nedivi will receive an annual base salary of $450,000 for the term of the Employment Agreement, subject to annual adjustments at the sole discretion of CTI’s board of directors. Mr. Nedivi is also eligible to receive an annual bonus based on certain predetermined yearly performance targets (“Annual Performance Targets”). If CTI’s performance meets, but does not exceed, the Annual Performance Targets for a given fiscal year, the amount of the bonus for such fiscal year shall equal 140% of the annualized rate of Mr. Nedivi base salary in effect as of the end of such fiscal year. If CTI’s performance exceeds the Annualized Performance Targets for a given fiscal year, the amount of the bonus for such fiscal year shall equal 140% of the annualized rate of Mr. Nedivi base salary in effect as of the end of such fiscal year, plus an additional 1% of such annualized rate for each 1% by which CTI’s performance exceeds the Annualized Performance Targets for such fiscal year. If CTI’s performance fails to meet the Annualized Performance Targets for a given fiscal year, the amount of the bonus for such fiscal year shall equal 140% of the annualized rate of Mr. Nedivi base salary in effect as of the end of such fiscal year, less 2% of such annualized rate for each 1% by which CTI’s performance failed to meet the Annualized Performance Targets for such fiscal year, provided, however, that Mr. Nedivi shall not be eligible for any bonus for a given fiscal year in which CTI’s performance was less than or equal to 70% of the Annualized Performance Targets for such fiscal year.

 

The Consultant initially received an option to purchase up to 1,036,104 shares of the Company’s common stock at an exercise price per share of $1.50 (the “Initial Nedivi Option”). The Initial Nedivi Option became exercisable annually in five equal installments on each of the first five anniversaries of the approval of the issuance of the Initial Nedivi Option. In November 2014, that option was cancelled and replaced with an option, issued directly to Mr. Nedivi, to purchase 5,015,891 shares of the Company’s common stock at an exercise price per share of $0.09 (the “Nedivi Option”), subject to the effectiveness of the adoption of the Plan and the Amendment. The Nedivi Option shall be subject to vesting over four years from the date of grant, in four equal annual installments commencing on the first anniversary of the date of grant with the final installment occurring on the fourth anniversary of the date of grant, provided that the Nedivi Option shall not vest until the Company’s senior debt and junior debt have both been re-financed such that the total cost of new money shall not exceed 25% per annum including cash and PIK interest and the cost of warrants (unless such threshold is subsequently increased by the Board). Additionally, the Nedivi Option shall vest in full upon the sale of the Company for at least $35 million of enterprise value. If neither a qualified refinancing nor a qualified sale of the Company, as described above, occurs then no portion of the Nedivi Option shall vest.

 

In the event Mr. Nedivi’s employment under the Employment Agreement is terminated by the Company without Cause or by non-renewal, or by Mr. Nedivi for Good Reason, in addition to the amounts accrued to him, Mr. Nedivi would be entitled to receive continued payment of his base salary then in effect for a six-month period, subject to Mr. Nedivi signing a release of claims in favor of the Company and its affiliates.

 

During the term of the Employment Agreement and for a period of two years thereafter, Mr. Nedivi is subject to non-solicitation and non-competition provisions. Mr. Nedivi is also subject to confidentiality provisions both during and after his employment with CTI.

 

Pursuant to the services agreement, subject to limitations imposed by law, the Company and CTI shall indemnify and hold harmless Consultant and Mr. Nedivi to the fullest extent permitted by law from and against any and all claims, damages, expenses (including attorneys’ fees), judgments, penalties, fines, settlements, and all other liabilities incurred or paid by him in connection with the investigation, defense, prosecution, settlement or appeal of any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative and to which Consultant and/or Mr. Nedivi was or is a party or is threatened to be made a party by reason of the fact that Consultant and/or Mr. Nedivi is or was an officer, employee or agent of a member of the Company or any Company subsidiary, or by reason of anything done or not done by Consultant and/or Mr. Nedivi in any such capacity or capacities, provided that Consultant and/or Mr. Nedivi, as applicable, acted in good faith, in a manner that was not grossly negligent or constituted willful misconduct and in a manner it or he reasonably believed to be in or not opposed to the best interests of the Company or any Company subsidiary, and, with respect to any criminal action or proceeding, had no reasonable cause to believe it or his conduct was unlawful.

 

Dale Baker Mr. Baker’s employment agreement, effective September 10, 2012, provides that Mr. Baker will be employed as CTI’s Chief Operating Officer. The contract has an initial term of three years and shall continue for successive one-year periods unless terminated by either party upon 30 days written notice prior to the anniversary/expiration date or terminated pursuant to certain events or for cause. Mr. Baker receives an annual base salary of $350,000, subject to annual adjustments at the sole discretion of the board of directors. The base salary shall increase ten percent (10%) for every $35,000,000 of revenue growth, calculated based on the Company’s fiscal year. Mr. Baker shall be eligible for the first such increase when annual revenues total at least $105,000,000. Annually, Mr. Baker is entitled to a cash bonus of up to 90% of annual base salary based on the achievement of certain performance targets, all determined by the board of directors. If Mr. Baker voluntarily resigns or is terminated for cause during the period of employment, then he is not entitled to receive any benefit or compensation following the date of termination. If terminated without cause during his initial term, Mr. Baker is entitled to severance of an amount equal to six months of his annual base salary.

 

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Mr. Baker also received an initial option to purchase up to 350,000 shares of the Company’s common stock at an exercise price per share of $1.50 (the “Initial Baker Option”). The Initial Baker Option became exercisable annually in five equal installments on each of the first five anniversaries of the approval of the issuance of the Initial Baker Option. In November 2014, the Initial Baker Option was cancelled and replaced with an option to purchase 1,504,767 shares of the Company’s common stock at an exercise price per share of $0.09 (the “Baker Option”), subject to the effectiveness of the adoption of the Plan and the Amendment. The Baker Option shall be subject to vesting over four years from the date of grant, in four equal annual installments commencing on the first anniversary of the date of grant with the final installment occurring on the fourth anniversary of the date of grant, provided that the Baker Option shall not vest until the Company’s senior debt and junior debt have both been re-financed such that the total cost of new money shall not exceed 25% per annum including cash and PIK interest and the cost of warrants (unless such threshold is subsequently increased by the Board). Additionally, the Baker Option shall vest in full upon the sale of the Company for at least $35 million of enterprise value. If neither a qualified refinancing or a qualified sale of the Company, as described above, occurs then no portion of the Baker Option shall vest.

 

Michael Bielonko Mr. Bielonko’s employment agreement, effective October 10, 2013, provides that Mr. Bielonko will be employed as CTI’s Chief Financial Officer. The contract has an initial term expiring on December 31, 2014 unless extended in writing by the mutual agreement of the parties or unless terminated by either party upon 30 days written notice prior to the anniversary/expiration date or terminated pursuant to certain events or for cause. Mr. Bielonko receives an annual base salary of $187,000. Mr. Bielonko is entitled to a minimum cash bonus of at least $100,000, payable in 2015, for successfully fulfilling conditions in his agreement. If Mr. Bielonko is terminated for cause during the period of employment, then he is not entitled to receive any benefit or compensation following the date of termination. If terminated without cause during his initial term or he voluntarily resigns, Mr. Bielonko is entitled to severance of an amount equal to six months of his annual base salary. If Mr. Bielonko is terminated without cause pursuant to a change in control, he is entitled to receive an amount equal to six months of his annual base salary in addition to his other severance benefits. As of December 31, 2014, the employment agreement effective October 10, 2013 expired; Mr. Bielonko continues to serve as the CFO on an agreed upon day-to-day basis until such time as he is replaced or a new agreement is entered into.

 

Employee Benefits Plans

 

Pension Benefits

 

We do not sponsor any qualified or non-qualified pension benefit plans.

 

Nonqualified Deferred Compensation

 

We do not maintain any non-qualified defined contribution or deferred compensation plans. We sponsor a tax qualified defined contribution 401(k) plan in which employees of CTI who have reached the age of 18 are eligible for participation after completing the earlier of (i) three consecutive months of service or (ii) one year of service may participate.

 

Severance Arrangements

 

Assuming the employment of our named executive officers were to be terminated without cause, each as of December 31, 2014, the following individuals would be entitled to payments in the amounts set forth opposite to their name in the below table:

    Cash Severance  
    No Change in Control     Change in Control  
Zivi Nedivi   $ 225,000     $ 225,000  
Dale Baker   $ 175,000     $ 175,000  
Michael Bielonko   $ 93,500     $ 187,000  

 

We are not obligated to make any cash payments to these executives if their employment is terminated by us for cause or by death or disability, other than the payment of accrued but unpaid annual salary and bonus, if any, and reimbursement of accrued but unpaid business expenses.

 

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Summary Compensation Table

 

The following table shows information concerning the annual compensation in 2014 and 2013 for services provided to us by each person who served as our Chief Executive Officer during 2014 and our two other executive officers during 2014.

 

 

Name and Principal
Position

  Year  

Salary

($)

 

Earned

Bonus

($)

   

Option
Awards

($) (1)

 

All Other

Compensation

($)

 

Total

Compensation

($)

 
Zivi Nedivi,   2014     431,250           (3)       431,250  
President & CEO   2013     450,000                   450,000  
                                       
Dale Baker,   2014     342,613           (3)   774     343,387  
COO   2013     355,467                   355,467  
                                       
Michael Bielonko,   2014     187,000     100,000 (2)     $27,279     14,496     328,775  
CFO & Secretary   2013     187,000     100,000 (2)         12,701     299,701  

 

(1) The amounts in this column reflect the aggregate full grant date fair value of each award computed in accordance with ASC Topic 718, Compensation-Stock Compensation . This is not necessarily representative of the value received. The executive officers can only realize value from stock options if the market price of Cyalume stock increases above the exercise price of the options.

 

(2) Represents a stay bonus paid pursuant to the terms of Mr. Bielonko’s employment agreement.

 

(3) Due to the performance-based conditions associated with this award, the fair value is zero as of this date.

 

Equity Compensation Awards

 

On November 21, 2014, the Compensation Committee of the Board of Directors authorized 5,015,891 stock options to Zivi Nedivi, 1,504,767 stock options to Dale Baker and 324,729 stock options to Michael Bielonko, in each case subject to the effectiveness of the adoption of the Plan.

 

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Outstanding Equity Awards at December 31, 2014

 

    Option Awards   Stock Awards  
    Equity Incentive Plan Awards:   Equity Incentive Plan Awards:  
Name   Number of
securities
underlying
unexercised
options
(#)
exercisable
    Number of
securities
underlying
unexercised
options (#)
unexercisable
    Number of
securities
underlying
unexercised
unearned
options (#)
    Option
exercise
price
($)
    Option
expiration
date
  Number of
shares of
stock that
have not
vested
(#)
    Market
value of
shares of
stock that
have not
vested

($) (1)
    Number
of
unearned
shares
that
have not
vested
(#)
    Market or
payout value
of unearned
shares that
have not
vested
($)
 
Zivi           5,015,891       (1)   $ 0.09     11/21/2024                        
Nedivi                                                                    
                                                                     
Dale           1,504,767       (2)   $ 0.09     11/21/2024                        
Baker                                                                    
                                                                     
Michael     4,950       19,799       (3)   $ 1.66     1/7/2023                        
Bielonko           324,749       (4)   $ 0.09     11/21/2024                        

 

(1) These options were granted on November 21, 2014, subject to the effectiveness of the adoption of the Plan, and vest in the following increments: 1,253,973 on 11/21/2015, 2016 and 2017 and 1,253,972 on 11/21/2018.
(2) These options were granted on November 21, 2014, subject to the effectiveness of the adoption of the Plan, and vest in the following increments: 376,192 on 11/21/2015, 2016 and 2017 and 376,191 on 11/21/2018.
(3) These options vest in the following increments: 4,950 on 1/1/2014, 2015, 2016 and 2017 and 4,949 on 1/1/2018.
(4) These options were granted on November 21, 2014, subject to the effectiveness of the adoption of the Plan, and vest in the following increments: 81,187 on 11/21/2015, 2016 and 2017 and 81,188 on 11/21/2018.

