UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended ~~March~~June 3130, 2016

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

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

(954) 315-4939

(413) 858-2500

(Registrant's telephone number, including area code)

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

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

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

Large accelerated filer ¨

Accelerated filer ¨

Non-accelerated filer ¨

(Do not check if a smaller
reporting company)

Smaller reporting
company x

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

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: As of ~~May~~August 10, 2016, ~~there~~ there were outstanding 21,400,244 shares of the registrant’s Common Stock, par value $.001 per share.

Cyalume Technologies Holdings, Inc.

FORM 10-Q

INDEX

PART I—FINANCIAL INFORMATION
Item 1.	Financial Statements ~~(Unaudited)~~
	Condensed Consolidated Balance Sheets as of March 31, 2016 (unaudited) and December 31, 2015	3
	Condensed Consolidated Balance Sheets as of June 30, 2016 and December 31, 2015 (unaudited)	3
	Condensed Consolidated Statements of Comprehensive Income (Loss) for the three months ended March 31, 2016 and 2015 (unaudited)	4
	Condensed Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2016 and 2015 (unaudited)	4
	Condensed Consolidated Statements of Changes in Preferred Stock and Stockholders' Equity for the three months ended March 31, 2016 (unaudited)	5
	Condensed Consolidated Statements of Changes in Convertible Preferred Stock and Stockholders' Equity for the Six Months Ended June 30, 2016 (unaudited)	5
	Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2016 and 2015 (unaudited)	6
	Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2016 and 2015 (unaudited)	6
	Notes to Condensed Consolidated Financial Statements (unaudited)	7
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	2321
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	2825
Item 4.	Controls and Procedures	2825
PART II—OTHER INFORMATION
Item 1.	Legal Proceedings	2826
Item 1A.	Risk Factors	2826
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	2826
Item 3.	Defaults Upon Senior Securities	2826
Item 4.	Mine Safety Disclosures	2926
Item 5.	Other Information	2926
Item 6.	Exhibits	3026
Signatures		3127

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 ~~context~~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 Balance Sheets

(in thousands, except shares and per share information)

(Unaudited)

	March 31, 2016			December 31, 2015
	June 30, 2016			December 31, 2015
Assets
Current assets:
Cash	$	1,~~082~~303		$	1,526
Accounts receivable, net of allowance for doubtful accounts of $11 and $5, respectively		3,732			4,299
Accounts receivable, net of allowance for doubtful accounts of $12 and $5, respectively		4,452			4,299
Inventories, net		7,~~601~~831			7,528
Income taxes refundable		~~216~~101			442
Prepaid expenses and other current assets		1,~~452~~659			1,388
Total current assets		1415,~~083~~346			15,183
Property, plant and equipment, net		6,~~720~~561			6,795
Goodwill		7,992			7,992
Other intangible assets, net		5,~~488~~350			5,691
Total assets	$	3435,~~283~~249		$	35,661
Liabilities and Stockholders’ Equity
Current liabilities:
Line of credit	$	~~1,000~~500		$	1,000
Current portion of notes payable		~~385~~610			274
Accounts payable		1,~~161~~600			947
Accrued expenses		2,~~110~~768			3,858
Deferred revenue and deferred rent		7363			125
Income taxes payable		~~137~~250			327
Warrants liability		4131			54
Total current liabilities		45,~~907~~822			6,585
Notes payable, net of current portion, unamortized debt discount and unamortized debt issuance costs		14,804			15,207
Notes payable, net of current portion		14,057			15,207
Deferred income taxes		~~582~~574			567
Asset retirement obligation		~~217~~220			214
Other noncurrent liabilities, net of current portion		84			81
Other noncurrent liabilities		82			81
Total liabilities		20,~~594~~755			22,654
Commitments and contingencies (Note 11)
Series C preferred stock, $0.001 par value; 1,000,000 shares of preferred stock authorized; 1,000 shares issued and outstanding at March 31, 2016 and December 31, 2015		2,438			2,367
Series C preferred stock, $0.001 par value; 1,000,000 shares authorized; 1,000 shares issued and outstanding		2,511			2,367
Series D convertible preferred stock, $0.001 par value; 1,000,000 shares of preferred stock authorized; 10 shares issued and outstanding at March 31, 2016 and December 31, 2015		2,751			2,751
Series D convertible preferred stock, $0.001 par value; 1,000,000 shares authorized; 10 shares issued and outstanding		2,751			2,751
Series A convertible preferred stock, $0.001 par value; 1,000,000 shares authorized; 123,097 and 123,077 shares issued and outstanding at March 31, 2016 and December 2015, respectively		5,291			5,137
Series A convertible preferred stock, $0.001 par value; 1,000,000 shares authorized; 123,097 shares issued and outstanding		5,449			5,137
Stockholders' equity:
Series B convertible preferred stock, $0.001 par value; 1,000,000 shares of preferred stock authorized; 1,000 shares issued and outstanding at March 31, 2016 and December 31, 2015		1,401			1,401
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 and 21,400,244 issued and outstanding at March 31, 2016 and December 31, 2015, respectively		21			21
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,~~484~~336			102,624
Accumulated deficit		(99,~~836~~045	)		(100,315	)
Accumulated other comprehensive loss		(~~861~~930	)		(979	)
Total stockholders’ equity		3,~~209~~783			2,752
Total liabilities and stockholders' equity	$	3435,~~283~~249		$	35,661

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

Cyalume Technologies Holdings, Inc.

