Cyalume
Cyalume Technologies Holdings, Inc. (Form: 10-Q, Received: 08/14/2015 18:39:25)

 

 

 

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

(Mark One)

 

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

 

For the quarterly period ended June 30, 2015

 

OR

 

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

 

For the transition period from                             to                       

 

Commission File Number  000-52247

 

Cyalume Technologies Holdings, Inc.

(Exact name of registrant as specified in its charter)

 

Delaware   20-3200738
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification No.)
     
910 SE 17 th  Street, Suite 300, Fort Lauderdale, Florida   33316
(Address of principal executive offices)   (Zip Code)

 

(413) 858-2500

(Registrant's telephone number, including area code)

 

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

 

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

 

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

 

Large accelerated filer  ¨   Accelerated filer  ¨  

Non-accelerated filer  ¨

(Do not check if a smaller
reporting company)

  Smaller reporting
company  x

 

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

 

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: As of August 12, 2015, there were outstanding 21,400,244 shares of the registrant’s Common Stock, par value $.001 per share.

 

 

 

 

Cyalume Technologies Holdings, Inc.

FORM 10-Q

 

INDEX

 

PART I—FINANCIAL INFORMATION  
   
Item 1. Financial Statements  
     
  Condensed Consolidated Balance Sheets as of June 30, 2015 and December 31, 2014 (unaudited) 3
     
  Condensed Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2015 and 2014 (unaudited) 4
     
  Condensed Consolidated Statements of Changes in Convertible Preferred Stock and Stockholders' Equity for the Six Months Ended June 30, 2015 (unaudited) 5
     
  Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2015 and 2014 (unaudited) 6
     
  Notes to Condensed Consolidated Financial Statements (unaudited) 7
     
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 21
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk 25
     
Item 4. Controls and Procedures 25
     
PART II—OTHER INFORMATION  
   
Item 1. Legal Proceedings 26
     
Item 1A. Risk Factors 26
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 26
     
Item 3. Defaults Upon Senior Securities 26
     
Item 4. Mine Safety Disclosures 26
     
Item 5. Other Information 26
     
Item 6. Exhibits 26
     
Signatures 27

  

  1  

 

  

PART I—FINANCIAL INFORMATION

 

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

  

  2  

 

 

ITEM 1. Financial Statements

Cyalume Technologies Holdings, Inc.

Condensed Consolidated Balance Sheets

(in thousands, except shares and per share information)

  

    June 30,
2015
(unaudited)
    December 31,
2014
 
Assets                
Current assets:                
Cash   $ 1,073     $ 2,358  
Accounts receivable, net of allowance for doubtful accounts of $21 and $22, respectively     4,554       3,622  
Inventories, net     8,168       7,826  
Income taxes refundable     130       0  
Prepaid expenses and other current assets     1,184       648  
Total current assets     15,109       14,454  
                 
Property, plant and equipment, net     6,869       7,120  
Goodwill     7,992       7,992  
Other intangible assets, net     6,111       6,591  
Debt issue costs, noncurrent     880       0  
Other noncurrent assets     0       18  
Total assets   $ 36,961     $ 36,175  
Liabilities and Stockholders’ Equity                
Current liabilities:                
Line of credit   $ 3,000     $ 2,050  
Current portion of notes payable     598       5,775  
Accounts payable     2,230       2,144  
Accrued expenses     2,223       2,690  
Deferred revenue and deferred rent     166       181  
Income taxes payable     400       644  
Capital lease obligation     0       7  
Warrants liability     30       25  
Legal obligation     1,400       0  
Total current liabilities     10,047       13,516  
                 
Notes payable, net of current portion     16,598       10,214  
Note payable due to related parties     0       2,100  
Deferred income taxes     376       430  
Legal obligation     0       2,781  
Other noncurrent liabilities     280       282  
Total liabilities     27,301       29,323  
                 
Commitments and contingencies (Note 12)                
                 
Series C preferred stock, $0.001 par value; 1,000,000 shares authorized; 1,000 shares issued and outstanding     2,230       2,103  
Series D convertible preferred stock, $0.001 par value; 1,000,000 shares authorized; 10 shares issued and outstanding     830       0  
Series A convertible preferred stock, $0.001 par value; 1,000,000 shares authorized; 123,097 shares issued and outstanding     4,840       4,564  
                 
Stockholders' equity:                
Series B convertible preferred stock, $0.001 par value; 1,000,000 shares authorized; 1,000 shares issued and outstanding     1,401       1,401  
Common stock, $0.001 par value; 150,000,000 shares authorized; 21,400,244 shares issued and outstanding     21       21  
Additional paid-in capital     102,871       103,014  
Accumulated deficit     (101,604 )     (103,590 )
Accumulated other comprehensive loss     (929 )     (661 )
Total stockholders’ equity     1,760       185  
Total liabilities and stockholders' equity   $ 36,961     $ 36,175  

 

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

   

  3  

 

 

 

Cyalume Technologies Holdings, Inc.

Condensed Consolidated Statements of Comprehensive Income

(in thousands, except shares and per share information)

(Unaudited)

 

    Three     Three     Six     Six  
    Months Ended     Months Ended     Months Ended     Months Ended  
    June 30, 2015     June 30, 2014     June 30, 2015     June 30, 2014  
Revenues   $ 9,916     $ 8,887     $ 16,858     $ 16,156  
Cost of revenues     5,326       5,336       9,130       9,728  
Gross profit     4,590       3,551       7,728       6,428  
                                 
Other expenses (income):                                
Sales and marketing     562       911       1,108       1,865  
General and administrative     1,912       1,554       3,486       3,473  
Research and development     287       379       599       754  
Interest expense, net     857       524       1,360       1,037  
Interest expense – related party     37       117       100       223  
Amortization of intangible assets     238       497       477       993  
Legal settlement     (1,381 )     0       (1,381 )     0  
Change in warrant liability fair value     (15 )     (4,095 )     5       (5,042 )
Other expenses, net     6       291       (131 )     352  
Total other expenses, net     2,503       178       5,623       3,655  
                                 
Income before income taxes     2,087       3,373       2,105       2,773  
Provision for income taxes     34       101       119       175  
Net income     2,053       3,272       1,986       2,598  
                                 
Other comprehensive (loss) income, net of tax:                                
Foreign currency translation adjustments     73       (44 )     (268 )     (52 )
Other comprehensive income (loss)     73       (44 )     (268 )     (52 )
Comprehensive income   $ 2,126     $ 3,228     $ 1,718     $ 2,546  
                                 
Net income   $ 2,053     $ 3,272     $ 1,986     $ 2,598  
Series A convertible preferred stock dividends     (141 )     (125 )     (276 )     (245 )
Series C preferred stock dividends     (65 )     0       (127 )     0  
Net income available to common stockholders   $ 1,847     $ 3,147     $ 1,583     $ 2,353  
                                 
Earnings per common share:                                
Basic   $ 0.09     $ 0.15     $ 0.07     $ 0.11  
Diluted   $ 0.02     $ 0.10     $ 0.02     $ 0.08  
Weighted average shares used to compute net earnings per common share:                                
Basic     21,400,244       21,362,564       21,400,244       21,184,567  
Diluted     100,479,954       32,153,976       100,370,051       29,322,654  

 

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

 

  4  

 

   

Cyalume Technologies Holdings, Inc.