 

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Securities Authorized for Issuance Under Equity Compensation Plans

 

The following table sets forth, as of December 31, 2014, certain information as to the equity compensation plan of the Company pursuant to which grants of options, restricted stock, restricted stock units or other rights to acquire shares of the Company’s common stock may be granted from time to time.

Plan Category   Number of
Securities to be
Issued Upon
Exercise of
Outstanding
Options,
Warrants or
Rights
(a)
    Weighted
Average
Exercise Price
of Outstanding
Options,
Warrants and
Rights
(b)
    Number of
Securities
Remaining
Available for
Future Issuance
Under Plans
(Excluding
Securities
Reflected in
Column (a))
(c)
 
Equity compensation plans approved by security holders (1)     1,150,082     $ 2.09 (2)     1,106,334  
Equity compensation plans not approved by security holders (adopted by security holders February 15, 2015) (3)     2,676,582     $ 0.09       7,323,418  
Total     3,826,664     $ 0.87       8,429,752  

 

(1) This plan is the Company’s Amended 2009 Omnibus Securities and Incentive Plan.

(2) Weighted Average exercise price of outstanding options; excludes restricted stock.

(3) This is the Company’s 2014 Equity Incentive Plan.

 

Director Compensation

 

Our director compensation policy for 2014 was to provide each non-employee director with an option award of 20,000 shares of common stock plus an additional amount as determined by the Compensation Committee of the Board on an individual basis based on an evaluation of a director’s contribution, giving recognition to chairing the Board or various committees. The following options were awarded in 2014: Winston Churchill: 57,500; Yaron Eitan: 97,500; Jason Epstein: 57,500; Andrew Intrater: 50,000; John G. Meyer, Jr.: 165,000; Thomas G. Rebar: 137,500; Ji Ham: 20,000; James Schleck: 20,000 and Michael Barry: 20,000. There were no stock awards made in 2014. No compensation was paid to non-employee directors. All directors are reimbursed for travel and other expenses directly related to activities as directors.

 

The following table provides compensation information for our non-employee directors for 2014.

 

Name   Fees
Earned or
Paid in
Cash
    Stock
Awards
    Option
Awards (1)
    Total     Total Number of
Option Awards
Outstanding
at December 31,
2014 (#)
 
Winston Churchill (2)                 $4,830       $4,830       95,000  
Yaron Eitan                 $8,190       $8,190       135,000  
Jason Epstein                 $4,830       $4,830       95,000  
Andrew Intrater                 $4,200       $4,200       80,000  
John G. Meyer, Jr.                 $13,860       $13,860       270,000  
Thomas G. Rebar                 $11,550       $11,550       175,000  
Michael Barry (3)                 $1,680       $1,680       20,000  
James Schleck                 $1,680       $1,680       20,000  
Ji Ham                 $1,680       $1,680       20,000  

 

(1) The amounts reflect the aggregate full grant date fair value of each award computed in accordance with ASC 718, Compensation-Stock Compensation . Assumptions used in the calculation of these amounts are included in Note 20 to our audited financial statements for the year ended December 31, 2014 included in our annual report on Form 10-K for the year ended December 31, 2014.
(2) On August 6, 2014, Mr. Winston Churchill resigned from the Board of Directors.
(3) On July 30, 2014, Mr. Michael Barry joined the Board of Directors.

  

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

 

The following table sets forth, as of the Record Date, certain information as to the stock ownership of (i) each person known by the Company to own beneficially more than five percent of the Company’s Common Stock, (ii) each of the Company’s current directors and those nominees standing for election, (iii) each of the Company’s executive officers, and (iv) the Company’s executive officers and directors as a group. Except otherwise set forth in the notes to the table, the business address of each stockholder is c/o the Company, 910 SE 17 th St., Suite 300, Fort Lauderdale, FL 33316. Information provided as to 5% stockholders other than our employees or management is based solely on forms 13D or 13G filed with the Securities and Exchange Commission and subsequent issuances by the Company.

 

Shares of common stock which an individual or group has a right to acquire within 60 days pursuant to the exercise or conversion of convertible preferred stock, options, warrants or other similar convertible or derivative securities are deemed to be outstanding for the purpose of computing the percentage ownership of such individual or group, but are not deemed to be outstanding for the purpose of computing the percentage ownership of any other person shown in the table.

 

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The applicable percentage of ownership is based on 21,400,244 shares outstanding as of the Record Date.

 

Name and Address of Beneficial Owner (1)   Amount and
Nature of
Beneficial
Ownership
    Approximate
Percentage of
Common Stock
 
Ji Ham (2)     0       0  
Yaron Eitan (3)     1,134,832       5.3 %
Jason Epstein (4)     37,500       *  
Andrew Intrater (5)     55,277,485       75.8 %
John G. Meyer, Jr. (6)     105,915       *  
Zivi Nedivi (7)     0       0 %
Thomas G. Rebar (8)     212,637       *  
James Schleck (9)     14,568,695       40.5 %
Michael Barry (10)     14,106,693       39.7 %
Dale Baker(11)     0       0 %
Michael Bielonko (12)     91,781       *  
Cova Small Cap Holdings, LLC (4)(5)(13)     21,779,839       55.2 %
Kline Hawkes Pacific Advisors, LLC (14)     2,273,434       10.6 %
US VC Partners, L.P. (15)     33,467,646       61.0 %
All Directors and Executive Officers as a group (11 persons)     81,981,850       83.3 %

 

 

 

* Less than 1%.

 

(1) The business address of each of our current officers and directors is 910 SE 17 th St., Suite 300, Fort Lauderdale, FL 33316.
   
(2) Excludes shares beneficially owned by US VC Partners, LP (“US VC”), as described in footnote (15). Mr. Ham was appointed to the Board pursuant to the rights granted to US VC under the terms of the Certificate of Designations of the Company’s Series A Convertible Preferred Stock, in connection with US VC’s equity investment in the Company consummated on November 19, 2013. Mr. Ham disclaims beneficial ownership of the shares held by US VC.
   
(3) Based on information filed by Yaron Eitan from time to time with the Securities and Exchange Commission.  Consists of (i) 608,999 shares of common stock held directly, (ii) options to purchase 37,500 shares of common stock held directly, (iii) 483,333 shares of common stock held by Selway Capital, LLC, Mr. Eitan is the Manager of Selway Capital, LLC and (iv) 5,000 shares of common stock held by Mr. Eitan’s child.
   
(4) Excludes shares beneficially owned by Cova Small Cap Holdings, LLC (“Cova”), as described in footnote (13). Mr. Epstein directly holds an option to purchase 37,500 shares of our Common Stock; however, pursuant to a privately negotiated agreement with Cova, Mr. Epstein has agreed to transfer ownership of all common stock underlying the stock option to Cova upon exercise of the stock option.  Cova is an affiliate of Renova U.S. Management LLC, in which Mr. Epstein serves as a Manager and participates in a profit sharing plan.  Mr. Epstein disclaims beneficial ownership of the shares held by Cova.

 

(5) Includes shares beneficially owned by Cova, as described in footnote (13), and shares beneficially owned by US VC, as described in footnote (15). Also includes a stock option to purchase 30,000 shares of common stock held of record by Mr. Intrater. Mr. Intrater, as chief executive officer of Cova, may be deemed to beneficially own the securities held by Cova.  Mr. Intrater is also the Special Managing Member of US VC Partners Management, LLC, which manages US VC Partners GP, LLC (“GP”), the sole general partner of US VC and, therefore, may be deemed to beneficially own the securities held by US VC. Mr. Intrater disclaims beneficial ownership over the securities held by Cova and US VC, except to the extent of his pecuniary interest therein, if any.
   
(6) Consists of options to purchase shares of common stock.
   
(7) Gives effect to the cancellation of the Initial Nedivi Option, and does not include shares issuable pursuant to the terms of the Nedivi Option, which are subject to the effectiveness of the adoption of the Plan and the Amendment.
   
(8) Consists of: (i) options to purchase 37,500 shares of common stock and (ii) 175,137 shares of common stock.
   
(9) Based on information contained in a Schedule 13D/A filed on August 14, 2014, by James Schleck, JFC Technologies, LLC and Bayonet Capital Fund I, LLP. Consists of: (i) 250 shares of common stock held directly by Mr. Schleck; (ii) options to purchase 200,000 shares held by Mr. Schleck that are currently exercisable; (iii) 3,478,943 shares of common stock owned by JFC Technologies, LLC (“JFC”); (iv) 7,318,187 shares of common stock that are issuable to JFC upon the conversion, at the option of JFC, of up to $1 million of the principal amount of a promissory note issued by the Company to JFC, into that 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, but currently 30,769 shares of Series A Preferred Stock); and (v) 3,571,315 shares of common stock issuable upon the conversion of 100 shares of Series B Preferred Stock owned by Bayonet Capital Fund I, LLC (“Bayonet”). Mr. Schleck is the Chief Executive Officer of JFC and Bayonet and, as such, may be deemed to beneficially own the securities held by them. Mr. Schleck disclaims beneficial ownership over the securities held by JFC and Bayonet, except to the extent of his pecuniary interest therein, if any.
   
(10) Based on information contained in a Form 3 filed on August 7, 2014, by Michael Barry. Consists of shares of common stock issuable upon the conversion of 395 shares of Series B Preferred Stock owned by the Michael G. Barry Irrevocable Trust of 2006, a trust for the benefit of Mrs. Barry and Mr. Barry’s children. Mr. Barry’s spouse is trustee of the trust. Mr. Barry disclaims beneficial ownership of these securities.
   
(11) Gives effect to the cancellation of the Initial Baker Option, and does not include shares issuable pursuant to the terms of the Baker Option, which are subject to the effectiveness of the adoption of the Plan and the Amendment.
   
(12) Consists of: (i) 86,831 shares of common stock and (ii) options to purchase 24,749 shares of common stock.
   
(13) Based on information contained in a Schedule 13D/A filed on August 19, 2014, by Cova, Andrew Intrater, Renova US Holdings Ltd, Columbus Nova Investments IV Ltd, CN Special Opportunity Fund Ltd. and CN Credit Opportunities Fund 2007-1 Ltd. Consists of 3,744,700 shares of common stock and 18,035,139 shares of common stock issuable upon the conversion of 505 shares of Series B Preferred Stock. Cova’s business address is 900 Third Avenue, 19 th Floor, New York, NY 10022.
   
(14) Based on information contained in a Schedule 13D/A filed on January 22, 2009. Kline Hawkes’ business address is 11726 San Vicente Blvd., Suite 300, Los Angeles, CA 90049.
   
(15) Based on information contained in a Schedule 13D/A filed on August 19, 2014, by US VC, US VC Partners Management, LLC and Andrew Intrater. Consists of shares of common stock issuable upon the conversion of 123,077 shares of Series A Preferred Stock. US VC has a number of officers in common with Cova. US VC’s business address is 900 Third Avenue, 19 th Floor, New York, NY 10022.

