Cyalume
Cyalume Technologies Holdings, Inc. (Form: 10-K, Received: 04/07/2016 17:04:50)

 

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

 

FORM 10-K

 

x

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

For the fiscal year ended December 31, 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)

 

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

 

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

 

Title of class

Common Stock, $0.001 par value

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Large Accelerated Filer   ¨   Accelerated Filer   ¨
Non-Accelerated Filer      ¨
(Do not check if a smaller reporting company)
  Smaller reporting company   x

 

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

 

The aggregate market value of Common Stock held by non-affiliates of the registrant (10,490,705 shares) based on the last reported sale price of the registrant’s Common Stock on the OTCBB on June 30, 2015, which was the last business day of the registrant’s most recently completed second fiscal quarter, was $629,442. For purposes of this computation, all officers, directors, and 10% beneficial owners of the registrant are deemed to be affiliates. Such determination should not be deemed to be an admission that such officers, directors, or 10% beneficial owners are, in fact, affiliates of the registrant.

 

As of March 30, 2016, there were outstanding 21,400,244 shares of the registrant’s Common Stock, par value $.001 per share.

 

 

 

 

CYALUME TECHNOLOGIES HOLDINGS, INC.

ANNUAL REPORT ON FORM 10-K

YEAR ENDED DECEMBER 31, 2015

 

TABLE OF CONTENTS

 

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

 

  2  

 

 

PART I

 

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

 

ITEM 1:    BUSINESS

 

General

 

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

 

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

 

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

 

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

 

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

 

Overall Approach

 

Our primary focus is providing tactical and training solutions to the military of the United States, and other select countries, through both products and services. We manufacture chemical light, reflective and battlefield effects simulator products while our services include planning and implementing tactical training exercises simulating real-world experiences. We also sell the chemical light and reflective products into the law enforcement, commercial, and other markets. In addition, we provide specialty chemical products to the defense, pharmaceutical, cosmetic and other markets. We employ the following strategies to seek to provide for long-term success.

 

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

 

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

 

  3  

 

 

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

 

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

 

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

 

Products and Services

 

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

 

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

 

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

 

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

 

We do not sell products as novelties.

 

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

 

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

 

  4  

 

 

Markets

 

  · Chemical Light

 

Chemical light revenue, including ammunition, accounted for approximately 69% of total revenues in 2015 and 66% in 2014. We primarily sell chemiluminescent devices, primarily light sticks in varying colors, lengths and durations of light output, as well as flat chemiluminescent disks and reflective patches and belts. The primary users of these products and services are the U.S. Military and European militaries participating in the NATO Support Agency f/k/a the NATO Maintenance and Supply Agency (“NSPA”).

 

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

 

  · Ammunition

 

Ammunition revenue was negligible in 2014, but represented approximately 14% of total revenues in 2015. These revenues represent sales of chemiluminescent payloads and components that are incorporated into training ammunition. Ammunition revenues increased in 2015 due to a new contract.

 

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

 

  · Training & Simulation

 

Training & simulation revenue accounted for approximately one percent of total revenues in 2015 and two percent in 2014. We sell battlefield effects simulator devices and training services.

 

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

 

  · Specialty Products

 

Through CSP, we provide specialty chemicals to a variety of customers including chemical, defense, cosmetic, nutritional supplement and pharmaceutical companies. These revenues represented approximately 30% of total revenues in 2015 and 32% in 2014.

 

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

 

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

 

Customers and Concentrations

 

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

 

  · LC Industries

 

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

 

  5  

 

 

Our contract with LCI was entered into June 1, 2004 and had an initial term of five years, followed by three automatic five-year renewal terms unless the agreement is cancelled. This contract was renewed in both 2009 and 2014 and we currently expect that the contract will renew again in 2019. The contract between LCI and the U.S. military is an IDIQ contract (indefinite demand, indefinite quantity) with fixed prices subject to annual renegotiation. Through our agreement with LCI, we share in any price increases received by LCI. Revenues through LCI accounted for approximately 23% of total revenues in 2015 and 28% in 2014.

 

  · NSPA

 

We have a direct contract with NSPA, the administrative services arm serving the non-U.S. NATO countries. NSPA re-awarded the contract to us in November 2013. The base contract period is for three years and NSPA has the option to extend for another two years. The contract contains provisions for pricing escalations. Revenues through NSPA accounted for 10% of total revenues in 2015 and approximately 13% in 2014.

 

  · Ammunition : Revenues to American Rheinmetall Munition accounted for approximately 14% of total revenues in 2015, and were negligible for 2014.

 

  · Training & Simulation : No individual customer accounted for sales in either 2015 or 2014 that exceeded 10% of total revenues.

 

  · Specialty Products: Sales are made to a variety of customers in the various markets served, none of which individually represented more than 10% of total revenues in either 2015 or 2014.  

 

Revenues to customers outside the United States represented approximately 31% and 52% of our total revenues for the years ended December 31, 2015 and 2014, respectively.

 

Sales and Marketing

 

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

 

Competitive Strengths

 

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

 

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

 

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

 

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

 

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

 

Competition

 

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

 

  6  

 

 

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

 

In the training and simulation market, we compete with a number of firms. We focus on specific niches to minimize competition.

 

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

 

Employees

 

As of December 31, 2015, we had 162 full-time employees and 28 on-call part-time employees who participate in training simulations as needed. We operate in local labor markets that provide an adequate supply of labor to compensate for any turnover. We are not party to any collective bargaining agreements, have not experienced any work stoppages and consider our relationship with employees to be sound.

 

Employee Benefits

 

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

 

Supply Chain

 

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

 

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

 

Research and Development

 

We have active research and development groups with full-time chemists and engineers at both the West Springfield and Bound Brook facilities. Additionally, we utilize consultants as needed for specific projects. Our research and development group is focused on maintaining the high level of quality of existing products, developing improvements to existing products, and developing new technologies and products with viable commercial applications. We maintain an active program of soliciting feedback and ideas from end-users of products. We incurred research and development expense of approximately $1.4 million and $1.5 million during the years ended December 31, 2015 and 2014, respectively. Additionally, we incurred approximately $0.2 million in capitalized costs for filing patents in each of the years ended December 31, 2015 and 2014.

 

Intellectual Property

 

We rely on the ability to develop patentable technology to help ensure the commercial success of products and technology. Once patents are issued, we follow an active program of monitoring competitors’ products to attempt to ensure that our intellectual property rights are not violated. We currently hold and maintain more than 50 active and pending U.S. patents. Many of these patents are also registered in various foreign countries. These patents include phthalate free formulations, formulas for creating a more consistent light for longer periods, a bio-degradable light stick, flat disks employing a translucent aluminum pouch instead of an ampoule, and various battlefield effects simulators. We expect to file for additional patents during 2016 and thereafter. Patents typically have a 20-year life from date of filing. We had no key patents expire in 2015 and no key patents are scheduled to expire in 2016. We do not anticipate any near-term decline in sales as a result of any expiring or expired patents.

 

  7  

 

 

Government Regulations

 

We are subject to the jurisdiction of the State Department of the United States under the International Traffic in Arms Regulations (“ITAR”). Specifically, chemical light infrared products, which are exported from the West Springfield facility, are subject to these regulations. We must periodically re-register with the State Department for exporting purposes. Our latest renewal that was granted expires June 30, 2016 and is subject to renewal again at that time. We are in good standing with the State Department and the ITAR.

 

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

 

Environmental

 

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

 

Backlog

 

A significant portion of our revenue is generated under indefinite quantity, fixed-price contracts or arrangements whereby we fulfill orders as they are placed by customers. Once orders are received they are typically fulfilled within three months. As of December 31, 2015, we had total open sales and purchase orders for products that approximated $9.0 million, versus $14.7 million at December 31, 2014. As of December 31, 2014, our backlog included a two-year ammunition order for 2015 and 2016. As of December 31, 2015, only one year of backlog remained from this two-year order. Purchase orders can be amended or cancelled, however, the Company has no indications of any amended orders or any cancelled orders.

 

Segments

 

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

 

ITEM 1A. Risk Factors

 

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

 

Sales for which federal or foreign governments and militaries thereof are the ultimate customer accounted for more than 50% of our business in both 2015 and 2014. Budget reductions, reallocations of existing budgets, or spending constraints affecting military spending could cause significant delays or reductions in the number and value of orders for products, which could reduce revenues.

 

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

 

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

 

A large percentage of our revenue is typically derived from a small number of customers, and we expect this trend to continue.  For our fiscal year ended December 31, 2015, two customers accounted for approximately 37% of our revenue. We cannot be certain that customers that have accounted for significant revenue in past periods will continue to purchase our products at the same levels, or at all. Accordingly, our revenue and results of operations may vary substantially from period to period. We are also subject to credit risk associated with the concentration of our accounts receivable from our customers. If one or more of our significant customers were to terminate or fail to renew its contract with us, to otherwise cease doing business with us, to significantly reduce or delay its purchases from us or to fail to pay us on a timely basis, our business, financial condition and results of operations could be materially adversely affected.

 

  8  

 

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Changes in foreign currency exchange rates could affect financial results .

 

CTI and CTSAS manufacture products in and sell products from the U.S. and France, respectively. Products sold by CTI are priced in U.S. dollars and most raw material components are purchased in U.S. dollars. Products sold by CTSAS are priced predominantly in euros and most of CTSAS’s raw material purchases from third parties are priced in euros. Significant changes in foreign exchange rates will affect reported financial results.

 

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

 

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

 

  9  

 

 

Inability to effectively integrate future acquisitions could reduce profitability.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

  10  

 

 

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

 

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

 

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

 

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

 

Our business has substantial indebtedness.

 

We currently have, and will likely continue to have, a substantial amount of indebtedness. Our indebtedness could, among other things, require us to use a large portion of our cash flow from operations to repay and service our debt or otherwise create liquidity problems, limit our flexibility to adjust to market conditions, place us at a competitive disadvantage and expose us to interest rate fluctuations. As of December 31, 2015, we had total debt obligations outstanding of approximately $20.3 million, versus $21.3 million as of December 31, 2014. We expect to obtain the money to pay our expenses and pay the principal and interest on our indebtedness from cash flow from our operations and potentially from other debt or equity offerings. Accordingly, our ability to meet our obligations depends on our future performance and capital raising activities, which will be affected by financial, business, economic and other factors, many of which are beyond our control. If our cash flow and capital resources prove inadequate to allow us to pay the principal and interest on our debt and meet our other obligations, we could face substantial liquidity problems and might be required to restructure or refinance our debt, or dispose of material assets or operations, which we may be unable to do on acceptable terms, and forgo attractive business opportunities. In addition, the terms of our existing or future debt agreements may restrict us from pursuing any of these alternatives.

 

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

 

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

 

  11  

 

 

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

 

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

 

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

 

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

 

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

 

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

 

We have never declared or paid any cash dividends on common stock. We currently intend to retain all future earnings, if any, for use in the operations and expansion of the business. As a result, we do not anticipate paying cash dividends in the foreseeable future. Any future determination as to the declaration and payment of cash dividends will be at the discretion of our Board of Directors and will depend on factors our Board of Directors deems relevant, including among others, results of operations, financial condition and cash requirements, business prospects, and the terms of credit facilities and other financing arrangements. In addition, our credit facility precludes us from paying dividends without the consent of our lenders. Accordingly, realization of a gain on stockholders’ investments will depend on the appreciation of the price of our common stock. There is no guarantee that our common stock will appreciate in value.

 

Our securities are quoted on the OTCQB Market, which may limit the liquidity and price of our securities more than if the securities were quoted or listed on the NASDAQ or the AMEX markets.

 

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

 

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

 

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

 

In our November 2013 financing, we issued 123,077 shares of Series A preferred stock outstanding that may be converted into shares of common stock. Each share of Series A preferred stock is convertible into common stock at a conversion price of $0.13664587. We also have additional options and warrants outstanding. On July 30, 2014, we issued an aggregate of 1,000 units of securities of the Company for an aggregate purchase price of $2.0 million (or $2,000 per unit). Investors purchased an aggregate of 1,000 units of securities of the Company (the “Units”), with each Unit comprising (1) one share of Series B Convertible Preferred Stock of the Company and (2) one share of Series C Preferred Stock of the Company. Each share of Series B Convertible Preferred Stock is initially convertible into 35,713.147 shares of common stock. We issued 10 shares of Series D preferred stock in connection with the May 2015 refinancing and each share is convertible into 752,807.8 shares of common stock. The issuance of shares upon conversion of the preferred stock, or outstanding indebtedness and exercise of warrants and options may result in substantial dilution to the interests of other stockholders. We may find it more difficult to raise additional equity capital while our preferred stock and our warrants are outstanding.

 

  12  

 

 

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

 

The holders of the Series A preferred stock are entitled to receive cumulative quarterly dividends at a rate of 12% per annum on the liquidation value, payable in cash or, subject to the satisfaction of certain conditions, in paid-in-kind shares. To the extent not paid in cash or by issuance of additional shares of Series A preferred stock on the last day of each calendar quarter, all accrued dividends on any outstanding shares of Series A preferred stock shall accumulate and compound. Holders of the Series C preferred stock are entitled to receive cumulative quarterly dividends at a rate of 12% per annum, calculated based on an assumed price of $2,000 per share, payable in cash or in kind; provided that to the extent not paid in cash or by issuance of additional shares of Series C Preferred Stock on the last day of each calendar quarter, all accrued dividends on any outstanding shares of Series C preferred stock shall accumulate and compound. As a result of the payment of dividends, we may be obligated to pay significant sums of money or issue significantly more shares of common stock than our Series A preferred stock would otherwise be convertible into, which could negatively affect our operations or result in the dilution of the holders of our common stock, respectively.

 

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

 

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

 

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

 

As of December 31, 2015, Cova Small Cap Holdings, LLC (“Cova”) and US VC Partners, L.P. (“US VC”), holders of our common and preferred stock, were entitled to vote a number of shares equal to approximately 23% and 39.7%, respectively, of our common shares eligible to vote, or, on a combined basis approximately 62.7%. Both Cova and US VC have a number of officers in common. As a result, these stockholders have substantial influence over all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions. In addition, this concentration of ownership may delay or prevent a change in control of our company and make some future transactions more difficult or impossible without the support of these stockholders. The interests of these stockholders may not coincide with our interests or the interests of other stockholders.

 

We have experienced recurring operating losses prior to 2015 and our liquidity had been reduced.

 

For the year ended December 31, 2015, we had net income of approximately $3.3 million versus for the year ended December 31, 2014, in which we had a net loss of approximately $7.7 million. As of December 31, 2015, we had an accumulated deficit of approximately $100.0 million and total stockholders’ equity of $2.8 million. Our unrestricted cash balance was approximately $1.5 million at December 31, 2015 and our borrowing availability under our senior lender credit facility was $4.0 million. Although improving, our financial condition may limit our ability to do acquisitions or grow the business.

 

  13  

 

 

ITEM 1B. UNRESOLVED STAFF COMMENTS

 

None.

 

ITEM 2.    PROPERTIES

 

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

 

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

 

We lease several buildings in Bound Brook, New Jersey, where administrative, manufacturing and research and development activities are housed for CSP. The lease is a market-based lease, for approximately 50,000 square feet of production and office space that was entered into with the acquisition of the assets of JFC Technologies, effective August 31, 2011. The lease ends on August 31, 2016, with extension options available, and requires current lease payments of approximately $33,000 per month.

 

Effective March 5, 2013, we entered into a five-year lease for approximately 8,500 square feet of office space in Fort Lauderdale, Florida to house certain executive, sales and administrative personnel and corporate functions. Monthly lease payments are approximately $19,000 and subject to annual escalation.

 

ITEM 3.    LEGAL PROCEEDINGS

 

None.

 

ITEM 4.    MINE SAFETY DISCLOSURES

 

Not applicable.

