Cyalume Technologies Holdings, Inc. - FORM 10-Q

Attached files

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EX-32.1 - Cyalume Technologies Holdings, Inc.	v221099_ex32-1.htm
EX-31.2 - Cyalume Technologies Holdings, Inc.	v221099_ex31-2.htm
EX-31.1 - Cyalume Technologies Holdings, Inc.	v221099_ex31-1.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended March 31, 2011

¨	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.)

96 Windsor Street, West Springfield, Massachusetts		01089
(Address of principal executive offices)		(Zip Code)

(413) 858-2500

(Registrant's telephone number, including area code)

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

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

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

Large accelerated filer ¨

Accelerated filer ¨

Non-accelerated filer ¨

(Do not check if a smaller

reporting company)

Smaller reporting company x

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

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: As of May 6, 2011, there were outstanding 16,743,553 shares of the registrant’s Common Stock, par value $.001 per share.

Cyalume Technologies Holdings, Inc.

FORM 10-Q

INDEX

PART I—FINANCIAL INFORMATION

Item 1.	Financial Statements

	Condensed Consolidated Statements of Income for the three months ended March 31, 2011 and 2010 (unaudited)	4

	Condensed Consolidated Balance Sheets as of March 31, 2011 (unaudited) and December 31, 2010	5

	Condensed Consolidated Statements of Changes in Stockholders' Equity and Comprehensive Income for the three months ended March 31, 2011 (unaudited)	6

	Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2011 and 2010 (unaudited)	7

	Notes to Condensed Consolidated Financial Statements (unaudited)	8

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	14

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	17

Item 4.	Controls and Procedures	17

PART II—OTHER INFORMATION

Item 1.	Legal Proceedings	17

Item 1A.	Risk Factors	17

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	18

Item 3.	Defaults Upon Senior Securities	18

Item 4.	[Removed and Reserved]	18

Item 5.	Other Information	18

Item 6.	Exhibits	19

Signatures		20

PART I—FINANCIAL INFORMATION

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

ITEM 1.

Financial Statements

Cyalume Technologies Holdings, Inc.

Condensed Consolidated Statements of Income

(in thousands, except shares and per share information)

(Unaudited)

	For the Three		For the Three
	Months Ended		Months Ended
	March 31,		March 31,
	2011		2010
Revenues	$	9,074	$	8,885
Cost of goods sold		4,555		4,602
Gross profit		4,519		4,283

Other expenses (income):
Sales and marketing		1,062		788
General and administrative		1,434		1,513
Research and development		499		382
Interest expense, net		599		665
Interest expense – related party		17		16
Amortization of intangible assets		402		456
Other expenses (income), net		53		(10	)
Total other expenses		4,066		3,810

Income before income taxes		453		473
Provision for income taxes		181		312
Net income	$	272	$	161

Net income per common share:
Basic	$	0.02	$	0.01
Diluted	$	0.00	$	0.01

Weighted average shares used to compute net income per common share:
Basic		15,752,302		15,406,550
Diluted		19,545,963		15,447,245

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

Cyalume Technologies Holdings, Inc.

Condensed Consolidated Balance Sheets

(in thousands, except shares and per share information)

	March 31,
	2011 (unaudited)			December 31, 2010
Assets
Current assets:
Cash	$	7,042		$	4,086
Accounts receivable, net of allowance for doubtful accounts of $79 and $62 at March 31, 2011 and December 31, 2010, respectively		3,227			1,925
Inventories, net		10,837			9,920
Deferred income taxes		817			931
Prepaid expenses and other current assets		385			429
Total current assets		22,308			17,291

Property, plant and equipment, net		8,663			8,509
Goodwill		51,244			51,244
Other intangible assets, net		20,636			20,912
Due from related party		2,304			—
Other noncurrent assets		248			286
Total assets	$	105,403		$	98,242