 

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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

 

Related Party Debt

 

In 2011, CSP entered into a market-based lease for property in Bound Brook, New Jersey, from Brook Industrial Park, LLC, an entity that is wholly owned by Mr. Schleck, a member of our board. The term of the lease expires on August 31, 2016 (subject to renewal options). The monthly rent payable under the lease was $24,000 from September 1, 2011 through August 2013, and was adjusted to $30,000 per month beginning September 1, 2013 to reflect the changes of average cost per square foot as reported by Newmark Knight and Frank in their 2nd Quarter New Jersey Industrial Market Report, Average Asking Rate for Somerset County.

 

In December 2012, we incurred an unsecured promissory note in the original principal amount of $2,100,000. On November 19, 2013 the note was amended whereby interest accrues on the principal at the rate of 12% per annum, retroactive to the date of the original note in December 2012.The note is payable in full on the earlier of December 16, 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). Up to $1 million of the principal amount is convertible, at the option of the holder, into shares of Series A Preferred Stock equal to the amount converted divided by $32.50 (subject to certain adjustments based on changes in capitalization affecting the Series A Preferred Stock). On July 30, 2014, in connection with the financing consummated by us on that date (as described below), we entered into a Consent and Waiver Agreement pursuant to which, among other things, the provisions in the unsecured promissory note that had provided that, upon conversion of the first $499,980 of principal of the note, the holder would receive warrants to purchase the Company’s common stock and warrants to purchase shares of Series A Preferred Stock were deleted. The lender is a related party due to the lender being partially owned by James Schleck, a board member.

 

July 2014 Financing

 

On July 30, 2014, we entered into a Securities Purchase Agreement (the “Purchase Agreement”) with Cova Small Cap Holdings, LLC (“Cova”), Michael G. Barry and Bayonet Capital Fund I, LLC (each, an “Investor”) for the purchase by the Investors of an aggregate of 1,000 units of securities of the Company (the “Units”) for an aggregate purchase price of $2.0 million (or $2,000.00 per Unit), with each Unit comprising (1) one share of Series B Convertible Preferred Stock of the Company, par value $0.001 per share (the “Series B Preferred Stock”), and (2) one share of Series C Preferred Stock of the Company, par value $0.001 per share (the “Series C Preferred Stock”). 900 of the Units were sold on July 30, 2014, and the remaining 100 Units were sold on August 4, 2014. $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 the original principal amount of $250,000.

 

The shares of Series B Preferred Stock have the rights and preferences set forth in the Certificate of Designation of Series B Convertible Preferred Stock which was filed by the Company with the Secretary of State of the State of Delaware on July 30, 2014 (the “Series B Certificate of Designation”). Pursuant to the Series B Certificate of Designation, each share of Series B Preferred Stock ranks senior to the Company’s common stock (the “Common Stock”) and the Company’s Series A Convertible Preferred Stock (the “Series A Preferred Stock”) with respect to payment of dividends and distribution of assets upon liquidation, dissolution or winding up of the Company. Upon the Company’s liquidation, sale to or merger with another corporation or other “Change of Control” (as such term is defined in the Series B Certificate of Designation), each share of Series B Preferred Stock would be entitled to a liquidation preference in an amount equal to the amount per share that would have been payable had all shares of Series B Preferred Stock been converted into Common Stock immediately prior to such event in accordance with the terms of the Series B Certificate of Designation, excluding for purposes of such calculation the liquidation preference payable to the holders of Series A Preferred Stock. Holders of the Series B Preferred Stock are entitled to convert at any time all or any portion of the shares of Series B Preferred Stock into a number of shares of Common Stock initially equal to 35,713.147 shares of Common Stock per share of Series B Preferred Stock (the “Conversion Number”), such that the 1,000 shares of Series B Preferred Stock issued pursuant to the Purchase Agreement will initially be convertible into a number of shares of Common Stock representing approximately 40% of the total number of shares of Common Stock outstanding, calculated on a fully-diluted basis, assuming the conversion of all outstanding shares of Series A Preferred Stock and Series B Preferred Stock. The Conversion Number is subject to customary adjustments, including for dividends, stock splits and other reorganizations affecting the Common Stock. In addition, the Conversion Number is subject to anti-dilution protections such that, subject to certain exceptions, if the Company issues or sells shares of Common Stock or other equity securities for no consideration or for consideration that is based on an equity valuation of the Company of less than $2 million in the aggregate, the Conversion Number will be increased to a number such that the Series B Preferred Stock will continue to be exercisable for 40% of the total number of shares of Common Stock outstanding, calculated on a fully-diluted, as-converted basis. Each share of Series B Preferred Stock will automatically convert into shares of Common Stock on the tenth anniversary of its original issuance date, at the then-current Conversion Number. Each share of Series B Preferred Stock is entitled to a number of votes equal to the number of shares of Common Stock into which such share is convertible and will be entitled to vote with holders of outstanding shares of Common Stock, voting together as a single class, with respect to any and all matters presented to the stockholders of the Company for their action or consideration.

 

The shares of Series C Preferred Stock have the rights and preferences set forth in the Certificate of Designation of Series C Preferred Stock which was filed by the Company with the Secretary of State of the State of Delaware on July 30, 2014 (the “Series C Certificate of Designation”). Pursuant to the Series C Certificate of Designation, each share of Series C Preferred Stock ranks senior to the Common Stock, the Series A Preferred Stock and the Series B Preferred Stock with respect to payment of dividends and distribution of assets upon liquidation, dissolution or winding up of the Company. Upon the Company’s liquidation, sale to or merger with another corporation or other “Change of Control” (as such term is defined in the Series C Certificate of Designation), each share of Series C Preferred Stock would be entitled to a liquidation preference equal to the greater of (1) $3,000 per share or (2) $2,000 per share plus any accrued but unpaid dividends, in each case subject to customary adjustments as set forth in the Series C Certificate of Designation (the “Liquidation Value”). 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; provided that to the extent not paid in cash or by issuance of additional shares of Series C Preferred Stock on the last day of each calendar quarter (a “Dividend Payment Date”), all accrued dividends on any outstanding shares of Series C Preferred Stock shall accumulate and compound. In the event the Company has not paid in cash or by the issuance of additional shares of Series C Preferred Stock all accrued dividends on a Dividend Payment Date, at the election of holders of at least 75% of the outstanding shares of Series C Preferred Stock (the “Requisite Holders”), all such dividends accruing on the shares of Series C Preferred Stock will be paid in shares of Series C Preferred Stock. From and after the fifth anniversary of the issuance of the shares of Series C Preferred Stock, the Requisite Holders will have the right to elect to cause the Company to redeem, out of funds legally available therefore, all but not less than all of the then outstanding shares of Series C Preferred Stock, for a price per share equal to the Liquidation Value for such shares. In addition, the Company has the right to redeem at any time, out of funds legally available therefor, all or any portion of the then outstanding shares of Series C Preferred Stock, for a price per share equal to the Liquidation Value for such shares. The Series C Preferred Stock is not convertible into Common Stock or other securities of the Company, and does not have any voting rights.

 

Pursuant to the terms of the Purchase Agreement, each of Cova and Mr. Barry will have the right, until such time as its or his “Purchaser Threshold Date” (as defined below), to nominate one individual to the Company’s board of directors (the “Board”); provided that Cova, together with its affiliates, shall not have the right to nominate, appoint or elect a total of more than three individuals to the Board, pursuant to the Purchase Agreement and any other agreements or other instruments currently in existence (including the Restated Series A Certificate of Designation, as defined below). “Purchaser Threshold Date” means (1) prior to the date that the Series C Preferred Stock is redeemed in full by the Company in accordance with the terms of the Series C Certificate of Designation, the earlier of the date upon which the applicable Investor (together with its affiliates) holds less than 25% of the shares of Series C Preferred Stock purchased by such Investor at the Closing (as defined below) or 10% of the outstanding Common Stock (on a fully-diluted, as-if converted basis), and (2) after the date that the Series C Preferred Stock is so redeemed in full by the Company, the date upon which the applicable Investor (together with its affiliates) holds less than 10% of the outstanding Common Stock (on a fully-diluted, as-if converted basis). On July 30, 2014, Mr. Barry was appointed to the Board, to fill the previously-existing vacancy on the Board, pursuant to this provision.

 

In connection with the closing of the sale of Units pursuant to the Purchase Agreement (the “Closing”), the Company, US VC Partners, L.P. (the “Series A Investor”) and JFC Technologies, LLC (“JFC”) entered into a Consent and Waiver Agreement (the “Consent Agreement”) pursuant to which, among other things, the Series A Investor provided certain consents and waived certain rights under the documents related to its acquisition of shares of Series A Preferred Stock (the “Series A Financing”), in order to facilitate the sale of Units pursuant to the Purchase Agreement. In addition, the Series A Investor agreed to the termination of all of the warrants issued to it in connection with the Series A Financing, and JFC agreed to amend the amended and restated promissory note, dated November 19, 2013, between the Company and JFC, in the original principal amount of $2,100,000, as described above.

 

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Also in connection with the Closing, the Certificate of Designation of the Series A Preferred Stock was amended and restated to modify the rights and preferences of the Series A Preferred Stock, as set forth in the Amended and Restated Certificate of Designation of the Series A Preferred Stock which was filed by the Company with the Secretary of State of the State of Delaware on July 30, 2014 (the “Restated Series A Certificate of Designation”). Among other things, the Restated Series A Certificate of Designation (1) reduced the number of authorized shares of Series A Preferred Stock from 800,000 to 300,000, (2) reduced the “Conversion Price” applicable to the Series A Preferred Stock from $0.65 per share to $0.13664587 per share, (3) removed all references to the warrants originally issued by the Company in connection with the issuance of the shares of Series A Preferred Stock, (4) increased the threshold of shares of Common Stock which the Series A Investor must continue to hold for the holders of Series A Preferred Stock to retain the right to elect to the Board one or more representatives, from 5% of the Common Stock deemed outstanding (on a fully diluted, as-if converted basis) to 10%, and (5) modified the dividend provisions of the Series A Preferred Stock to provide that dividends may only be paid on the Series A Preferred Stock in cash if cash dividends are also paid on the outstanding shares of Series C Preferred Stock on the same Dividend Payment Date.

 

Also on July 30, 2014 and in connection with the Purchase Agreement, the Company entered into a Registration Rights Agreement (the “Registration Rights Agreement”) with the Investors pursuant to which the Company granted four long-form registrations and unlimited piggy-back registrations to the Investors, subject to certain limitations as set forth in the Registration Rights Agreement, to register the resale of the shares of Common Stock issuable upon conversion of the Series B Preferred Stock.

 

Mr. Barry assigned his right to receive the shares of Series B Preferred Stock under the Purchase Agreement to the Michael G. Barry Irrevocable Trust of 2006 (the “Barry Trust”), a trust of which Mr. Barry’s wife serves as the trustee. Accordingly, the Company issued the shares of Series B Preferred Stock otherwise issuable to Mr. Barry under the Purchase Agreement to the Barry Trust, and the Barry Trust signed a joinder to the Purchase Agreement and Registration Rights Agreement.

 

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 the Series A Investor, an entity with which Cova has a number of officers in common). Both 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).

 

Management Agreement with Board Member

 

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

 

  Strategic development and implementation as well as consultation to our chief executive officer on a regular basis as per his reasonable requests;

 

  Identifying strategic partners with companies with which Selway has relationships and access. In this connection, Selway will focus on building partnerships with companies in Israel, Singapore, India and Europe. The focus will be on the expansion of our munitions business;

 

  Advise and support us on our investor relations strategy;

 

  Advise and support our future fund raising, including identifying sources of capital in the United States; and

 

  Support our mergers and acquisitions strategy and play an active role in our due diligence and analysis.