 

  14  

 

 

PART II

 

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

 

Market Information

 

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

 

    Common Stock     Units  
    High     Low     High     Low  
                         
First quarter 2014   $ 0.94     $ 0.64     $ 3.50     $ 3.50  
Second quarter 2014   $ 0.45     $ 0.08     $ 3.50     $ 3.50  
Third quarter 2014   $ 0.10     $ 0.04     $ 3.50     $ 3.50  
Fourth quarter 2014   $ 0.10     $ 0.05     $ 3.50     $ 3.50  
First quarter 2015   $ 0.17     $ 0.03     $ 3.50     $ 3.50  
Second quarter 2015   $ 0.15     $ 0.03     $ 3.50     $ 3.50  
Third quarter 2015   $ 0.10     $ 0.04     $ 3.50     $ 3.50  
Fourth quarter 2015   $ 0.15     $ 0.04     $ 3.50     $ 3.50  

 

Holders of Common Stock

 

As of March 11, 2016, there were of record 161 holders of common stock and one holder of units.

 

Dividends

 

We have never declared or paid cash dividends on common stock and do not anticipate declaring or paying cash dividends on common stock in the foreseeable future. Payments of future dividends on common stock, if any, will be at the discretion of our Board of Directors after taking into account various factors, including financial condition, operating results, current and anticipated cash needs, plans for expansion and other factors that our Board of Directors may deem relevant. Our credit agreement with our senior lenders prohibits paying a dividend without their consent.

 

Performance Graph

 

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

 

Recent Sales of Unregistered Securities

 

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

 

Purchases of Equity Securities by the Company and Affiliated Purchasers

 

We did not purchase any equity securities during the fourth quarter of 2015, and we have no publicly announced plans or programs to do so.

 

ITEM 6.    SELECTED FINANCIAL DATA

 

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

 

  15  

 

 

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

 

Overview

 

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

 

We are a global, technology-based manufacturer primarily providing tactical and training solutions to the military of the U.S. and other select countries, through both products and services. We manufacture chemical light, reflective and battlefield effects simulator products while our services include planning and implementing tactical training exercises simulating real world experiences. We also sell products into the law enforcement, commercial/public safety, and other markets. In addition, through CSP, we provide specialty chemical products to the pharmaceutical, defense and other industries.

 

The majority of revenues are derived from sales for the ultimate use by the U.S. Military and various other militaries around the globe. For 2015, there were two direct customers each with revenues greater than 10% of our total revenues: LC Industries, which accounted for approximately 23% of total revenues, and American Rheinmetall Munition, which accounted for approximately 14% of total revenues. In the military markets, we have longer-term, fixed-price, indefinite-quantity contracts lasting three to five years. They generally provide higher margins because the products are more technologically advanced, versus some of the commercial markets, where advanced technology/performance is generally not as important and therefore competition is greater, resulting in lower margins. See Item 1: Business for greater detail.

 

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

 

Critical Accounting Policies

 

Use of Estimates

 

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

 

Revenue Recognition

 

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

 

  16  

 

 

We have two significant contracts, with LC Industries and the NSPA, as discussed in Item 1: Business, providing for the sale of indefinite quantities of products at fixed per unit prices, subject to adjustment for certain economic factors. In addition, we accepted a two year purchase order covering the period 2015 – 2016 for training ammunition with a fixed unit price for the period. Revenue under these contracts is recognized when products ordered under the contracts are received by the customer. Whenever costs change, we review the pricing under these contracts to determine whether they require the sale of products at a loss. To date, we have no loss contracts which would require the accrual of future losses in the current financial statements.

 

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

 

Warrants Liability

 

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

 

Income Taxes

 

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

 

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

 

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

 

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

 

In September 2015, the IRS completed an audit of our tax return for the year 2013. There were no adjustments to our 2013 tax return. Our tax return filed for the year 2014 is still open for audit. The tax return for 2014 was filed on September 14, 2015 under a filing extension. The tax return for 2015 is expected to be filed under a filing extension prior to September 15, 2016.

 

Goodwill

 

Goodwill is deemed to have an indefinite life and accordingly, is not subject to annual amortization. Goodwill is subject to annual impairment reviews, and, if conditions warrant (a “triggering event”), interim reviews based upon its estimated fair value. Impairment charges, if any, are recorded in the period in which the impairment is determined.

 

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

 

  17  

 

 

Intangible Assets

 

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

 

Inventories

 

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

 

Foreign Operations and Currency

 

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

 

Recent Accounting Pronouncements

 

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

 

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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. In July 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date (“ASU 2015-14”). The amendments in ASU 2015-14 defer the effective date of ASU 2014-09 for all entities by one year. As a result, this guidance is now effective for annual reporting periods (including interim reporting periods within those periods) beginning after December 15, 2017 and early adoption is permitted only as of annual reporting periods (including interim reporting periods within those reporting periods) beginning after December 15, 2016. Entities have the option of using either a full retrospective or a modified approach to adopt the guidance. The Company is in the process of determining the potential effects on the consolidated financial statements.

 

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 when adopted in 2016.

 

In July 2015, the FASB issued ASU 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory (“ASU 2015-11”). The amendments in ASU 2015-11 require an entity to measure in scope inventory at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. Subsequent measurement is unchanged for inventory measured using LIFO or the retail inventory method. The amendments do not apply to inventory that is measured using last-in, first-out (LIFO) or the retail inventory method. The amendments apply to all other inventory, which includes inventory that is measured using first-in, first-out (FIFO) or average cost. This guidance is effective for public business entities for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. A reporting entity should apply the amendments prospectively with earlier application permitted as of the beginning of an interim or annual reporting period. The Company is in the process of determining the potential effects on the consolidated financial statements.

 

In November 2015, the FASB issued ASU 2015-17, Balance Sheet Classification of Deferred Taxes (Topic 740) (“ASU 2015-17”). ASU 2015-17 simplifies the presentation of deferred income taxes by requiring that deferred tax assets and liabilities be classified as noncurrent on the balance sheet instead of separating into current and noncurrent amounts. ASU 2015-17 will be effective for annual periods beginning on or after December 15, 2016 and may be applied either prospectively or retrospectively. Early adoption is permitted. The Company has elected to early adopt this guidance as of December 31, 2015 on a prospective basis. As a result, we reclassified our deferred tax assets classified as current to noncurrent and our deferred tax liabilities classified as current to noncurrent in our December 31, 2015 consolidated balance sheet. Prior balance sheets were not retrospectively adjusted.

 

In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments – Overall (Subtopic 825-10) (“ASU 2016-01”), which updates certain aspects of recognition, measurement, presentation and disclosure of financial instruments. ASU 2016-01 will be effective for the Company beginning in its first quarter of 2019 and early adoption is not permitted. The Company does not expect the adoption of ASU 2016-01 will have a material impact on its consolidated financial statements.

 

In February 2016, the FASB issued ASU 2016-02, Leases   (Topic 842) (“ASU 2016-02”), which requires companies that are lessees to recognize a right-of-use asset and lease liability for most leases that do not meet the definition of a short-term lease. For income statement purposes, leases will continue to be classified as either operating or financing. Classification will be based on criteria that are largely similar to those applied in current lease accounting. This standard will result in extensive qualitative and quantitative disclosure changes. This standard will be effective for annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period. The Company is currently evaluating the impact of ASU 2016-02 on its consolidated financial statements.

 

  18  

 

 

Results of Operations

 

Overall Perspective : Financial results for 2015 improved from those of 2014. We began sales under a new training ammunition program, and sales increased over the prior year in our Specialty Chemicals business. These increases were partially offset by decreases in our Chemical Light and Training & Simulation businesses. We had expected the decrease in Chemical Light revenues based on the expected impact from the drawdown and reassignment of troops from Afghanistan, and believe that the 2015 level of sales achieved represents a base from which to grow. Our operating expenses increased over 2014, but this was due to performance bonuses being accrued for achieving financial targets set by the Board of Directors. Absent the bonus expense accrual, our operating expenses declined from 2014 levels. In May 2015, we refinanced our senior and subordinated debt by entering into a new five year credit agreement that we believe will meet the Company’s liquidity needs.

 

Revenues :    Total revenues for 2015 of approximately $37.8 million increased by approximately $4.5 million from 2014 due primarily to the start of sales under a new training ammunition program. The following table depicts annual revenues by sales category. In managing the business, we do not prepare profitability statements or track assets / costs by these categories; the business is operated as a single segment.

 

Category ($ in millions)   2015     2014     Change  
Chemical Light   $ 20.7     $ 22.1     $ (1.4 )
Ammunition     5.3       0.0       5.3
Training & Simulation     0.4       0.6       (0.2 )
Specialty Products     11.4       10.6       0.8  
Total   $ 37.8     $ 33.3     $ 4.5  

 

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

 

2015          Category ($ in millions)   Q1     Q2     Q3     Q4     2015  
Chemical Light   $ 4.2     $ 5.0     $ 5.5     $ 6.0     $ 20.7  
Ammunition     0.2       1.5       2.1       1.5       5.3  
Training & Simulation     0.1       0.1       0.1       0.1       0.4  
Specialty Products     2.4       3.3       2.8       2.9       11.4  
Total   $ 6.9     $ 9.9     $ 10.5     $ 10.5     $ 37.8  

 

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

 

  19  

 

 

Chemical Light: Revenues of approximately $20.7 million for 2015 were approximately $1.4 million, or approximately 6% below revenues of approximately $22.2 million for 2014 due to decreased sales to both LC Industries and the NSPA.

 

Ammunition: Revenues increased by approximately $5.3 million from the start of a new contract for 40mm low-velocity training ammunition.

 

Training & Simulation: Revenues for 2015 of approximately $0.4 million declined by approximately $0.2 million from the prior year due to fewer CTS devices being purchased and fewer training sessions conducted.

 

Specialty Products: Revenues of approximately $11.4 million for 2015 were approximately $0.8 million, or 8%, above revenues of approximately $10.6 million for 2014 due to increased purchases from several customers.

 

Gross profit: Gross profit was approximately $17.4 million for 2015 versus $13.9 million for 2014, representing a $3.5 million increase. The increase was the result of sales of training ammunition, an improvement in overhead absorption and lower expense for slow moving and obsolete inventory. The gross margin for 2015 was 46.0% versus 41.8% for 2014. Contributing to this were price increases, the improved absorption of overhead and lower expense for slow moving and obsolete inventory.

 

Expenses: Sales and marketing expenses in 2015 of approximately $2.4 million decreased by $1.0 million, or approximately 29%, from the prior year, primarily due to lower sales and marketing payroll expense from a reduction in positions and a corresponding drop in sales and marketing related travel expenses. General and administrative expenses in 2015 of approximately $7.6 million increased from 2014 by approximately $1.9 million, primarily due to the accruing of performance based bonus expense. Research and development expenses of approximately $1.4 million in 2015 decreased by approximately $0.1 million, or a 7% decrease from 2014 due to increased focus of resources on fewer research activities.

 

Interest expense, net : Interest expense of approximately $3.0 million increased by approximately $0.9 million from the prior year. The increase was primarily attributable to the amortization of debt issuance costs incurred in the refinancing of our senior and subordinated debt on May 18, 2015.

 

Amortization of intangible assets : Amortization of intangibles was approximately $1.0 million in 2015 and $1.8 million in 2014. The reduction in 2015 is due to a number of intangible assets becoming fully amortized, as well as the reduced amount being amortized in 2015 as a result of the impairment charges recorded during 2014.

 

Impairment Charges: During 2015, based on our annual review, there were no impairment charges.

 

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

 

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

 

The “step 1” goodwill impairment assessment for 2015 and 2014 was performed by comparing the fair value of each reporting unit containing goodwill to those reporting units’ carrying values. Our Chemical Light and Specialty Products reporting units have goodwill assets. Since there are no quoted market prices for our reporting units, the fair value of our reporting units were determined using a discounted present value technique utilizing each reporting unit’s forecasted after-tax cash flows. The “step 1” test determined that the fair value of the both the Chemical Light reporting unit and the Specialty Products reporting unit exceeded their carrying values, and therefore the goodwill did not need to be tested further under what is commonly known as “step 2” of the goodwill impairment assessment.

 

  20  

 

 

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

 

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

 

Provision for (benefit from) income taxes: The change from a pre-tax loss in 2014 to pre-tax income in 2015 is due primarily to the increase in revenues, decrease in legal fees, and sales and marketing expenses in 2015. The 2014 intangible impairment loss, as well as a loss on the extinguishment of related party debt, resulted in an overall pre-tax loss of approximately $6.5 million for the year ended December 31, 2014. The effective tax rate for 2015 of approximately 6% is lower than the 2014 rate of (19%). The Company incurred approximately $0.3 million of foreign tax expense on CTSAS’s income in 2015. The Company continues to have a full valuation allowance against its U.S. deferred tax assets. The Company has a valuation allowance of approximately $12.3 million as of December 31, 2015 against deferred tax assets generated primarily as a result of foreign tax credits and net operating losses.

 

Balance Sheet

 

Accounts receivable at December 31, 2015 were approximately $4.3 million, or approximately $0.7 million higher than at the end of 2014. Higher fourth quarter revenues in 2015 and timing differences for billings and collections account for most of the change.

 

Inventories, net were approximately $7.5 million at December 31, 2015 versus $7.8 million at the end of 2014. The decrease was the result of efforts to continuously reduce the level of inventory on-hand and timing. Our inventory balances fluctuate from a combination of recent sales activity and the timing of purchases of raw materials. Certain raw materials are purchased only several times a year due to long lead times and the desire to purchase in bulk to minimize costs, while other materials are purchased more frequently.

 

  21  

 

 

Property, plant and equipment of approximately $6.8 million at December 31, 2015, decreased from the end of 2014 by approximately $0.3 million due to depreciation in excess of capital additions.

 

Net intangible assets of approximately $5.7 million at December 31, 2015, decreased from the end of 2014 by approximately $0.9 million due primarily to approximately $1.0 of amortization of such assets.

 

The current portion of notes payable decreased to approximately $0.5 million at December 31, 2015, from $5.8 million at the prior year-end. The 2014 balance was significantly higher in order to recognize a December 2015 maturity date on our senior debt with TD Bank.

 

Accounts payable and accrued expenses, combined, were approximately $4.8 million at the end of both 2015 and 2014. Accounts payable of approximately $0.9 million as of December 31, 2015, was approximately $1.2 million lower than the prior year-end. Further improvement in 2015 of Company performance and cash flow contributed to reducing outstanding payables. Accrued expenses of $3.8 million as of December 31, 2015 were approximately $1.1 million higher than the previous year-end due primarily to the accrual of performance bonuses earned in 2015 and payable in 2016.

 

Net deferred income tax assets increased at the end of 2015 over the prior year, primarily as a result of the following:

 

  · Decreases in accrued legal fees and legal settlements;
  · Decreases in inventory reserves.

· An increase in deferred tax liabilities as a result of future non-deductible goodwill amortization.

 

A valuation allowance of approximately $12.2 million remains on deferred federal tax assets for the carryforward of net operating losses and foreign tax credits, which we do not anticipate using in the near-term. The utilization of this asset is dependent upon generation of significant revenues from sources outside the U.S.

 

We had federal net operating loss carryforwards amounting to $4.6 million and $3.9 million at December 31, 2015 and 2014, respectively. The net operating loss carryforward at December 31, 2015 expires in fiscal years 2027 through 2035. Internal Revenue Code Section 382 limits utilization of prior losses to approximately $0.4 million per year. However, it is possible that future changes in ownership could result in changes to the amounts allowed by IRC Section 382 and provide for a lower annual limitation for utilization of losses. State net operating loss carryforwards amounted to $8.4 million and $10.3 million as of December 31, 2015 and 2014, respectively. 