Liabilities and Stockholders’ Equity
Current liabilities:
Current portion of notes payable	$	1,598		$	1,453
Accounts payable		2,937			2,185
Accrued expenses and other current liabilities		2,106			2,362
Income tax payable		984			700
Total current liabilities		7,625			6,700

Notes payable, net of current portion		22,345			22,715
Notes payable due to related parties		1,148			1,131
Deferred income taxes		8,013			8,147
Other noncurrent liabilities		2,759			531
Total liabilities		41,890			39,224

Commitments and contingencies		—			—

Stockholders' equity:
Preferred stock, $0.001 par value; 1,000,000 shares authorized, no shares issued or outstanding		—			—
Common stock, $0.001 par value; 50,000,000 shares authorized; 16,743,553 and 15,748,570 shares issued and outstanding		17			16
Additional paid-in capital		93,203			89,452
Accumulated deficit		(29,508	)		(29,780	)
Accumulated other comprehensive loss		(199	)		(670	)
Total stockholders’ equity		63,513			59,018
Total liabilities and stockholders' equity	$	105,403		$	98,242

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

Cyalume Technologies Holdings, Inc.

Condensed Consolidated Statements of Changes in Stockholders' Equity and Comprehensive Income

(in thousands, except shares)

(Unaudited)

	Common Stock					Additional						Accumulated Other			Total
	Number of Shares			Amount		Paid-In Capital			Accumulated Deficit			Comprehensive Loss			Stockholders’ Equity			Comprehensive Income
Balance at December 31, 2010		15,748,570		$	16	$	89,452		$	(29,780	)	$	(670	)	$	59,018		$	—
Shares issued – private placement		871,823			1		3,377			—			—			3,378			—
Shares issued – cashless option exercise		450			—		—			—			—			—			—
Shares issued – cashless warrant exercise		6,060			—		—			—			—			—			—
Share-based compensation		123,250			—		394			—			—			394			—
Repurchase and retirement of common stock		(6,600	)		—		(27	)		—			—			(27	)		—
Adjustment to the accounting for warrants issued in July 2010 in conjunction with issuance of subordinated term loan		—			—		7			—			—			7			—
Foreign currency translation adjustments		—			—		—			—			437			437			437
Unrealized gain on cash flow hedges, net of taxes of $(19)		—			—		—			—			34			34			34
Net income		—			—		—			272			—			272			272
Comprehensive income		—			—		—			—			—			—		$	743
Balance at March 31, 2011		16,743,553		$	17	$	93,203		$	(29,508	)	$	(199	)	$	63,513

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

Cyalume Technologies Holdings, Inc.

Condensed Consolidated Statements of Cash Flows

(in thousands, except shares)

(Unaudited)

	For the Three			For the Three
	Months Ended			Months Ended
	March 31,			March 31,
	2011			2010
Cash flows from operating activities:
Net income	$	272		$	161
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation of property, plant and equipment		257			164
Amortization		494			540
Provision for deferred income taxes		(95	)		109
Stock-based compensation expense		394			472
Other non-cash expenses		77			57
Changes in operating assets and liabilities:
Accounts receivable		(1,278	)		(867	)
Inventories		(777	)		(314	)
Prepaid expenses and other current assets		49			44
Accounts payable and accrued liabilities		439			723
Income taxes payable, net		231			3
Net cash provided by operating activities		63			1,092

Cash flows from investing activities:
Purchases of long-lived assets		(336	)		(463	)
Net cash used in investing activities		(336	)		(463	)

Cash flows from financing activities:
Repayment of notes payable		(328	)		(1,030	)
Payments to reacquire and retire common stock		(27	)		—
Proceeds from issuance of common stock		3,378			—
Net cash provided by (used in) financing activities		3,023			(1,030	)

Effect of exchange rate changes on cash		206			(42	)
Net increase (decrease) in cash		2,956			(443	)
Cash, beginning of period		4,086			2,003
Cash, end of period	$	7,042		$	1,560

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

Cyalume Technologies Holdings, Inc.