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

(in thousands, except shares)

(Unaudited)

 

    Series A Convertible Preferred Stock    

Series C Preferred Stock

   

Series D Convertible Preferred Stock

   

Series B Preferred Stock

    Common Stock    

Additional

         

Accumulated Other

   

Total

 
    Number of Shares     Amount     Number of Shares     Amount     Number of Shares     Amount     Number of Shares     Amount     Number of Shares     Amount    

Paid-In

Capital

   

Accumulated Deficit

   

Comprehensive Loss

   

Stockholders’ Equity

 
Balance at December 31, 2014     123,077     $ 4,564       1,000     $ 2,103       0     $ 0       1,000     $ 1,401       21,400,244     $ 21     $ 103,014     $ (103,590 )   $ (661 )   $ 185  
                                                                                                                 
Dividends accrued on Series A and Series C preferred stock     0       276       0       127       0       0       0       0       0       0       (403 )     0       0       (403 )
Issuance of Series A and Series D convertible preferred stock     20       0       0       0       10       830       0       0       0       0       0       0       0       0  
Relative fair value allocated to warrant issued     0       0       0       0       0       0       0       0       0       0       46                       46  
Share-based compensation     0       0       0       0       0       0       0       0       0       0       214       0       0       214  
Net income     0       0       0       0       0       0       0       0       0       0       0       1,986       0       1,986  
Other comprehensive loss     0       0       0       0       0       0       0       0       0       0       0       0       (268 )     (268 )
Balance at June 30, 2015     123,097     $ 4,840       1,000     $ 2,230       10     $ 830       1,000     $ 1,401       21,400,244     $ 21     $ 102,871     $ (101,604 )   $ (929 )   $ 1,760  

  

 

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

  

  5  

 

 

Cyalume Technologies Holdings, Inc.

Condensed Consolidated Statements of Cash Flows

(in thousands)

(Unaudited)

 

    For the Six     For the Six  
    Months Ended     Months Ended  
    June 30,     June 30,  
    2015     2014  
Cash flows from operating activities:                
Net income   $ 1,986     $ 2,598  
Adjustments to reconcile net income to net cash provided by operating activities:                
Depreciation and amortization of property, plant and equipment     615       750  
Amortization of intangible assets, debt issuance costs and debt discount     905       1,111  
Non-cash interest expense     414       490  
Share-based compensation expense     214       262  
Change in fair value of derivatives     (29 )     0  
Change in fair value of warrant liability     5       (5,042 )
Legal settlement     (1,381 )     0  
Other non-cash expenses     4       8  
Changes in operating assets and liabilities:                
Accounts receivable     (404 )     16  
Inventories     (422 )     1,137  
Prepaid expenses and other current assets     (49 )     197  
Accounts payable and accrued liabilities     (375 )     (1,494 )
Accrued interest on note payable to related party     (504 )     125  
Deferred revenue and deferred rent     (15 )     267  
Income taxes payable     (359 )     181  
Net cash provided by operating activities     605       606  
                 
Cash flows from investing activities:                
Purchases of long-lived assets     (483 )     (104 )
Payments for intangibles     (84 )     (152 )
Net cash used in investing activities     (567 )     (256 )
                 
Cash flows from financing activities:                
(Repayments on) proceeds from TD Bank line of credit, net     (2,050 )     650  
Principal repayments on CTI long term notes payable     (15,880 )     (962 )
Borrowings on Monroe line of credit, net     3,000       0  
Borrowings on Monroe long term notes payable, net of repayments     17,888       0  
Repayment of related party note payable     (2,100 )     0  
Principal payments on capital lease obligations     (7 )     (7 )
Proceeds received from warrant exercise     0       1  
Payment of preferred stock issuance costs     0       (53 )
Payment in connection with legal settlement agreement     (107 )     (107 )
Payment of debt issuance and deferred financing costs     (1,983 )     (15 )
Net cash used in financing activities     (1,239 )     (493 )
                 
Effect of exchange rate changes on cash     (84 )     (17 )
Net decrease in cash     (1,285 )     (160 )
Cash, beginning of period     2,358       865  
Cash, end of period   $ 1,073     $ 705  

 

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

 

 

  6  

 

 

Cyalume Technologies Holdings, Inc.

Notes to Condensed Consolidated Financial Statements

 

1. ORGANIZATION

 

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

 

2. BASIS OF PRESENTATION

 

The accompanying unaudited condensed consolidated financial statements included herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission and in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information. Certain information and note disclosures normally included in annual financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to those rules and regulations. The Company believes that the disclosures made are adequate to make the information presented not misleading. All the adjustments which, in the opinion of management, are considered necessary for a fair presentation of the results of operations for the periods shown are of a normal recurring nature and have been reflected in the unaudited condensed consolidated financial statements. Results from operations for the three and six months ended June 30, 2015 are not necessarily indicative of the results that may be expected for any other interim period or for the year ending December 31, 2015. The consolidated balance sheet at December 31, 2014 has been derived from the audited consolidated financial statements at that date. The information included in these unaudited interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and footnotes thereto in our Annual Report on Form 10-K for the year ended December 31, 2014 filed on March 31, 2015.

 

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the period. While the Company believes that such estimates are fair when considered in conjunction with the condensed consolidated financial position and results of operations taken as a whole, the actual amount of such estimates, when known, may vary from these estimates.

  

3. DESCRIPTION OF BUSINESS

 

These consolidated financial statements and footnotes include the financial position and operations of Cyalume Technologies Holdings, Inc. (“Cyalume”), a holding company that is the sole shareholder of Cyalume Technologies, Inc. (“CTI”), of Cyalume Specialty Products, Inc. (“CSP”) and of CT SAS Holdings, Inc. (“CT SAS Holdings”). CTI is the sole shareholder Cyalume Realty, Inc. (“CRI”) and Combat Training Solutions, Inc. (“CTS”) and CT SAS Holdings is the sole shareholder of Cyalume Technologies, SAS (“CTSAS”). 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’s business operations constitute the majority, based on revenues and assets, of our consolidated business operations.

 

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

 

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

 

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

 

  7  

 

 

Cyalume Technologies Holdings, Inc.

Notes to Condensed Consolidated Financial Statements

 

The Company’s business is managed and financial results are reported as one segment. Our CEO, who is the Company’s chief operating decision maker, focuses on consolidated results to make strategic and tactical decisions. The Company’s 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, the holding company CT SAS Holdings and the parent company Cyalume Technologies Holdings, Inc.).

 

The Company’s condensed consolidated financial statements have been prepared assuming the Company will continue as a going concern. For the six months ended June 30, 2015, the Company had net income of approximately $2.0 million and generated approximately $0.6 million of cash from its operations. As of June 30, 2015, the Company has an accumulated deficit of approximately $101.6 million, stockholders’ equity of approximately $1.8 million and the Company’s unrestricted cash balance was approximately $1.1 million.

 

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.

 

Management continues to evaluate various possibilities including but not limited to refinancing or restructuring the Company’s debt, reducing or eliminating operating expenses, and raising additional capital through the issuance of common or preferred stock or securities convertible into common stock. Effective May 18, 2015, the Company refinanced the majority of its debt (see Note 6).

 

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

  

4. INVENTORIES

 

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

 

    June 30,
2015
    December 31,
2014
 
Raw materials   $ 4,792     $ 4,777  
Work-in-process     1,896       1,546  
Finished goods     1,480       1,503  
    $ 8,168     $ 7,826  

 

5. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

 

The derivative assets and (liabilities) as of June 30, 2015 in our condensed consolidated balance sheet consist of the following (all amounts in thousands):

 

Derivative Instrument   Balance Sheet Location   Fair Value  
Currency forward contract   Other current assets   $ 5  
Warrants   Warrant liability     (30) (See Note 8)  
             

Currency Forward Contracts

 

CTSAS’ functional currency is the Euro. Periodically, CTSAS purchases inventory from CTI, which requires payment in U.S. dollars. Under certain circumstances, the Company uses currency forward contracts to mitigate CTSAS’ exposure to changes in the Euro-to-U.S. dollar exchange rate upon payment of these inventory purchases. Such currency forward contracts typically have durations of less than six months. The Company reports these currency forward contracts at their fair value. This relationship has not been designated as a hedge and therefore all changes in these currency forward contracts’ fair value are recorded in other (income) expenses, net within the accompanying condensed consolidated statements of comprehensive income. At June 30, 2015, the Company held one such currency forward contract. See Note 13 for a description of how the fair value of these contracts is estimated. 

  

  8  

 

 

Cyalume Technologies Holdings, Inc.