 

Effective as of August 3, 2015, CTI entered into a Second Amendment (the “Settlement Amendment”) to the Confidential Settlement Agreement and Mutual Release (the “Settlement Agreement”) entered into on July 10, 2014 (the “Settlement Agreement”), with certain former stockholders and members of management of Omniglow Corporation (collectively, the “Omniglow Buyers”) (which Settlement Agreement was summarized in the Current Report on Form 8-K filed by the Company on July 16, 2014). Pursuant to the Settlement Amendment, the parties to the Settlement Agreement agreed to amend CTI’s obligation to make the final settlement payment due under the Settlement Agreement, such that CTI would make a final payment of $1.4 million (the “Reduced Final Payment”) within five days of the execution of the Settlement Amendment 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, which payment was made on August 3, 2015, CTI has no further payment obligations pursuant to the Settlement Agreement.

 

Liquidity and Capital Resources

 

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”). 

 

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.

 

  22  

 

 

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 were used 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.

 

As of December 31, 2015, cash was approximately $1.7 million versus $2.4 million as of December 31, 2014. However, our availability under our revolving credit facility was $4.0 million at December 31, 2015 versus availability at December 31, 2014 of $0.6 million.

 

  23  

 

 

Capital expenditures and payments for intangibles, which totaled approximately $0.8 million in 2014, were approximately $1.2 million for 2015 and are expected to increase for 2016 to reflect a number of planned capital improvement projects. We expect to fund these capital expenditures in 2016 from existing cash and operating cash flows.

 

We were in compliance with our financial planned covenants as of December 31, 2015. We expect to meet our financial covenants for 2016 and that cash provided by the business will be adequate to meet our planned needs.

 

Subsequently, on March 18, 2016, we paid approximately $1.8 million in accrued performance bonuses out of cash on hand without need to access the revolving line of credit.

 

The Company did not pay a dividend in 2015 and has no plans to do so.

 

Off-Balance Sheet Arrangements

 

We did not have any off-balance sheet arrangements during 2015 or 2014.

 

Contractual Obligations

 

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

 

  24  

 

 

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

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

 

ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

Selected Quarterly Financial Data

 

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

 

Financial Statements

 

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

 

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

 

None.

 

ITEM 9A. CONTROLS AND PROCEDURES

 

Disclosure Controls and Procedures

 

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

 

Management carried out an evaluation, under the supervision of the Chief Executive Officer and Chief Financial Officer, of the effectiveness of disclosure controls and procedures as of December 31, 2015. Based upon that evaluation, management, including the Chief Executive Officer and Chief Financial Officer, concluded that the design and operation of disclosure controls and procedures were effective as of December 31, 2015.

 

Management's Report on Internal Control over Financial Reporting

 

Management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in the Securities Exchange Act of 1934, as amended. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Management assessed the effectiveness of internal control over financial reporting as of December 31, 2015. In making this assessment, management used the criteria set forth by Internal Control—Integrated Framework - 1992 issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on its assessment using those criteria, management concluded that internal control over financial reporting was effective as of December 31, 2015.

 

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

 

Changes in Internal Control over Financial Reporting

 

We have had no changes in internal control over financial reporting during our last fiscal quarter of 2015 that have materially affected, or are reasonably likely to materially affect, internal control over financial reporting.

 

ITEM 9B. OTHER INFORMATION

 

None.

 

  25  

 

 

PART III

 

ITEM 10.  DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

 

Directors and Executive Officers

 

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

 

Name   Age  

Position with Cyalume and

Principal Occupation

 

Held Office

Since

Yaron Eitan   59   Director and Vice Chairman of the Board   2006
Zivi Nedivi   57   President and Chief Executive Officer, Director   2012
Dale Baker   58   Chief Operating Officer   2012
Michael Bielonko   63   Chief Financial Officer & Secretary   2013
James (Jamie) Schleck   47   Director   2011
Ji Ham   40   Director   2013
Jason Epstein   42   Director   2008
Andrew Intrater   53   Director   2009
John G. Meyer, Jr.   71   Director   2011
Thomas G. Rebar   53   Director and Chairman of the Board   2007
Michael Barry   58   Director   2014

 

Background of Officers and Directors

 

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

 

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

 

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

 

Yaron Eitan has been our Vice Chairman of the Board since December 2008 and was our Chief Executive Officer and President from May 2006 through December 2008. In 1998, Mr. Eitan founded Selway Partners LLC, a holding company focused on technology investments, and has been its President and Chief Executive Officer since that time. From July 2002 to the present, Mr. Eitan has been a member of SCP Private Equity Management Company, LLC, a private equity and venture capital management company. Mr. Eitan is the Chairman and/or board member of several privately-held technology companies. Mr. Eitan holds an M.B.A. from the Wharton School of Business of the University of Pennsylvania. We believe that Mr. Eitan’s leadership, business and technology experience qualify him to serve as a director.

 

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

 

  26  

 

 

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

 

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

 

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

 

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

 

Thomas G. Rebar has served as a Director of Cyalume since August 6, 2007 and as our Chairman from August 2014. Mr. Rebar has been a Partner of SCP Private Equity Management, LLC since 1996. Mr. Rebar is currently a Director of several privately-held companies. Mr. Rebar has served as the chair of our audit committee since January 2009. Mr. Rebar received his B.S. summa cum laude from the University of Scranton and an M.B.A. from New York University Graduate School of Business Administration. Mr. Rebar’s leadership, business and financial experience qualify him to serve as a director.

 

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

 

Meetings and Committees of the Board of Directors

 

During the year ended December 31, 2015, the Board of Directors met 10 times. All of the directors attended at least 75% of the meetings of the Board and each committee on which he serves, except Jason Epstein and Andrew Intrater. Each director is expected to participate, either in person or via teleconference, in meetings of our Board of Directors and meetings of committees of our Board of Directors in which each director is a member, and to spend the time necessary to properly discharge such director’s respective duties and responsibilities. The Board of Directors has determined that Messrs. Eitan, Ham, Epstein, Intrater, Meyer, Rebar and Barry, are each independent directors as defined in Rule 4200 of the Nasdaq Marketplace Rules and applicable Securities and Exchange Commission (“SEC”) regulations.

 

  27  

 

 

Compensation Committee . On January 13, 2009, the Board of Directors formed a Compensation Committee and adopted a written charter. Serving on the Compensation Committee are Yaron Eitan (chairman), Jason Epstein and John G. Meyer, Jr., each of whom is independent as defined in Rule 5605(a)(2) of the Listing Rules. The Compensation Committee held three meetings during 2015. The charter is available to security holders on our website, www.cyalume.com . The charter sets forth responsibilities, authority and specific duties of the Compensation Committee. The Compensation Committee reviews and recommends to the board the compensation for the CEO and non-employee directors of our Company, and reviews the CEO’s compensation recommendations for all other corporate officers. It also reviews the general policy relating to compensation and benefits for all employees. The Compensation Committee has been designated by the Board of Directors to administer the Cyalume Technologies Holdings, Inc. 2009 Omnibus Securities and Incentive Plan and the Cyalume Technologies Holdings, Inc. 2014 Equity Incentive Plan.

 

Nominating and Corporate Governance Committee . On January 13, 2009, the Board of Directors formed the Nominating and Corporate Governance Committee and adopted a written charter. Thomas Rebar (Chairman) and Andrew Intrater, each of whom is independent as defined in Rule 5605(a)(2) of the Listing Rules, serve on this committee. The Nominating and Corporate Governance Committee’s charter is available to security holders on our website, www.cyalume.com . The Nominating and Corporate Governance Committee did not meet during 2015. There were no vacancies on the Board occurring during 2015. The Nominating and Corporate Governance Committee will consider director candidates recommended by security holders. Potential nominees to the Board of Directors are required to have such experience in business or financial matters as would make such nominee an asset to the Board of Directors and may, under certain circumstances, be required to be “independent”, as such term is defined under Rule 5605 of the Listing Rules and applicable SEC regulations. Stockholders wishing to submit the name of a person as a potential nominee to the Board of Directors must send the name, address, and a brief (no more than 500 words) biographical description of such potential nominee to the Nominating and Corporate Governance Committee at the following address: Nominating and Corporate Governance Committee of the Board of Directors, c/o Cyalume Technologies Holdings, Inc., 910 SE 17 th Street, Suite 300, Fort Lauderdale, Florida 33316. Potential director nominees will be evaluated by personal interview, such interview to be conducted by one or more members of the Nominating and Corporate Governance Committee, and/or any other method the Nominating and Corporate Governance Committee deems appropriate, which may, but need not, include a questionnaire. Those suggesting a nominee should include evidence that the writer is a Company stockholder, the name and contact information of the candidate and a statement signed by the candidate that the candidate is willing to be considered for nomination by the committee and wiling to serve as a director, if nominated and elected. The Nominating and Corporate Governance Committee may solicit or receive information concerning potential nominees from any source it deems appropriate. The Nominating and Corporate Governance Committee need not engage in an evaluation process unless (i) there is a vacancy on the Board of Directors, (ii) a director is not standing for re-election, or (iii) the Nominating and Corporate Governance Committee does not intend to recommend the nomination of a sitting director for re-election. A potential director nominee recommended by a security holder will not be evaluated differently from any other potential nominee. Although it has not done so in the past, the Nominating and Corporate Governance Committee may retain search firms to assist in identifying suitable director candidates.

 

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

 

  28  

 

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

  29  

 

 

Executive Committee. On January 13, 2009, the Board of Directors formed an Executive Committee. Yaron Eitan (Chairman), Michael Barry, Ji Ham, Thomas Rebar and Zivi Nedivi serve on this committee. The Executive Committee exercises the powers of the Board between meetings of the full Board of Directors. The Executive Committee met monthly during 2015.

 

Audit Committee. The Audit Committee is established in accordance with Section 3(a)(58)(A) of the Securities Exchange Act of 1934. Thomas G. Rebar (Chairman), Michael Barry and Yaron Eitan serve on this committee. The Audit Committee held five meetings during 2015. The Board of Directors has determined that Thomas G. Rebar is an “audit committee financial expert”. The Board of Directors has determined that each of the members of the Audit Committee are independent as defined in Rule 5605(a)(2) of the Listing Rules.

 

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

 

Compensation Committee Interlocks and Insider Participation

 

During 2015, no current or former officer or employee of CTI, CSP or CTS participated in deliberations of Cyalume’s Board of Directors concerning Executive Officer compensation.

 

Board Operations

 

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

 

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

 

Section 16(a) Beneficial Ownership Reporting Compliance

 

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

 

Based solely on our review of such forms furnished to us and written representations from certain reporting persons, we believe that all stockholders have complied with all filing requirements applicable to 10% beneficial owners during the year-ended December 31, 2015.

 

Code of Ethics

 

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

 

  30  

 

 

ITEM 11.  EXECUTIVE COMPENSATION

 

Overview

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

 

Compensation Philosophy

 

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

 

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

 

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

 

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

 

Administration of Executive Compensation Programs

 

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

 

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

 

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

 

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

 

Employment Agreements

 

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

 

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

 

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

 

  31  

 

 

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

 

The Consultant initially received an option to purchase up to 1,036,104 shares of the Company’s common stock at an exercise price per share of $1.50 (the “Initial Nedivi Option”). The Initial Nedivi Option became exercisable annually in five equal installments on each of the first five anniversaries of the approval of the issuance of the Initial Nedivi Option. In November 2014, that option was cancelled and replaced with an option, issued directly to Mr. Nedivi, to purchase 5,015,891 shares of the Company’s common stock at an exercise price per share of $0.09 (the “Nedivi Option”), subject to the effectiveness of the adoption of the 2014 Plan [and the Amendment]. The Nedivi Option shall be subject to vesting over four years from the date of grant, in four equal annual installments commencing on the first anniversary of the date of grant with the final installment occurring on the fourth anniversary of the date of grant, provided that the Nedivi Option shall not vest until the Company’s senior debt and junior debt have both been re-financed such that the total cost of new money shall not exceed 25% per annum including cash and PIK interest and the cost of warrants (unless such threshold is subsequently increased by the Board). This performance condition was met on May 18, 2015. Additionally, the Nedivi Option shall vest in full upon the sale of the Company for at least $35 million of enterprise value. If neither a qualified refinancing nor a qualified sale of the Company, as described above, occurs then no portion of the Nedivi Option shall vest.

 

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

 

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

 

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

 

  32  

 

 

Mr. Baker also received an initial option to purchase up to 350,000 shares of the Company’s common stock at an exercise price per share of $1.50 (the “Initial Baker Option”). The Initial Baker Option became exercisable annually in five equal installments on each of the first five anniversaries of the approval of the issuance of the Initial Baker Option. In November 2014, the Initial Baker Option was cancelled and replaced with an option to purchase 1,504,767 shares of the Company’s common stock at an exercise price per share of $0.09 (the “Baker Option”), subject to the effectiveness of the adoption of the 2014 Plan [and the Amendment]. The Baker Option shall be subject to vesting over four years from the date of grant, in four equal annual installments commencing on the first anniversary of the date of grant with the final installment occurring on the fourth anniversary of the date of grant, provided that the Baker Option shall not vest until the Company’s senior debt and junior debt have both been re-financed such that the total cost of new money shall not exceed 25% per annum including cash and PIK interest and the cost of warrants (unless such threshold is subsequently increased by the Board). This performance condition was met on May 18, 2015. Additionally, the Baker Option shall vest in full upon the sale of the Company for at least $35 million of enterprise value. If neither a qualified refinancing or a qualified sale of the Company, as described above, occurs then no portion of the Baker Option shall vest.

 

Michael Bielonko Mr. Bielonko’s employment agreement, effective October 10, 2013, provided that Mr. Bielonko would be employed as CTI’s Chief Financial Officer. The contract had an initial term expiring on December 31, 2014 unless extended in writing by the mutual agreement of the parties or unless terminated by either party upon 30 days written notice prior to the anniversary/expiration date or terminated pursuant to certain events or for cause. As of December 31, 2014, the employment agreement effective October 10, 2013 expired; Mr. Bielonko continues to serve as the CFO on an agreed upon day-to-day basis until such time as he is replaced, ends the day-to-day agreement, or a new agreement is entered into.

 

Employee Benefits Plans

 

Pension Benefits

 

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

 

Nonqualified Deferred Compensation

 

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

 

Severance Arrangements

 

Assuming the employment of our named executive officers were to be terminated without cause, each as of December 31, 2015, the following individuals would be entitled to payments in the amounts set forth opposite to their name in the below table:

 

    Cash Severance  
    No Change in Control     Change in Control  
Zivi Nedivi   $ 450,000     $ 450,000  
Dale Baker   $ 175,000     $ 175,000  
Michael Bielonko   $ 93,500     $ 93,500  

 

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

 

  33  

 

 

Summary Compensation Table

 

The following table shows information concerning the annual compensation in 2015 and 2014 for services provided to us by our Chief Executive Officer and our two other executive officers.

 

Name and Principal
Position
  Year  

Salary

($)

   

Earned

Bonus

($)

   

Option
Awards

($) (1)

   

All Other

Compensation

($)

   

Total

Compensation

($)

 
Zivi Nedivi,   2015     435,577       740,528       181,676 (4)           1,357,781  
President & CEO   2014     431,250             (3)           431,250  
                                             
Dale Baker,   2015     345,816       400,966       126,400 (4)     774       873,956  
COO   2014     342,613             (3)     774       343,387  
                                             
Michael Bielonko,   2015     181,246       139,430             12,847       333,523  
CFO & Secretary   2014     187,000       100,000 (2)     27,279       14,496       328,775  

 

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

 

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

 

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

 

(4) Performance based conditions were met May 18, 2015 with the refinancing of the Company’s debt.