Condensed Consolidated Statements of Comprehensive Income ~~(Loss)~~

(in thousands, except shares and per share information)

(Unaudited)

	For the Three			For the Three
	Three			Three			Six			Six
	Months Ended			Months Ended			Months Ended			Months Ended
	March 31,			March 31,
	June 30, 2016			June 30, 2015			June 30, 2016			June 30, 2015
	2016			2015
Revenues	$	10,610		$	9,916		$	19,852		$	16,858
Revenues	$	9,242		$	6,942
Cost of revenues		5,689			5,326			10,201			9,130
Cost of revenues		4,512			3,804
Gross profit		4,921			4,590			9,651			7,728
Gross profit		4,730			3,138
Other expenses (income):
Other expenses (income):
Sales and marketing		585			562			1,178			1,108
Sales and marketing		593			546
General and administrative		2,029			1,912			4,178			3,486
General and administrative		2,149			1,574
Research and development		336			287			727			599
Research and development		391			312
Interest expense, net		746			857			1,475			1,360
Interest expense, net		729			503
Interest expense – related party		0			37			0			100
Interest expense – related party		0			63
Amortization of intangible assets		244			238			484			477
Amortization of intangible assets		240			239
Legal settlement		0			(1,381	)		0			(1,381	)
Change in fair value of warrant liability		(13	)		20
Change in warrant liability fair value		(10	)		(15	)		(23	)		5
Other (income) expenses, net		26			(137	)
Other expenses, net		(3	)		6			23			(131	)
Total other expenses, net		43,~~115~~927			32,~~120~~503			8,042			5,623
Income before income taxes		~~615~~994			182,087			1,609			2,105
Provision for income taxes		~~136~~203			8534			339			119
Net income (loss)		479			(67	)
Net income		791			2,053			1,270			1,986
Other comprehensive income (loss), net of tax:
Other comprehensive (loss) income, net of tax:
Foreign currency translation adjustments		~~118~~(69	)		~~(341~~73	)		49			(268	)
Other comprehensive income (loss)		~~118~~(69	)		~~(341~~73	)		49			(268	)
Comprehensive income (loss)	$	597		$	(408	)
Comprehensive income	$	722		$	2,126		$	1,319		$	1,718
Net income (loss)	$	479		$	(67	)
Net income	$	791		$	2,053		$	1,270		$	1,986
Series A convertible preferred stock dividends		(~~154~~158	)		(~~135~~141	)		(312	)		(276	)
Series C preferred stock dividends		(7173	)		(6265	)		(144	)		(127	)
Net income (loss) available to common stockholders – basic	$	254		$	(264	)
Net income available to common stockholders - basic	$	560		$	1,847		$	814		$	1,583
Series A convertible preferred stock dividends		~~154~~158			0141			312			276
Change in fair value of warrant liability		(1310	)		0(15	)		(23	)		5
Net income (loss) available to common stockholders –diluted	$	395		$	(264	)
Convertible related party promissory note		0			16			0			45
Income (loss) per common share:
Net income available to common stockholders - diluted	$	708		$	1,989		$	1,103		$	1,909
Basic	$	0.02		$	(0.01	)
Earnings per common share:
Diluted	$	0.00		$	(0.01	)
Basic	$	0.03		$	0.09		$	0.04		$	0.07
Weighted average shares used to compute net income (loss) per common share:
Diluted	$	0.01		$	0.02		$	0.01		$	0.02
Basic		21,400,244			21,400,244
Weighted average shares used to compute earnings per common share:
Diluted		104,237,394			21,400,244
Basic		21,400,244			21,400,244			21,400,244			21,400,244
Diluted		105,310,495			100,479,954			105,354,931			100,370,051

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

Cyalume Technologies Holdings, Inc.

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

(in thousands, except shares)

(Unaudited)

	Series A Convertible Preferred Stock				Series C Preferred Stock				Series D Convertible Preferred Stock				Series B Preferred Stock				Common Stock				Additional						Accumulated Other			Total
	Number of Shares		Amount		Number of Shares		Amount		Number of Shares		Amount		Number of Shares		Amount		Number of Shares		Amount		Paid-In Capital			Accumulated Deficit			Comprehensive ~~Income (~~Loss)			Stockholders’ Equity
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
Dividends accrued on Series A and Series C preferred stock		0		~~154~~312		0		71144		0		0		0		0		0		0		(~~225~~456	)		0			0			(~~225~~456	)
Share-based compensation		0		0		0		0		0		0		0		0		0		0		85168			0			0			85168
Net income		0		0		0		0		0		0		0		0		0		0		0			~~479~~1,270			0			~~479~~1,270
Other comprehensive income		0		0		0		0		0		0		0		0		0		0		0			0			~~118~~49			~~118~~49
Balance at March 31, 2016		123,097	$	5,291		1,000	$	2,438		10	$	2,751		1,000	$	1,401		21,400,244	$	21	$	102,484		$	(99,836	)	$	(861	)	$	3,209
Balance at June 30, 2016		123,097	$	5,449		1,000	$	2,511		10	$	2,751		1,000	$	1,401		21,400,244	$	21	$	102,336		$	(99,045	)	$	(930	)	$	3,783

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)

(Unaudited)