Notes to Condensed Consolidated Financial Statements

1.	BASIS OF PRESENTATION

We have prepared the accompanying unaudited interim condensed consolidated financial statements in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and the instructions to Form 10-Q and Rule 8-03 of Regulation S-X. Accordingly, these interim condensed consolidated financial statements do not include all of the information and disclosures required by U.S. GAAP for complete financial statements.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the period.

These accompanying unaudited interim condensed consolidated financial statements recognize the effects of all subsequent events that provide additional evidence about conditions that existed at March 31, 2011, including the estimates inherent in the process of preparing financial statements. Additionally, all significant intercompany accounts and transactions have been eliminated in consolidation.

Certain amounts in prior periods have been reclassified to conform to the 2011 presentation. These reclassifications had no effect on operating results as previously reported.

We believe all adjustments (consisting of normal, recurring adjustments) considered necessary for a fair presentation have been included in these interim condensed consolidated financial statements. Operating results for the three-month periods presented are not necessarily indicative of the results that may be expected for any other interim period or for the full year. The consolidated balance sheet at December 31, 2010 has been derived from the audited consolidated financial statements at that date. We suggest that these unaudited interim condensed consolidated financial statements be read in conjunction with the consolidated financial statements and footnotes thereto in our Annual Report on Form 10-K for the year ended December 31, 2010.

2.	BACKGROUND AND DESCRIPTION OF BUSINESS

These condensed consolidated financial statements and footnotes include the financial position and results of operations of Cyalume Technologies Holdings, Inc. (“Cyalume”), a holding company that owns 100% of the stock of Cyalume Technologies, Inc. (“CTI”). CTI is the sole shareholder of Cyalume Technologies, SAS (“CTSAS”).

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 Aix-en-Provence, France and represents us in certain international markets, primarily Europe and the Middle East. CTI sells to customers in all other geographic markets.

Our headquarters are located in West Springfield, MA. Our products are manufactured at both the West Springfield and Aix-en-Provence locations.

3.	NEW ACCOUNTING PRONOUNCEMENTS

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

In December 2010, the FASB issued ASU 2010-28, Intangibles-Goodwill and Other (Topic 350): When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts. The update requires a company to perform Step 2 of the goodwill impairment test if the carrying value of the reporting unit is zero or negative and adverse qualitative factors indicate that it is more likely than not that a goodwill impairment exists. The qualitative factors to consider are consistent with the existing guidance and examples in Topic 350, which requires that goodwill of a reporting unit be tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying amount. The requirements in ASU 2010-28 are effective for public companies in the first annual period beginning after December 15, 2010. ASU 2010-28 did not materially impact our interim condensed consolidated financial statements.

Cyalume Technologies Holdings, Inc.

Notes to Condensed Consolidated Financial Statements

In December 2010, the FASB issued ASU 2010-29, Business Combinations (Topic 805): Disclosure of Supplementary Pro Forma Information for Business Combinations. ASU 2010-29 specifies that when a public company completes a business combination, the company should disclose revenue and earnings of the combined entity as though the business combination occurred as of the beginning of the comparable prior annual reporting period. The update also expands the supplemental pro forma disclosures under Topic 805 to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the pro forma revenue and earnings. The requirements in ASU 2010-29 are effective for business combinations that occur on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. We will apply the provisions of ASU 2010-29 on a prospective basis.

In April 2010, the FASB issued Accounting Standards Update 2010-17 (ASU 2010-17), Revenue Recognition (Topic 605): Milestone Method. ASU 2010-17 provides guidance on applying the milestone method of revenue recognition in arrangements with research and development activities. ASU 2010-17 is effective on a prospective basis for milestones achieved in fiscal years, and interim periods within those years, beginning on or after June 15, 2010. Although we are still evaluating the impact of this standard, we do not expect its adoption to have a material impact on our financial position or the results of our operations.