 

Equity Compensation Awards

 

On November 21, 2014, the Compensation Committee of the Board of Directors authorized 5,015,891 stock options to Zivi Nedivi, 1,504,767 stock options to Dale Baker and 324,729 stock options to Michael Bielonko, in each case subject to the effectiveness of the adoption of the 2014 Plan, which became effective February 2015.

 

  34  

 

 

Outstanding Equity Awards at December 31, 2015

 

    Option Awards   Stock Awards  
    Equity Incentive Plan Awards:   Equity Incentive Plan Awards:  
Name   Number of
securities
underlying
unexercised
options
(#)
exercisable
    Number of
securities
underlying
unexercised
options (#)
unexercisable
    Number of
securities
underlying
unexercised
unearned
options (#)
    Option
exercise
price
($)
    Option
expiration
date
  Number of
shares of
stock that
have not
vested
(#)
    Market
value of
shares of
stock that
have not
vested
($)
    Number
of
unearned
shares
that
have not
vested
(#)
    Market or
payout value
of unearned
shares that
have not
vested
($)
 
Zivi     1,253,972 (1)     3,761,919 (1)         $ 0.09     11/21/2024                        
Nedivi                                                                    
                                                                     
Dale     376,191 (2)     1,128,576 (2)         $ 0.09     11/21/2024                        
Baker                                                                    
                                                                     
Michael     9,900 (3)     14,849 (3)         $ 1.66     1/7/2023                        
Bielonko     324,749 (4)     0 (4)         $ 0.09     11/21/2024                        

 

  (1) These options were granted on November 21, 2014, subject to the effectiveness of the adoption of the 2014 Plan, and vest in the following increments: 1,253,972 on 11/21/2015, 2016 and 2017 and 1,253,975 on 11/21/2018.

 

  (2) These options were granted on November 21, 2014, subject to the effectiveness of the adoption of the 2014 Plan, and vest in the following increments: 376,191 on 11/21/2015, 2016 and 2017 and 376,194 on 11/21/2018.

 

  (3) These options vest in the following increments: 4,950 on 1/1/2014, 2015, 2016 and 2017 and 4,949 on 1/1/2018.

 

  (4) These options were granted on November 21, 2014, subject to the effectiveness of the adoption of the 2014 Plan, and vested December 31, 2015 on the condition met by Mr. Bielonko that he did not leave the Company voluntarily prior to December 31, 2015.

 

  35  

 

 

Securities Authorized for Issuance Under Equity Compensation Plans

 

The following table sets forth, as of December 31, 2015, certain information as to the equity compensation plan of the Company pursuant to which grants of options, restricted stock, restricted stock units or other rights to acquire shares of the Company’s common stock may be granted from time to time.

 

Plan Category   Number of
Securities to be
Issued Upon
Exercise of
Outstanding
Options,
Warrants or
Rights
(a)
    Weighted
Average
Exercise Price
of Outstanding
Options,
Warrants and
Rights
(b)
    Number of
Securities
Remaining
Available for
Future Issuance
Under Plans
(Excluding
Securities
Reflected in
Column (a))
(c)
 
Equity compensation plans approved by security holders (1)     4,027,164     $ 0.84 (2)     8,229,252  
Total     4,027,164     $ 0.84       8,229,262  

 

(1) Consists of the Company’s Amended 2009 Omnibus Securities and Incentive Plan and the 2014 Equity Incentive Plan (adopted February 15, 2015).

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

 

Director Compensation

 

There were no option awards or stock awards made in 2015. No compensation was paid to non-employee directors in 2015. All directors are reimbursed for travel and other expenses directly related to activities as directors. 

 

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

 

The following table sets forth, as of March __, 2016, certain information as to the stock ownership of (i) each person known by the Company to own beneficially more than five percent of the Company’s Common Stock, (ii) each of the Company’s current directors and those nominees standing for election, (iii) each of the Company’s executive officers, and (iv) the Company’s executive officers and directors as a group. Except otherwise set forth in the notes to the table, the business address of each stockholder is c/o the Company, 910 SE 17 th St., Suite 300, Fort Lauderdale, FL 33316. Information provided as to 5% stockholders other than our employees or management is based solely on forms 13D or 13G filed with the Securities and Exchange Commission and subsequent issuances by the Company.

 

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

 

  36  

 

 

The applicable percentage of ownership is based on 21,400,244 shares outstanding.

 

Name and Address of Beneficial Owner (1)   Amount and
Nature of
Beneficial
Ownership
    Approximate
Percentage of
Common Stock
 
Ji Ham (2)     20,000       *  
Yaron Eitan (3)     1,232,332       5.7 %
Jason Epstein (4)     95,000       *  
Andrew Intrater (5)     60,565,878       77.4 %
John G. Meyer, Jr. (6)     270,915       1.3 %
Zivi Nedivi (7)     1,253,972       5.5 %
Thomas G. Rebar (8)     350,137       1.6 %
James Schleck (9)     7,159,265       28.6 %
Michael Barry (10)     14,126,693       39.8 %
Dale Baker (11)     376,191       1.7 %
Michael Bielonko (12)     426,430       2.0 %
Cova Small Cap Holdings, LLC (4)(5)(13)     21,779,839       55.2 %
Kline Hawkes Pacific Advisors, LLC (14)     2,273,434       10.6 %
US VC Partners, L.P. (15)     38,706,039       64.4 %
All Directors and Executive Officers as a group (11 persons)     85,913,341       87.0 %

 

 

* Less than 1%.

 

(1) The business address of each of our current officers and directors is 910 SE 17 th St., Suite 300, Fort Lauderdale, FL 33316.
   
(2) Excludes shares beneficially owned by US VC Partners, LP (“US VC”), as described in footnote (15). Mr. Ham was appointed to the Board pursuant to the rights granted to US VC under the terms of the Certificate of Designations of the Company’s Series A Convertible Preferred Stock, in connection with US VC’s equity investment in the Company consummated on November 19, 2013. Mr. Ham disclaims beneficial ownership of the shares held by US VC.
   
(3) Based on information filed by Yaron Eitan from time to time with the Securities and Exchange Commission.  Consists of (i) 555,024 shares of common stock held directly, (ii) options to purchase 135,000 shares of common stock held directly, (iii) 537,308 shares of common stock held by Selway Capital, LLC, Mr. Eitan is the Manager of Selway Capital, LLC and (iv) 5,000 shares of common stock held by Mr. Eitan’s child.
   
(4) Excludes shares beneficially owned by Cova Small Cap Holdings, LLC (“Cova”), as described in footnote (13). Mr. Epstein directly holds an option to purchase 95,000 shares of our Common Stock; however, pursuant to a privately negotiated agreement with Cova, Mr. Epstein has agreed to transfer ownership of all common stock underlying the stock option to Cova upon exercise of the stock option.  Cova is an affiliate of Renova U.S. Management LLC, in which Mr. Epstein serves as a Manager and participates in a profit sharing plan.  Mr. Epstein disclaims beneficial ownership of the shares held by Cova.

 

(5) Includes shares beneficially owned by Cova, as described in footnote (13), and shares beneficially owned by US VC, as described in footnote (15). Also includes a stock option to purchase 80,000 shares of common stock held of record by Mr. Intrater. Mr. Intrater, as chief executive officer of Cova, may be deemed to beneficially own the securities held by Cova.  Mr. Intrater is also the Special Managing Member of US VC Partners Management, LLC, which manages US VC Partners GP, LLC (“GP”), the sole general partner of US VC and, therefore, may be deemed to beneficially own the securities held by US VC. Mr. Intrater disclaims beneficial ownership over the securities held by Cova and US VC, except to the extent of his pecuniary interest therein, if any.
   
(6) Consists of options to purchase 270,000 shares of common stock and 915 shares of common stock held directly.
   
(7) Consists of vested options to purchase shares of common stock.
   
(8) Consists of: (i) options to purchase 175,000 shares of common stock and (ii) 175,137 shares of common stock held directly.
   
(9) Based on information contained in a Schedule 13D/A filed on May 28, 2015, by James Schleck, JFC Technologies, LLC and Bayonet Capital Fund I, LLP. Consists of: (i) 250 shares of common stock held directly by Mr. Schleck; (ii) vested options to purchase 140,000 shares held by Mr. Schleck; (iii) 3,478,943 shares of common stock owned by JFC Technologies, LLC (“JFC”); (iv) shares of common stock that are issuable to JFC upon the conversion of 20 shares of Series A Preferred Stock; and (v) 3,571,315 shares of common stock issuable upon the conversion of 100 shares of Series B Preferred Stock owned by Bayonet Capital Fund I, LLC (“Bayonet”). Mr. Schleck is the Chief Executive Officer of JFC and Bayonet and, as such, may be deemed to beneficially own the securities held by them. Mr. Schleck disclaims beneficial ownership over the securities held by JFC and Bayonet, except to the extent of his pecuniary interest therein, if any.
   
(10) Consists of options to purchase 20,000 shares of common stock plus shares of common stock issuable upon the conversion of 395 shares of Series B Preferred Stock owned by the Michael G. Barry Irrevocable Trust of 2006, a trust for the benefit of Mrs. Barry and Mr. Barry’s children. Mr. Barry’s spouse is trustee of the trust. Mr. Barry disclaims beneficial ownership of these securities.
   
(11) Consists of vested options to purchase shares of common stock.
   
(12) Consists of: (i) 86,831 shares of common stock and (ii) options to purchase 339,599  shares of common stock.
   
(13) Based on information contained in a Schedule 13D/A filed on August 19, 2014, by Cova, Andrew Intrater, Renova US Holdings Ltd, Columbus Nova Investments IV Ltd, CN Special Opportunity Fund Ltd. and CN Credit Opportunities Fund 2007-1 Ltd. Consists of 3,744,700 shares of common stock and 18,035,139 shares of common stock issuable upon the conversion of 505 shares of Series B Preferred Stock. Cova’s business address is 900 Third Avenue, 19 th Floor, New York, NY 10022.
   
(14) Based on information contained in a Schedule 13D/A filed on January 22, 2009. Kline Hawkes’ business address is 11726 San Vicente Blvd., Suite 300, Los Angeles, CA 90049.
   
(15) Based on information contained in a Schedule 13D/A filed on August 19, 2014, by US VC, US VC Partners Management, LLC and Andrew Intrater. Consists of shares of common stock issuable upon the conversion of 123,077 shares of Series A Preferred Stock. US VC has a number of officers in common with Cova. US VC’s business address is 900 Third Avenue, 19 th Floor, New York, NY 10022.

 

  37  

 

 

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

 

Related Party Debt

 

In 2011, CSP entered into a market-based lease for property in Bound Brook, New Jersey, from Brook Industrial Park, LLC, an entity that is wholly owned by Mr. Schleck, a member of our board. The term of the lease expires on August 31, 2016 (subject to renewal options). The monthly rent currently payable under the lease is approximately $33,000.

 

In December 2012, we incurred an unsecured promissory note in the original principal amount of $2,100,000. On November 19, 2013 the note was amended whereby interest accrues on the principal at the rate of 12% per annum, retroactive to the date of the original note in December 2012.The note is payable in full on the earlier of December 16, 2016 or upon the refinancing of the Company’s existing indebtedness (subject to the availability of at least $5,000,000 in available credit after such repayment). Up to $1 million of the principal amount is convertible, at the option of the holder, into shares of Series A Preferred Stock equal to the amount converted divided by $32.50 (subject to certain adjustments based on changes in capitalization affecting the Series A Preferred Stock). On July 30, 2014, in connection with the financing consummated by us on that date (as described below), we entered into a Consent and Waiver Agreement pursuant to which, among other things, the provisions in the unsecured promissory note that had provided that, upon conversion of the first $499,980 of principal of the note, the holder would receive warrants to purchase the Company’s common stock and warrants to purchase shares of Series A Preferred Stock were deleted. On May 18, 2015, in conjunction with the refinancing of the Company’s debt, the note holder converted $650 of principal into 20 shares of Series A Preferred Stock, and the balance of the principal plus accrued interest due under the note at that time were paid in full and the note extinguished. The lender is a related party due to the lender being partially owned by James Schleck, a board member.

 

Related Party Transactions Policy

 

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

 

ITEM 14.  PRINCIPAL ACCOUNTING FEES AND SERVICES

 

BDO USA, LLP audited our consolidated financial statements for the years ended December 31, 2015 and 2014. BDO USA, LLP is our principal accountant as of December 31, 2015.

 

The following table sets forth the aggregate fees billed by BDO USA, LLP for professional services rendered during the fiscal years ended December 31, 2015 and 2014:

 

    2015     2014  
Audit fees (1)   $ 336,194     $ 259,092  
Audit-related fees (2)     -       -  
Tax fees (3)     20,500       -  
All other fees (4)     -       -  
Total fees   $ 356,694     $ 259,092  

 

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

 

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

 

  (3) Tax fees were primarily related the Company's Internal Revenue Code Section 382 study during 2015.

 

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

 

PART IV

 

ITEM 15.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES

 

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

 

Consolidated Balance Sheets

Consolidated Statements of Comprehensive Income (Loss)

Consolidated Statements of Changes in Preferred Stock and Stockholders’ Equity

Consolidated Statements of Cash Flows

Notes to Consolidated Financial Statements

 

  38  

 

 

(b)          Exhibits

 