Notes to Condensed Consolidated Financial Statements

 

6. CREDIT LINE AND NOTES PAYABLE

 

Monroe Refinancing

 

On May 18, 2015, the Company entered into a credit agreement with Monroe Capital Management Advisors, LLC (the “Monroe Credit Agreement”), refinancing its existing senior and subordinated debt (see below). The Monroe Credit Agreement provides for a $25.0 million credit facility consisting of up to: (i) a $5.0 million revolving credit facility (the “Monroe Line of Credit”); (ii) an $18.0 million senior secured term loan (the “Term A Loan”) and (iii) a $2.0 million delayed draw term loan (the “Delayed Draw Loan”), which will be used to satisfy the Omniglow Settlement Agreement amount as described further in Notes 12 and 16.

 

The Monroe Credit Agreement has a term of five years and bears interest at a rate of the one-month LIBOR plus 9%. The Term A Loan requires quarterly repayments of approximately $113,000 beginning on June 30, 2015 through March 31, 2016; quarterly repayments of approximately $225,000 beginning on June 30, 2016 through March 31, 2017; quarterly repayments of approximately $450,000 beginning on June 30, 2017 through March 31, 2020; and a payment of approximately $11.3 million on the Term A Loan maturity date of May 18, 2020. Accrued interest shall be payable monthly in arrears on the last business day of each calendar month.


Pursuant to the terms of the Monroe Credit Agreement, the Company must maintain: (i) a fixed charge coverage ratio of 1.25 to 1.00; (ii) a senior debt to EBITDA ratio of 4.50 to 1.00, decreasing to 1.50 to 1.00 over the term of the loans; and (iii) a twelve month trailing EBITDA , measured quarterly, in the amount of $4,750,000, increasing to $7.0 million over the term of the loans. The Company was in compliance with the financial covenants related to these loans as of June 30, 2015.

 

The Delayed Draw Loan, which was drawn on August 3, 2015 (see Note 12), provides for quarterly amortization payments on the last day of each calendar quarter in an aggregate principal amount equal to 0.625% of the original principal amount of the Delayed Draw Loan, increasing to 1.25% on March 31, 2016, and increasing to 2.5% on March 31, 2017, with the balance payable on the maturity date of May 18, 2020.

 

In connection with the execution of the Monroe Credit Agreement, the Company issued 10 shares of Series D convertible preferred stock (the “Series D Convertible Preferred Stock”).  Each share of Series D Convertible Preferred Stock may be converted at any time at the option of the holder into a number of shares of common stock initially equal to 752,807.8 shares of common stock (see Note 7).

 

The proceeds from the Monroe Credit Agreement were allocated to the instruments issued based on their relative fair value.

 

Line of Credit

 

The Monroe Line of Credit has a maximum borrowing capacity of $5.0 million, bears interest at a rate of the one-month LIBOR plus 9% and expires on May 18, 2020. The Monroe Line of Credit replaced the Company’s previous line of credit with TD Bank N.A. (“TD Bank”). The amount which may be borrowed under the Monroe Line of Credit is dependent mainly on accounts receivable and inventory balances. Under the terms of the Monroe Credit Agreement, the Company is able to borrow under the Monroe Line of Credit in an amount not to exceed the lesser of: (i) $5.0 million and (ii) the sum of 85% of all eligible accounts receivable plus 60% of all eligible inventory. Interest is payable monthly and the Monroe Line of Credit’s interest rate at June 30, 2015 was 10%. This line of credit is subject to various restrictive covenants and collateral guarantees. At June 30, 2015, approximately $3.0 million was outstanding on the Monroe Line of Credit and borrowing availability was approximately $2.0 million.

 

Notes Payable

 

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

 

    June 30,
2015
    December 31,
2014
 
Monroe Term A Loan   $ 17,888     $ 0  
TD Bank Term Loan     0       4,239  
TD Bank Real Estate Loan     0       1,551  
Subordinated Term Loan     0       9,676  
Promissory Note Payable     753       860  
Total     18,641       16,326  
Less: Unamortized debt discount     (1,445 )     (337 )
Less: Current portion of notes payable, including current portion of unamortized debt discount     (598 )     (5,775 )
Notes payable, net of current portion   $ 16,598     $ 10,214  

 

Term Loans

 

In addition to the previous line of credit with TD Bank, CTI previously had two loans payable to TD Bank, a Term Loan and a Real Estate Loan (together, the “Senior Debt”), 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.

 

  9  

 

 

Cyalume Technologies Holdings, Inc.

Notes to Condensed Consolidated Financial Statements

 

On July 29, 2010, the subordinated term loan of $8.5 million (the “Subordinated Term Loan”) 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 was being accrued in kind monthly at a rate of 11% per annum. No principal payments were required until maturity. The Subordinated Term Loan was 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 was converted to the Company’s common stock. The Company previously determined that the convertible notes’ conversion feature was not a beneficial conversion feature under U.S. GAAP. Simultaneous with the issuance of the Subordinated Term Loan during 2010, the Company issued warrants to repay certain costs of obtaining the convertible notes. These warrants allowed the holder to purchase 160,000 shares of common stock at $1.50 per share through July 19, 2018. A portion of the $8.5 million gross proceeds from the issuance of the loan was allocated to the warrants based on the relative fair values of the debt instrument without the warrants and of the warrants themselves at time of issuance. The portion of the proceeds so allocated to the warrants was recorded as a debt discount and an increase to additional paid-in capital. The warrant’s fair value was increased in 2012 due to (i) a decrease in the exercise price of the warrants and (ii) an extension of the term of the warrant. The warrants were amended again during 2013 in connection with the Senior Amendment described above. An additional amount was added to debt discount and warrant liability during 2013 relating to (i) another decrease in the exercise price of the warrants to $0.01, (ii) an extension of the term of the warrants, and (iii) an increase to the number of shares of common stock that may be purchased upon exercise of the warrants to 455,514 shares of common stock that may be purchased. The debt discount was being amortized to interest expense using the effective interest method over the life of the convertible notes which had a maturity date of June 30, 2016. As a result of the amendment to the warrants in 2013, the warrants are no longer indexed to the Company’s stock, are considered a derivative and therefore, are being accounted for as a liability. The warrant liability relating to the 455,514 shares of common stock which may be purchased upon exercise of the warrants is approximately $30,000 as of June 30, 2015 (see Note 8).

 

The Company’s Senior Debt and Subordinated Term Loan were refinanced on May 18, 2015.

 

Upon the consummation of the Monroe Credit Agreement, the Company paid in full all amounts due under (i) the Amended and Restated Revolving Credit and Term Loan Agreement, dated July 29, 2010, as amended (the “Senior Credit Agreement”), by and among the Company, Cyalume Technologies, Inc. (“CTI”), certain of the Company’s other subsidiaries and TD Bank, N.A., as administrative agent and lender, (ii) the Subordinated Term Loan, dated July 29, 2010, as amended (the “Subordinated Loan Agreement”), by and among the Company, CTI, certain of the Company’s other subsidiaries, Granite Creek Flexcap I, L.P., Patriot Capital II, L.P. and Granite Creek Partners Agent, L.L.C., as administrative agent, and (iii) the amended and restated promissory note, dated November 19, 2013, as amended, previously issued by the Company to JFC Technologies, LLC (the “Amended JFC Note”) (see Note 10), such that each of the Senior Credit Agreement, the Subordinated Loan Agreement and the Amended JFC Note was paid in full and the Company has no further financial obligations thereunder. During the six months ended June 30, 2015, the Company expensed the remaining unamortized issuance costs relating to the previous Senior Debt and Subordinated Term Loan of approximately $0.3 million which is included within interest expense, net, within the accompanying Condensed Consolidated Statements of Comprehensive Income.

 

Promissory Note Payable

 

On November 19, 2013, the Company entered into a legal settlement agreement. The executed settlement agreement provided for the Company to make a series of payments to Antonio Colon in the amount of $215,000 annually, for a total of $1,075,000 pursuant to the Promissory Note executed on November 19, 2013 (the “Promissory Note”). This Promissory Note bears interest at a rate of 2% annually and requires principal and interest payments each March and September. The Promissory Note has a maturity date of October 15, 2018.