 

The agreement stipulates that these services would be performed by Yaron Eitan, an employee of Selway and a member of our Board of Directors, with assistance, as needed, from other employees of Selway. The initial agreement, which expired on October 1, 2012, was extended through December 31, 2013. Subsequently a new agreement was entered into that was to expire on December 31, 2015. Under that agreement, we indemnified Selway and Selway indemnified us against certain losses that could be incurred while carrying out its obligations under the agreement. Selway’s compensation for these services was $11,000 per month. We also reimbursed Selway for costs incurred specifically on our behalf for these services. The agreement was terminated effective March 31, 2014.

 

It is the Company’s policy to not enter any transaction (other than compensation arrangements in the ordinary course) with any director, executive officer, employee, or principal stockholder or party related to them, unless authorized by a majority of the directors having no interest in the transaction, upon a favorable recommendation by the Audit Committee (or a majority of its disinterested members).

 

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

 

BDO USA, LLP audited our consolidated financial statements for the years ended December 31, 2014 and 2013. BDO USA, LLP is our principal accountant as of December 31, 2014.

 

The following table sets forth the aggregate fees billed by BDO USA, LLP for professional services rendered during the fiscal years ended December 31, 2014 and 2013:

 

    2014     2013  
Audit fees (1)   $ 259,092     $ 331,900  
Audit-related fees (2)     -       -  
Tax fees (3)     -       -  
All other fees (4)     -       -  
Total fees   $ 259,092     $ 331,900  

 

(1) Audit fees were primarily related to our financial statement audits, related quarterly reviews and review of various SEC Forms filed during the period.

 

(2) There were no fees for audit-related services provided during the period from either firm.

 

(3) There were no tax related services provided during the period from either firm.

 

(4) There were no other services provided during the period from either firm.

 

PART IV

 

ITEM 15.    EXHIBITS, FINANCIAL STATEMENT SCHEDULES

  

(a)   (1)     Financial statements filed as part of this report

 

Consolidated Balance Sheets

Consolidated Statements of Comprehensive Loss

Consolidated Statements of Changes in Stockholders’ Equity

Consolidated Statements of Cash Flows

Notes to Consolidated Financial Statements

 

(2)     Financial statement schedule filed as part of this report

Schedule II – Valuation and Qualifying Accounts

 

39
 

  

(b)          Exhibits

 

Exhibit    
Number   Description
2.1 (1) Stock Purchase Agreement dated February 14, 2008 by and among Vector Intersect Acquisition Corporation, as the Parent, Cyalume Acquisition Corp., a Delaware corporation, as the Purchaser, Cyalume Technologies, Inc. and GMS Acquisition Partners Holdings, LLC
2.2 (2) Amendment No. 1 to Stock Purchase Agreement, dated October 22, 2008
2.3 (3) Amendment No. 2 to Stock Purchase Agreement, dated December 17, 2008
2.4 (3) Amendment No. 3 to Stock Purchase Agreement, dated December 18, 2008
3.1 (3) Fifth Amended and Restated Certificate of Incorporation
3.2 (4) By-laws
3.3 (22) Amended and Restated Certificate of Designation of Series A Convertible Preferred Stock filed by the Company with the Secretary of State of the State of Delaware on July 30, 2014. (3.1)
3.4 (19) Warrant to Purchase Common Stock, dated November 19, 2013, issued to the Investor. (3.2)
3.5 (19) Warrant to Purchase Series A Preferred Stock, dated November 19, 2013, issued to the Investor. (3.3)
3.6 (19) Second Amended and Restated Warrant to Purchase Common Stock, dated November 19, 2013, issued to Granite Creek FlexCap I, L.P. (3.4)
3.7 (19) Second Amended and Restated Warrant to Purchase Common Stock, dated November 19, 2013, issued to Patriot Capital II, LP. (3.5)
3.8 (19) Warrant to Purchase Common Stock, dated November 19, 2013, issued to JFC. (3.6)

3.9

(22)

Certificate of Designation of Series B Convertible Preferred Stock filed by the Company with the Secretary of State of the State of Delaware on July 30, 2014. (3.2)

3.10

(22)

Certificate of Designation of Series C Preferred Stock filed by the Company with the Secretary of State of the State of Delaware on July 30, 2014. (3.3)

4.1 (4) Specimen Common Stock Certificate
4.2 (4) Specimen Unit Certificate
4.3 (4) Specimen Warrant Certificate
4.4 (4) Form of Unit Purchase Option to be granted to the representative
4.5 (8) Registration Rights Agreement dated March 18, 2011
4.6 (14) Stock Option Agreement between Cyalume Technologies Holdings, Inc. and East Shore Ventures, LLC (4.1)
4.7 (14) Stock Option Agreement between Cyalume Technologies Holdings, Inc. and Dale S. Baker (4.2)
10.1 (4) Form of Stock Escrow Agreement among the Registrant, American Stock Transfer & Trust Company and the Initial Stockholders
10.2 (4) Form of Registration Rights Agreement among the Registrant, the Initial Stockholders and the Private Placement Purchasers
10.3 (5) Cyalume Technologies Holdings, Inc. 2009 Omnibus Securities and Incentive Plan
10.4 (6) Share Purchase Agreement dated March 18, 2011
10.5 (7) Amendment No. 1 to the Employee Agreement of Derek Dunaway dated May 9, 2011
10.6 (7) Amendment No. 1 to the Employee Agreement of Edgar E. Cranor dated May 9, 2011
10.7 (8) Securities Exchange Agreement between Cyalume Technologies Holdings, Inc. and Rodman Principal Investments, LLC dated June 30, 2011  (10.1)
10.8 (8) Securities Exchange Agreement between Cyalume Technologies Holdings, Inc. and Winston Churchill dated July 7, 2011  (10.2)
10.9 (8) Securities Exchange Agreement between Cyalume Technologies Holdings, Inc. and Thomas Rebar dated July 7, 2011  (10.3)
10.10 (8) Securities Exchange Agreement between Cyalume Technologies Holdings, Inc. and Wayne Weisman dated July 7, 2011 (10.4)
10.11 (9) Amendment No. 2 to the Employee Agreement of Derek Dunaway  (10.5)
10.12 (9) Amendment No. 1 to the Employee Agreement of Michael Bielonko  (10.6)
10.13 (9) Amendment No. 2 to the Employee Agreement of Edgar E. Cranor  (10.7)
10.14 (9) Asset Purchase Agreement dated August 31, 2011 among Cyalume Technologies Holdings, Inc., Cyalume Specialty Products, Inc., JFC Technologies, LLC and Selling Members of Seller  (10.8)
10.15 (9) Registration Rights Agreement between Cyalume Technologies Holdings, Inc., James G. Schleck, James R. Schleck, Jame Fine Chemical, Inc., and JFC Technologies, LLC dated as of August 31, 2011  (10.9)
10.16 (9) Lease Agreement between Brook Industrial Park, LLC and Cyalume Specialty Products, Inc. (10.10)
10.17 (10) Stock Purchase Agreement dated December 22, 2011 among Cyalume Technologies Inc., Cyalume Technologies Holdings, Inc., Combat Training Solutions, Inc., and Antonio Colon  (10.27)

  

40
 

  

10.18 (10) Registration Rights Agreement, dated as of December 22, 2011, between Cyalume Technologies Holdings, Inc., and Antonio Colon (10.28)
10.19 (10) Second Amendment to Amended and Restated Revolving Credit and Term Loan Agreement between Cyalume Technologies, Inc., Cyalume Technologies Holdings, Inc., Combat Training Solutions, Inc., Cyalume Realty, Inc., Cyalume Specialty Products, Inc. and TD Bank, N.A. dated March 30, 2012 (10.30)
10.20 (10) Second Amendment to Subordinated Loan Agreement between Cyalume Technologies, Inc., Cyalume Technologies Holdings, Inc., Combat Training Solutions, Inc., Cyalume Realty, Inc., Cyalume Specialty Products, Inc., Granite Creek Partners Agent, LLC, Granite Creek Flexcap I, L.P. and Patriot Capital II, L.P. dated March 30, 2012 (10.31)
10.21 (11) Services Agreement by and among the Company, Cyalume Technologies, Inc. and East Shore Ventures, LLC dated as of April 2, 2012  (10.1)
10.22 (11) Inducement Agreement by and between East Shore Ventures, LLC and Zivi Nedivi  (10.2)
10.23 (11) Separation Agreement and General Release by and between Cyalume Technologies, Inc. and Derek Dunaway effective as of April 2, 2012 (10.3)
10.24 (12) Amended and Restated Employment Agreement of Michael Bielonko, Chief Financial Officer, Cyalume Technologies, Inc. (10.1)
10.25 (12) Separation and Release Agreement between Monte L. Pickens and Cyalume Technologies, Inc. (10.2)
10.26 (13) Employment Agreement between Daniel S. Baker and Cyalume Technologies, Inc. effective September 10, 2012 (10.1)
10.27 (14) Amendment No. 1 to Services Agreement dated September 10, 2012 between Cyalume Technologies Holdings, Inc., Cyalume Technologies, Inc., and East Shore Ventures, LLC (10.1)
10.28 (15) Third Amendment to Amended and Restated Revolving Credit and Term Loan Agreement effective December 28, 2012 with TD Bank, N.A. (10.1)
10.29 (15) Third Amendment to Subordinated Loan Agreement effective December 28, 2012 with Granite Creek Flexcap I, L.P. and Patriot Capital II, L.P., and Granite Creek Partners Agent, L.L.C (10.2)
10.30 (16) Amendment Agreement dated December 27, 2012 by and among the  Cyalume Technologies Holdings, Inc.,  Cyalume Specialty Products, Inc.,  JFC Technologies, LLC  and  James G. Schleck (10.1)
10.31 (16) Unsecured Promissory Note dated December 31, 2012 with JFC Technologies, LLC (10.2)
10.32 (17) Employment Agreement, effective as of November 1, 2011, between Cyalume Specialty Products, Inc. and James G. Schleck (10.3)
10.33 (17) First Amendment to Employment Agreement, dated December 27, 2012, between  Cyalume Specialty Products, Inc. and James G. Schleck (10.4)
10.36 (19) Securities Purchase Agreement, dated November 19, 2013, between the Company and the Investor. (10.1)
10.37 (19) Registration Rights Agreement, dated November 19, 2013, between the Company and the Investor. (10.2)
10.38 (19) Release and Escrow Agreement, dated November 19, 2013, among the Company, CTI, Cova and the Investor. (10.3)
10.39 (19) Fourth Amendment to Amended and Restated Revolving Credit and Term Loan Agreement, dated November 19, 2013. (10.4)
10.40 (19) Fourth Amendment to Subordinated Loan Agreement, dated November 19, 2013. (10.5)
10.41 (19) Amended and Restated Promissory Note, dated November 19, 2013. (10.6)
10.42 (20) Separation and Release Agreement, dated December 31, 2013, between Cyalume Specialty Products, Inc. and James G. Schleck . (10.42)
10.43 (20) Consulting Agreement, dated December 31, 2013, between Cyalume Specialty Products, Inc. and James G. Schleck . (10.43)

10.44

(21)

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

10.45

(22)

Securities Purchase Agreement, dated July 30, 2014. (10.1)

10.46

(22)

Registration Rights Agreement, dated July 30, 2014. (10.2)

10.47

(22)

Sixth Amendment to Amended and Restated Revolving Credit and Term Loan Agreement and Limited Consent and Waiver, dated July 30, 2014. (10.3)

10.48

(22)

Amendment No. 1 to Amended and Restated Promissory Note, dated July 30, 2014. (10.4)

10.49

(22)

Consent and Waiver Agreement, dated July 30, 2014. (10.5)

10.50

(23)

Confidential Settlement Agreement and Mutual Release dated July 10. 2014. (10.1)

10.51

(24)

2014 Equity Incentive Plan.

14.1 (10) Code of Conduct and Ethics (14.1)
16.1 (18) Letter from CCR LLP
21.1 * Subsidiaries of the Registrant
23.1 * Consent of BDO USA, LLP
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

  

  (1) Incorporated by reference to the Current Report on Form 8-K dated February 14, 2008 and filed with the Commission February 21, 2008.
  (2) Incorporated by reference to the Current Report on Form 8-K dated October 22, 2008 and filed with the Commission November 4, 2008.
  (3) Incorporated by reference to the Current Report on Form 8-K dated December 17, 2008 and filed with the Commission December 23, 2008.
  (4) Incorporated by reference to the Registration Statement on Form S-1 (File No. 333-127644) filed August 18, 2005.
  (5) Incorporated by reference to Exhibit A of the definitive Proxy Statement filed with the Commission April 30, 2009 pursuant to Regulation 14A of the Exchange Act for our 2009 Annual Meeting of Stockholders.