	For the Three			For the Three
	For the Six			For the Six
	Months Ended			Months Ended
	March 31,			March 31,
	June 30,			June 30,
	2016			2015
Cash flows from operating activities:
Net income (loss)	$	479		$	(67	)
Net income	$	1,270		$	1,986
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation of property, plant and equipment		220			305
Depreciation and amortization of property, plant and equipment		435			615
Amortization of intangible assets, debt issuance costs and debt discount		~~468~~976			~~300~~905
Non-cash interest expense		0			~~269~~414
Share-based compensation expense		85168			~~101~~214
Change in fair value of derivatives		0			(29	)
Change in fair value of warrant liability		(1323	)		205
Loss on disposal of property, plant and equipment		2930			0
Other non-cash expenses		9			2
Legal settlement		0			(1,381	)
Other non-cash expenses		12			4
Changes in operating assets and liabilities:
Accounts receivable		~~577~~(155	)		73(404	)
Inventories		(31286	)		(~~778~~422	)
Prepaid expenses and other current assets		(~~251~~492	)		(~~161~~49	)
Restricted cash		153			0
Accounts payable and accrued liabilities		(~~1,549~~446	)		~~960~~(375	)
Accrued interest on note payable to related party		0			62(504	)
Deferred revenue and deferred rent		(5262	)		6(15	)
Income taxes payable		42266			90(359	)
Net cash provided by operating activities		~~166~~1,846			~~1,153~~605
Cash flows from investing activities:
Purchases of long-lived assets		(~~127~~210	)		(~~280~~483	)
Payments for intangibles		(7126	)		(4984	)
Net cash used in investing activities		(~~134~~336	)		(~~329~~567	)
Cash flows from financing activities:
Repayments on line of credit		0			(1,150	)
(Repayments on) proceeds from TD Bank line of credit, net		0			(2,050	)
Repayment of long term notes payable		(378	)		(475	)
Principal repayments on CTI long term notes payable		0			(15,880	)
Principal payments on capital lease obligations		0			(4	)
Borrowings (repayments) on Monroe line of credit, net		(500	)		3,000
Repayment of legal settlement promissory note		(107	)		(107	)
Borrowings (repayments) on Monroe long term notes payable, net		(1,131	)		17,888
Net cash used in financing activities		(485	)		(1,736	)
Repayment of related party note payable		0			(2,100	)
Effect of exchange rate changes on cash		9			(103	)
Principal payments on capital lease obligations		0			(7	)
Net decrease in cash		(444	)		(1,015	)
Payment in connection with legal settlement agreement		(107	)		(107	)
Payment of debt issuance and deferred financing costs		0			(1,983	)
Net cash used in financing activities		(1,738	)		(1,239	)
Effect of exchange rate changes on cash		5			(84	)
Net decrease in cash		(223	)		(1,285	)
Cash, beginning of period		1,526			2,358
Cash, end of period	$	1,~~082~~303		$	1,~~343~~073

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

Cyalume Technologies Holdings, Inc.

Notes to Condensed Consolidated Financial Statements

ORGANIZATION

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

BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements included herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission and in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information. Certain information and note disclosures normally included in annual financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to those rules and regulations. The Company believes that the disclosures made are adequate to make the information presented not misleading. All the adjustments which, in the opinion of management, are considered necessary for a fair presentation of the results of operations for the periods shown are of a normal recurring nature and have been reflected in the unaudited condensed consolidated financial statements. Results from operations for the three and six months ended ~~March~~June 3130, 2016 are not necessarily indicative of the results that may be expected ~~for~~ for any other interim period or for the year ending December 31, 2016. The consolidated balance sheet at December 31, 2015 has ~~been~~ been derived from the audited consolidated financial statements at that date. The information included in these unaudited interim ~~condensed~~ condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and footnotes ~~thereto~~ thereto in our Annual Report on Form 10-K for the year ended December 31, 2015 filed on April 7, 2016.

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

Reclassification of the Company’s unamortized debt issuance costs have been made to prior period amounts to conform to the current period financial statement presentation.

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”). 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~~producing ~~tactical~~specialty chemicals and ~~training~~related ~~solutions~~products toand ~~the~~sub-contract ~~military~~manufacturing of components for use in the pharmaceutical and medical products markets. The Company sells to the U.S. military and other ~~countries~~militaries, ~~through~~and ~~both~~to ~~products~~major pharmaceutical and ~~services~~medical device companies throughout the world.

CTI and CTSAS manufacture ~~and~~ and sell chemiluminescent products and reflective and photoluminescent materials to military, ammunition, commercial and public safety markets. CTSAS is located in France and represents usCTI in certain international markets, primarily Europe and the Middle East. CTI sells to customers in all other geographic markets. CTI’s and CTSAS’s business operations constitute the majority, based on revenues and assets, of the Company’s consolidated business operations.

CSP manufactures on a subcontractor basis and sells specialty chemical products to the pharmaceutical, medical products, defense 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.

Cyalume Technologies Holdings, Inc.

Notes to Condensed Consolidated Financial Statements

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 Company’s CEO, who is the Company’s chief operating decision maker, focuses on consolidated results to make strategic and tactical decisions. The Company’s one operating segment consists of three reporting units: Chemical Light (the operations of CTI, CTS and CTSAS), Specialty Products (the operations of CSP) and Other (the operations of CRI and the parent company Cyalume Technologies Holdings, Inc.).