 

7. PREFERRED STOCK

 

Series A Convertible Preferred Stock

 

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

 

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

 

Each share of Series A Preferred Stock may be converted at any time at the option of the holder into a number of shares of common stock initially equal to 50 shares of common stock, determined by dividing the Liquidation Value per share of Series A Preferred Stock by the

 

  10  

 

 

Cyalume Technologies Holdings, Inc.

Notes to Condensed Consolidated Financial Statements

 

applicable conversion price per share of Series A Preferred Stock. The initial conversion price was equal to $0.65, subject to customary adjustments, including for any accrued but unpaid dividends and pursuant to certain anti-dilution provisions. Pursuant to the Series A Certificate of Designation amended on July 30, 2014 and amended again on May 15, 2015 (the “Amended Series A Certificate of Designation”), the conversion price per share of Series A Preferred Stock is now equal to $0.13664587. The Series A Preferred Stock is not subject to mandatory conversion at any time.

 

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

 

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

 

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

 

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

 

Series B Convertible Preferred Stock

 

On July 30, 2014, the Company entered into a Securities Purchase Agreement (the “Series B and C Purchase Agreement”) with Cova Small Cap Holdings, LLC (“Cova”), Bayonet Capital Fund I, LLC, and another investor (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”). Approximately $1.3 million of the net proceeds from the sale of the Units was used to pay a contingent legal obligation pursuant to Civil Action No. 06-706 (see Note 12).

 

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 amended on May 15, 2015 (the “Amended Series B Certificate of Designation”). Pursuant to the Amended 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 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 Amended 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 Amended 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, subject to certain exceptions, if the Company issues or sells shares of Common Stock or other equity securities for no consideration or for

 

  11  

 

 

Cyalume Technologies Holdings, Inc.

Notes to Condensed Consolidated Financial Statements

 

consideration that is based on an equity valuation of the Company of less than $2.0 million in the aggregate (a “Trigger Issuance”). In the event of a Trigger Issuance, the Conversion Number shall be increased as of the close of business on the effective date of the Trigger Issuance to a number calculated as follows: (i) two-thirds of the Common Stock deemed Outstanding (as defined in the Amended Series A Certificate of Designation) immediately following such Trigger Issuance (excluding any Common Stock Deemed Outstanding as a result of the conversion of the Series B Preferred Stock) (ii) divided by 1,000. 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.

 

Series C Preferred Stock

 

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 amended on May 15, 2015 (the “Amended Series C Certificate of Designation”). Pursuant to the Amended Series C Certificate of Designation, each share of Series C Preferred Stock ranks senior to the Common Stock, the Series A Preferred Stock, the Series B Preferred Stock and the Series D 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 Amended Series C Certificate of Designation), each share of Series C Preferred Stock would be entitled to a liquidation preference equal to the sum of: (1) $3,000 per share (the “Base Liquidation Value”) and the (2) the amount, if any, by which the Base Value exceeds 150% of the purchase price (the “Excess Liquidation Value), plus any accrued but unpaid dividends, in each case subject to customary adjustments as set forth in the Amended Series C Certificate of Designation. 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 Series C Liquidation Value for such shares. In addition, the Company has the right to redeem at any time, out of funds legally available therefore, all or any portion of the then outstanding shares of Series C Preferred Stock, for a price per share equal to the Series C 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. As a result of the redemption provisions, the Series C Preferred Stock has been classified outside of permanent equity.

 

Series D Convertible Preferred Stock

 

In connection with the execution of the Monroe Credit Agreement, the Company entered into a Subscription Agreement (the “Subscription Agreement”) with Monroe Capital Corporation, Monroe Capital Senior Secured Direct Loan Fund LP, Monroe Capital Senior Secured Direct Loan Fund (Unleveraged) LP and Monroe Capital Partners Fund II, LP. Pursuant to the Subscription Agreement, the Company issued 10 shares of $0.001 par value per share Series D convertible preferred stock (the “Series D Convertible Preferred Stock”).  Each share of Series D Convertible Preferred Stock may be converted at any time at the option of the holder into a number of shares of common stock initially equal to 752,807.8 shares of common stock. The Series D Convertible Preferred Stock will automatically, without any action on the part of the holder thereof, be converted into that number of fully paid and nonassessable shares of the Company’s common stock equal to the conversion number at the time in effect. The Series D Convertible Preferred Stock has a mandatory conversion date on the tenth anniversary of the issuance date. The Series D Convertible Preferred Stock ranks senior to the Company’s Series A Preferred Stock and the Company’s Series B Preferred Stock. The Company’s Series C Preferred Stock ranks senior to the Series D Convertible Preferred Stock. The shares of Series D Preferred Stock have the rights and preferences set forth in the Certificate of Designation of Series D Convertible Preferred Stock (the “Series D Certificate of Designation”).

 

In the event of any voluntary or involuntary liquidation, the holders of the Series D Convertible Preferred Stock shall be entitled to be paid out of the assets of the Corporation available for distribution to its stockholders before any payment shall be made to the holders of junior securities. The Series C Preferred Stockholders would receive the Base Liquidation Value first, and not be entitled to the Excess Liquidation Value (as defined in the Amended Certificate of Designation of the Series C Preferred Stock) until the holders of the Series D Convertible Preferred Stock receive a pro rata Liquidation Value amount in cash. If at any time the Company redeems the outstanding

 

  12  

 

 

Cyalume Technologies Holdings, Inc.

Notes to Condensed Consolidated Financial Statements

 

shares of Series A Preferred Stock or Series C Preferred Stock, the holders of the Series D Preferred Stock would 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 D Preferred Stock, for a price per share equal to the Liquidation Value for such shares; provided that, prior to the Company paying the full redemption price for all outstanding shares of Series D Preferred Stock, the Company would not be permitted to pay (i) any amounts in excess of the Series C Base Liquidation Value upon the redemption of shares of Series C Preferred Stock or (ii) any amounts upon the redemption of shares of Series A Preferred Stock. In the event of a voluntary or involuntary liquidation, each share of Series D 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 D Preferred Stock been converted into Common Stock immediately prior to such event in accordance with the terms of the Series D Certificate of Designation, excluding for purposes of such calculation the liquidation preference payable to the holders of Series A Preferred Stock and the holders of Series B Preferred Stock. The Series D Preferred Stock does not have any voting rights, except that the written consent of the holders of a majority of the then-outstanding Series D Preferred Stock shall be required for the Company to take certain actions, including the amendment of its certificate of incorporation or bylaws in a manner that adversely affects the relative rights, preferences, privileges or powers of holders of Series D Preferred Stock. As a result of the redemption provisions, the Series D Convertible Preferred Stock has been classified outside of permanent equity.

 

8. STOCKHOLDERS’ EQUITY

 

Common Stock

 

The Company is authorized to issue 150,000,000 shares of common stock. Common stockholders are entitled to one vote for each share held of record on all matters to be voted on by stockholders. Common stockholders have no conversion, preemptive or other subscription rights and there are no sinking fund or redemption provisions applicable to the common stock.

 

Common and Preferred Warrants

 

Common stock purchase warrants accounted for within equity are recorded at their initial fair value and reported in stockholders’ equity as increases to additional paid-in capital. Warrants reported as equity, rather than liabilities (i) may not be net-cash settled, (ii) have contractual limits on the number of shares to be delivered in a net-share settlement and (iii) are supported by sufficient unissued common shares available to settle the outstanding warrants. Subsequent changes in fair value from the warrants’ initial fair value are not recognized as long as the warrants continue to merit classification as equity.

 

During 2012, warrants to purchase 160,000 shares of the Company’s common stock issued in conjunction with the Subordinated Term Loan were outstanding and initially accounted for within equity. These warrants were amended again during 2013 in connection with the Senior Amendment described in Note 6, at which time they were reclassified to warrants liability. These warrants are no longer indexed to the Company’s stock, are considered a derivative and therefore, are being accounted for as a liability. As of June 30, 2015 and December 31, 2014, warrants to purchase 455,514 shares of the Company’s common stock issued relating to the Subordinated Term Loan were outstanding.