 

41
 

  

  (6) Incorporated by reference to the Current Report on Form 8-K dated March 18, 2011 and filed with the Commission March 21, 2011.
  (7) Incorporated by reference to our Form 10-Q dated June 30, 2011 and filed with the Commission August 10, 2011. The number given in parenthesis indicates the corresponding exhibit number in such Form 10-Q.
  (8) Incorporated by reference to the Current Report on Form 8-K dated June 30, 2011 and filed with the Commission July 7, 2011. The number given in parenthesis indicates the corresponding exhibit number in such Form 8-K.
  (9) Incorporated by reference to our Form 10-Q dated September 30, 2011 and filed with the Commission November 14, 2011. The number given in parenthesis indicates the corresponding exhibit number in such Form 10-Q.
  (10) Incorporated by reference to our Form 10-K dated December 31, 2012 and filed with the Commission April 16, 2012. The number given in parenthesis indicates the corresponding exhibit number in such Form 10-K.
  (11) Incorporated by reference to the Current Report on Form 8-K dated March 30, 2012 and filed with the Commission April 5, 2012. The number given in parenthesis indicates the corresponding exhibit number in such Form 8-K.
  (12) Incorporated by reference to the Current Report on Form 8-K dated April 19, 2012 and filed with the Commission April 25, 2012. The number given in parenthesis indicates the corresponding exhibit number in such Form 8-K.
  (13) Incorporated by reference to the Current Report on Form 8-K dated July 19, 2012 and filed with the Commission July 25, 2012. The number given in parenthesis indicates the corresponding exhibit number in such Form 8-K.
  (14) Incorporated by reference to the Current Report on Form 8-K dated September 10, 2012 and filed with the Commission September 12, 2012. The number given in parenthesis indicates the corresponding exhibit number in such Form 8-K.
  (15) Incorporated by reference to the Current Report on Form 8-K dated December 20, 2012 and filed with the Commission December 31, 2012. The number given in parenthesis indicates the corresponding exhibit number in such Form 8-K.
  (16) Incorporated by reference to the Current Report on Form 8-K dated December 27, 2012 and filed with the Commission January 2, 2013. The number given in parenthesis indicates the corresponding exhibit number in such Form 8-K.
  (17) Incorporated by reference to the Current Report on Form 8-K dated December 31, 2012 and filed with the Commission January 7, 2013. The number given in parenthesis indicates the corresponding exhibit number in such Form 8-K.
  (18) Incorporated by reference to the Current Report on Form 8-K dated November 28, 2011 and filed with the Commission December 2, 2011.
  (19) Incorporated by reference to the Current Report on Form 8-K dated November 22, 2013 and filed with the Commission on that date. The number given in parenthesis indicates the corresponding exhibit number in such Form 8-K.

  (20) Incorporated by reference to our Form 10-K dated December 31, 2014 and filed with the Commission on April 15, 2014. The number given in parenthesis indicates the corresponding exhibit number in such Form 10-K.
  (21) Incorporated by reference to our Form 10-Q dated March 31, 2014 and filed with the Commission on May 20, 2014. The number given in parenthesis indicates the corresponding exhibit number in such Form 10-Q.
  (22) Incorporated by reference to the Current Report on Form 8-K filed with the Commission on August 5, 2014. The number given in parenthesis indicates the corresponding exhibit number in such Form 8-K.
  (23) Incorporated by reference to our Form 10-Q dated June 30, 2014 and filed with the Commission on August 14, 2014. The number given in parenthesis indicates the corresponding exhibit number in such Form 10-Q.
  (24) Incorporated by reference to Exhibit B to our definitive information statement on Schedule 14C filed with the Commission on January 26, 2015.

 

  * Filed herewith.

 

42
 

 

INDEX TO FINANCIAL STATEMENTS

 

Cyalume Technologies Holdings, Inc.

 

Years ended December 31, 2014 and 2013

 

    Page
Report of Independent Registered Public Accounting Firm   F-2
     
Consolidated Financial Statements :    
     
Consolidated Balance Sheets   F-3
     
Consolidated Statements of Comprehensive Loss   F-4
     
Consolidated Statements of Changes in Stockholders' Equity   F-5
     
Consolidated Statements of Cash Flows   F-6
     
Notes to Consolidated Financial Statements   F-7
     
Schedule II—Valuation and Qualifying Accounts   S-1
     
Signatures   S-2

 

F- 1
 

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

Board of Directors and Stockholders

Cyalume Technologies Holdings, Inc.

Fort Lauderdale, Florida

 

We have audited the accompanying consolidated balance sheets of Cyalume Technologies Holdings, Inc. (the “Company”) as of December 31, 2014 and 2013 and the related consolidated statements of comprehensive loss, changes in stockholders’ equity, and cash flows for the years then ended. In connection with our audits of the financial statements, we have also audited the financial statement schedule listed in the accompanying index. These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement and schedule presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Cyalume Technologies Holdings, Inc. at December 31, 2014 and 2013, and the results of its operations and its cash flows for the years ended December 31, 2014 and 2013, in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

 

 

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As described in Note 1 to the consolidated financial statements, the Company has suffered recurring losses from operations and has a net capital deficiency that raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. Our opinion is not modified with respect to this matter.

 

/s/ BDO USA LLP

 

 

Boston, Massachusetts

March 31, 2015

 

 

F- 2
 

 

 

Cyalume Technologies Holdings, Inc.

Consolidated Balance Sheets

(in thousands, except shares and per share information)

 

    December 31,     December 31,  
    2014     2013  
Assets                
Current assets:                
Cash   $ 2,358     $ 865  
Accounts receivable, net of allowance for doubtful accounts of $22 and $44, respectively     3,622       3,788  
Inventories, net     7,826       10,782  
Income taxes refundable     0       163  
Deferred income taxes - current     0       3,847  
Prepaid expenses and other current assets     648       463  
Total current assets     14,454       19,908  
                 
Property, plant and equipment, net     7,120       8,001  
Goodwill     7,992       7,992  
Other intangible assets, net     6,591       17,948  
Other noncurrent assets     18       465  
Total assets   $ 36,175     $ 54,314  
Liabilities and Stockholders’ Equity                
Current liabilities:                
Line of credit   $ 2,050     $ 1,600  
Current portion of notes payable     5,775       1,925  
Accounts payable     2,144       6,182  
Accrued expenses     2,690       2,059  
Deferred revenue and deferred rent     181       80  
Income taxes payable     644       97  
Current portion of capital lease obligation     7       15  
Warrants liability     25       6,373  
Legal obligation     0       3,986  
Other current liabilities     0       242  
Total current liabilities     13,516       22,559  
                 
Notes payable, net of current portion     10,214       14,969  
Note payable due to related parties     2,100       2,100  
Deferred income taxes     430       3,847  
Asset retirement obligation     204       194  
Capital lease obligation, net of current portion     0       7  
Legal obligation, noncurrent     2,781       0  
Other noncurrent liabilities, net of current portion     78       79  
Total liabilities     29,323       43,755  
Commitments and contingencies (Note 18)                
                 
Series C preferred stock, $0.001 par value; 1,000,000 shares of preferred stock authorized; 1,000 shares issued and outstanding at December 31, 2014     2,103       0  
Series A convertible preferred stock, $0.001 par value; 1,000,000 shares authorized; 123,077 shares issued and outstanding at December 31, 2014 and 2013     4,564       4,055  
                 
Stockholders' equity:                
 Series B convertible preferred stock, $0.001 par value; 1,000,000 shares of preferred stock  authorized; 1,000 shares issued and outstanding at December 31, 2014     1,401       0  
Common stock, $0.001 par value; 100,000,000 shares authorized; 21,400,244 and 20,738,260 issued and outstanding at December 31, 2014 and 2013, respectively     21       21  
Additional paid-in capital     103,014       102,575  
Accumulated deficit     (103,590 )     (95,874 )
Accumulated other comprehensive loss     (661 )     (218 )
Total stockholders’ equity     185       6,504  
Total liabilities and stockholders' equity   $ 36,175     $ 54,314  

 

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

 

F- 3
 

  

Cyalume Technologies Holdings, Inc.

Consolidated Statements of Comprehensive Loss

(in thousands, except shares and per share information)

 

    For the Year     For the Year  
    Ended     Ended  
    December 31,     December 31,  
    2014     2013  
Revenues   $ 33,322     $ 31,760  
Cost of revenues     19,392       17,957  
Gross profit     13,930       13,803  
                 
Other expenses (income):                
Sales and marketing     3,395       4,903  
General and administrative     5,662       11,404  
Research and development     1,506       1,864  
Interest expense, net     2,086       2,310  
Interest expense – related party     356       297  
Amortization of intangible assets     1,812       1,796  
Uncollectible receivable – related party     0       3,862  
Impairment loss on intangible assets     9,580       875  
Impairment loss on goodwill     0       168  
Legal settlement     0       2,048  
Change in fair value of contingent consideration     0       242  
Change in fair value of warrants liability     (4,852 )     525  
Loss on extinguishment of debt – related party     527       2,142  
Other expenses (income), net     336       58  
Total other expenses     20,408       32,494  
                 
Loss before income taxes     (6,478 )     (18,691 )
Provision for (benefit from) income taxes     1,238       (3,038 )
Net loss   $ (7,716 )   $ (15,653 )
                 
Other comprehensive income (loss), net of tax:                
Foreign currency translation adjustments   $ (443 )   $ 200  
Unrealized gain on cash flow hedges, net of taxes of $0 and $(59), respectively     0       97  
Other comprehensive (loss) income     (443 )     297  
Comprehensive loss   $ (8,159 )   $ (15,356 )
                 
Net loss   $ (7,716 )   $ (15,653 )
   Series A convertible preferred stock dividends     (509 )     (55 )
   Series C preferred stock dividends     (103 )     0  
   Series A deemed dividend     (2,422 )     (5,553 )
   Series B deemed dividend     (1,098 )     0  
   Series C deemed dividend     (1,401 )     0  
Loss available to common stockholders – basic and diluted   $ (13,249 )   $ (21,261 )
                 
Loss per common share:                
Basic and diluted   $ (0.62 )   $ (1.03 )
                 
Weighted average shares used to compute net loss per common share:                
Basic and diluted     21,294,432       20,714,531  

 

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

 

F- 4
 

  

Cyalume Technologies Holdings, Inc.