INVENTORIES

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

	March 31, 2016		December 31, 2015
	June 30, 2016		December 31, 2015
Raw materials	$	4,~~339~~690	$	4,406
Work-in-process		1,~~854~~795		1,809
Finished goods		1,~~408~~346		1,313
	$	7,~~601~~831	$	7,528

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 a legal settlement agreement amount.

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 initially 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, with the amounts ranging from $4,750,000, increasing up to $7.0 million over the term of the loans. The Company was in compliance with the financial covenants related to these loans as of June 30, 2016.

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 a final payment due under the a legal 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 a final legal settlement payment, and the remaining $100,000 of which was paid to Monroe 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.

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.

Cyalume Technologies Holdings, Inc.

Notes to Condensed Consolidated Financial Statements

~~Pursuant~~In toconnection with the ~~terms~~ execution of the Monroe Credit Agreement, the Company ~~must~~issued ~~maintain:~~10 ~~(i)~~shares aof ~~fixed~~Series ~~charge~~D ~~coverage~~convertible ~~ratio~~preferred ofstock ~~1.25~~(the to“Series ~~1.00;~~D ~~(ii~~Convertible Preferred Stock”). Each ashare ~~senior~~of ~~debt~~Series toD ~~EBITDA ratio~~Convertible ofPreferred ~~4.50~~Stock tomay ~~1.00,~~be ~~decreasing~~converted toat ~~1.50~~any totime ~~1.00~~at ~~over~~ the ~~term~~option of the ~~loans;~~holder ~~and~~into ~~(iii)~~ a ~~twelve~~number ~~month~~of ~~trailing~~shares ~~EBITDA~~of common stock initially equal to 752,807.8 ~~measured~~shares of common stock (see Note 16). The relative ~~quarterly,~~fair ~~with~~value of the ~~amounts~~Series ~~ranging~~D ~~from~~Convertible ~~$4,750,000,~~Preferred ~~increasing~~Stock upwas toapproximately $72.08 million ~~over~~which ~~the~~was ~~term~~recorded as debt issuance costs of ~~the~~approximately ~~loans~~$0.4 ~~The~~million ~~Company~~and ~~was in~~debt ~~compliance~~discount ~~with~~on the ~~financial~~Company’s ~~covenants~~Term ~~related~~A toLoan ~~these~~and ~~loans~~Delayed asDraw Loan of ~~March~~approximately ~~31, 2016~~$2.4 million.

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. The relative fair value of the Series D Convertible Preferred Stock was approximately $2.8 million which was 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 ~~March~~June 3130, 2016 was 10%. This line of credit is is subject to various restrictive covenants and collateral guarantees. At ~~March~~June 3130, 2016, approximately $1.0.5 million was outstanding on the Monroe Line of Credit and additional borrowing availability was approximately $34.5 million.

CTSAS has lines of credit, ~~for~~ for borrowing against receivables, with a combined maximum borrowing capacity of €750,000 (or approximately $~~848~~833,000 as of ~~March~~ 31June 30, 2016). There were no outstanding borrowings at ~~March~~June 3130, 2016 or December 31, 2015. The lines’ interest rates are variable, based on 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.

Cyalume Technologies Holdings, Inc.

Notes to Condensed Consolidated Financial Statements

Notes Payable

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

	March 31, 2016			December 31, 2015
	June 30, 2016			December 31, 2015
Monroe Term A Loan	$	16,~~778~~044		$	17,138
Delayed Draw Loan		1,~~463~~444			1,481
Promissory Note Payable		538			645
Total		18,~~779~~026			19,264
Less: Unamortized debt discount and unamortized debt issuance costs		(3,~~590~~359	)		(3,783	)
Less: Current portion of notes payable, including current portion of unamortized debt discount and current portion of unamortized debt issuance costs		(~~385~~610	)		(274	)
Notes payable, net of current portion	$	14,~~804~~057		$	15,207

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

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 $41,000 as of March 31, 2016 (see Note 12).9

Cyalume Technologies Holdings, Inc.

Notes to Condensed Consolidated Financial Statements

On July 29, 2010, a 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 warrants’ 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 warrants. 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. 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 $31,000 as of June 30, 2016 (see Note 12).

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 9), 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~~ remaining unamortized issuance costs relating to the previous Senior Debt and Subordinated Term Loan.

Promissory Note Payable

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

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~~composed 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.10

Cyalume Technologies Holdings, Inc.

Notes to Condensed Consolidated Financial Statements

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”).

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

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

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

Series B Convertible Preferred Stock

On July 30, 2014, the Company entered into a Securities Purchase Agreement (the “Series ~~Band~~B and C Purchase Agreement”) with Cova Small Cap Holdings, LLC (“Cova”), Bayonet Capital Fund I, LLC (see Note 9), 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.

12The 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

Cyalume Technologies Holdings, Inc.

Notes to Condensed Consolidated Financial Statements

~~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.

Cyalume Technologies Holdings, Inc.

Notes to Condensed Consolidated Financial Statements

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.

The proceeds allocated to the Series DC 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.

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”).12

Cyalume Technologies Holdings, Inc.