 

Pursuant to the terms of a letter agreement previously entered into between the Company and Dragonfly Capital Partners, LLC (“Dragonfly”) under which Dragonfly provided advisory services to the Company in connection with the Company’s debt financing, the Company paid $820,000 cash to Dragonfly and issued to Dragonfly a warrant on May 18, 2015 to purchase from the Company up to an aggregate of 1,003,744 shares of Common Stock (subject to customary adjustments) at an exercise price of $0.05 per share (the “Dragonfly Warrant”). The Dragonfly warrant is being accounted for within equity at its initial fair value.

 

The estimated fair value of the Dragonfly Warrant was recorded as an issuance cost in connection with the Monroe refinancing transaction. The Dragonfly Warrant fair value of approximately $46,000 was estimated using the Black-Scholes pricing model with the following inputs:

 

Stock price of underlying equity   $ 0.05  
Exercise price   $ 0.05  
Expected term (years)     5.0  
Risk-free interest rate     1.5 %
Estimated dividend yield      None  
Volatility     157.0 %

 

  13  

 

 

Cyalume Technologies Holdings, Inc.

Notes to Condensed Consolidated Financial Statements

  

Warrants to purchase the Company’s common stock were outstanding as follows as of June 30, 2015:

 

Warrant Holder   Number of
Shares
Under
Warrant
    Number of
Shares
Exercisable
Under
Warrant
    Exercise
Price
    Expiration Date
Granite Creek FlexCap I, L.P. (“Granite”)     267,950       267,950     $ 0.01     November 19, 2023
Patriot Capital II, L.P. (“Patriot”)     187,564       187,564     $ 0.01     November 19, 2023
Dragonfly Capital Partners, LLC (“Dragonfly”)     1,003,744       1,003,744     $ 0.05     May 18, 2020

  

The fair value as of June 30, 2015 of the Granite and Patriot Warrants is estimated using the Black-Scholes pricing model with the following inputs:

 

    Granite and Patriot
Warrants
 
Stock price of underlying equity   $ 0.06  
Exercise price   $ 0.01  
Expected term (years)     8.4  
Risk-free interest rate     2.2 %
Estimated dividend yield      None  
Volatility     162.4 %

 

The change in the fair value of the warrants liability during the six months ended June 30, 2015 is as follows (amounts in thousands):

 

    Granite and Patriot
Warrants (see
Note 6)
 
Warrant liability at December 31, 2014   $ 25  
Change in fair value of warrants     5  
Warrant liability at June 30, 2015   $ 30  

 

9. INCOME TAXES

 

During the six months ended June 30, 2015, the Company recorded approximately $79,000 of foreign tax expense on CTSAS’s income and approximately $40,000 of state income tax expense on CSP’s income. During the six months ended June 30, 2014, the Company recorded approximately $157,000 of foreign tax expense on CTSAS’s income. The Company continues to have a full valuation allowance against its U.S. deferred tax asset. The Company has a valuation allowance of approximately $13.1 million as of June 30, 2015 against deferred tax assets generated primarily as a result of foreign tax credits and net operating losses.

 

10. RELATED PARTY TRANSACTIONS

 

Financing Arrangements with Related Parties

 

In December 2012, the Company entered into a $2,100,000 unsecured promissory note with JFC Technologies, LLC (“JFC”), an entity controlled by James Schleck, a previous employee of CSP, who is an owner of a significant amount of the Company’s common shares and is a Board member. On November 19, 2013, the unsecured promissory note was amended (the “Amended JFC Note”). Pursuant to the Amended JFC Note, interest accrued at the rate of 12% per annum, retroactive to the date of the original note. On May 18, 2015, the

 

  14  

 

 

  Cyalume Technologies Holdings, Inc.

Notes to Condensed Consolidated Financial Statements

 

Amended JFC Note of approximately $2.1 million and approximately $0.5 million of accrued interest on the Amended JFC Note were repaid in connection with the Company refinancing its debt. Pursuant to the Amended JFC Note, up to $1.0 million of the principal amount was convertible, at the option of JFC, into the number of shares of Series A Preferred Stock equal to the portion of the principal amount being converted divided by the conversion price of $32.50 per share. On May 18, 2015, $650 was converted into 20 shares of Series A Preferred Stock issued to James Schleck.

  

CSP leases property in Bound Brook, New Jersey, from Brook Industrial Park, LLC. This lease requires monthly lease payments of approximately $30,000 and ends on August 31, 2016, with extension options available.

 

Bayonet Capital Fund I, LLC, Brook Industrial Park, LLC and JFC are controlled by James Schleck.

  

11. NET INCOME PER COMMON SHARE

 

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

 

    Three Months Ended June 30,     Six Months Ended June 30,  
    2015     2014     2015     2014  
                         
Numerator (in thousands):                                
Net income   $ 2,053     $ 3,272     $ 1,986     $ 2,598  
Less: Series A convertible preferred stock dividends     (141 )     (125 )     (276 )     (245 )
Less: Series C preferred stock dividends     (65 )     0       (127 )     0  
Income available to common stockholders - basic   $ 1,847     $ 3,147     $ 1,583     $ 2,353  
Effect of dilutive securities:                                
Less: Change in fair value of warrant liability for dilutive warrants (income) expense     (15 )     (232 )     5       (228 )
Add: Convertible related party promissory note     16       30       45       60  
Add: Series A convertible preferred stock dividends     141       125       276       245  
Add: Convertible debt     0       250       0       0  
Income available to common stockholders - diluted   $ 1,989     $ 3,320     $ 1,909     $ 2,430  
                                 
Denominator:                                
Weighted average shares outstanding - basic     21,400,244       21,362,564       21,400,244       21,184,567  
Effect of dilutive securities:                                
Warrants     608,274       432,445       506,553       445,787  
Series B convertible preferred stock     35,713,147       0       35,713,147       0  
Series D convertible preferred stock     3,474,498       0       1,746,847       0  
Convertible related party promissory note     3,860,143       1,538,450       5,579,612       1,538,450  
Series A convertible preferred stock     35,423,648       6,153,850       35,423,648       6,153,850  
Convertible debt     0       2,666,667       0       0  
Weighted average common shares - diluted     100,479,954       32,153,976       100,370,051       29,322,654  
                                 
Income per common share:                                
Basic   $ 0.09     $ 0.15     $ 0.07     $ 0.11  
Diluted   $ 0.02     $ 0.10     $ 0.02     $ 0.08  

 

  15  

 

 

  Cyalume Technologies Holdings, Inc.

Notes to Condensed Consolidated Financial Statements

  

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

 

    Three Months Ended June 30,     Six Months Ended June 30,  
    2015     2014     2015     2014  
Options     10,547,322       2,986,186       10,547,322       2,986,186  
Series A convertible preferred stock     0       0       33,401,765       0  
Series B convertible preferred stock     0       0       0       0  
Convertible related party promissory note     0       0       0       0  
Convertible debt     2,666,667       0       2,666,667       2,666,667  
Warrants     0       6,153,850       455,514       6,153,850  

 

12. COMMITMENTS AND CONTINGENCIES

 

Legal

 

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

 

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

 

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

 

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

 

On July 12, 2012, the Court issued an Amended Final Judgment and, on September 20, 2012, a Final Judgment. There were no changes to the previously described damage awards. In response, on October 17, 2012, the Company filed a Notice of Appeal and on August 2, 2013, the Company filed a Formal Appeal, which contains a number of bases for overturning the awards. Oral arguments were made by the parties before the Appellate Court during January of 2014. In May 2014, the Company received notice that its appeal of the Final Judgment had been denied. On July 1, 2014, CTI filed an Application for Further Appellate Review in the Massachusetts Supreme Judicial Court.