4.	INVENTORIES

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

	March 31, 2011			December 31, 2010
Raw materials	$	5,837		$	5,539
Work-in-process		3,896			3,356
Finished goods		1,248			1,227
		10,981			10,122
Less: Reserve for obsolescence		(144	)		(202	)
	$	10,837		$	9,920

5.	DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

The derivative liabilities as of March 31, 2011 in our condensed consolidated balance sheet consist of the following (all amounts in thousands):

Derivative Instrument	Balance Sheet Location	Fair Value
Interest rate swaps	Other noncurrent liabilities	$	(284	)
Currency forward contract	Other noncurrent liabilities		(14	)

We have not held any other types of derivative instruments other than the derivatives listed above.

Interest Rate Swaps

In December 2008, we entered into two pay-fixed, receive-variable, interest rate swaps to reduce exposure to changes in cash payments caused by changes in interest rates on our notes payable with TD Bank, N.A. Both relationships are designated as cash flow hedges and meet the criteria for the shortcut method for assessing hedge effectiveness; therefore, the hedge is assumed to be 100% effective and all changes in the fair value of the interest rate swaps are recorded in comprehensive income. These unrealized gains and losses must be reclassified in whole or in part into earnings if, and when, a comparison of the swap(s) and the related hedged cash flows demonstrates that the shortcut method is no longer applicable. We expect these hedges to meet the criteria of the shortcut method for the duration of the hedging relationship, which ends upon maturity of the notes payable, and therefore we do not expect to reclassify any portion of these unrealized losses from accumulated other comprehensive loss to earnings in the future. The fair values of the swaps are determined by discounting the estimated cash flows to be received and paid due to the swaps over the swap’s contractual lives using an estimated risk-free interest rate for each swap settlement date.

Currency Forward Contracts

CTSAS’ functional currency is the Euro. Periodically, CTSAS purchases inventory from CTI, which requires payment in U.S. dollars. Beginning in 2009 and only under certain circumstances, we use currency forward contracts to mitigate CTSAS’ exposure to changes in the Euro-to-U.S.-dollar exchange rate upon CTSAS’ payment to CTI for these inventory purchases. Such currency forward contracts typically have durations of less than six months. We report these currency forward contracts at their fair value. This relationship has not been designated as a hedge and therefore all changes in these currency forward contracts’ fair value are recorded in other expenses (income) on our condensed consolidated statement of income. The fair value of these contracts is determined by taking the difference between (a) the U.S. dollar amount due on the contract at maturity and (b) the present value of estimated cash flows developed using, among other data, expectations of future currency exchange rates over the remaining term of the contract discounted at an estimated risk-free interest rate. At March 31, 2011, we held one such currency forward contract.

Cyalume Technologies Holdings, Inc.

Notes to Condensed Consolidated Financial Statements

Effect of Derivatives on Statement of Operations

The effect of derivative instruments (a) designated as cash flow hedges and (b) not designated as hedging instruments on our condensed consolidated statement of income for the three months ended March 31, 2011 was as follows (all amounts in thousands):

	Gain (Loss)		Gain (Loss)		Gain (Loss)
	In AOCL (1)		Reclassified (2)		in Earnings (3)
Derivatives designated as cash flow hedging relationships:
Interest rate swaps, net of taxes of $(19)	$	34	$	—	$	—
Derivatives not designated as hedging instruments:
Forward currency contracts	$	—	$	—	$	14

(1)

Amount recognized in accumulated other comprehensive loss (AOCL) (effective portion and net of taxes) during the three months ended March 31, 2011.

(2)

Amount of gain (loss) originally recorded in AOCL but reclassified from AOCL into earnings during the three months ended March 31, 2011.

(3)

Amount of gain (loss) recognized in earnings on the derivative (ineffective portion and amount excluded from effectiveness testing) reported in other expenses (income), net on the condensed consolidated statement of income for the three months ended March 31, 2011.