Exhibit    
Number   Description
2.1 (1) Stock Purchase Agreement dated February 14, 2008 by and among Vector Intersect Acquisition Corporation, as the Parent, Cyalume Acquisition Corp., a Delaware corporation, as the Purchaser, Cyalume Technologies, Inc. and GMS Acquisition Partners Holdings, LLC
2.2 (2) Amendment No. 1 to Stock Purchase Agreement, dated October 22, 2008
2.3 (3) Amendment No. 2 to Stock Purchase Agreement, dated December 17, 2008
2.4 (3) Amendment No. 3 to Stock Purchase Agreement, dated December 18, 2008
3.1 (3) Fifth Amended and Restated Certificate of Incorporation
3.2 (4) By-laws
3.3 (26) Second Amended and Restated Certificate of Designation of Series A Convertible Preferred Stock filed by the Company with the Secretary of State of the State of Delaware on May 15, 2015. (3.1)
3.4 (19) Warrant to Purchase Common Stock, dated November 19, 2013, issued to the Investor. (3.2)
3.5 (19) Warrant to Purchase Series A Preferred Stock, dated November 19, 2013, issued to the Investor. (3.3)
3.6 (19) Second Amended and Restated Warrant to Purchase Common Stock, dated November 19, 2013, issued to Granite Creek FlexCap I, L.P. (3.4)
3.7 (19) Second Amended and Restated Warrant to Purchase Common Stock, dated November 19, 2013, issued to Patriot Capital II, LP. (3.5)
3.8 (19) Warrant to Purchase Common Stock, dated November 19, 2013, issued to JFC. (3.6)
3.9 (26) Amended and Restated Certificate of Designation of Series B Convertible Preferred Stock filed by the Company with the Secretary of State of the State of Delaware on May 15, 2015. (3.2)
3.10 (26) Amended and Restated Certificate of Designation of Series C Preferred Stock filed by the Company with the Secretary of State of the State of Delaware on May 15, 2015. (3.3)
3.11 (26) Certificate of Designation of Series D Convertible Preferred Stock filed by the Company with the Secretary of State of the State of Delaware on May 15, 2015. (3.4)
3.12 (26) Warrant to Purchase Common Stock, dated May 18, 2015. (3.5)
4.1 (4) Specimen Common Stock Certificate
4.2 (4) Specimen Unit Certificate
4.3 (4) Specimen Warrant Certificate
4.4 (4) Form of Unit Purchase Option to be granted to the representative
4.5 (8) Registration Rights Agreement dated March 18, 2011
4.6 (14) Stock Option Agreement between Cyalume Technologies Holdings, Inc. and East Shore Ventures, LLC (4.1)
4.7 (14) Stock Option Agreement between Cyalume Technologies Holdings, Inc. and Dale S. Baker (4.2)
10.1 (4) Form of Stock Escrow Agreement among the Registrant, American Stock Transfer & Trust Company and the Initial Stockholders
10.2 (4) Form of Registration Rights Agreement among the Registrant, the Initial Stockholders and the Private Placement Purchasers
10.3 (5) Cyalume Technologies Holdings, Inc. 2009 Omnibus Securities and Incentive Plan
10.4 (6) Share Purchase Agreement dated March 18, 2011
10.5 (7) Amendment No. 1 to the Employee Agreement of Derek Dunaway dated May 9, 2011
10.6 (7) Amendment No. 1 to the Employee Agreement of Edgar E. Cranor dated May 9, 2011
10.7 (8) Securities Exchange Agreement between Cyalume Technologies Holdings, Inc. and Rodman Principal Investments, LLC dated June 30, 2011  (10.1)
10.8 (8) Securities Exchange Agreement between Cyalume Technologies Holdings, Inc. and Winston Churchill dated July 7, 2011  (10.2)
10.9 (8) Securities Exchange Agreement between Cyalume Technologies Holdings, Inc. and Thomas Rebar dated July 7, 2011  (10.3)
10.10 (8) Securities Exchange Agreement between Cyalume Technologies Holdings, Inc. and Wayne Weisman dated July 7, 2011 (10.4)
10.11 (9) Amendment No. 2 to the Employee Agreement of Derek Dunaway  (10.5)
10.12 (9) Amendment No. 1 to the Employee Agreement of Michael Bielonko  (10.6)
10.13 (9) Amendment No. 2 to the Employee Agreement of Edgar E. Cranor  (10.7)
10.14 (9) Asset Purchase Agreement dated August 31, 2011 among Cyalume Technologies Holdings, Inc., Cyalume Specialty Products, Inc., JFC Technologies, LLC and Selling Members of Seller  (10.8)
10.15 (9) Registration Rights Agreement between Cyalume Technologies Holdings, Inc., James G. Schleck, James R. Schleck, Jame Fine Chemical, Inc., and JFC Technologies, LLC dated as of August 31, 2011  (10.9)
10.16 (9) Lease Agreement between Brook Industrial Park, LLC and Cyalume Specialty Products, Inc. (10.10)
10.17 (10) Stock Purchase Agreement dated December 22, 2011 among Cyalume Technologies Inc., Cyalume Technologies Holdings, Inc., Combat Training Solutions, Inc., and Antonio Colon  (10.27)
10.18 (10) Registration Rights Agreement, dated as of December 22, 2011, between Cyalume Technologies Holdings, Inc., and Antonio Colon (10.28)
10.19 (10) Second Amendment to Amended and Restated Revolving Credit and Term Loan Agreement between Cyalume Technologies, Inc., Cyalume Technologies Holdings, Inc., Combat Training Solutions, Inc., Cyalume Realty, Inc., Cyalume Specialty Products, Inc. and TD Bank, N.A. dated March 30, 2012 (10.30)
10.20 (10) Second Amendment to Subordinated Loan Agreement between Cyalume Technologies, Inc., Cyalume Technologies Holdings, Inc., Combat Training Solutions, Inc., Cyalume Realty, Inc., Cyalume Specialty Products, Inc., Granite Creek Partners Agent, LLC, Granite Creek Flexcap I, L.P. and Patriot Capital II, L.P. dated March 30, 2012 (10.31)
10.21 (11) Services Agreement by and among the Company, Cyalume Technologies, Inc. and East Shore Ventures, LLC dated as of April 2, 2012  (10.1)
10.22 (11) Inducement Agreement by and between East Shore Ventures, LLC and Zivi Nedivi  (10.2)
10.23 (11) Separation Agreement and General Release by and between Cyalume Technologies, Inc. and Derek Dunaway effective as of April 2, 2012 (10.3)

 

  

  39  

 

 

10.24 (12) Amended and Restated Employment Agreement of Michael Bielonko, Chief Financial Officer, Cyalume Technologies, Inc. (10.1)
10.25 (12) Separation and Release Agreement between Monte L. Pickens and Cyalume Technologies, Inc. (10.2)
10.26 (13) Employment Agreement between Daniel S. Baker and Cyalume Technologies, Inc. effective September 10, 2012 (10.1)
10.27 (14) Amendment No. 1 to Services Agreement dated September 10, 2012 between Cyalume Technologies Holdings, Inc., Cyalume Technologies, Inc., and East Shore Ventures, LLC (10.1)
10.28 (15) Third Amendment to Amended and Restated Revolving Credit and Term Loan Agreement effective December 28, 2012 with TD Bank, N.A. (10.1)
10.29 (15) Third Amendment to Subordinated Loan Agreement effective December 28, 2012 with Granite Creek Flexcap I, L.P. and Patriot Capital II, L.P., and Granite Creek Partners Agent, L.L.C (10.2)
10.30 (16) Amendment Agreement dated December 27, 2012 by and among the  Cyalume Technologies Holdings, Inc.,  Cyalume Specialty Products, Inc.,  JFC Technologies, LLC  and  James G. Schleck (10.1)
10.31 (16) Unsecured Promissory Note dated December 31, 2012 with JFC Technologies, LLC (10.2)
10.32 (17) Employment Agreement, effective as of November 1, 2011, between Cyalume Specialty Products, Inc. and James G. Schleck (10.3)
10.33 (17) First Amendment to Employment Agreement, dated December 27, 2012, between  Cyalume Specialty Products, Inc. and James G. Schleck (10.4)
10.36 (19) Securities Purchase Agreement, dated November 19, 2013, between the Company and the Investor. (10.1)
10.37 (19) Registration Rights Agreement, dated November 19, 2013, between the Company and the Investor. (10.2)
10.38 (19) Release and Escrow Agreement, dated November 19, 2013, among the Company, CTI, Cova and the Investor. (10.3)
10.39 (19) Fourth Amendment to Amended and Restated Revolving Credit and Term Loan Agreement, dated November 19, 2013. (10.4)
10.40 (19) Fourth Amendment to Subordinated Loan Agreement, dated November 19, 2013. (10.5)
10.41 (19) Amended and Restated Promissory Note, dated November 19, 2013. (10.6)
10.42 (20) Separation and Release Agreement, dated December 31, 2013, between Cyalume Specialty Products, Inc. and James G. Schleck. (10.42)
10.43 (20) Consulting Agreement, dated December 31, 2013, between Cyalume Specialty Products, Inc. and James G. Schleck. (10.43)
10.44 (21) Amendment to Consulting Agreement between Cyalume Specialty Products, Inc. and James G. Schleck. (10.1)
10.45 (22) Securities Purchase Agreement, dated July 30, 2014. (10.1)
10.46 (22) Registration Rights Agreement, dated July 30, 2014. (10.2)
10.47 (22) Sixth Amendment to Amended and Restated Revolving Credit and Term Loan Agreement and Limited Consent and Waiver, dated July 30, 2014. (10.3)
10.48 (22) Amendment No. 1 to Amended and Restated Promissory Note, dated July 30, 2014. (10.4)
10.49 (22) Consent and Waiver Agreement, dated July 30, 2014. (10.5)
10.50 (23) Confidential Settlement Agreement and Mutual Release dated July 10. 2014. (10.1)
10.51 (24) 2014 Equity Incentive Plan.
10.52 (25) Employment Agreement between Cyalume Technologies, Inc., Cyalume Technologies Holdings, Inc. and Zivi Nedivi, dated as of February 1, 2015. (10.1)
10.53 (26) Credit Agreement, dated May 18, 2015. (10.1)
10.54 (26) Subscription Agreement, dated May 18, 2015. (10.2)
10.55 (26) Registration Rights Agreement, dated May 18, 2015. (10.3)
10.56 (27) Second Amendment to Confidential Settlement Agreement and Mutual Release. (10.1)
10.57 (27) First Amendment to Credit Agreement, dated as of August 3, 2015. (10.2)
14.1 (10) Code of Conduct and Ethics (14.1)
16.1 (18) Letter from CCR LLP
21.1 * Subsidiaries of the Registrant
23.1 * Consent of BDO USA, LLP, Independent Registered Public Accounting Firm
31.1 * Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2 * Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1 * Certification of Principal Executive Officer and Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS * XBRL Instance Document
101.SCH * XBRL Taxonomy Extension Schema
101.CAL * XBRL Taxonomy Extension Calculation Database
101.DEF * XBRL Taxonomy Extension Definition Linkbase
101.LAB * XBRL Taxonomy Extension Label Linkbase
101.PRE * XBRL Taxonomy Extension Presentation Linkbase

  

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

 

  40  

 

 

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

  (20) Incorporated by reference to our Form 10-K dated December 31, 2014 and filed with the Commission on April 15, 2014. The number given in parenthesis indicates the corresponding exhibit number in such Form 10-K.
  (21) Incorporated by reference to our Form 10-Q dated March 31, 2014 and filed with the Commission on May 20, 2014. The number given in parenthesis indicates the corresponding exhibit number in such Form 10-Q.
  (22) Incorporated by reference to the Current Report on Form 8-K filed with the Commission on August 5, 2014. The number given in parenthesis indicates the corresponding exhibit number in such Form 8-K.
  (23) Incorporated by reference to our Form 10-Q dated June 30, 2014 and filed with the Commission on August 14, 2014. The number given in parenthesis indicates the corresponding exhibit number in such Form 10-Q.
  (24) Incorporated by reference to Exhibit B to our definitive information statement on Schedule 14C filed with the Commission on January 26, 2015.
  (25) Incorporated by reference to the Current Report on Form 8-K filed with the Commission on February 3, 2015. The number given in parenthesis indicates the corresponding exhibit number in such Form 8-K.
  (26) Incorporated by reference to the Current Report on Form 8-K filed with the Commission on May 21, 2015. The number given in parenthesis indicates the corresponding exhibit number in such Form 8-K.
  (27) Incorporated by reference to the Current Report on Form 8-K filed with the Commission on August 6, 2015. The number given in parenthesis indicates the corresponding exhibit number in such Form 8-K.

  

 

  * Filed herewith.

 

  41  

 

 

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) 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: April 7, 2016   By: /s/  Zivi Nedivi
      Zivi Nedivi, President, Chief Executive Officer
       (Principal Executive Officer)

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 

Name   Title   Date
         
    President, Chief Executive Officer    
/s/  Zivi Nedivi   (Principal Executive Officer) and Director   April 7, 2016
Zivi Nedivi        
         
    Chief Financial Officer    
/s/  Michael Bielonko   (Principal Financial Officer and Principal
Accounting Officer)
  April 7, 2016
Michael Bielonko        
         
/s/  Thomas G. Rebar   Director and Chairman   April 7, 2016
Thomas G. Rebar        
         
/s/  Yaron Eitan   Director and Vice Chairman   April 7, 2016
Yaron Eitan        
         
/s/  Ji Ham   Director   April 7, 2016
Ji Ham        
         
/s/  Jason Epstein   Director   April 7, 2016
Jason Epstein        
         
/s/   John Meyer, Jr.   Director   April 7, 2016
John Meyer, Jr.        
         
/s/  Michael Barry   Director   April 7, 2016
Michael Barry        
         
/s/  Andrew Intrater   Director   April 7, 2016
Andrew Intrater        
         
/s/  James Schleck   Director   April 7, 2016
James Schleck        

 

  42  

 

 

INDEX TO FINANCIAL STATEMENTS

 

Cyalume Technologies Holdings, Inc.

 

Years ended December 31, 2015 and 2014

 

    Page
Report of Independent Registered Public Accounting Firm   F-2
     
Consolidated Financial Statements :    
     
Consolidated Balance Sheets   F-3
     
Consolidated Statements of Comprehensive Income (Loss)   F-4
     
Consolidated Statements of Changes in Preferred Stock and Stockholders' Equity   F-5
     
Consolidated Statements of Cash Flows   F-6
     
Notes to Consolidated Financial Statements   F-7
     
Signatures    

 

  F- 1  

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

Board of Directors and Stockholders

Cyalume Technologies Holdings, Inc.

Fort Lauderdale, Florida

 

We have audited the accompanying consolidated balance sheets of Cyalume Technologies Holdings, Inc. (the “Company”) as of December 31, 2015 and 2014 and the related consolidated statements of comprehensive income (loss), changes in preferred stock and stockholders’ equity, and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

 

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

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Cyalume Technologies Holdings, Inc. at December 31, 2015 and 2014, and the results of its operations and its cash flows for the years ended December 31, 2015 and 2014, in conformity with accounting principles generally accepted in the United States of America.

 

/s/ BDO USA, LLP

 

Boston, Massachusetts

April 7, 2016

 

  F- 2  

 

 

Cyalume Technologies Holdings, Inc.

Consolidated Balance Sheets

(in thousands, except shares and per share information)

 

    December 31,     December 31,  
    2015     2014  
Assets                
Current assets:                
Cash   $ 1,526     $ 2,358  
Accounts receivable, net of allowance for doubtful accounts of $5 and $22, respectively     4,299       3,622  
Inventories, net     7,528       7,826  
Income taxes refundable     442       0  
Debt issue costs, current     809       21  
Prepaid expenses and other current assets     797       627  
Total current assets     15,401       14,454  
                 
Property, plant and equipment, net     6,795       7,120  
Goodwill     7,992       7,992  
Other intangible assets, net     5,691       6,591  
Debt issue costs, noncurrent     809       5  
Other noncurrent assets     0       13  
Total assets   $ 36,688     $ 36,175  
Liabilities and Stockholders’ Equity                
Current liabilities:                
Line of credit   $ 1,000     $ 2,050  
Current portion of notes payable     492       5,775  
Accounts payable     947       2,144  
Accrued expenses     3,858       2,690  
Deferred revenue and deferred rent     125       181  
Income taxes payable     327       644  
Current portion of capital lease obligation     0       7  
Warrants liability     54       25  
Total current liabilities     6,803       13,516  
                 
Notes payable, net of current portion     16,016       10,214  
Note payable due to related parties     0       2,100  
Deferred income taxes     567       430  
Asset retirement obligation     214       204  
Legal obligation, noncurrent     0       2,781  
Other noncurrent liabilities, net of current portion     81       78  
Total liabilities     23,681       29,323  
Commitments and contingencies (Note 16)                
                 
Series C preferred stock, $0.001 par value; 1,000,000 shares authorized; 1,000 shares issued and outstanding     2,367       2,103  
Series D convertible preferred stock, $0.001 par value; 1,000,000 shares authorized; 10 shares issued and outstanding     2,751       0  
Series A convertible preferred stock, $0.001 par value; 1,000,000 shares authorized; 123,097 and 123,077 shares issued and outstanding, respectively     5,137       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     102,624       103,014  
Accumulated deficit     (100,315 )     (103,590 )
Accumulated other comprehensive loss     (979 )     (661 )
Total stockholders’ equity     2,752       185  
Total liabilities and stockholders' equity   $ 36,688     $ 36,175  

 

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

 

  F- 3  

 

 

Cyalume Technologies Holdings, Inc.