Notes to Condensed Consolidated Financial Statements

Series D Convertible Preferred Stock

In connection with the execution of the Monroe Credit Agreement, the Company entered into a Subscription Agreement (the “Subscription Agreement”) with Monroe Capital Corporation, Monroe Capital Senior Secured Direct Loan Fund LP, Monroe Capital Senior Secured Direct Loan Fund (Unleveraged) LP and Monroe Capital Partners Fund II, LP. Pursuant to the Subscription Agreement, the Company issued 10 shares of $0.001 par value per share Series D convertible preferred stock (the “Series D Convertible Preferred Stock”). Each share of Series D Convertible Preferred Stock may be converted at any time at the option of the holder into a number of shares of common stock initially equal to 752,807.8 shares of common stock. The Series D Convertible Preferred Stock has a mandatory conversion date on the tenth anniversary of the issuance date. 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 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.

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 Stock Purchase 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.

As of ~~March~~June 3130, 2016 and ~~December~~ December 31, 2015, respectively, warrants to purchase 455,514 shares of the Company’s common stock were outstanding (see Note 12). These warrants are not indexed to the Company’s stock, are considered a derivative and therefore, are being accounted for as a liability.

1513

Cyalume Technologies Holdings, Inc.

Notes to Condensed Consolidated Financial Statements

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 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 ~~March~~June 3130, 2016:

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 ~~March~~June 3130, 2016 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	$	0.0907
Exercise price	$	0.01
Expected term (years)		7.64
Risk-free interest rate		1.74	%
Estimated dividend yield		None
Volatility		~~166~~172.94	%

~~The change in the fair value of the warrants liability during the three months ended March 31, 2016 is as follows (amounts in thousands):~~14

	Granite and Patriot Warrants (see Note 12)
Warrant liability at December 31, 2015	$	54
Change in fair value of warrants		(13	)
Warrant liability at March 31, 2016	$	41

8. INCOME TAXES

During the three months ended March 31, 2016 and 2015, the Company incurred approximately $36,000 and $85,000, respectively, of foreign tax expense on CTSAS’s income. During the three months ended March 31, 2016, the Company incurred approximately $100,000 of U.S. tax expense. The Company has a valuation allowance against its U.S. deferred tax asset. The Company has a valuation allowance of approximately $12.2 million as of March 31, 2016 against deferred tax assets generated primarily as a result of foreign tax credits and net operating losses.

Cyalume Technologies Holdings, Inc.

Notes to Condensed Consolidated Financial Statements

The change in the fair value of the warrants liability during the six months ended June 30, 2016 is as follows (amounts in thousands):

	Granite and Patriot Warrants (see Note 12)
Warrant liability at December 31, 2015	$	54
Change in fair value of warrants		(23	)
Warrant liability at June 30, 2016	$	31

INCOME TAXES

During the three and six months ended June 30, 2016, the Company incurred tax expense of approximately $58,000 and $94,000, respectively, on foreign income generated by the Company’s CTSAS subsidiary. During the three and six months ended June 30, 2015, the Company recorded a tax benefit of approximately $6,000 and tax expense of approximately $79,000, respectively, on foreign income generated by the Company’s CTSAS subsidiary. The remaining income tax expense reflected for both the three and six months ended June 30, 2016 and 2015, respectively, reflects tax expense on U.S. income generated. Due to management’s assessment that it is more likely than not that a portion of certain deferred tax assets may not be realized, the Company has a valuation allowance of approximately $12.2 million as of June 30, 2016 against its U.S. deferred tax asset, which was generated primarily as a result of foreign tax credits and net operating losses.

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, 100 units of securities of the Company (the “Units”) were issued to Bayonet Capital Fund I, LLC (see Note 6), 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”).~~

~~10. NET INCOME (LOSS) PER COMMON SHARE~~15

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)
	Three Months Ended March 31,
	2016			2015
Numerator (in thousands):
Net income (loss)	$	479		$	(67	)
Series A convertible preferred stock dividends		(154	)		(135	)
Series C preferred stock dividends		(71	)		(62	)
Net income (loss) available to common stockholders – basic	$	254		$	(264	)
Effect of dilutive securities:
Add: Series A convertible preferred stock dividends		154			0
Less: Change in fair value of warrant liability for dilutive warrants income		(13	)		0
Income (loss) available to common stockholders – diluted	$	395		$	(264	)

Cyalume Technologies Holdings, Inc.

Notes to Condensed Consolidated Financial Statements

	(in thousands, except shares and per share information)
	Three Months Ended March 31,
	2016		2015
Denominator:
Weighted average common shares outstanding – basic		21,400,244		21,400,244
Weighted average effect of dilutive common equivalent shares:
Assumed conversion of Series A convertible preferred stock		38,723,815		0
Assumed conversion of Series B convertible preferred stock		35,713,147		0
Assumed conversion of Series D convertible preferred stock		7,528,078		0
Warrants		862,958		0
Options		9,152		0
Weighted average common shares outstanding – diluted		104,237,394		21,400,244
Income (loss) per common share:
Basic	$	0.02	$	(0.01	)
Diluted	$	0.00	$	(0.01	)

10.