6.	INCOME TAXES

For the three months ended March 31, 2011, the effective tax rate of 40% differed from the statutory rate of 34% due to state taxes and certain share-based compensation. For the three months ended March 31, 2010, the effective tax rate of 66% differed from the statutory rate of 34% due to the valuation allowance on foreign tax credits that were generated by unrepatriated earnings of CTSAS.

7.	NET INCOME PER COMMON SHARE

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

Cyalume Technologies Holdings, Inc.

Notes to Condensed Consolidated Financial Statements

	Three Months Ended March 31,
	2011			2010
Basic:
Net income (in thousands)	$	272		$	161
Weighted average shares		15,752,302			15,406,550
Basic income per common share	$	0.02		$	0.01
Diluted:
Net income (in thousands)	$	272		$	161
Adjustments to net income assuming convertible notes payable are converted to common stock:
Reversal of interest expense on convertible notes payable (in thousands)		234			—
Write off of unamortized costs of issuing convertible notes payable (in thousands)		(768	)		—
Adjustments’ estimated effect on provision for income taxes (in thousands)		321	(1)		—
Income available to common stockholders for diluted net income per common share (in thousands)		59			161
Weighted average shares		15,752,302			15,406,550
Effect of dilutive potential common share equivalents		3,793,661			40,695
Weighted average shares, as adjusted		19,545,963			15,447,245
Diluted income per common share	$	0.00		$	0.01

(1)

Assumes an effective tax rate of approximately 40%.

The following common shares issuable upon exercise of potential common share equivalents were excluded from the calculation of diluted net income per common share because their effect was antidilutive for each of the periods presented:

	Three Months Ended March 31,
	2011		2010
Options and warrants		4,653,588		6,310,756

8.	COMMITMENTS AND CONTINGENCIES

Legal

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

On January 23, 2006, before we owned CTI, the former owners of CTI (from whom we purchased CTI) (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.

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

On March 28, 2011, CTI received Findings, Rulings and Order in Civil Action No. 06-706 in which the court intends to award $1.7 million damages for certain lost profits. Prejudgment interest at the rate of twelve (12%) percent per annum since the filing of the complaint in 2006 will accrue on $575,000 of that amount. We estimate that interest to total $319,000 as of March 31, 2011. The court also intends to award attorney’s fees and costs in the amount of $235,000 to the Omniglow Buyers. A final judgment will enter at the direction of the court.

Cyalume Technologies Holdings, Inc.

Notes to Condensed Consolidated Financial Statements

CTI is considering its alternatives relating to the Findings and is in the process of evaluating all avenues of appeal. CTI has thirty (30) days from the entry of final judgment to file any appeal.

Although we intend to appeal the final judgment and do not believe the awards in the final judgment will stand upon appeal, we have recorded a litigation award payable in the amount of approximately $2.3 million on our condensed consolidated balance sheet (included in “other noncurrent liabilities”) as of March 31, 2011. Since the Former Owners (i) retained the responsibility for paying the costs and liabilities associated with Civil Action No. 06-706 and (ii) are related parties under U.S. GAAP due to their ownership interest in us and their membership on our board of directors, we have recorded approximately $2.3 million, along with other costs we have incurred while litigating Civil Action No. 06-706, as due from related party on our condensed consolidated balance sheet as of March 31, 2011. We believe that the related party receivable is collectible.

There are additional matters still being litigated under Civil Action No. 06-706 on which the court has not yet ruled. The amount of damages or loss for these matters, if any, cannot be determined and therefore no liability for them has been recorded.

Management Agreement with Board Member

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

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

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

Advise and support us on our investor relations strategy;

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

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

The management agreement stipulates that these services would be performed by Yaron Eitan, an employee of Selway and a member of our Board of Directors, with assistance, as needed, from other employees of Selway. The management agreement expires on October 1, 2012 and can be terminated by either us or Selway upon 30-days written notice or upon our default in payment or Selway’s failure to perform services under the management agreement. Under the management agreement, we indemnified Selway and Selway indemnified us against certain losses that could have been incurred while carrying out its obligations under the management agreement. Per the management agreement and subsequent amendments thereto, Selway’s compensation for these services is $11,667 per month. We also reimburse Selway for costs incurred specifically on our behalf for these services.