Consolidated Statements of Comprehensive Income (Loss)

(in thousands, except shares and per share information)

 

    For the Year     For the Year  
    Ended     Ended  
    December 31,     December 31,  
    2015     2014  
Revenues   $ 37,842     $ 33,322  
Cost of revenues     20,448       19,392  
Gross profit     17,394       13,930  
                 
Other expenses (income):                
Sales and marketing     2,375       3,395  
General and administrative     7,576       5,662  
Research and development     1,396       1,506  
Interest expense, net     2,934       2,086  
Interest expense – related party     100       356  
Amortization of intangible assets     954       1,812  
Impairment loss on intangible assets     0       9,580  
Legal settlement     (1,381 )     0  
Change in fair value of warrants liability     29       (4,852 )
Loss on extinguishment of debt – related party     0       527  
Other expenses (income), net     (73 )     336  
Total other expenses     13,910       20,408  
                 
Income (loss) before income taxes     3,484       (6,478 )
Provision for income taxes     209       1,238  
Net income (loss)   $ 3,275     $ (7,716 )
                 
Other comprehensive income (loss), net of tax:                
Foreign currency translation adjustments   $ (318 )   $ (443 )
Other comprehensive loss     (318 )     (443 )
Comprehensive income (loss)   $ 2,957     $ (8,159 )
                 
Net income (loss)   $ 3,275     $ (7,716 )
Series A convertible preferred stock dividends     (573 )     (509 )
Series C preferred stock dividends     (264 )     (103 )
Series A deemed dividend     0       (2,422 )
Series B deemed dividend     0       (1,098 )
Series C deemed dividend     0       (1,401 )
Net income (loss) available to common stockholders – basic   $ 2,438     $ (13,249 )
Convertible related party promissory note     45       0  
Series A convertible preferred stock dividends     573       0  
Net income (loss) available to common stockholders - diluted   $ 3,056     $ (13,249 )
                 
Earnings (loss) per common share:                
Basic   $ 0.11     $ (0.62 )
Diluted   $ 0.03     $ (0.62 )
                 
Weighted average outstanding common shares used to compute earnings (loss) per common share:                
Basic     21,400,244       21,294,432  
Diluted     102,376,045       21,294,432  

 

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

 

  F- 4  

 

  

Cyalume Technologies Holdings, Inc.

Consolidated Statements of Changes in Preferred Stock and Stockholders' Equity

(in thousands, except shares)

 

    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, 2013     123,077     $ 4,055       0     $ 0       0     $ 0       0     $ 0       20,738,260     $ 21     $ 102,575     $ (95,874 )   $ (218 )   $ 6,504  
                                                                                                                 
Proceeds received from issuance of Series C preferred stock     0       0       1,000       1,000       0       0       0       0       0       0       0       0       0       0  
Proceeds received from issuance of Series B convertible preferred stock     0       0       0       0       0       0       1,000       1,000       0       0       0       0       0       1,000  
Series A, B and C allocation of fair value     0       0       0       (401 )     0       0       0       401       0       0       0       0       0       401  
Series A, B and C preferred stock issuance costs     0       0       0       0       0       0       0       0       0       0       (321 )     0       0       (321 )
Dividends accrued on Series A convertible preferred stock & Series C preferred stock     0       509       0       103       0       0       0       0       0       0       (612 )     0       0       (612 )
Reversal of forfeited restricted awards     0       0       0       0       0       0       0       0       (3,333 )     0       0       0       0       0  
Granite Patriot Warrants amended in connection with debt refinancing     0       0       0       0       0       0       0       0       0       0       (72 )     0       0       (72 )
Common stock issuance - payment of contingent consideration liability     0       0       0       0       0       0       0       0       350,000       0       241       0       0       241  
Common stock issuance - issuance of shares to Selway for services provided     0       0       0       0       0       0       0       0       242,308       0       157       0       0       157  
Shares issued - warrant exercise and adjustment to warrant liability     0       0       0       0       0       0       0       0       73,009       0       45       0       0       45  
Excess of Amended JFC Note Fair Value over Face Value of $2.1M     0       0       0       0       0       0       0       0       0       0       483       0       0       483  
Termination of USVC common and preferred warrants     0       0       0       0       0       0       0       0       0       0       1,525       0       0       1,525  
Series C deemed dividends     0       0       0       1,401       0       0       0       0       0       0       (1,401 )     0       0       (1,401 )
Share-based compensation     0       0       0       0       0       0       0       0       0       0       394       0       0       394  
Net loss     0       0       0       0       0       0       0       0       0       0       0       (7,716 )     0       (7,716 )
Other comprehensive loss     0       0       0       0       0       0       0       0       0       0       0       0       (443 )     (443 )
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       573       0       264       0       0       0       0       0       0       (837 )     0       0       (837 )
Issuance of Series A and Series D convertible preferred stock     20       0       0       0       10       2,751       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       43                       43  
Share-based compensation     0       0       0       0       0       0       0       0       0       0       404       0       0       404  
Net income     0       0       0       0       0       0       0       0       0       0       0       3,275       0       3,275  
Other comprehensive loss     0       0       0       0       0       0       0       0       0       0       0       0       (318 )     (318 )
Balance at December 31, 2015     123,097     $ 5,137       1,000     $ 2,367       10     $ 2,751       1,000     $ 1,401       21,400,244     $ 21     $ 102,624     $ (100,315 )   $ (979 )   $ 2,752  

 

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

 

  F- 5  

 

 

Cyalume Technologies Holdings, Inc.

Consolidated Statements of Cash Flows

(in thousands)

 

    For the Year     For the Year  
    Ended     Ended  
    December 31,     December 31,  
    2015     2014  
Cash flows from operating activities:                
Net income (loss)   $ 3,275     $ (7,716 )
Adjustments to reconcile net income (loss) to net cash provided by operating activities:                
Depreciation and amortization of property, plant and equipment     1,228       1,367  
Amortization of intangible assets, debt issuance costs and debt discount     1,855       2,050  
Provision for deferred income taxes     138       430  
Share-based compensation expense     404       394  
Impairment loss on intangible assets     0       9,580  
Change in fair value of derivatives     (29 )     0  
Change in fair value of warrants liability     29       (4,852 )
Non-cash interest expense     414       1,017  
Legal settlement     (1,381 )     0  
Loss on extinguishment of debt – related party     0       527  
Other non-cash expenses     18       69  
Changes in operating assets and liabilities:                
Accounts receivable     (154 )     112  
Inventories     203       2,818  
Prepaid expenses and other current assets     23       157  
Restricted cash     (153 )     0  
Accounts payable and accrued liabilities     (21 )     (3,347 )
Accrued interest on note payable to related party     (504 )     252  
Deferred revenue and deferred rent     (56 )     101  
Income taxes payable     (743 )     723  
Change in legal obligation – settlement payments     (1,400 )     (1,250 )
Net cash provided by operating activities     3,146       2,432  
                 
Cash flows from investing activities:                
Purchases of long-lived assets     (1,034 )     (664 )
Payments for intangibles     (157 )     (172 )
Net cash used in investing activities     (1,191 )     (836 )
                 
Cash flows from financing activities:                
(Repayments on) proceeds from TD Bank line of credit, net     (2,050 )     450  
Principal repayments on CTI long term notes payable     (15,880 )     (1,912 )
Borrowings on Monroe line of credit, net     1,000       0  
Borrowings on Monroe long term notes payable, net of repayments     18,619       0  
Repayment of related party note payable     (2,100 )     0  
Principal payments on capital lease obligations     (7 )     (15 )
Proceeds received from issuance of Series C and Series B preferred stock     0       2,000  
Proceeds received from warrant exercise     0       1  
Payment of preferred stock issuance costs     0       (321 )
Repayment of legal settlement promissory note     (215 )     (215 )
Payment of debt issuance and deferred financing costs     (2,118 )     (21 )
Net cash used in financing activities     (2,751 )     (33 )
                 
Effect of exchange rate changes on cash     (36 )     (70 )
Net increase (decrease) in cash     (832 )     1,493  
Cash, beginning of period     2,358       865  
Cash, end of period   $ 1,526     $ 2,358  

 

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

 

  F- 6  

 

 

Cyalume Technologies Holdings, Inc.

Notes to Consolidated Financial Statements

 

1. BACKGROUND AND DESCRIPTION OF BUSINESS

 

These consolidated financial statements and footnotes include the financial position and operations of Cyalume Technologies Holdings, Inc. (“Cyalume” or the “Company”), a holding company that is the sole shareholder of Cyalume Technologies, Inc. (“CTI”), of Cyalume Specialty Products, Inc. (“CSP”) and of CT SAS Holdings, Inc. (“CT SAS Holdings”). CTI is the sole shareholder of 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’ 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 and therefore, this subsidiary no longer has any activity.

 

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

 

The Company’s business is managed and financial results are reported as one segment. The CEO, who is the chief operating decision maker, focuses on consolidated results to make strategic and tactical decisions. 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.).

   

2. SIGNIFICANT ACCOUNTING POLICIES

 

Foreign Operations

 

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

 

Reclassifications

 

Certain reclassifications have been made to prior period amounts to conform to the current period financial statement presentation. These reclassifications relate to the Company’s historical classification of legal settlement payments from financing activities to operating activities in the statement of cash flows.

 

Historically, the Company classified cash flows associated with obligations relating to the Omniglow Settlement Agreement as cash flows from financing activities based on the presence of financing elements in the Omniglow Settlement Agreement. However as these obligations also possess elements of operating activities, the Company has determined that it will classify the related cash flows as cash flows from operating activities. Accordingly, prior period amounts were reclassified in the Consolidated Statements of Cash Flows to conform to the current year presentation. See Note 16 – Commitments and Contingencies for additional information pertaining to these legal settlement payments.

 

  F- 7  

 

 

Comprehensive Income (Loss)

 

Comprehensive income (loss) accounts for changes in stockholders’ equity resulting from non-stockholder sources. All transactions that would cause comprehensive income (loss) to differ from net income (loss) have been recorded and disclosed and relate to the translation of the accounting records of our France-based subsidiary CTSAS.

 

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 estimating parameters and assumptions used to determine the fair values of warrants and preferred stock. Estimates are based on historical experience, where applicable, and assumptions that are believed to be reasonable under the circumstances. Due to the inherent uncertainty involved with estimates, actual results may differ.

 

Accounts Receivable

 

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

 

Inventories

 

Inventories are stated at the lower of cost (on a first-in first-out (“FIFO”) method) or net realizable value. The cost of inventory consists of raw material content, labor costs to produce the inventory and overhead costs incurred during production of the inventory. The Company periodically reviews the realizability of inventory. Provisions are recorded for potential obsolescence which requires management’s judgment. Conditions impacting the realizability of inventory could cause actual write-offs to be materially different than provisions for obsolescence.

 

Property, Plant and Equipment

 

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

 

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

 

  F- 8  

 

 

Goodwill

 

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

 

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

 

Intangible Assets

 

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

 

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

 

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

 

  (1) Each patent has its own legal expiration date and, therefore, its own useful life. Generally, our patents’ legal lives begin when the related patent application is filed with the relevant government authority and ends 20 years thereafter. Amortization on patent costs begins when the relevant government authority approves the related patent. Patents that have been recorded as of December 31, 2015 are expected to expire by 2034. Impairment charges, if any, are recorded in the period in which the impairment is determined. An intangible impairment loss on patents of approximately $5.3 million was recorded during 2014 (see Note 3).

 

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

 

Debt Issuance and Deferred Financing Costs

 

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

 

  F- 9  

 

 

Derivatives

 

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

 

Warrants Liability

 

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

 

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.

 

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

 

Research and development services are provided for customers for which the Company earns payments that are contingent upon achieving a specific result (“milestones”). Upon achieving such milestones, revenue is recognized provided that the payment is (i) related to past performance, (ii) reasonable relative to all of the deliverables and payment terms within the arrangement with our customer, and (iii) nonrefundable.

 

Taxes Collected from Customers

 

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

 

Shipping and Handling Costs

 

Outbound shipping and handling costs are included in sales and marketing expenses in the accompanying consolidated statements of comprehensive income (loss). These costs were approximately $231,000 and $358,000 for the years ended December 31, 2015 and 2014, respectively.

 

  F- 10  

 

 

Advertising Costs

 

Advertising costs are expensed as incurred and are included in sales and marketing expenses in the accompanying consolidated statements of comprehensive income (loss). Advertising expense was approximately $67,000 and $151,000 for the years ended December 31, 2015 and 2014, respectively.

 

Stock-Based Compensation

 

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

 

The fair value of share-based payments to non-employees is estimated at each reporting period, until a measurement date is reached, and recorded as expense over the service period.

 

Research and Development

 

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

 

Income Taxes

 

Deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using enacted tax rates and laws that will be in effect when the differences are expected to reverse. Deferred tax assets are recognized when, based upon available evidence, realization of the assets is more likely than not. In assessing the realization of long-term deferred income tax assets, it is considered whether it is more likely than not that the deferred income tax assets will be realized. The realization of deferred income tax assets depends upon future taxable income in years before net operating loss carryforwards expire. The recoverability of deferred income tax assets is evaluated on a quarterly basis. If the Company determines that it is more likely than not that deferred income tax assets will not be recovered, a valuation allowance is established against some or all deferred income tax assets.

 

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

 

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

 

In September 2015, the IRS completed an audit of our tax return for the year 2013. There were no adjustments to our 2013 tax return. Our tax return filed for the year 2014 is still open for audit. The tax return for 2014 was filed on September 14, 2015 under a filing extension. The tax return for 2015 is expected to be filed under a filing extension prior to September 15, 2016.

 

  F- 11  

 

 

Net Income (Loss) per Common Share

 

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

 

    (in thousands, except shares and per share information)  
    Year Ended December 31,  
    2015     2014  
Numerator (in thousands):                
Net income (loss)   $ 3,275     $ (7,716 )
Series A convertible preferred stock dividends     (573 )     (509 )
Series C preferred stock dividends     (264 )     (103 )
Series A deemed dividend     0       (2,422 )
Series B deemed dividend     0       (1,098 )
Series C deemed dividend     0       (1,401 )
Net income (loss) available to common stockholders – basic   $ 2,438     $ (13,249 )
Effect of dilutive securities:                
Add: Convertible related party promissory note     45       0  
Add: Series A convertible preferred stock dividends     573       0  
Income (loss) available to common stockholders – diluted   $ 3,056     $ (13,249 )
                 
Denominator:                
Weighted average common shares outstanding – basic     21,400,244       21,294,432  
Weighted average effect of dilutive common equivalent shares:                
Assumed conversion of Series A convertible preferred stock     37,598,865       0  
Assumed conversion of Series B convertible preferred stock     35,713,147       0  
Assumed conversion of Series D convertible preferred stock     4,661,221       0  
Convertible related party note     2,766,876       0  
Warrants     234,214       0  
Options     1,478       0  
Weighted average common shares outstanding – diluted     102,376,045       21,294,432  
                 
Earnings (loss) per common share:                
Basic   $ 0.11     $ (0.62 )
Diluted   $ 0.03     $ (0.62 )

 

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

 

    Year Ended December 31,  
    2015     2014  
Options     10,505,322       10,347,322  
Series A convertible preferred stock     0       33,401,765  
Series B convertible preferred stock     0       35,713,147  
Amended related party note     0       3,997,074  
Convertible notes payable     0       2,666,667  
Warrants     455,514       455,514  

  

  F- 12  

 

 

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

 

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

 

Fair Value

 

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

 

  Level 1 Quoted prices for identical assets or liabilities in active markets to which we have access at the measurement date.

 

  Level 2 Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.

 

  Level 3 Unobservable inputs for the asset or liability.

 

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

 

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

 

  Market Approach Uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities. Prices may be indicated by pricing guides, sale transactions, market trades, or other sources.
     
  Cost Approach Based on the amount that currently would be required to replace the service capacity of an asset (replacement cost).
     
  Income Approach Uses valuation techniques to convert future amounts to a single present amount based on current market expectations about the future amounts (includes present value techniques and option-pricing models). Net present value is an income approach where a stream of expected cash flows is discounted at an appropriate market interest rate.

 

  F- 13  

 

 

Recent 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 Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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. In July 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date (“ASU 2015-14”). The amendments in ASU 2015-14 defer the effective date of ASU 2014-09 for all entities by one year. As a result, this guidance is now effective for annual reporting periods (including interim reporting periods within those periods) beginning after December 15, 2017 and early adoption is permitted only as of annual reporting periods (including interim reporting periods within those reporting periods) beginning after December 15, 2016. Entities have the option of using either a full retrospective or a modified approach to adopt the guidance. The Company is in the process of determining the potential effects on the consolidated financial statements.