 

The Former Owners (1) previously retained the responsibility for paying the costs and liabilities associated with Civil Action No. 06-706 and (2) are related parties under U.S. GAAP due to their ownership interest in the Company and their membership on the Company’s board of directors. On November 19, 2013, a Release and Escrow Agreement was executed whereby the Company released affiliates of the Former Owners from being obligated on the costs and liabilities associated with Civil Action No. 06-706 in exchange for 625,139 shares of Cyalume stock placed in escrow (the “Escrowed Shares”). During 2013, 625,139 shares of the Company’s common stock were placed into escrow which were applied against any damages during July 2014 up to the value of the shares upon conversion to cash. The Escrowed

 

 

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Cyalume Technologies Holdings, Inc.

Notes to Condensed Consolidated Financial Statements

 

Shares provided the Company with a source of recovery with respect to any loss, liability or expenses incurred by the Company in connection with Civil Action No. 06-706. The Company reflected the value of the 625,139 Escrowed Shares at each reporting period based upon the close price of Cyalume’s stock at each balance sheet date. The Escrow Shares were transferred during July 2014 in connection with the Confidential Settlement Agreement and Mutual Release discussed below. On July 10, 2014, the Company entered into a Confidential Settlement Agreement and Mutual Release (the “Omniglow Settlement Agreement”) with the Former Owners and members of management of Omniglow Corporation (collectively, the “Omniglow Buyers”). Pursuant to the Omniglow Settlement Agreement, CTI agreed to either pay the full settlement amount of approximately $4.5 million or satisfy the settlement amount as follows: (i) an initial payment of $250,000, (ii) transfer the 625,139 Escrowed Shares, (iii) payment of $1.0 million in cash within 21 days from the execution of the Omniglow Settlement Agreement and (iv) additional payments in cash and/or through cooperative marketing credits of $1.9 million if paid within 18 months from the date of the Omniglow Settlement Agreement, or of approximately $2.4 million if paid within 27 months from the date of the Omniglow Settlement Agreement. During July 2014, the Company fulfilled its obligations under items (i), (ii) and (iii) described above. CTI entered into a Second Amendment (the “Settlement Amendment”) to the Confidential and Mutual Release (the “Settlement Agreement”) initially entered into on July 10, 2014 (as described above), with certain former stockholders and members of management of Omniglow Corporation (collectively, the “Omniglow Buyers”). Pursuant to the Settlement Amendment, CTI’s obligation was reduced and a final payment of $1.4 million (the “Reduced Final Payment”) was agreed to be made within five days of the execution of the first amendment to the Company’s Monroe Credit Agreement (see Note 16). The Reduced Final Payment is in lieu of a payment of $1.9 million that would otherwise have been due on January 10, 2016 (or, at CTI’s election, a payment of $2.35 million due on October 10, 2016). Accordingly, upon payment by CTI of the Reduced Final Payment on August 3, 2015, CTI has no further payment obligations pursuant to the Settlement Agreement. Therefore, the Company reversed $1,381,000 of a legal obligation during the six months ended June 30, 2015, as included within the legal settlement line in the accompanying Condensed Consolidated Statements of Comprehensive Income and the $1.4 million Reduced Final Payment amount is included within the current legal obligation line in the accompanying Condensed Consolidated Balance Sheet as of June 30, 2015.

  

13. FAIR VALUES OF ASSETS AND LIABILITIES

 

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 we are required to record such assets and liabilities at fair value, that fair value is estimated using an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. That fair value is determined based on significant inputs contained in a fair value hierarchy as follows:

 

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

 

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

 

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

 

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

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

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

 

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Cyalume Technologies Holdings, Inc.

Notes to Condensed Consolidated Financial Statements

 

Assets and Liabilities Measured at Fair Value on a Recurring Basis

 

Assets and liabilities itemized below were measured at fair value on a recurring basis at June 30, 2015 (all amounts in thousands):

 

    Level 1
Quoted
Prices in
Active
Markets
for
Identical
Assets
    Level 2
Significant
Other
Observable
Inputs
    Level 3
Significant
Unobservable
Inputs
    Assets/
(Liabilities)
At Fair
Value
 
Currency forward contract (see Note 5) (1)     0       5       0       5  
Warrants (see Note 8)   (2)     0       0       (30 )     (30 )
    $ 0     $ 5     $ (30 )   $ (25 )

 

  (1) The fair value of these contracts is determined by multiplying the notional amount of the contract by the difference between (a) the U.S. dollar amount due on the contract at maturity and (b) the foreign exchange rate as of the date the contract is valued (the balance sheet date). Because the contracts typically have a short duration, the value is not discounted using a present value technique (an income approach).
  (2) The Company has classified its warrant liability which could be potentially settled in cash within Level 3 because the fair values are determined using significant unobservable inputs into the Black-Scholes pricing model.

 

Assets and liabilities itemized below were measured at fair value on a recurring basis at December 31, 2014 (all amounts in thousands):

 

    Level 1
Quoted
Prices in
Active
Markets
for
Identical
Assets
    Level 2
Significant
Other
Observable
Inputs
    Level 3
Significant
Unobservable
Inputs
    Assets/
(Liabilities)
At Fair
Value
 
Warrants (see Note 8) (1)     0       0       (25 )     (25 )
    $ 0     $ 0     $ (25 )   $ (25 )

 

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

 

The Company did not transfer any assets or liabilities between Levels 1, 2 or 3 during the three months ended June 30, 2015. Any such transfer would be based on a review of the inputs used that are significant to the fair value measurement of that asset or liability.

 

The Company has other financial instruments, such as cash, accounts receivable, other current assets, accounts payable, notes payable and a line of credit. The Company believes the carrying amounts of those assets and liabilities approximate their fair value since the Company has estimated those carrying amounts to approximate the exit price we would receive to sell these assets or pay to transfer these liabilities to a market participant.

 

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

 

During the three and six months ended June 30, 2015, none of our assets or liabilities were remeasured at fair value on a nonrecurring basis.

 

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Cyalume Technologies Holdings, Inc.

Notes to Condensed Consolidated Financial Statements

  

14. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

 

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

 

    Six Months Ended June 30  
    2015     2014  
Interest   $ 456     $ 310  
Income taxes     510       171  

 

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

 

    Six Months Ended June 30,  
    2015     2014  
Series A Convertible Preferred stock accrued dividend   $ 276     $ 245  
Series C Preferred stock accrued dividend     127       0  
Issuance of Series D Convertible Preferred stock in connection with debt refinancing     830       0  
Warrant issued in connection with debt refinancing     46       0  
Adjustment to warrant liability upon warrant exercise     0       44  
Issuance of 350,000 shares to JFC in connection with settling a contingent consideration liability resulting from the acquisition of CSP     0       241  
Issuance of 242,308 shares to Selway     0       157  

 

15. NEW ACCOUNTING PRONOUNCEMENTS

 

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

 

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”). 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. Entities have the option of using either a full retrospective or a modified approach to adopt the guidance. On July 9, 2015, the FASB voted to delay the effective date of the new revenue standard by one year but to permit entities to choose to adopt the standard as of the original effective date.

 

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.

  

In April 2015, the FASB issued ASU 2015-03, Interest – Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs (“ASU 2015-03”). ASU 2015-03 states that entities that have historically presented debt issuance costs as an asset, related to a recognized debt liability, will be required to present those costs as a direct deduction from the carrying amount of that debt liability. This presentation will result is debt issuance cost being presented the same way debt discounts have historically been handled. ASU 2015-03 does not change the recognition, measurement, or subsequent measurement guidance for debt issuance costs. This guidance is effective for the Company as of January 1, 2016 and may be adopted early. The Company expects this new guidance will reduce total assets and total long-term debt on its consolidated balance sheets by amounts classified as deferred debt issuance costs, but does not expect this update to have any other effect on its consolidated financial statements.

 

 

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Cyalume Technologies Holdings, Inc.