9.	FAIR VALUE

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

Level 1

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

Level 2

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

Level 3

Unobservable inputs for the asset or liability.

Cyalume Technologies Holdings, Inc.

Notes to Condensed Consolidated Financial Statements

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

As of March 31, 2011, our only assets and liabilities required to be reported at fair value on a recurring basis were the interest rate swaps and currency forward contract described in Note 5, both of which are measured at fair value using level 2 inputs.

We have other non-derivative financial instruments, such as cash, accounts receivable, accounts payable, accrued expenses and long-term debt, whose carrying amounts approximate fair value.

10.	SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

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

	Three Months Ended March 31,
	2011		2010
Interest	$	469	$	628
Income taxes	$	33	$	202

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

	Three Months Ended March 31,
	2011		2010
Adjustment to the accounting for warrants issued in July 2010 in conjunction with issuance of subordinated term loan	$	7	$	—
Litigation award payable accounted for as a receivable due from related party		2,292		—

ITEM 2.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

Company Overview

We primarily produce products based on technologies whereby light is generated through a chemical reaction known as chemiluminescence. Our base product is known as a ‘‘light stick’’ and is typically 6 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. In addition, we also produce reflective (patches) and reflective plus photoluminescent (fire tape) products.

Chemiluminescent products come in varying shapes, sizes and functions, and provide light in different colors, intensity and durations.

We maintain principal executive offices at 96 Windsor Street, West Springfield, Massachusetts 01089. We have one direct subsidiary: Cyalume Technologies, Inc. (“CTI”). CTI is a Delaware corporation formed on March 27, 1997 with headquarters also located in West Springfield, MA. CTI has one subsidiary, Cyalume Technologies, SAS (“CTSAS”), located in Aix-en-Provence, France.

We manufacture products at both the West Springfield and Aix-en-Provence locations.

Material Changes in Results of Operations – 3 Months Ended March 31, 2011 versus the 3 Months Ended March 31, 2010

Revenues were higher in 2011 due primarily to the volume of chemical-based products sold to international military customers and the mix of products sold. Price increases provided approximately 20% of the additional revenues.

Cost of goods sold were essentially the same in 2011 as they were in 2010. With the increase in 2011 revenues discussed in the previous paragraph, our gross profit increased 5.5%. Our 2011 gross margin improved to 49.8% compared to 48.2% in 2010 due to higher prices realized for certain products and a more profitable product mix.

Sales and marketing expenses increased primarily due to increases in payroll costs, share-based compensation awards and consultant costs. Payroll costs have increased mainly due to the hiring of additional sales personnel. Expense relating to share-based compensation awards to employees increased in part due to awards to these new employees, and also due to new share-based awards in the first quarter of 2011. We also incurred consulting costs related to the selling of new and existing products to military customers.

General and administrative expenses decreased primarily due to decreases in our share-based compensation to board members and a decrease in management fees. In 2010, board compensation was determined in the first quarter, while in 2011 such determination has not been made, and therefore no expense was recorded. Management fees decreased as a result of an amendment to our management agreement with Selway Capital, LLC in conjunction with the July 2010 issuance of our subordinated term loan.

Research and development expenses increased primarily due to (i) an increased use of consultants to supplement our ongoing research and development projects and (ii) an increase in non-capitalizable patent and trademark-related costs.

Provision for income taxes decreased in 2011 as compared to 2010 primarily due to an increase in the valuation allowance of our deferred tax asset during 2010.

Material Changes in Financial Condition – March 31, 2011 versus December 31, 2010

Our accounts receivable increased due to higher sales during the three months ending March 31, 2011 versus the three months ending December 31, 2010. Since our sales are typically lower during the last three months of our calendar year, we typically purchase and produce less inventory during that time, which caused inventory to be lower at December 31, 2010 when compared to March 31, 2011.