Consolidated Statements of Changes in Stockholders' Equity

(in thousands, except shares)

 

    Series A
Preferred Stock
    Series C
Preferred Stock
    Series B
Preferred Stock
    Common Stock                          
    Number
of Shares
    Amount     Number
of Shares
    Amount     Number
of Shares
    Amount     Number
of Shares
    Amount     Additional
Paid-In
Capital
    Accumulated
Deficit
    Accumulated
Other
Comprehensive
Loss
    Total
Stockholders’
Equity
 
Balance at December 31, 2012     0     $ 0       0     $ 0       0     $ 0       20,738,260     $ 21     $ 105,990     $ (80,221 )   $ (515 )   $ 25,275  
Proceeds received from issuance of Series A convertible preferred stock     123,077       4,000       0       0       0       0       0       0       0       0       0       0  
Series A convertible preferred stock issuance costs     0       0       0       0       0       0       0       0       (647 )     0       0       (647 )
Dividends accrued on Series A convertible preferred stock     0       55       0       0       0       0       0       0       (55 )     0       0       (55 )
Deemed dividend on Series A convertible preferred stock     0       4,000       0       0       0       0       0       0       (4,000 )     0       0       (4,000 )
Excess of common warrant and preferred warrant fair value     0       (4,000 )     0       0       0       0       0       0       (1,553 )     0       0       (1,553 )
Fair value of amended related party note over note face value     0       0       0       0       0       0       0       0       2,067       0       0       2,067  
Share-based compensation     0       0       0       0       0       0       0       0       773       0       0       773  
Net loss     0       0       0       0       0       0       0       0       0       (15,653 )     0       (15,653 )
Other comprehensive income     0       0       0       0       0       0       0       0       0       0       297       297  
Balance at December 31, 2013     123,077       4,055       0       0       0       0       20,738,260       21       102,575       (95,874 )     (218 )     6,504  
Proceeds received from issuance of Series C preferred stock     0       0       1,000       1,000       0       0       0       0       0       0       0       0  
Proceeds received from issuance of Series B convertible preferred stock     0       0       0       0       1,000       1,000       0       0       0       0       0       1,000  
Series A, B and C allocation of fair value     0       0       0       (401 )     0       401       0       0       0       0       0       401  
Series A, B and C preferred stock issuance costs     0       0       0       0       0       0       0       0       (321 )     0       0       (321 )
Dividends accrued on Series A and Series C preferred stock     0       509       0       103       0       0       0       0       (612 )     0       0       (612 )
Reversal of forfeited restricted awards     0       0       0       0       0       0       (3,333 )     0       0       0       0       0  
Warrants amended in connection with refinancing     0       0       0       0       0       0       0       0       (72 )     0       0       (72 )
Common stock issuance - payment of contingent consideration liability     0       0       0       0       0       0       350,000       0       241       0       0       241  
Shares issued to related party     0       0       0       0       0       0       242,308       0       157       0       0       157  
Shares issued – warrant exercise     0       0       0       0       0       0       73,009       0       45       0       0       45  
Excess of Amended JFC Note fair value over face value     0       0       0       0       0       0       0       0       483       0       0       483  
Termination of USVC common and preferred warrants     0       0       0       0       0       0       0       0       1,525       0       0       1,525  
Series C deemed dividends     0       0       0       1,401       0       0       0       0       (1,401 )     0       0       (1,401 )
Share-based compensation     0       0       0       0       0       0       0       0       394       0       0       394  
                                                                                                 
Net loss     0       0       0       0       0       0       0       0       0       (7,716 )     0       (7,716 )
                                                                                                 
Other comprehensive loss     0       0       0       0       0       0       0       0       0       0       (443 )     (443 )
Balance at December 31, 2014     123,077     $ 4,564       1,000     $ 2,103       1,000     $ 1,401       21,400,244     $ 21     $ 103,014     $ (103,590 )   $ (661 )   $ 185  

 

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

 

F- 5
 

  

Cyalume Technologies Holdings, Inc.

Consolidated Statements of Cash Flows

(in thousands)

 

    For the Year     For the Year  
    Ended     Ended  
    December 31,     December 31,  
    2014     2013  
Cash flows from operating activities:                
Net loss   $ (7,716 )   $ (15,653 )
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:                
Depreciation and amortization of property, plant and equipment     1,367       1,387  
Amortization of intangible assets, debt issuance costs and debt discount     2,050       2,429  
Provision for (benefit) from deferred income taxes     430       (3,328 )
Share-based compensation expense     394       773  
Impairment loss on intangible assets     9,580       875  
Impairment loss on goodwill     0       168  
Change in fair value of contingent consideration     0       242  
Change in fair value of derivatives     0       (14 )
Change in fair value of warrants liability     (4,852 )     525  
Non-cash interest expense     1,017       159  
Legal settlement     0       2,038  
Uncollectible receivable – related party     0       3,862  
Loss on extinguishment of debt – related party     527       2,142  
Other non-cash expenses     69       127  
Changes in operating assets and liabilities:                
Accounts receivable     112       212  
Inventories     2,818       (1,124 )
Prepaid expenses and other current assets     157       12  
Accounts payable and accrued liabilities     (3,347 )     2,115  
Accrued interest on note payable to related party     252       252  
Deferred revenue and deferred rent     101       80  
Income taxes payable     723       114  
Net cash provided by (used in) operating activities     3,682       (2,607 )
                 
Cash flows from investing activities:                
Purchases of long-lived assets     (664 )     (813 )
Payments for intangibles     (172 )     (370 )
Proceeds from disposal of long-lived assets     0       18  
Net cash used in investing activities     (836 )     (1,165 )
                 
Cash flows from financing activities:                
Net proceeds from line of credit     450       1,600  
Principal payments on notes payable     (1,912 )     (2,621 )
Payments of debt issuance and deferred financing costs     (21 )     (163 )
Proceeds received from issuance of preferred stock     2,000       4,000  
Payment of preferred stock issuance costs     (321 )     (647 )
Proceeds received from warrant exercise     1       0  
Payment in connection with legal settlement agreements     (1,465 )     (275 )
Principal payments on capital lease obligations     (15 )     (14 )
Net cash (used in) provided by financing activities     (1,283 )     1,880  
                 
Effect of exchange rate changes on cash     (70 )     62  
Net increase (decrease) in cash     1,493       (1,830 )
Cash, beginning of period     865       2,695  
Cash, end of period   $ 2,358     $ 865  

 

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

 

F- 6
 

  

Cyalume Technologies Holdings, Inc.

Notes to Consolidated Financial Statements

 

1. BACKGROUND AND DESCRIPTION OF BUSINESS

 

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

 

The Company’s 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 (see Note 18) and therefore, this subsidiary no longer has any activity.

 

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

 

Our business is managed and financial results are reported as one segment. The CEO, who is the chief operating decision maker, focuses on consolidated results to make strategic and tactical decisions. Our one operating segment consists of three reporting units: Chemical Light (the operations of CTI, CTS and CTSAS), 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 years ended December 31, 2014 and 2013, the Company had net losses of approximately $7.7 million and $15.7 million, respectively, and generated approximately $3.7 million of cash from its operations for the year ended December 31, 2014. The Company used approximately $2.6 million in cash flow for operating activities for the year ended December 31, 2013. As of December 31, 2014 and 2013, the Company had an accumulated deficit of approximately $103.6 million and $95.9 million, respectively, and total stockholders’ equity of $0.2 million and $6.5 million, respectively. The Company’s unrestricted cash balance was approximately $2.4 million at December 31, 2014.

 

Due to uncertainty about the Company’s ability to meet its current debt obligations, in their report on our annual financial statements for the year ended December 31, 2014, the Company’s independent registered public accounting firm included an explanatory paragraph regarding the Company’s ability to continue as a going concern.

 

In light of the Company’s results of operations, management has been evaluating various possibilities including but not limited to refinancing or restructuring the Company’s debt, reducing or eliminating operating expenses, and raising additional capital through the issuance of common or preferred stock or securities convertible into common stock. These possibilities, to the extent available, may be on terms that result in significant dilution to the Company’s existing stockholders, may reduce the value of the stockholders’ investment in the Company or may impact the Company’s stock price.

 

There can be no assurances that the Company will be successful in raising adequate additional financial support. If not, the Company would be required to reduce operations. The Company’s consolidated financial statements do not include any adjustments relating to the recoverability of assets and classification of assets and liabilities that might be necessary should the Company be unable to continue as a going concern.

 

F- 7
 

  

2. SIGNIFICANT ACCOUNTING POLICIES

 

Foreign Operations

 

The accounting records of our France-based subsidiary CTSAS are maintained in Euros, their local and functional currency. For consolidation, revenue and expense transactions are translated to U.S. dollars using the average exchange rate of the month in which the transaction took place. Assets and liabilities are translated to U.S. dollars using the exchange rate in effect as of the balance sheet date. Equity transactions are translated to U.S. dollars using the exchange rate in effect as of the date of the equity transaction. Translation gains and losses are reported as a component of accumulated other comprehensive income within stockholders’ equity. Gains and losses resulting from transactions which are denominated in other than the functional currency are reported as other income or loss in the statement of comprehensive income (loss) in the period the gain or loss occurred.

 

Comprehensive Loss

 

Comprehensive loss accounts for changes in stockholders’ equity resulting from non-stockholder sources. All transactions that would cause comprehensive loss to differ from net loss have been recorded and disclosed and relate to (i) the translation of the accounting records of our France-based subsidiary CTSAS and (ii) the effective portion of activities designated as hedges for hedge accounting purposes.

 

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 are believed to be reasonable under the circumstances. Due to the inherent uncertainty involved with estimates, actual results may differ.

 

Accounts Receivable

 

Accounts receivable are recorded at the aggregate unpaid amount less any allowance for doubtful accounts. The allowance is based on historical bad debt experience and the specific identification of accounts deemed uncollectible. An account receivable’s delinquency status is determined based on its contractual terms. Interest is not charged on outstanding balances. Accounts are written off only when all methods of recovery have been exhausted. Credit risk is controlled through initial credit evaluations and approvals, credit limits, and monitoring procedures. Ongoing credit evaluations of customers are performed but do not require collateral to secure accounts receivable.

 

Inventories

 

Inventories are stated at the lower of cost (on a first-in first-out (“FIFO”) method) or net realizable value. The cost of inventory consists of raw material content, labor costs to produce the inventory and overhead costs incurred during production of the inventory. The Company periodically reviews 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.

 

Property, Plant and Equipment

 

Property, plant and equipment are stated at cost. Depreciation is computed under the straight-line method over the estimated useful lives of four to eight years for equipment and 30 years for buildings and improvements.

 

Property, plant and equipment assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. Such reviews are based on a comparison of the asset’s undiscounted cash flows to the recorded carrying value for the asset. Impairment charges, if any, are recorded in the period in which the impairment is determined.

 

F- 8
 

  

Goodwill

 

Goodwill is deemed to have an indefinite life and accordingly, is not subject to amortization. Goodwill is subject to annual impairment reviews as of August 31, and, if conditions warrant, interim reviews based upon its estimated fair value. Impairment charges, if any, are recorded in the period in which the impairment is determined.

 

The Company performs a traditional two-step process for assessing goodwill for impairment annually. The first step of the two-step process requires a comparison of estimated fair value for each reporting unit versus the carrying or book value. If the carrying value exceeds fair value, further analysis (step 2 of the two-step process) is required to determine the amount, if any, that goodwill is impaired. Fair value is determined using a discounted cash flow analysis.