Notes to Condensed Consolidated Financial Statements

 

16. SUBSEQUENT EVENTS

 

On August 3, 2015, the Company entered into a First Amendment (the “First Amendment”) to the Monroe Credit Agreement. Pursuant to the First Amendment, the Monroe Credit Agreement was amended to, among other things, reduce the aggregate amount of the Delayed Draw Loan under the Monroe Credit Agreement, which loan commitment was for purposes of funding the final payment due under the Settlement Agreement, from $2.0 million to $1.5 million. On August 3, 2015, the full amount of the Delayed Draw Loan was funded to the Company, $1.4 million of which was used to make the Reduced Final Payment, and the remaining $100,000 of which was paid to the Agent as a deferred closing fee. The First Amendment also modified, for certain periods during the term of the Credit Agreement, (i) the maximum senior debt to EBITDA ratio that the Company is required to maintain and (ii) the applicable limits on the Company’s aggregate permitted capital expenditures pursuant to the terms of the Credit Agreement.

  

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

 

You should read the following discussion of our financial condition and results of operations in conjunction with our interim condensed consolidated financial statements and the accompanying notes to those financial statements included elsewhere in this Quarterly Report on Form 10-Q and in conjunction with our Annual Report on Form 10-K for the fiscal year ended December 31, 2014. This discussion contains forward-looking statements that involve risks and uncertainties. Unless the content otherwise requires, all references to "we", "us", the “Company" or “Cyalume" in this Quarterly Report on Form 10-Q refers to Cyalume Technologies Holdings, Inc.

 

Company Overview

 

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

 

We maintain principal executive offices at 910 SE 17 th Street, Suite 300, Fort Lauderdale, Florida 33316. We have three U.S.-based subsidiaries: Cyalume Technologies, Inc. (“CTI”), Cyalume Specialty Products, Inc. (“CSP”) and CT SAS Holdings, Inc. (“CT SAS Holdings”). CTI is located in West Springfield, Massachusetts and CSP is located in Bound Brook, New Jersey. CT SAS Holdings is a U.S. holding company for our non-U.S.-based subsidiary, Cyalume Technologies, SAS (“CTSAS”), located in Aix-en-Provence, France. CTI has two U.S.-based subsidiaries, Cyalume Realty, Inc. (“CRI”) and Combat Training Solutions, Inc. (“CTS”), based in West Springfield, Massachusetts. We manufacture products in the West Springfield, Bound Brook, and Aix-en-Provence locations.

 

Material Changes in Results of Operations – Three and Six Months Ended June 30, 2015 versus the Three and Six Months Ended June 30, 2014

 

Revenues for 2015 and 2014 were as follows:

    Three Months Ended
June 30,
    Six Months Ended
June 30,
 
Category ($ in millions)   2015     2014     2015     2014  
                         
Chemical Light   $ 5.0     $ 6.2     $ 9.3     $ 11.2  
Ammunition     1.5       0.0       1.7       0.0  
Training and Simulation     0.1       0.2       0.2       0.3  
Specialty Products     3.3       2.5       5.7       4.7  
Total   $ 9.9     $ 8.9     $ 16.9     $ 16.2  

 

Chemical Light revenues decreased for both the three months and six months ended June 30, 2015 from the corresponding prior year periods primarily as a result of lower European military purchases. As much of the Chemical Light revenue comes from indefinite demand/indefinite quantity contracts, we do not have direct insight into the patterns of demand/consumption. Ammunition revenues were approximately $1.5 million and $1.7 million for the three months and six months ended June 30, 2015. Sales for military training rounds utilizing our technology resumed during February of 2015. Training and Simulation revenues for the three and six months ended June 30, 2015, respectively, which are generated from CTS devices being purchased, remained relatively flat compared to the corresponding prior year periods. Specialty Products revenue during the three and six months ended June 30, 2015 increased by approximately $0.8 million and $1.0 million, respectively, compared to the corresponding prior year periods primarily as a result of an increase in product sales.

 

Cost of goods sold was approximately $5.3 million for both the second quarter of 2015 and the second quarter of 2014. The gross profit margin for the second quarter of 2015 was approximately 46.3% versus 40.0% for the second quarter of 2014. The gross profit for the six months ended June 30, 2015 was approximately 45.8% versus 39.8% for the six months ended June 30, 2014. This increase compared to both corresponding prior year periods was largely attributable to favorable product mix changes including higher-margin specialty product sales during the second quarter of 2015.

  

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Sales and marketing expenses for the three and six months ended June 30, 2015 were approximately $0.6 million and $1.1 million, respectively, versus approximately $0.9 million and $1.9 million, respectively, for the corresponding prior year periods. The decrease of approximately $0.3 million for the three months ended June 30, 2015 and the decrease of approximately $0.8 million for the six months ended June 30, 2015 were attributable to a decrease in sales and marketing expenses resulting from the reduction of sales and marketing positions during the last half of 2014.

 

General and administrative expenses for the three and six months ended June 30, 2015 were approximately $1.9 million and $3.5 million, respectively, versus approximately $1.6 million and $3.5 million, respectively, for the corresponding prior year periods. The increase of approximately $0.3 million for the three months ended June 30, 2015 relates to the 2015 bonus plan accrual compared to the prior year during which the Company did not have a 2014 bonus plan.

 

Research and development expenses for the three and six months ended June 30, 2015 were approximately $0.3 million and $0.6 million, respectively, compared to approximately $0.4 million and $0.8 million, respectively, for the corresponding prior year periods. We had fewer research and development initiatives during 2015 versus 2014.

 

During the six months ended June 30, 2015, we recorded tax expense of approximately $0.1 million on foreign income generated by our CTSAS subsidiary. During the six months ended June 30, 2014, we recorded tax expense of approximately $0.2 million on foreign income generated by our CTSAS subsidiary. We continue to have a full valuation allowance against our U.S. deferred tax asset due to management’s assessment that it is more likely than not that a portion of certain deferred tax assets may not be realized. We have a valuation allowance of approximately $13.1 million as of June 30, 2015 against deferred tax assets generated primarily as a result of foreign tax credits and net operating losses.

 

Material Changes in Financial Condition – June 30, 2015 versus December 31, 2014

 

Cash was approximately $1.1 million at June 30, 2015, representing a decrease of $1.3 million from December 31, 2014. Accounts payable and accrued liabilities combined were approximately $4.4 million at June 30, 2015 versus approximately $4.8 million at December 31, 2014, a decrease of approximately $0.4 million due to the payment of prior year accruals and vendor payments. Accounts receivable increased by approximately $0.9 million at June 30, 2015 as a result of ammunition billing during the second quarter of 2015. Our receivables are generally collected within 30 days, thus, billings recorded in the 30-day period preceding a reporting period date may significantly impact the reported balances. Inventories as of June 30, 2015 increased by approximately $0.3 million compared to December 31, 2014 primarily as a result of material purchases for ammunition manufacturing.

 

Our line of credit, used to meet temporary working capital needs, was approximately $3.0 million at June 30, 2015 versus approximately $2.1 million at December 31, 2014.

 

The current portion of notes payable was approximately $0.6 million at June 30, 2015, which decreased compared to approximately $5.8 million at December 31, 2014, primarily as a result of scheduled maturities of our refinanced debt (see Note 6 within the accompanying Notes to Condensed Consolidated Financial Statements).

 

Liquidity and Capital Resources

 

As of June 30, 2015 and December 31, 2014, we had approximately $1.1 million and approximately $2.4 million, respectively, of cash on hand. In addition to the refinancing of our debt, the other major sources and uses of cash during 2015 were all in the normal course of business.

 

Capital expenditures and payments for intangibles were approximately $0.6 million for the six months ended June 30, 2015 and approximately $0.3 million for the six months ended June 30, 2014. We expect to fund capital expenditures for the remainder of 2015 from existing cash and operating cash flows.

 

On May 18, 2015, we entered into a credit agreement with Monroe Capital Management Advisors, LLC as administrative agent and lead arranger (the “Agent”) and the various lenders party thereto (the “Monroe Credit Agreement”). The Monroe Credit Agreement provides for a total borrowing commitment of $25.0 million (the “Monroe Credit Facility”) in the form of (i) a $5.0 million revolving credit facility (the “Monroe Line of Credit”); (ii) an $18.0 million senior secured term loan (the “Term A Loan”) and (iii) a $2.0 million delayed draw term loan (the “Delayed Draw Loan”).