NET INCOME PER COMMON SHARE

~~The~~Basic ~~following~~income ~~potentially~~per ~~dilutive~~ common share is ~~equivalents~~computed ~~were~~by ~~excluded~~dividing ~~from~~net income available to common stockholders by the ~~calculation~~basic weighted average number of ~~diluted~~common ~~earnings~~shares ~~(loss)~~outstanding. Diluted income per common share ~~because~~is ~~their~~computed ~~effect~~by ~~was~~dividing net income available to common stockholders by the weighted average number ~~antidilutive~~of ~~for~~common ~~each~~shares and dilutive potential common share equivalents then outstanding. Potential common share equivalents consist of (i) shares issuable upon the ~~periods~~exercise ~~presented:~~of warrants and options (using the “treasury stock” method), (ii) unvested restricted stock awards (using the “treasury stock” method) and (iii) shares issuable upon conversion of convertible notes and convertible preferred stock using the “if-converted” method.

	Three Months Ended March 31,
	Three Months Ended June 30,						Six Months Ended June 30,
	2016			2015			2016			2015
Options		1,258,082			10,347,322
Numerator (in thousands):
Series A convertible preferred stock		0			33,401,765
Net income	$	791		$	2,053		$	1,270		$	1,986
Series B convertible preferred stock		0			35,713,147
Less: Series A convertible preferred stock dividends		(158	)		(141	)		(312	)		(276	)
Amended related party note		0			7,318,187
Less: Series C preferred stock dividends		(73	)		(65	)		(144	)		(127	)
Convertible notes payable		0			2,666,667
Income available to common stockholders - basic	$	560		$	1,847		$	814		$	1,583
Warrants		0			455,514
Effect of dilutive securities:
Less: Change in fair value of warrant liability for dilutive warrants (income) expense		(10	)		(15	)		(23	)		5
Add: Convertible related party promissory note		0			16			0			45
Add: Series A convertible preferred stock dividends		158			141			312			276
Income available to common stockholders - diluted	$	708		$	1,989		$	1,103		$	1,909
Denominator:
Weighted average shares outstanding - basic		21,400,244			21,400,244			21,400,244			21,400,244
Weighted average effect of dilutive common equivalent shares:
Warrants		782,904			608,274			824,491			506,553
Assumed conversion of Series B convertible preferred stock		35,713,147			35,713,147			35,713,147			35,713,147
Assumed conversion of Series D convertible preferred stock		7,528,078			3,474,498			7,528,078			1,746,847
Convertible related party promissory note		0			3,860,143			0			5,579,612
Assumed conversion of Series A convertible preferred stock		39,882,454			35,423,648			39,882,454			35,423,648
Options		3,668			0			6,517			0
Weighted average common shares outstanding - diluted		105,310,495			100,479,954			105,354,931			100,370,051
Earnings per common share:
Basic	$	0.03		$	0.09		$	0.04		$	0.07
Diluted	$	0.01		$	0.02		$	0.01		$	0.02

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

	Three Months Ended June 30,				Six Months Ended June 30,
	2016		2015		2016		2015
Options		10,455,322		10,547,322		10,455,322		10,547,322
Series A convertible preferred stock		0		0		0		33,401,765
Convertible debt		0		2,666,667		0		2,666,667
Warrants		0		0		0		455,514

Cyalume Technologies Holdings, Inc.

Notes to Condensed Consolidated Financial Statements

11.

COMMITMENTS AND CONTINGENCIES

Legal

From time to time and in the ordinary course of business, the ~~Company~~company may be subject to various claims, charges, and litigation. At ~~March~~June 3130, 2016 and December 31, 2015, the ~~Company~~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.

12.

FAIR VALUES OF ASSETS AND LIABILITIES

Under U.S. GAAP, the Company is required to record certain financial assets and liabilities at fair value and may choose to record other financial assets and financial liabilities at fair value as well. Also under U.S. GAAP, the Company is required to record nonfinancial assets and liabilities at fair value due to events that may or may not recur in the future, such as an impairment event. When 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 the Company has 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~~The ~~Technologies~~determination ~~Holdings, Inc~~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.

Notes to Condensed Consolidated Financial Statements

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.

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.

~~Assets and Liabilities Measured at Fair Value on a Recurring Basis~~ 17

Assets and liabilities itemized below were measured at fair value on a recurring basis at March 31, 2016 (all amounts in thousands):

	Level 1 Quoted Prices in Active Markets for Identical Assets		Level 2 Significant Other Observable Inputs		Level 3 Significant Unobservable Inputs			Assets/ (Liabilities) At Fair Value
Warrants (see Note 7) (1)	$	0	$	0	$	(41	)	$	(41	)
	$	0	$	0	$	(41	)	$	(41	)

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

The table below presents reconciliations for all assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) (all amounts in thousands):

	March 31, 2016			December 31, 2015
Warrants liability:
Balance at the beginning of period	$	54		$	25
Change in fair value of warrants		(13	)		29
Balance at the end of period	$	41		$	54

Cyalume Technologies Holdings, Inc.

Notes to Condensed Consolidated Financial Statements

Assets and Liabilities Measured at Fair Value on a Recurring Basis

Assets and liabilities itemized below were measured at fair value on a recurring basis at June 30, 2016 (all amounts in thousands):

	Level 1 Quoted Prices in Active Markets for Identical Assets		Level 2 Significant Other Observable Inputs		Level 3 Significant Unobservable Inputs			Assets/ (Liabilities) At Fair Value
Warrants (see Note 7) ⁽¹⁾		0		0		(31	)		(31	)
	$	0	$	0	$	(31	)	$	(31	)

⁽¹⁾

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

The tables below presents reconciliations for all assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) (all amounts in thousands):

	June 30, 2016			December 31, 2015
Warrants liability:
Balance at the beginning of period	$	54		$	25
Change in fair value of warrants		(23	)		29
Balance at the end of period	$	31		$	54

The Company has other financial instruments, such as cash, accounts receivable, due from related party, accounts payable, notes payable and a line of credit. The Company believes the carrying amounts of those assets and liabilities approximate their fair value since those carrying amounts have been estimated to approximate the exit price which would be received to sell these assets or pay to transfer these liabilities to a market participant.