 

Intangible Assets

 

Intangible assets include developed technologies and patents, customer relationships, non-compete agreements, trademarks and trade names, all of which are amortized over their estimated useful lives. The carrying amounts of amortizing intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that those carrying amounts may not be recoverable.

 

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. Costs incurred with third parties that are related to internally developing or successfully defending an intangible asset are capitalized as part of the intangible asset developed or defended and amortized over that asset’s remaining useful life. Such costs with third parties related to patent or trademark applications that are ultimately rejected by the relevant government authority are expensed upon rejection. The useful lives used for amortization of intangible assets are as follows:

 

    Useful lives  
Patents and developed technologies     (1)  
Purchased customer relationships     9 – 13 years  
Trademarks and trade names     (2)  
Non-compete agreements     5 years  

 

(1) Each patent has its own legal expiration date and, therefore, its own useful life. Generally, our patents’ legal lives begin when the related patent application is filed with the relevant government authority and ends 20 years thereafter. Amortization on patent costs begins when the relevant government authority approves the related patent. Patents that have been recorded as of December 31, 2014 are expected to expire by 2034. Impairment charges, if any, are recorded in the period in which the impairment is determined. An intangible impairment loss on patents of approximately $5.3 million was recorded during 2014 (see Note 3).

 

(2) Trademarks and trade names of CTI are deemed to have a useful life of 15 years. CTI’s trademarks and trade names are reviewed for impairment whenever events or changes in circumstances indicate that those carrying amounts may not be recoverable. Impairment charges, if any, are recorded in the period in which the impairment is determined. An intangible impairment loss on trade names of approximately $4.3 million was recorded during 2014 (see Note 3).

 

Debt Issuance and Deferred Financing Costs

 

Costs paid to lenders to obtain financing are presented as discounts on the related debt and are amortized to interest expense over the term of the related financing, using the effective interest method (unless the financing is a line of credit, in which case the straight-line method is used). Such costs paid to third parties are presented as assets and are amortized to interest expense in the same manner as costs paid to lenders.

 

Derivatives

 

Derivatives are recorded at their fair value as of the balance sheet date. If a derivative qualifies for “hedge accounting” under U.S. GAAP and has been designated as a hedge by us, then the “effectively hedged” portion is recorded, as defined by U.S. GAAP, of changes in such derivatives’ fair value in accumulated other comprehensive loss, which is a component of our stockholders’ equity. The Company records (i) ineffectively hedged portions of such changes in fair value or (ii) changes in the fair value of derivatives not designated as a hedge in our consolidated statement of comprehensive loss in the period the change occurred. On the consolidated statement of cash flows, cash flows from derivative instruments accounted for as cash flow hedges are classified in the same category as the cash flows from the items being hedged.

 

F- 9
 

  

Warrants Liability

 

The Company uses fair values as determined by significant unobservable inputs. These estimated values are significant inputs into the Monte Carlo simulation method and the Black Scholes pricing model used to calculate the estimated fair value of common warrants and preferred warrants potentially settleable in cash, which are recorded as warrants liability. The estimated fair value of the common warrants and the preferred warrants are determined at each balance sheet date and the change in the estimated fair value of the warrants is reflected within the Company’s statements of comprehensive loss. Certain common and preferred warrants were terminated on July 30, 2014 (see Note 19).

 

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.

 

Two significant contracts provide 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, the pricing under these contracts is reviewed to determine whether they require the sale of products at a loss. To date, there are no loss contracts which would require the accrual of future losses in the current financial statements.

 

Research and development services are provided for customers for which the Company earns payments that are contingent upon achieving a specific result (“milestones”). Upon achieving such milestones, revenue is recognized provided that 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.

 

Taxes Collected from Customers

 

Sales taxes collected from customers are not considered revenue and are included in accounts payable and accrued expenses until remitted to the taxing authorities.

 

Shipping and Handling Costs

 

Outbound shipping and handling costs are included in sales and marketing expenses in the accompanying consolidated statements of comprehensive income (loss). These costs were approximately $358,000 and $423,000 for the years ended December 31, 2014 and 2013, respectively.

 

Advertising Costs

 

Advertising costs are expensed as incurred and are included in sales and marketing expenses in the accompanying consolidated statements of comprehensive income (loss). Advertising expense was $151,000 and $215,000 for the years ended December 31, 2014 and 2013, respectively.

 

Stock-Based Compensation

 

Stock-based compensation is incurred related to awards of common stock, restricted common stock and options to employees and non-employees. Those awards are measured at their fair value on the date the award is granted and are recognized in our consolidated financial statements over the period the grantee is required to provide services in exchange for the award. When recognized as an expense, the fair value of the award, less estimated forfeitures, is recognized on a straight-line basis over the award service period; if there is no such service period, then the entire fair value of the award is recognized as expense on the grant date.

 

Research and Development

 

The Company has research and development groups with full-time chemists and engineers at both the West Springfield and Bound Brook facilities. The research and development groups are focused on maintaining quality of existing products, developing improvements to existing products, and developing new technologies and products with viable commercial applications. Research and development costs are expensed as incurred.

 

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.

 

F- 10
 

  

In assessing the realization of long-term deferred income tax assets, it is considered whether it is more likely than not that the deferred income tax assets will be realized. The realization of deferred income tax assets depends upon future taxable income in years before net operating loss carryforwards expire. The recoverability of deferred income tax assets is evaluated on a quarterly basis. If the Company determines that it is more likely than not that deferred income tax assets will not be recovered, a valuation allowance is established 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 sheet along with any associated interest and penalties that would be payable to the taxing authorities upon examination. There were no such positions as of December 31, 2014 or 2013.

 

Interest on tax deficiencies is classified as interest expense and income tax penalties are classified as other expense.

 

In February 2012, an IRS audit was completed of the Company’s tax returns for the years 2008 and 2009. There were no adjustments to those tax returns. Tax returns filed for the years 2010, 2011, 2012 and 2013 are still open for audit and the 2013 tax return has been selected for examination by the IRS. The tax return for 2014 is expected to be filed under a filing extension prior to September 15, 2015.

 

Net Loss per Common Share

 

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

 

  (in thousands, except shares and per share information)
    Year Ended December 31,  
    2014     2013  
Numerator (in thousands):                
Net loss   $ (7,716 )   $ (15,653 )
Series A convertible preferred stock dividends     (509 )     (55 )
Series C preferred stock dividends     (103 )     0  
Series A deemed dividend     (2,422 )     (5,553 )
Series B deemed dividend     (1,098 )     0  
Series C deemed dividend     (1,401 )     0  
Loss available to common stockholders – basic and diluted   $ (13,249 )   $ (21,261 )
                 
Denominator:                
Weighted average shares outstanding – basic and diluted     21,294,432       20,714,531  
                 
Loss per common share:                
Basic and diluted loss per common share   $ (0.62 )   $ (1.03 )

 

F- 11
 

  

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:

 

    Year Ended December 31,  
    2014     2013  
Options     10,347,322       2,852,186  
Series A convertible preferred stock     33,401,765       6,153,850  
Series B convertible preferred stock     35,713,147       0  
Amended related party note     3,997,074       1,538,450  
Convertible notes payable     2,666,667       2,666,667  
Warrants     455,514       528,523  
Restricted stock awards     0       34,266  

  

A preferred warrant convertible into 123,077 shares of Series A preferred stock was only exercisable if 2014 earnings fell below a certain threshold. The 123,077 shares of Series A preferred stock would have been convertible into 6,153,850 shares of the Company’s common stock. The preferred warrant was terminated on July 30, 2014. The underlying 6,153,850 common shares issuable upon conversion of the Series A preferred stock relating to the preferred warrant were not included in the computation of diluted loss per common share for the years ended December 31, 2014 and 2013.

 

In connection with the issuance of the Company's Series A preferred stock, warrants to purchase a total of 528,523 shares of the Company's common stock were issued. If the preferred warrant became exercisable, the warrant shares pursuant to the warrants would have been increased by 174,404. The preferred warrant was terminated on July 30, 2014. The 174,404 contingently issuable warrant shares were not included in the computation of diluted loss per common share for the years ended December 31, 2014 and 2013.

 

Fair Value

 

Under U.S. GAAP, the Company is 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, the Company is 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 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.

 

F- 12
 

 

 

Recent Accounting Pronouncements

 

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

 

In July 2013, the FASB issued Accounting Standards Update (“ASU”) 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.

 

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 0214-09”). ASU 2014-09 states that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The new standard will be effective for annual and interim periods beginning on or after December 15, 2016, and will be effective for the Company beginning on January 1, 2017. Early adoption is not permitted. The Company is currently evaluating the method of adoption and the potential impact the update may have on our financial position and results of operations.

 

In August 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements – Going Concern (Topic 915): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (“ASU 2014-15”). ASU 2014-15 states that in connection with preparing financial statements for each annual and interim reporting period, an entity’s management should evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued (or within one year after the date that the financial statements are available to be issued when applicable). ASU 2014-15 will be effective for annual and interim periods beginning on or after December 15, 2016, and will be effective for the Company beginning on January 1, 2017. Early adoption is permitted. The Company is currently evaluating the impact, if any, of the adoption of this update.

 

3. IMPAIRMENT CHARGES

 

During 2014, the Company’s Chemical Light reporting unit recorded a loss on impairment of certain amortizing intangible assets of $9.6 million. See Note 23 for fair value information on these assets.

 

During the third quarter of 2014, management conducted an annual review of tangible and intangible assets for impairment. Before assessing whether any of the Company’s reporting units’ goodwill was impaired, the Company first assessed whether any long-lived assets were impaired. This assessment determined that the CTI patent asset was impaired by approximately $5.3 million and that CTI trademarks and trade names were impaired by approximately $4.3 million. Therefore, the Company recorded a $9.6 million impairment loss on these CTI intangible assets during the third quarter of 2014.

 

The “step 1” goodwill impairment assessment was performed by comparing the fair value of each reporting unit containing goodwill to those reporting units’ carrying values. The Company’s Chemical Light and Specialty Products reporting units have goodwill assets. Since there are no quoted market prices for the Company’s reporting units, the fair value of the Company’s reporting units were determined using a discounted present value technique utilizing each reporting unit’s forecasted after-tax cash flows. The “step 1” test determined that the fair value of the both the Chemical Light reporting unit and the Specialty Products reporting unit exceeded its carrying value, and therefore the goodwill did not need to be tested further under what is commonly known as “step 2” of the goodwill impairment assessment.

 

Under “step 2” of a goodwill impairment assessment, the implied fair value of a reporting unit’s goodwill is compared with the carrying amount of that goodwill. If the carrying amount of the goodwill exceeds the implied fair value of that goodwill, that excess must be recognized as an impairment loss. The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination. The excess of the fair value of the reporting unit over the amounts assigned to its assets and liabilities is the implied amount of a reporting unit’s goodwill. Intangible assets are identified and valued during this process, such as customer relationships, patents, trade names, non-compete agreements, and the Company’s workforce.

 

During 2013, CTS recorded a goodwill impairment loss of $168,000 and a loss on impairment of certain amortizable intangible assets of $875,000. During 2012, CTI recorded a $47.1 million loss on goodwill impairment, a $281,000 loss on impairment of certain amortizing intangible assets and a $273,000 loss on impairment of certain manufacturing equipment. The Chemical Light’s trade name intangible asset was not considered to be impaired as of August 31, 2013 or as of August 31, 2012. See Note 23 for fair value information on these assets.