 

Effective as of August 3, 2015, we entered into a Second Amendment (the “Settlement Amendment”) to the Confidential Settlement Agreement and Mutual Release (the “Settlement Agreement”) initially entered into on July 10, 2014 (see Note 12 within the accompanying Notes to Condensed Consolidated Financial Statements), with certain former stockholders and members of management of Omniglow Corporation (collectively, the “Omniglow Buyers”). Pursuant to the Settlement Amendment, the parties to the Settlement Agreement agreed to amend our obligation to make the final settlement payment due under the Settlement Agreement, such that we would make a final payment of $1.4 million (the “Reduced Final Payment”) within five days of the execution of the first amendment to the Monroe Credit Agreement in lieu of a payment of $1.9 million that would otherwise have been due on January 10, 2016 (or, at our election, a payment of $2.35 million due on October 10, 2016). Accordingly, upon payment of the Reduced Final Payment, which payment was made on August 3, 2015, we have no further payment obligations pursuant to the Settlement Agreement.

 

On August 3, 2015, we entered into a First Amendment (the “First Amendment”) to the Monroe Credit Agreement. Pursuant to the First Amendment, the Monroe Credit Agreement was amended to, among other things, reduce the aggregate amount of the Delayed Draw Loan under the Credit Agreement, which loan commitment was for purposes of funding the final payment due under the Settlement Agreement, from $2.0 million to $1.5 million. On August 3, 2015, the full amount of the Delayed Draw Loan was funded to us, $1.4 million of which was used to make the Reduced Final Payment, and the remaining $100,000 of which was paid to the Agent as a deferred closing fee. The First Amendment also modified, for certain periods during the term of the Credit Agreement, (i) the maximum senior debt to EBITDA ratio that the Company is required to maintain and (ii) the applicable limits on the Company’s aggregate permitted capital expenditures pursuant to the terms of the Credit Agreement.

 

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Pursuant to the Monroe Credit Agreement, we borrowed an aggregate principal amount equal to $21.0 million ($3.0 million under the Monroe Line of Credit and $18.0 million under the Term A Loan), less closing fees and expenses. The drawn proceeds from the Monroe Credit Facility were used to repay in full our senior debt with TD Bank, N.A., repay in full the Company’s subordinated debt with Granite Creek Partners Agent, LLC, and retire the Company’s amended and restated promissory note in favor of JFC Technologies, LLC. The remainder of the proceeds are for the Company’s general working capital purposes.

 

Under the terms of the Monroe Credit Facility, the Company is able to borrow under the Monroe Line of Credit in an amount not to exceed the lesser of: (i) $5.0 million; and (ii) the sum of 85% of all eligible accounts receivable plus 60% of all eligible inventory. Additionally, while the loans are outstanding we must maintain: (a) a fixed charge coverage ratio of 1.25 to 1.00; (b) a senior debt to EBITDA ratio of 4.50 to 1.00, decreasing to 1.50 to 1.00 over the term of the loans; and (c) a twelve month trailing EBITDA, measured quarterly, in the amount of $4,750,000, increasing to $7,000,000 over the term of the loans.

 

The Term A Loan provides for quarterly amortization payments on the last day of each calendar quarter, commencing on June 30, 2015, in an aggregate principal amount equal to $112,500, increasing to $225,000 on June 30, 2016, and increasing to $450,000 on June 30, 2017, with the balance payable on the termination date of May 18, 2020 (the “Termination Date”). The Delayed Draw Loan provides for quarterly amortization payments on the last day of each calendar quarter, in an aggregate principal amount equal to 0.625% of the original principal amount of the Delayed Draw Loan, increasing to 1.25% on March 31, 2016, and increasing to 2.5% on March 31, 2017, with the balance payable on the Termination Date. The Monroe Line of Credit is payable on the Termination Date.

 

We were in compliance with the financial covenants related to these loans as of June 30, 2015.

 

We did not pay a dividend in the six months ended June 30, 2015 and we do not intend to pay a common dividend in the future. We are accruing dividends in connection with the Series A Convertible Preferred Stock issued on November 19, 2013 and we are accruing dividends in connection with the Series C Preferred Stock issued on July 30, 2014.

 

Other than immaterial operating leases, we did not have any off-balance sheet arrangements during 2015 or 2014.

 

Critical Accounting Policies

 

Use of Estimates

 

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

 

Revenue Recognition

 

Revenue from the sale of products or the providing of services is recognized when the earnings process is complete, the amount of recognizable revenue can be determined, the risks and rewards of ownership have transferred to the customer and collectability is reasonably assured. Depending on the terms of the individual sales arrangement with our customer, product sales are recognized at either the shipping point or upon receipt by the customer. Costs and related expenses to manufacture the products are recorded as costs of goods sold when the related revenue is recognized. Additionally, if the right of return is granted to the buyer in a product sale, revenue is deferred until enough historical customer data is available to reasonably estimate returns and related costs. 

 

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

 

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

 

Warrants Liability

 

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

 

Income Taxes

 

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

 

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

 

When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefit associated with tax positions taken that exceeds the amount measured as described above, if such a position existed, would be reflected as a liability for unrecognized tax benefits in the accompanying balance sheets along with any associated interest and penalties that would be payable to the taxing authorities upon examination. There were no such positions as of June 30, 2015 or December 31, 2014.

 

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

 

In February 2012, we completed an audit by the IRS of our tax returns for the years 2008 and 2009. There were no adjustments to those tax returns. Tax returns filed for the years 2010, 2011 and 2012 are still open for audit. The 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 amortization. Goodwill is subject to an annual impairment review, and, if conditions warrant, interim impairment reviews. Impairment charges, if any, are recorded in the period in which the impairment is determined.

 

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

 

 

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Intangible Assets

 

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

 

Inventories

 

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

  

Foreign Operations and Currency

 

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

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

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

 

ITEM 4. CONTROLS AND PROCEDURES

 

Disclosure Controls and Procedures

 

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

 

Our management carried out an evaluation, under the supervision of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as of June 30, 2015. Based upon that evaluation, our management, including our Chief Executive Officer and Chief Financial Officer, concluded that the design and operation of our disclosure controls and procedures were effective as of June 30, 2015.

 

Changes in Internal Control over Financial Reporting

 

There was no change in our internal control over financial reporting that occurred during the three months ended June 30, 2015 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

  

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PART II – OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

None

 

ITEM 1A.   RISK FACTORS

 

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

 

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

 

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

 

None.

 

Purchases of Equity Securities by the Company and Affiliated Purchasers

 

None.

 

ITEM 3.   DEFAULTS UPON SENIOR SECURITIES

 

None.

 

ITEM 4.   MINE SAFETY DISCLOSURES

 

Not applicable.

 

ITEM 5.   OTHER INFORMATION

 

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

 

ITEM 6.   EXHIBITS

 

Exhibit

Number

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

 

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SIGNATURES

 

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

 

  Cyalume Technologies Holdings, Inc.
     
Date: August 14, 2015 By: /s/ Zivi Nedivi
     
    Zivi Nedivi, Chief Executive Officer
     (Principal Executive Officer)
     
Date: August 14, 2015 By: /s/ Michael Bielonko
     
    Michael Bielonko, Chief Financial Officer
    (Principal Financial Officer)

 

  27  

 

Exhibit 31.1

 

CERTIFICATION

 

I, Zivi Nedivi, certify that:

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Date: August 14, 2015  
  /s/ Zivi Nedivi
  Zivi Nedivi, Chief Executive Officer

 

 

 

 

Exhibit 31.2

 

CERTIFICATION

 

I, Michael Bielonko, certify that:

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Date: August 14, 2015 /s/ Michael Bielonko
  Michael Bielonko, Chief Financial Officer

 

 

 

 

 

Exhibit 32.1

 

CERTIFICATION

 

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

 

Date: August 14, 2015 /s/ Zivi Nedivi
   
  Zivi Nedivi, Chief Executive Officer
  (the Principal Executive Officer)
Date: August 14, 2015  
   
  /s/ Michael Bielonko
   
  Michael Bielonko, Chief Financial Officer
   (the Principal Financial Officer)

 

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