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

During the three ~~months~~and ~~ended~~six months ~~March~~ended 31June 30, 2016, none of ~~our~~the Company’s assets or liabilities were remeasured at fair value on a nonrecurring basis and no assets were identified as impaired as of ~~March~~June 3130, 2016.

~~13. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION~~18

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

	Three Months Ended March 31
	2016		2015
Interest	$	505	$	120
Income taxes		98		31

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

	Three Months Ended March 31,
	2016		2015
Series A Convertible Preferred stock accrued dividend	$	154	$	135
Series C Preferred stock accrued dividend		71		62

14. NEW ACCOUNTING PRONOUNCEMENTS

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

In May 2014, the 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.

Cyalume Technologies Holdings, Inc.

Notes to Condensed 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”)13. ~~ASU~~SUPPLEMENTAL ~~2014-15~~DISCLOSURE ~~states~~OF ~~that~~CASH inFLOW 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.INFORMATION

InCash ~~April~~Paid ~~2015,~~for ~~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, are required to present those costs as a direct deduction from the carrying amount of that debt liability. This presentation will result in debt issuance costs 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 was effective for the Company as of January 1, 2016. This new guidance reduced total assets and ~~total long-term debt on its condensed~~ ~~consolidated~~Income ~~balance~~Taxes ~~sheets~~(all by amounts ~~classified~~in asthousands) ~~deferred debt issuance costs relating to the Company’s Term A Loan and Delayed Draw Loan, but did not have any other effect on its condensed consolidated financial statements when adopted.~~:

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.

	Six Months Ended June 30
	2016		2015
Interest	$	985	$	456
Income taxes		75		510

~~In November 2015, the FASB issued ASU 2015~~Non-~~17,~~Cash ~~Balance~~Investing ~~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~~Financing ~~the~~Activities ~~balance~~(all ~~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 previously elected to early adopt this guidance as of December 31, 2015 on a prospective basis. As a result, the Company reclassified deferred tax assets classified as current to noncurrent and deferred tax liabilities classified as current to noncurrent in ~~the December~~thousands) ~~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.

	Six Months Ended June 30,
	2016		2015
Series A Convertible Preferred stock accrued dividend	$	312	$	276
Series C Preferred stock accrued dividend		144		127

2119

Cyalume Technologies Holdings, Inc.

Notes to Condensed 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 lease14. ~~For income~~ ~~statement~~SUBSEQUENT 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.EVENTS

15Pursuant to the terms of the Monroe Credit Agreement, the Company expects to make an excess cash payment of approximately $0.7 ~~SUBSEQUENT~~million ~~EVENTS~~on or before August 18, 2016, which will reduce the principal of the Company’s Term A Loan. The excess cash payment is calculated based on the definition of excess cash flow under the Monroe Credit Agreement.

~~Pursuant to the terms of the Monroe Credit Agreement, the Company made an excess cash payment of approximately $0~~15.5 ~~million~~NEW onACCOUNTING ~~May 10, 2016, which reduced the principal of the Company’s Term A Loan. The excess cash payment is calculated based on the definition of excess cash flow under the Monroe Credit Agreement.~~PRONOUNCEMENTS

22The following are recent accounting pronouncements that have affected the Company’s consolidated financial statements or may affect the Company’s consolidated financial statements in the future.

In March 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-09, Compensation- Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”). The purpose of the update is to simplify several areas of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. ASU 2016-09 is effective for annual reporting periods after December 15, 2016, including interim periods within those fiscal periods. Early adoption is permitted. The Company is currently evaluating the impact of adopting ASU 2016-09 on the Company’s financial position and results of operations.

In April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing (“ASU 2016-10”). The guidance clarifies that entities are not required to assess whether promised goods or services are performance obligations if they are immaterial in the context of the contract. ASU 2016-10 also addresses how to determine whether promised goods or services are separately identifiable and permits entities to make a policy election to treat shipping and handling costs as fulfillment activities. In addition, it clarifies key provisions in Topic 606 related to licensing. ASU 2016-10 is effective for annual reporting periods after December 15, 2016, including interim periods within those fiscal periods. Early adoption is permitted. The Company is currently evaluating the impact, if any, of adopting ASU 2016-10 on the Company’s financial position and results of operations.

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

You should read the following discussion of our financial condition and results of operations in conjunction with our interim condensed consolidated financial statements and the accompanying notes to those financial statements included elsewhere in this Quarterly Report on Form 10-Q and in conjunction with our Annual Report on Form 10-K for the fiscal year ended December 31, 2015. This discussion contains forward-looking statements that involve risks and uncertainties. Unless the ~~context~~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

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

We sell our products into the law enforcement, commercial public safety and other markets. We provide specialty chemical products to the pharmaceutical, medical products, defense and other markets. We primarily sell to the U.S. military and other militaries, and to major pharmaceutical and medical device companies throughout the world.