 

F- 13
 

  

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

 

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

 

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

 

4. INVENTORIES

 

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

 

    2014     2013  
Raw materials   $ 4,777     $ 6,535  
Work-in-process     1,546       2,185  
Finished goods     1,503       2,062  
    $ 7,826     $ 10,782  

 

5. PREPAID EXPENSES AND OTHER CURRENT ASSETS

 

Prepaid expenses and other current assets consist of the following (all amounts in thousands):

 

    2014     2013  
Value added taxes receivable   $ 30     $ 17  
Prepaid expenses     495       312  
Debt issuance costs, current portion     21       53  
Other     102       81  
    $ 648     $ 463  

 

F- 14
 

 

6. PROPERTY, PLANT AND EQUIPMENT

 

Property, plant and equipment consist of the following (all amounts in thousands):

 

    2014     2013  
Land   $ 1,267     $ 1,285  
Building and improvements     3,564       3,332  
Machinery and equipment     8,408       8,300  
Leasehold improvements     275       266  
Furniture and fixtures     131       122  
Software     132       59  
      13,777       13,364  
Less: accumulated depreciation and amortization     (6,657 )     (5,363 )
    $ 7,120     $ 8,001  

 

7. GOODWILL

 

Goodwill represents the excess of the cost of acquiring CTI and CTSAS in 2008 and CSP and CTS in 2011 over the net fair value assigned to the assets acquired and liabilities assumed in those acquisitions, net of adjustments and impairment losses. Changes in the carrying amount of goodwill consist of the following (all amounts in thousands): 

 

    CTI/CTSAS/CTS
Chemical Light
    CSP     Total
Consolidated
Goodwill
 
Balance on December 31, 2012   $ 5,182     $ 2,978     $ 8,160  
Impairment loss  (see Notes 3 and 23)     (168 )     0       (168 )
Balance on December 31, 2013 (1)   $ 5,014     $ 2,978     $ 7,992  
Impairment loss  (see Notes 3 and 23)     0       0       0  
Balance on December 31, 2014 (2)   $ 5,014     $ 2,978     $ 7,992  

 

(1)(2) Gross amount of goodwill was approximately $67.7 million as of December 31, 2014 and 2013. Accumulated impairment losses were approximately $59.7 million as of December 31, 2014 and 2013.

  

8. OTHER INTANGIBLE ASSETS

 

Intangible assets as of December 31, 2014 consist of the following (all amounts in thousands):

 

    Cost     Accumulated
Amortization
    Net Book Value  
Developed technologies, including patents (1)   $ 8,736     $ 6,582     $ 2,154  
Trademarks and trade names (4)     1,068       401       667  
Purchased customer relationships (2)     8,562       4,858       3,704  
Non-compete agreements (3)     160       107       53  
Website development costs     16       3       13  
    $ 18,542     $ 11,951     $ 6,591  

 

Intangible assets as of December 31, 2013 consist of the following (all amounts in thousands):

 

    Cost     Accumulated
Amortization
    Net Book Value  
Developed technologies, including patents (1)   $ 13,853     $ 5,720     $ 8,133  
Trademarks and trade names (4)     5,365       119       5,246  
Purchased customer relationships (2)     8,812       4,336       4,476  
Non-compete agreements (3)     160       75       85  
Website development costs     8       0       8  
    $ 28,198     $ 10,250     $ 17,948  

 

F- 15
 

  

(1) Includes a patent obtained in the acquisition of CSP with a cost of $50,000 that is expected to be fully amortized in August 2026. Patents obtained in the acquisition of CTS with an initial cost of $410,000 and a December 31, 2012 gross value of approximately $238,000 were impaired by approximately $174,000 during 2013 (see Note 3 Impairment Charges) and the $17,000 of CTS patents remaining after the impairment was transferred to CTI in 2014. The CTI patents were impaired by approximately $5.3 million during 2014 (see Note 3 Impairment Charges).
(2) Includes customer relationships obtained in the acquisition of CSP with a cost of $920,000 that is expected to be fully amortized in December 2019. Customer relationships obtained in the acquisition of CTS with a cost of $840,000 was impaired by approximately $650,000 during 2013 (see Note 3 Impairment Charges) and the $60,000 of CTS customer relationships remaining after the impairment was transferred to CTI in 2014.
(3) Includes a non-compete agreement obtained in the acquisition of CSP with a cost of $160,000 that is expected to be fully amortized in August 2016. A non-compete agreement obtained in the acquisition of CTS with an initial cost of $140,000 was impaired by approximately $34,000 in 2013 (see Note 3 Impairment Charges).

(4) Includes CTS trade names which were impaired by approximately $17,000 in 2013 (see Note 3 Impairment Charges). Includes CTI trademarks and trade names which were impaired by approximately $4.3 million during 2014 (see Note 3 Impairment Charges).

 

In 2014 and 2013, certain intangible assets were found to be impaired and their cost was reduced accordingly. See Note 3 and 24 for further discussion regarding these impairments.

 

Trademarks can be renewed without substantial cost. If trademark and trade names are not renewed, then expected future cash flows associated with trademarks and trade names could be adversely affected.

 

Amortization of intangible assets was $1.8 million for both years ended December 31, 2014 and 2013.

 

During 2014, the Company capitalized approximately $5,000 and $160,000 of costs paid to third parties to create or defend trademarks and patents, respectively. During 2013, the Company capitalized approximately $27,000 and $342,000 of costs paid to third parties to create or defend trademarks and patents, respectively. The Company expects the patent-related costs to be amortized over approximately 20 years. The Company does not consider any intangible assets to have residual value.

 

The future amortization expense relating to finite-lived intangible assets for the next five years and beyond is estimated at December 31, 2014 to be (all amounts in thousands):

 

Year Ending December 31,      
2015   $ 957  
2016     947  
2017     922  
2018     910  
2019     841  
Thereafter     1,894  
    $ 6,471  

 

9. DEBT ISSUANCE COSTS

 

Debt issuance costs consist of unamortized costs paid to third parties to obtain senior debt, a line of credit, convertible notes and an amended related party note that will be amortized to interest expense using the effective interest method through 2015 and 2016. Amortization of capitalized debt issuance costs was approximately $42,000 and $113,000 for the years ended December 31, 2014 and 2013, respectively.

 

The future amortization expense relating to current and noncurrent capitalized debt issuance costs is approximately $27,000 and will be amortized to interest expense using the effective interest method through 2016.

 

10. ACCRUED EXPENSES

 

Accrued expenses consist of the following (all amounts in thousands):

 

    2014     2013  
Payroll-related  (1)   $ 834     $ 1,145  
Interest payable     550       301  
Subordinated term loan exit fee     285       30  
Professional fees     87       26  
Franchise and sales tax payable     50       51  
Other     884       348  
Related party payable – Selway Capital, LLC (2)     0       158  
    $ 2,690     $ 2,059  

  

F- 16
 

  

(1) Accrued payroll-related costs as of December 31, 2014 include approximately $141,000 of accrued severance costs. Accrued payroll-related costs as of December 31, 2013 include approximately $534,000 of accrued severance costs.
(2) See Note 13 for a description of the agreement with Selway Capital, LLC.

  

11. LINES 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 the Prime Rate, plus 3%. The line of credit’s interest rate at December 31, 2014 was 6.25%. The line of credit expires on December 19, 2015. This line of credit is subject to (i) the same restrictive covenants and (ii) the same collateral and guarantees as the senior debt Term Loan and the senior debt Real Estate Loan (see Note 12). At December 31, 2014, approximately $2.1 million was outstanding on this line of credit and borrowing availability was approximately $594,000 at December 31, 2014.

 

CTSAS has lines of credit, for borrowing against receivables, with a combined maximum borrowing capacity of €750,000 (or approximately $900,000 as of December 31, 2014). There were no outstanding borrowings at December 31, 2014 or 2013. The lines’ interest rates are variable, based on the Euro Overnight Index Average and the 3-month Euro Interbank Offered Rate. The lines are collateralized by primarily CTSAS accounts receivable. The lines have indefinite termination dates, but can be renegotiated periodically.

 

12. NOTES PAYABLE

 

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

 

    2014     2013  
Senior Debt - Term Loan   $ 4,239     $ 6,023  
Senior Debt - Real Estate Loan     1,551       1,679  
Subordinated Term Loan     9,676       8,659  
Promissory Note Payable     860       1,075  
Total     16,326       17,436  
Less: Unamortized debt discount     (337 )     (542 )
Less: Current portion of notes payable, including current portion of unamortized debt discount     (5,775 )     (1,925 )
Notes payable, net of current portion   $ 10,214     $ 14,969  

 

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

 

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 as described below, plus a one-time principal payment of approximately $2.5 million due at maturity in December 2015.

 

During 2013, interest payments on 60% of the Term Loan’s principal balance were previously hedged using a pay-fixed, receive-variable interest rate swap to reduce exposure to changes in cash payments caused by changes in interest rates on the Term Loan. The total interest rate on the swapped portion of the Term Loan was changed from 6.53% to 6.25% on December 19, 2013 and was 6.25% at December 31, 2014. Interest on the remaining 40% of the Term Loan that was not subject to an interest rate hedging relationship was at 6.25% at December 31, 2014 and at December 31, 2013. The Term Loan is collateralized by all of the assets of CTI (except CTI’s equity interests in CTSAS, of which only 65% is collateral of the Term Loan) and is guaranteed by Cyalume. The Term Loan requires various restrictive financial and nonfinancial covenants, such as a maximum leverage ratio, debt service coverage ratio and limitations on capital expenditures and dividends, with which we are in compliance as of December 31, 2014.

 

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

 

F- 17
 

 

During 2013, interest payments on the Real Estate Loan principal balance were hedged using a pay-fixed, receive-variable interest rate swap to reduce exposure to changes in cash payments caused by changes in interest rates on the Real Estate Loan. The Real Estate Loan’s total interest rate was changed from 6.42% to 6.25% on December 19, 2013 and was 6.25% at December 31, 2014. The Real Estate Loan is secured by a mortgage of the real property (land and building) located in West Springfield, MA, and is guaranteed by Cyalume. The Real Estate Loan requires various restrictive financial and nonfinancial covenants, such as a maximum leverage ratio, debt service coverage ratio and limitations on capital expenditures and dividends, with which the Company is in compliance with as of December 31, 2014.

 

The TD Bank line of credit (see Note 11), the Term Loan and the Real Estate Loan are senior in payment priority to all other notes payable and lines of credit.

 

Subordinated Term Loan

 

On July 29, 2010, the Subordinated Term Loan of $8.5 million was issued to Granite Creek Partners Agent, LLC (“Granite Creek”) and on November 19, 2013, the Company entered into a Fourth Amendment to the Subordinated Term Loan (the “Subordinated Amendment”) which extended the maturity date to June 30, 2016. Pursuant to the Subordinated Amendment, interest is payable in kind through December 19, 2015 and then payable monthly in cash through the June 30, 2016 maturity date. Interest is payable monthly at a rate of 11% per annum. No principal payments are required until maturity. The Company has the right to prepay the loan in whole or in part at any time without penalty in the event that the TD Bank Senior Debt is repaid. The Subordinated Term Loan ranks junior to all debt held by TD Bank, N.A. but senior to all other remaining long-term debt including existing and future subordinated debt. The Subordinated Term Loan is convertible at any time by Granite Creek into 2,666,667 shares of common stock at a conversion price of approximately $3.19 per share. No portion of the Subordinated Term Loan has been converted to our common stock. The Company’s common stock’s closing market price on December 31, 2014 was $0.05 per share; therefore the loan’s if-converted value of approximately $0.1 million is less than the unpaid principal balance by approximately $9.5 million as of December 31, 2014. 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 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