 

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 when adopted in 2016.

 

In July 2015, the FASB issued ASU 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory (“ASU 2015-11”). The amendments in ASU 2015-11 require an entity to measure in scope inventory at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. Subsequent measurement is unchanged for inventory measured using LIFO or the retail inventory method. The amendments do not apply to inventory that is measured using last-in, first-out (LIFO) or the retail inventory method. The amendments apply to all other inventory, which includes inventory that is measured using first-in, first-out (FIFO) or average cost. This guidance is effective for public business entities for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. A reporting entity should apply the amendments prospectively with earlier application permitted as of the beginning of an interim or annual reporting period. The Company is in the process of determining the potential effects on the consolidated financial statements.

 

In November 2015, the FASB issued ASU 2015-17, Balance Sheet Classification of Deferred Taxes (Topic 740) (“ASU 2015-17”). ASU 2015-17 simplifies the presentation of deferred income taxes by requiring that deferred tax assets and liabilities be classified as noncurrent on the balance sheet instead of separating into current and noncurrent amounts. ASU 2015-17 will be effective for annual periods beginning on or after December 15, 2016 and may be applied either prospectively or retrospectively. Early adoption is permitted. The Company has elected to early adopt this guidance as of December 31, 2015 on a prospective basis. As a result, we reclassified our deferred tax assets classified as current to noncurrent and our deferred tax liabilities classified as current to noncurrent in our December 31, 2015 consolidated balance sheet. Prior balance sheets were not retrospectively adjusted.

 

 

In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments – Overall (Subtopic 825-10) (“ASU 2016-01”), which updates certain aspects of recognition, measurement, presentation and disclosure of financial instruments. ASU 2016-01 will be effective for the Company beginning in its first quarter of 2019 and early adoption is not permitted. The Company does not expect the adoption of ASU 2016-01 will have a material impact on its consolidated financial statements.

 

In February 2016, the FASB issued ASU 2016-02, Leases   (Topic 842) (“ASU 2016-02”), which requires companies that are lessees to recognize a right-of-use asset and lease liability for most leases that do not meet the definition of a short-term lease. For income statement purposes, leases will continue to be classified as either operating or financing. Classification will be based on criteria that are largely similar to those applied in current lease accounting. This standard will result in extensive qualitative and quantitative disclosure changes. This standard will be effective for annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period. The Company is currently evaluating the impact of ASU 2016-02 on its consolidated financial statements.

 

  F- 14  

 

 

3. IMPAIRMENT CHARGES

 

Management conducts annual impairment reviews as of August 31, and, if conditions warrant, interim reviews of long-lived tangible and intangible assets for impairment. Before assessing whether any of the Company’s reporting units’ goodwill is impaired, the Company first assesses whether any long-lived assets were impaired. Goodwill is subject to annual impairment reviews as of August 31, and, if conditions warrant, interim reviews based upon its estimated fair value. Impairment charges, if any, are recorded in the period in which the impairment is determined. There were no impairment charges during 2015.

 

During 2014, the Company’s Chemical Light reporting unit recorded a loss on impairment of certain amortizing intangible assets of $9.6 million. See Note 21 for fair value information on these assets.

 

During the third quarter of 2014, management conducted an annual review of tangible and intangible assets for impairment. Before assessing whether any of the Company’s reporting units’ goodwill was impaired, the Company first assessed whether any long-lived assets were impaired. This assessment determined that the CTI patent asset was impaired by approximately $5.3 million and that CTI trademarks and trade names were impaired by approximately $4.3 million. Therefore, the Company recorded a $9.6 million impairment loss on these CTI intangible assets during the third quarter of 2014. The “step 1” goodwill impairment assessment was performed by comparing the fair value of each reporting unit containing goodwill to those reporting units’ carrying values. The Company’s Chemical Light and Specialty Products reporting units have goodwill assets. Since there are no quoted market prices for the Company’s reporting units, the fair value of the Company’s reporting units were determined using a discounted present value technique utilizing each reporting unit’s forecasted after-tax cash flows. The “step 1” test determined that the fair value of the both the Chemical Light reporting unit and the Specialty Products reporting unit exceeded its carrying value, and therefore the goodwill did not need to be tested further under what is commonly known as “step 2” of the goodwill impairment assessment. Under “step 2” of a goodwill impairment assessment, the implied fair value of a reporting unit’s goodwill is compared with the carrying amount of that goodwill. If the carrying amount of the goodwill exceeds the implied fair value of that goodwill, that excess must be recognized as an impairment loss. The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination. The excess of the fair value of the reporting unit over the amounts assigned to its assets and liabilities is the implied amount of a reporting unit’s goodwill. Intangible assets are identified and valued during this process, such as customer relationships, patents, trade names and non-compete agreements.

 

4. INVENTORIES

 

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

 

    2015     2014  
Raw materials   $ 4,406     $ 4,777  
Work-in-process     1,809       1,546  
Finished goods     1,313       1,503  
    $ 7,528     $ 7,826  

 

5. PREPAID EXPENSES AND OTHER CURRENT ASSETS

 

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

 

    2015     2014  
Prepaid expenses   $ 594     $ 495  
Restricted cash (1)     153       0  
Other current assets     50       132  
    $ 797     $ 627  

 

(1) As of December 31, 2015, the Company has cash collateralizing a letter of credit for approximately $153,000 which is used to facilitate purchases from overseas vendors.  This letter of credit matures on February 22, 2016 and is included in “Prepaid expenses and other current assets” in the Company’s Consolidated Balance Sheet.

 

6. PROPERTY, PLANT AND EQUIPMENT

 

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

 

    2015     2014  
Land   $ 1,252     $ 1,267  
Building and improvements     3,890       3,564  
Machinery and equipment     8,877       8,408  
Leasehold improvements     322       275  
Furniture and fixtures     140       131  
Software     132       132  
      14,613       13,777  
Less: accumulated depreciation and amortization     (7,818 )     (6,657 )
    $ 6,795     $ 7,120  

 

  F- 15  

 

 

7. GOODWILL

 

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

 

    CTI/CTSAS/CTS
Chemical Light
    CSP     Total
Consolidated
Goodwill
 
Balance on December 31, 2013 (1)   $ 5,014     $ 2,978     $ 7,992  
Impairment loss  (see Note 3)     0       0       0  
Balance on December 31, 2014 (1)   $ 5,014     $ 2,978     $ 7,992  
Impairment loss  (see Note 3)     0       0       0  
Balance on December 31, 2015 (2)   $ 5,014     $ 2,978     $ 7,992  

 

  (1)(2) Gross amount of goodwill was approximately $67.7 million as of December 31, 2015 and 2014. Accumulated impairment losses incurred prior to 2015 were approximately $59.7 million as of December 31, 2015 and 2014.

  

8. OTHER INTANGIBLE ASSETS

 

Intangible assets as of December 31, 2015 consist of the following (all amounts in thousands):

 

    Cost     Accumulated
Amortization
    Net Book Value  
Developed technologies, including patents (1)   $ 8,865     $ 6,903     $ 1,962  
Trademarks and trade names (4)     1,070       450       620  
Purchased customer relationships (2)     8,368       5,314       3,054  
Non-compete agreements (3)     160       139       21  
Website development costs     42       8       34  
    $ 18,505     $ 12,814     $ 5,691  

 

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

 

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

 

  F- 16  

 

 

  (1) Includes a patent obtained in the acquisition of CSP with a cost of $50,000 that is expected to be fully amortized in August 2026 and also includes $17,000 of CTS patents which were transferred to CTI in 2014. The CTI patents were impaired by approximately $5.3 million during 2014 (see Note 3 Impairment Charges).

  (2) Includes customer relationships obtained in the acquisition of CSP with a cost of $920,000 that is expected to be fully amortized in December 2019. The $60,000 of CTS customer relationships remaining after the impairment was transferred to CTI in 2014.

  (3) Includes a non-compete agreement obtained in the acquisition of CSP with a cost of $160,000 that is expected to be fully amortized in August 2016.

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

 

In 2014 certain intangible assets were found to be impaired and their cost was reduced accordingly. See Note 3 and 21 for further discussion regarding these impairments.

 

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

 

Amortization of intangible assets was approximately $1.0 million and $1.8 million for the years ended December 31, 2015 and 2014, respectively.

 

During 2015, the Company capitalized approximately $2,000 and $130,000 of costs paid to third parties to create or defend trademarks and patents, respectively. During 2014, the Company capitalized approximately $5,000 and $160,000 of costs paid to third parties to create or defend trademarks and patents, respectively. The Company expects the patent-related costs to be amortized over approximately 20 years. The Company does not consider any intangible assets to have residual value.

 

The future amortization expense relating to finite-lived intangible assets for the next five years and beyond is estimated at December 31, 2015 to be (all amounts in thousands):

 

Year Ending December 31,      
2016   $ 917  
2017     870  
2018     870  
2019     800  
2020     660  
Thereafter     1,574  
    $ 5,691  

 

9. DEBT ISSUANCE COSTS

 

Debt issuance costs consist of unamortized costs paid to third parties in connection with the Company’s debt (see Note 11). Debt issuance costs are amortized to interest expense using the effective interest method. Amortization of capitalized debt issuance costs was approximately $240,000 and $42,000 for the years ended December 31, 2015 and 2014, respectively.

 

  F- 17  

 

 

The future amortization expense relating to current and noncurrent capitalized debt issuance costs is approximately $1.6 million and will be amortized to interest expense using the effective interest method through 2020.

 

10. ACCRUED EXPENSES

 

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

 

    2015     2014  
Payroll-related  (1)   $ 2,727     $ 834  
Interest payable     9       550  
Subordinated term loan exit fee     0       285  
Professional fees     101       87  
Franchise and sales tax payable     18       50  
Other     1,003       884  
    $ 3,858     $ 2,690  

  

  (1) Accrued payroll-related costs as of December 31, 2015 include approximately $1.8 million of accrued bonus costs and approximately $124,000 of accrued severance costs. Accrued payroll-related costs as of December 31, 2014 include approximately $141,000 of accrued severance costs.

  

11. 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”). The Delayed Draw Loan was used to satisfy the Omniglow Settlement Agreement amount as described further in Note 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 December 31, 2015.

 

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.

 

  F- 18  

 

 

The Delayed Draw Loan, which was drawn on August 3, 2015, 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 17). The relative fair value of the Series D Convertible Preferred Stock is approximately $2.8 million which has been recorded as debt issuance costs of approximately $0.4 million and debt discount on the Company’s Term A Loan and Delayed Draw Loan of approximately $2.4 million.

 

The proceeds from the Monroe Credit Agreement were allocated to the various 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 December 31, 2015 was 10%. This line of credit is subject to various restrictive covenants and collateral guarantees. At December 31, 2015, approximately $1.0 million was outstanding on the Monroe Line of Credit and additional borrowing availability was approximately $4.0 million.

 

CTSAS has lines of credit, for borrowing against receivables, with a combined maximum borrowing capacity of €750,000 (or approximately $820,000 as of December 31, 2015). There were no outstanding borrowings at December 31, 2015 or 2014. The lines’ interest rates are variable, based on the Euro Overnight Index Average and the 3-month Euro Interbank Offered Rate. The lines are collateralized by primarily CTSAS accounts receivable. The lines have indefinite termination dates but can be renegotiated periodically.

 

  F- 19  

 

 

Notes Payable

 

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

 

    2015     2014  
Monroe Term A Loan   $ 17,138     $ 0  
Delayed Draw Loan     1,481       0  
Senior Debt - Term Loan     0       4,239  
Senior Debt - Real Estate Loan     0       1,551  
Subordinated Term Loan     0       9,676  
Promissory Note Payable     645       860  
Total     19,264       16,326  
Less: Unamortized debt discount     (2,756 )     (337 )
Less: Current portion of notes payable, including current portion of unamortized debt discount     (492 )     (5,775 )
Notes payable, net of current portion   $ 16,016     $ 10,214  

 

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

 

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.

 

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 $54,000 as of December 31, 2015 (see Note 18).

 

  F- 20  

 

 

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 12), 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. At the time of the refinancing, 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 Consolidated Statements of Comprehensive Income (Loss).

 

Interest costs during 2015 for the Monroe Term A Loan and the Delayed Draw Loan are as follows (all amounts in thousands):

 

    Term A
Loan
    Delayed
Draw Loan
 
Contractual interest coupon rate   $ 1,131     $ 64  
Amortization of related debt discount and debt issuance costs     411       31  
Total interest expense recognized on the Monroe debt   $ 1,542     $ 95  

 

The effective interest rate on the Term A loan is approximately 17% and the effective interest rate on the Delayed Draw Loan is approximately 20%.

 

Promissory Note Payable

 

On November 19, 2013, the Company entered into a legal settlement agreement (see Note 16). 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 May and November. The Promissory Note has a maturity date of October 15, 2018.

 

Future Minimum Payments

 

As of December 31, 2015, future minimum payments due for notes payable for each of the five succeeding years and beyond are as follows (all amounts in thousands):

 

Year Ending December 31,      
2016   $ 1,078  
2017     1,940  
2018     2,165  
2019     1,950  
2020     12,131  
         
    $ 19,264  

  

  F- 21  

 

 

Amortization of debt discount was approximately $661,000 and $205,000 for the years ended December 31, 2015 and 2014, respectively.

 

12. 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 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. On July 30, 2014, units of securities of the Company (the “Units”) were issued to Bayonet Capital Fund I, LLC (see Note 17), 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”).

 

13. INCOME TAXES

 

The components of income (loss) before income taxes are as follows (all amounts in thousands):

 

    Year Ended December 31,  
    2015     2014  
Domestic   $ 2,752     $ (7,569 )
Foreign     732       1,091  
    $ 3,484     $ (6,478 )

 

Provision for income taxes consisted of the following (all amounts in thousands):

 

    Year Ended December 31,  
    2015     2014  
Current:                
Federal   $ (196 )   $ 223  
State     (43 )     156  
Foreign     310       443  
Deferred:                
Federal     (101 )     2,008  
State     298       (1,513 )
Foreign     (59 )     (79 )
Provision for  income taxes   $ 209     $ 1,238  

 

  F- 22  

 

 

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The primary sources of these differences relate to the carrying value of identified intangible assets, inventories, fixed assets, certain accruals and reserves.

 

Deferred income tax assets and liabilities consist of the following (all amounts in thousands):

 

    December 31, 2015     December 31, 2014  
    Non-current     Current     Non-current  
Deferred tax assets:                        
Federal   $ 13,285     $ 2,699     $ 11,857  
State     1,763       777       1,426  
Foreign     0       0       0  
Less: valuation allowance     (12,243 )     (2,741 )     (10,353 )
      2,805       735       2,930  
Deferred tax liabilities:                        
Federal     (2,385 )     (805 )     (2,103 )
State     (616 )     (219 )     (538 )
Foreign     (371 )     (16 )     (414 )
      (3,372 )     (1,040 )     (3,055 )
Deferred tax assets (liabilities)   $ (567 )   $ (305 )   $ (125 )

 

Principal components of our net liability representing deferred income tax balances are as follows (all amounts in thousands):

 

    December 31,  
    2015     2014  
Intangible assets   $ 566     $ 178  
Property, plant and equipment     (622 )     (661 )
U.S. loss carryforwards and tax credits, net (1)     10,004       10,151  
Subsidiary income (2)     (700 )     (764 )
Stock-based compensation expense     1,243       1,142  
Reserves, accruals and other     430       1,664  
State deferred tax asset     755       954  
Valuation allowance     (12,243 )     (13,094 )
    $ (567 )   $ (430 )

 

  (1) The Company had federal net operating loss carryforwards amounting to approximately $4.6 million and $3.9 million at December 31, 2015 and 2014, respectively. The net operating loss carryforward at December 31, 2015 expires in fiscal years 2027 through 2035. Internal Revenue Code Section 382 limits utilization of these losses to approximately $0.4 million per year. It is possible that future changes in ownership could result in changes to the amounts allowed by IRC Section 382. State net operating loss carryforwards amounted to approximately $8.4 million and $10.3 million as of December 31, 2015 and 2014, respectively.