In the first quarter we recorded an approximately $2.3 million litigation award payable and a related approximately $2.3 million receivable from a related party. This payable and receivable are based on March 2011 findings against CTI under Civil Action No. 06-706 (see Part II. Item 1 “Legal Proceedings” and Note 8 “Commitments and Contingencies” to our condensed consolidated financial statements). Although these findings are against our subsidiary CTI, the entity from which we purchased CTI in December 2008, which is also a related party to us, retained the responsibility for paying the costs and liabilities associated with Civil Action No. 06-706, therefore we recorded the receivable from them. Since CTI is appealing these findings, and the other motions under Civil Action No. 06-706 have not yet been ruled upon, we cannot estimate at this time the final amounts that will be paid and collected under Civil Action No. 06-706, but expect them to be significantly less than the March 2011 findings.

Accounts payable increased primarily due to the increased inventory purchases in 2011 as discussed previously in this section. Accrued liabilities decreased primarily due to the payment of 2010 bonuses in January 2011, offset by increases in accruals for costs related to the issuance of 871,823 of our common shares in March 2011. Our notes payable decreased due to scheduled principal payments made during 2011, net of amortization of debt issuance costs. Our income taxes payable increased due to the increased profitability of our operations.

Our deferred tax asset and liability decreased slightly since December 31, 2010 primarily due to estimated utilization of net operating losses during 2011.

Liquidity and Capital Resources

As of March 31, 2011 and December 31, 2010, we had $7.0 million and $4.1 million, respectively, of cash on hand. The major uses of cash during the three months ended March 31, 2011 were all in the normal course of business. The major sources of cash during the three months ended March 31, 2011 were in the normal course of business with the exception of approximately $3.4 million of cash received from the sale of 871,823 shares of common stock to institutional investors in a private placement. In conjunction with that sale, 1,015,000 of our public warrants were cancelled.

Forecasted principal and interest payments on bank debt for the next 12 months are $3.7 million. All operating and capital expenditures are expected to be funded completely from operating cash flows and the $3.4 million of cash discussed in the previous paragraph.

As discussed in the previous section titled “Material Changes in Financial Condition – March 31, 2011 versus December 31, 2010”, we have recorded an approximately $2.3 million payable for ongoing litigation for which a related party has retained the responsibility of paying. Assuming (i) our appeal of these findings is not successful and (ii) our related party is unable to reimburse us for these findings (and the related legal costs we incur), our liquidity and capital resources could be adversely affected. We believe that the related party receivable is collectible.

Off-Balance Sheet Arrangements

Other than immaterial operating leases, we did not have any off-balance sheet arrangements during 2011 or 2010.

Contractual Obligations

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

Critical Accounting Policies

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Estimates are used when accounting for certain items such as reserves for inventory, accounts receivable and deferred tax assets; assessing the carrying value of intangible assets including goodwill; determining the useful lives of property, plant and equipment and intangible assets; and in determining asset retirement obligations. 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 is recognized when the earnings process is complete and the risks and rewards of ownership have transferred to the customer. Depending on the terms of the individual sales arrangement with our customer, 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.

We have several significant contracts providing for the sale of indefinite quantities of items at fixed per unit prices, subject to adjustment for certain economic factors. Revenue under these contracts is recognized when goods 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.

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.

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 is 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.

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

Goodwill

Goodwill is deemed to have an indefinite life and accordingly, is not subject to amortization. Goodwill is subject to an annual impairment review, and, if conditions warrant, interim impairment reviews. Impairment charges, if any, are recorded in the period in which the impairment is determined.