 

  (2) A deferred tax liability has been recorded for income taxes which may become payable upon distribution of earnings of CTSAS, our French subsidiary. The estimated amount of tax that might be payable with regard to any distribution for foreign subsidiary earnings is reported net of foreign taxes paid, which are creditable against our domestic tax liability. The Company does not permanently reinvest foreign subsidiary earnings. The Company continually evaluates this assertion; if the Company’s foreign business needs change, so may this assertion.

 

  F- 23  

 

 

Income taxes computed using the federal statutory income tax rate differs from our effective tax rate primarily due to the following (all amounts in thousands):

 

    Year Ended December 31,  
    2015     2014  
Provision for (benefit) from federal income taxes expected at 34% statutory rate   $ 1,184     $ (2,201 )
Increase (reduction) resulting from:                
Tax on global activities, net of foreign tax credits     (394 )     (2,842 )
State income taxes, less federal income tax benefit     168       (895 )
Loss on debt extinguishment     0       179  
Change in valuation allowance     (851 )     7,172  
Change in fair value of warrants     10       (1,518 )
Legal settlement     (470 )     0  
Prior year true up     534       1,008  
Other     28     335  
Provision for income taxes   $ 209     $ 1,238  

   

14. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

 

Currency Forward Contracts

 

CTSAS’ functional currency is the Euro. Periodically, CTSAS purchases inventory from CTI, which requires payment in U.S. dollars. Beginning in 2009, and only under certain circumstances, the Company utilizes 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. These currency forward contracts are reported 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, net within the accompanying consolidated statements of comprehensive income (loss). There were no currency forward contracts outstanding at December 31, 2015 or December 31, 2014.

 

15. ASSET RETIREMENT OBLIGATION

 

The Company has an obligation to remediate certain known occurrences of asbestos at our manufacturing facility in West Springfield, Massachusetts. The significant assumptions used to estimate the obligation are:

 

Annual inflation rate     5.54 %
Credit-adjusted risk-free rate     5.37 %
Initial estimated remediation costs (undiscounted and not adjusted for inflation)     $200,000 ($41,000 paid in 2007)  
Estimated remediation completion date     December 19, 2038  
Estimated remediation cost on December 19, 2038   $ 720,000  

 

The following is a reconciliation of the beginning and ending aggregate carrying amounts of the asset retirement obligation (all amounts in thousands):

 

    Year Ended December 31,  
    2015     2014  
Balance, beginning   $ 204     $ 194  
Accretion expense     10       10  
Balance, ending   $ 214 (1)   $ 204  

 

  (1) The difference between the $214,000 liability as of December 31, 2015 and the estimated undiscounted future payments of $720,000 is estimated inflation between December 31, 2015 and December 19, 2038.

 

  F- 24  

 

 

Accretion expense on the asset retirement obligation is included in general and administrative expenses in the accompanying consolidated statements of comprehensive income (loss).

 

16. COMMITMENTS AND CONTINGENCIES

 

Operating Leases

 

The Company leases certain equipment, automobiles and other assets under cancelable and non-cancelable operating leases. Expenses associated with these leases totaled approximately $725,000 and $756,000 in 2015 and 2014, respectively.

 

Included in these leases is a market-based, related-party lease which CSP assumed in conjunction with the business combination. CSP entered into the lease with an entity controlled by one of our stockholders for industrial-use property located in Bound Brook, New Jersey, U.S.A. The lease ends on August 31, 2016, with extension options available, and requires lease payments of $24,000 per month from September 1, 2011 through August 31, 2013. The monthly lease payment was adjusted to approximately $30,000 per month beginning September 1, 2013 to reflect changes in the average cost per square foot.

 

Future minimum lease payments under non-cancelable lease obligations at December 31, 2015 are as follows (all amounts in thousands):

 

Year Ending December 31,      
2016   $ 543  
2017     279  
2018     100  
2019     32  
2020     0  
    $ 954  

 

Legal

 

From time to time and in the ordinary course of business, the Company may be subject to various claims, charges, and litigation. At December 31, 2015 and 2014 (see the description of the legal settlements below), the Company did not have any pending claims, charges, or litigation that it expects would have a material adverse effect on its consolidated financial position, results of operations, or cash flows.

 

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.

 

  F- 25  

 

 

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 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 December 31, 2013 based upon the close price of Cyalume’s stock on December 31, 2013. The value of the Escrowed Shares was previously included within the prepaid expenses and other current assets line item. 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.

 

Effective as of August 3, 2015, CTI entered into a Second Amendment (the “Settlement Amendment”) to the Confidential Settlement Agreement and Mutual Release (the “Settlement Agreement”) entered into on July 10, 2014 (the “Settlement Agreement”), with certain former stockholders and members of management of Omniglow Corporation (collectively, the “Omniglow Buyers”) (which Settlement Agreement was summarized in the Current Report on Form 8-K filed by the Company on July 16, 2014). Pursuant to the Settlement Amendment, the parties to the Settlement Agreement agreed to amend CTI’s obligation to make the final settlement payment due under the Settlement Agreement, such that CTI would make a final payment of $1.4 million (the “Reduced Final Payment”) within five days of the execution of the First Amendment 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, which payment was made on August 3, 2015, CTI has no further payment obligations pursuant to the Settlement Agreement.

 

  F- 26  

 

 

Settlement of Arbitration with Former Employee

 

On December 22, 2011, CTI entered into a Stock Purchase Agreement (“SPA”) with Combat Training Solutions, Inc. (“CTS”) and Antonio Colon, the sole stockholder of CTS. Pursuant to the SPA, CTI purchased all of the issued and outstanding capital stock of CTS. On June 15, 2012, the Company received a copy of a demand for arbitration filed by Mr. Colon with the American Arbitration Association. Management considered the allegations by Mr. Colon to be without merit. On August 17, 2012, Mr. Colon filed suit in Federal Court and on September 11, 2012, he filed to have the arbitration withdrawn. In addition, on September 11, 2012, Mr. Colon chose to cease working for the Company. CTI filed a Motion to Dismiss the Complaint in Federal Court and to compel the controversy to arbitration before the American Arbitration Association. The District Court for the District of Delaware held a hearing on January 23, 2013, at which it dismissed the Complaint in Federal Court without prejudice and indicated that the arbitration should proceed. On September 23, 2013, the parties entered into an agreement to resolve this matter, and a settlement agreement was signed on November 19, 2013. The executed settlement agreement provides for the Company to make a series of payments over five years to Mr. Colon in the amount of $215,000 annually, for a total of $1,075,000 pursuant to the Promissory Note executed on November 19, 2013 (see Note 11). The Company also made a settlement payment of $275,000 on November 20, 2013 and transferred the land located in Colorado (this land was originally acquired by CTI in connection with the 2011 CTS acquisition) to JasperCo, LLC pursuant to the terms of the executed settlement agreement with Antonio Colon. Pursuant to the Promissory Note, principal repayments of approximately $215,000 were made during both the years ended December 31, 2015 and 2014. 

 

17. 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 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 (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 Certificate of Designation (the “Series A Liquidation Value”).

 

  F- 27  

 

 

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.

 

The significant change in the conversion price of the Series A Preferred Stock was determined to be a substantive qualitative change of a conversion feature that is reasonably possible of being exercised. Therefore, the amendment to the terms of the Series A Preferred Stock made on July 30, 2014 was accounted for as an extinguishment in accordance with the derecognition accounting model under ASC 260-10-S99-2. The Series A Preferred Stock fair value on the extinguishment date was estimated at approximately $1.6 million. This resulted in the Company recognizing a deemed dividend of approximately $2.4 million to reflect the Series A Preferred Stock at its July 30, 2014 redemption value.

 

Series B Convertible Preferred Stock

 

On July 30, 2014, the Company entered into a Securities Purchase Agreement (the “Series Band C Purchase Agreement”) with Cova Small Cap Holdings, LLC (“Cova”), Bayonet Capital Fund I, LLC (see Note 12), 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 16).

 

  F- 28  

 

 

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”). 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 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. The Series B Preferred Stock has been classified within permanent equity.

 

In connection with the issuance of the Series B Preferred Stock and the Series C Preferred Stock on July 30, 2014, the Company allocated the aggregate proceeds of $2.0 million to the Series B Preferred Stock and the Series C Preferred Stock on a relative fair value basis. This resulted in approximately $1.4 million allocated to the Series B Preferred Stock and approximately $0.6 million allocated to the Series C Preferred Stock. At the issuance date, the Series B Preferred Stock is convertible into Common Stock having a fair value of approximately $2.5 million, which was in excess of the proceeds allocated to the Series B Preferred Stock. Therefore, the Company recognized a beneficial conversion feature of approximately $1.1 million in accordance with ASC 470-20. This initially recorded discount was then accreted back to its carrying value of the Series B Preferred Stock as the stock is immediately convertible at the option of the holder.

 

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. 

 

  F- 29  

 

 

The proceeds allocated to the Series C Preferred Stock fair on the issuance date were estimated at approximately $ 0.6 million. This resulted in the Company recognizing a deemed dividend of approximately $1.4 million to reflect the Series C Preferred Stock at its July 30, 2014 redemption value.

 

Series D 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 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.

 

  F- 30  

 

 

In connection with the Monroe refinancing transaction and the issuance of the Series D Preferred Stock, the Company allocated approximately $2.8 million to the Series B Preferred Stock on a relative fair value basis.

 

18. 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 December 31, 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 (see Note 11).

 

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 %

 

  F- 31  

 

     

The Dragonfly Warrant was reflected at its relative fair value of approximately $43,000 in connection with the Monroe refinancing transaction.

 

Warrants to purchase the Company’s common stock were outstanding as follows as of December 31, 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 December 31, 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   $ 0.12  
Exercise price   $ 0.01  
Expected term (years)     7.9  
Risk-free interest rate     2.2 %
Estimated dividend yield      None  
Volatility     167.0 %

 

The change in the fair value of the warrants liability during the year ended December 31, 2015 is as follows (amounts in thousands):

 

    Granite and
Patriot
Warrants (see
Note 11)
 
Warrant liability at December 31, 2014   $ 25  
Change in fair value of warrants     29  
Warrant liability at December 31, 2015   $ 54  

 

  F- 32  

 

 

Share-Based Compensation

 

On March 3, 2009, the Company’s Board of Directors adopted the Cyalume Technologies Holdings, Inc. 2009 Omnibus Securities and Incentive Plan (the “2009 Plan”). The Plan was approved during the Company’s Annual Meeting of Stockholders on June 18, 2009. On October 7, 2014, the Company’s Board of Directors adopted the Cyalume Technologies Holdings, Inc. 2014 Equity Incentive Plan (the “2014 Plan”). The 2014 Plan was approved on February 15, 2015. The purpose of the 2009 Plan and the 2014 Plan is to benefit stockholders by assisting the Company in attracting, retaining and providing incentives to key management employees and non-employee directors of, and non-employee consultants to, Cyalume Technologies Holdings, Inc. and its subsidiaries, and to align the interests of such employees, non-employee directors and non-employee consultants with those of stockholders. Accordingly, the 2009 Plan and the 2014 Plan both provide for the granting of Distribution Equivalent Rights, Incentive Stock Options, Non-Qualified Stock Options, Performance Share Awards, Performance Unit Awards, Restricted Stock Awards, Stock Appreciation Rights, Tandem Stock Appreciation Rights, Unrestricted Stock Awards or any combination of the foregoing, as may be best suited to the circumstances of the particular employee, director or consultant as provided therein. Under the 2009 Plan, the Company was authorized to issue up to 2,650,000 shares. Under the 2014 Plan, the Company is authorized to issue up to 10,000,000 shares. As of December 31, 2015, 1,149,082 shares were outstanding under the 2009 Plan. As of December 31, 2015, 2,885,582 shares were outstanding under the 2014 Plan. Awards under the plans can impose various service periods and other terms upon the awardee; however, the maximum term of options or similar instruments granted under the plans is ten years.

 

Share-based awards are also issued that are not under either the 2009 Plan or the 2014 Plan. In September 2012, the Company awarded options to purchase the Company’s common stock to the Chief Operating Officer and the Chief Executive Officer. These options were not awarded under the 2009 Plan and these options were canceled on November 21, 2014. The Company accounted for the cancellation of these two officer awards and the concurrent grant of the replacement awards as a modification of the terms of the cancelled awards. The Company determined the incremental compensation cost by comparing the fair value of the replacement awards to the fair value of the cancelled awards on November 21, 2014. The remaining unamortized compensation cost of approximately $0.4 million for the canceled awards is being recognized on a straight-line basis over the remaining vesting period of the original canceled officer awards.

 

These two canceled awards were replaced with options to the Chief Operating Officer to purchase 1,504,767 shares of common stock and options to the Chief Executive Officer to purchase 5,015,891 shares of common stock. Both replacement awards were made outside of the Company’s 2014 Plan and were granted with a $0.09 exercise price. Both replacement awards are included in the section titled “Stock Option Awards” below. The replacement awards were subject to performance-based conditions that provided that each option would not vest until the Company’s Term Loan, Real Estate Loan and Subordinated Term Loan were re-financed. The Company’s debt was refinanced on May 18, 2015 (see Note 11) at which time the Company recognized expense relating to these replacement awards as the performance condition had been achieved. Furthermore, the options provide for 100% vesting upon a sale of the Company at a defined minimum enterprise value.

 

During the years ended December 31, 2015 and 2014, total expense recorded for share-based compensation was approximately $404,000 and $394,000, respectively. The following presents how share-based expenses are included in our consolidated statements of comprehensive income (loss) (in thousands):

 

    Year Ended December 31,  
    2015     2014  
Cost of revenues   $ 11     $ 9  
Sales and marketing     32       38  
General and administrative     334       331  
Research and development     27       16  
    $ 404     $ 394  

 

The Company does not currently possess any treasury shares; therefore any issuance of stock for any share-based compensation award is expected to be from new shares.

 

  F- 33  

 

 

Stock Option Awards

 

The Black-Scholes pricing model is used to value stock options awarded as share-based compensation. The expected term of the options awarded under share-based compensation arrangements individually is estimated based on the estimated term of the award, the exercise price of the award, the estimated risk-free interest rate over the award’s estimated term, estimated annual dividend yield, and the estimated volatility of the price of our common stock over the award’s estimated term. Risk-free interest rate assumptions are based on U.S. Treasury securities issued with maturities similar to the expected terms of the awards. In September 2012, the Company began estimating the future volatility of the price of our common stock using historical daily prices of our common stock; before September 2012, since our common stock had insufficient trading history to estimate future price volatility, volatility was using historical data of another public company operating in our industry.

 

The fair value of each award was estimated on the date of grant using the Black-Scholes pricing model with the following assumptions for awards to employees and non-employees:

 

    2015     2014  
Expected term (years)     6.0 – 6.3       6.3 – 10.0  
Risk-free interest rate     1.61 – 1.74 %     1.83 – 2.31 %
Estimated dividend yield     None       None  
Volatility     161.01 – 165.83 %     143.89 – 144.45 %

 

Stock options awarded will generally vest in zero to five years. Options awarded to executive officers and other management often may be earned based on meeting Board-determined or CEO-determined performance goals unique to each award recipient and require continued employment over the vesting period. Options awarded to members of the Board of Directors typically vest on the grant date. Options awarded typically expire 10 years after the grant date.