Intangible Assets

Intangible assets include developed technologies and patents, customer relationships and non-compete agreements, which are amortized over their estimated useful lives, and trademarks and trade names, which are considered to have indefinite useful lives and therefore are not amortized. The non-compete agreements expired in December 2010, and were removed from our financial statements at that time. 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. 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 our inventory. Provisions are recorded and reserves are established for potential obsolescence. Determining adequate reserves for inventory obsolescence requires management’s judgment. Conditions impacting the realizability of our inventory could cause actual write-offs to be materially different than reported inventory reserve balances.

Foreign Operations and Currency

Accounts of our foreign subsidiary are recorded using their local currency (the euro) as the functional currency. For consolidation, income statement accounts are converted to U.S. dollars using the average exchange rate for the monthly period being reported. 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 (expense) income in the statement of income in the period the gain or loss occurred.

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

ITEM 4.

CONTROLS AND PROCEDURES

Disclosure controls and procedures

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

Our management carried out an evaluation, under the supervision of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as of March 31, 2011. Based upon that evaluation, our management, including our Chief Executive Officer and Chief Financial Officer, concluded that the design and operation of our disclosure controls and procedures were effective as of March 31, 2011.

Changes in internal control over financial reporting

There was no change in our internal control over financial reporting that occurred during the three months ended March 31, 2011 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II – OTHER INFORMATION

ITEM 1.

LEGAL PROCEEDINGS

Cyalume is not currently a named party in any legal proceedings.

CTI is currently named a defendant in Civil Action No. 06-706 in Superior Court of the State of Massachusetts. Filing suit against CTI is Omniglow, LLC (the former novelty business of CTI which was sold on January 23, 2006). CTI sold certain assets and liabilities related to the novelty and retail business to certain former shareholders and management (the “Omniglow Buyers”). 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.

CTI is considering its alternatives relating to this matter and is in the process of evaluating all avenues of appeal, which it intends to do. CTI has thirty (30) days from the entry of final judgment to file any appeal.

ITEM 1A. RISK FACTORS

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

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Recent sales of unregistered securities and use of proceeds from registered securities

Recent sales of unregistered securities are incorporated by reference to the Current Report on Form 8-K dated March 18, 2011 and filed with the Commission on March 21, 2011. Those securities were subsequently registered on Form S-1/A filed with the Commission on April 25, 2011.

Purchases of Equity Securities by the Company and Affiliated Purchasers

Period	Total Number of Shares Purchased			Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		Maximum Number (or Approximate Dollar Value) of Shares that May yet be Purchased under the Plans or Programs

January 1 to January 31		—			—		—	$	—
February 1 to February 28		—			—		—
March 1 to March 31		6,600	(1)	$	4.05		—		—

(1)

6,600 shares of our common stock were repurchased from employees of CTI. These shares were a portion of the shares that these employees received relating to stock awards that vested in January 2011. These shares were purchased to provide these employees with cash to pay personal income taxes arising from the stock awards.

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4.

[REMOVED AND RESERVED]

ITEM 5.

OTHER INFORMATION

There were no changes to the procedures by which security holders may recommend nominees to our Board of Directors during the three months ended March 31, 2011.

There is no information to report under this Item in lieu of reporting that information on Form 8-K.

ITEM 6. EXHIBITS

Exhibit Number		Description
4.1		Registration Rights Agreement dated March 18, 2011. (1)
10.1		Share Purchase Agreement dated March 18, 2011. (1)
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.

*	Filed herewith.

(1)	Incorporated by reference to the Current Report on Form 8-K dated March 18, 2011 and filed with the Commission March 21, 2011.

SIGNATURES

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

	Cyalume Technologies Holdings, Inc.

Date: May 9, 2011	By:	/s/ DEREK DUNAWAY

		Derek Dunaway, Chief Executive Officer
		(Principal Executive Officer)

Date: May 9, 2011	By:	/s/ MICHAEL BIELONKO

		Michael Bielonko, Chief Financial Officer
		(Principal Financial Officer and
		Chief Accounting Officer)

Attached files

Cyalume Technologies Holdings, Inc. Reports

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