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

Material Changes in Results of Operations – 3Three ~~Months~~and Six Months Ended ~~March~~June 3130, 2016 versus the 3Three and Six Months Ended ~~March~~June 3130, 2015

Revenues in the three months ended March 31, 2016 and 2015 were as follows:

	Three Months Ended June 30,				Six Months Ended June 30,
Revenue ($ in millions)	2016		2015		2016		2015

Chemical Light	$	5.1	$	5.0	$	10.6	$	9.3
Ammunition		2.0		1.5		3.1		1.7
Training and Simulation		0.1		0.1		0.1		0.2
Specialty Products		3.4		3.3		6.1		5.7
Total	$	10.6	$	9.9	$	19.9	$	16.9

Category ($ in millions)	2016		2015		Change
Chemical Light	$	5.5	$	4.2	$	1.3
Ammunition		1.1		0.2		0.9
Training and Simulation		0.0		0.1		(0.1	)
Specialty Products		2.6		2.4		0.2
Total	$	9.2	$	6.9	$	2.3

During the first half of 2016, Chemical Light revenues increased over the first half of 2015 primarily as a result of higher sales to our largest customer LC Industries for distribution to the U.S. Military, and also from higher commercial sales in the U.S. Ammunition revenues were higher during 2016 than the corresponding prior year periods as sales for military training rounds utilizing our technology resumed during February of 2015. Training and Simulation revenues for the first half of 2016, which are generated from CTS devices being purchased, were approximately $0.1 million compared to Training and Simulation revenue for the six months ended June 30, 2015 of approximately $0.2 million. Specialty Products revenue during both the first quarter and the second quarter of 2016 increased over the first and second quarters of 2015, primarily as a result of an increase in product sales.

~~During~~Cost of goods sold increased to approximately $5.7 million for the ~~first~~second quarter of 2016, ~~Chemical Light~~compared ~~revenues~~to ~~increased~~approximately ~~over~~$5.3 million for the ~~first~~second quarter of 2015 ~~primarily~~ as a result of the higher ~~sales~~revenue tolevels ~~our~~during ~~largest~~the ~~customer~~second LCquarter ~~Industries for~~of ~~distribution~~2016. toThe gross profit margin for the Usecond quarter of 2016 was approximately 46.S.4 ~~Military~~% ~~and~~compared ~~also~~to ~~from~~gross ~~higher~~profit ~~commercial~~margin ~~sales~~of inapproximately 46.3% for the Usecond quarter of 2015.S. ~~Ammunition~~Cost ~~revenues~~of ~~were~~goods sold increased to approximately $110.12 million ~~during~~for the ~~first~~six ~~quarter~~months ofended June 30, 2016 ascompared ~~sales~~to ~~for~~approximately ~~military~~$9.1 ~~training~~million ~~rounds~~for ~~utilizing~~the ~~our~~six ~~technology~~months ~~resumed~~ended ~~during~~June ~~February of~~30, 2015. as ~~Training~~a ~~and~~result ~~Simulation~~of ~~revenues for~~ the ~~first~~higher ~~quarter~~revenue oflevels during 2016,. ~~which~~The ~~are~~gross ~~generated~~profit ~~from~~margin ~~CTS~~for ~~devices~~the ~~being~~six ~~purchased~~months ended June 30, ~~were~~ ~~less~~2016 ~~than~~was $0approximately 48.16% ~~million~~versus ~~during~~45.8% for the ~~first~~six ~~quarter~~months ofended ~~2016~~June 30, 2015. ~~Specialty~~This ~~Products~~increase ~~revenue~~compared ~~during~~to ~~the~~both ~~first~~corresponding ~~quarter~~prior ofyear ~~2016~~periods ~~increased~~was ~~over~~largely ~~the~~attributable ~~first~~to ~~quarter~~favorable ofproduct ~~2015~~mix changes, ~~primarily~~including as a ~~result~~reduction ofin anmaterials ~~increase~~costs, inand ~~product~~higher-margin specialty product sales during 2016.

Cost of goods sold for the first quarter of 2016 increased to approximately $4.5 million from the prior year period amount of approximately $3.8 million as a result of the higher revenue levels during 2016. The gross profit for the first quarter of 2016 increased to approximately 51.2% versus 45.0% for the first quarter of 2015. This increase was largely attributable to favorable product mix changes, specifically an increase in higher-margin product sales during the quarter. 21

23Sales and marketing expenses for the three and six months ended June 30, 2016 were approximately $0.6 million and $1.2 million, respectively, versus approximately $0.6 million and $1.1 million, respectively, for the corresponding prior year periods. The increase of approximately $0.1 million for the six months ended June 30, 2016 was attributable to an increase in marketing efforts during 2016, primarily attending trade shows and an increased focus on online advertising.

~~Sales~~General and ~~marketing~~administrative expenses for the ~~first quarter~~three ofand six months ended June 30, 2016 were approximately $2.0 million and $4.62 million, respectively, versus approximately $01.9 million and $3.5 million, inrespectively, for the ~~first~~corresponding ~~quarter~~prior ofyear ~~2015~~periods. The ~~slight~~ increase was ~~attributable~~ due to ana ~~increase~~combination of factors including: increased compensation expense for additional personnel including bonuses being accrued in ~~sales~~2016; higher consulting fees for taxes and ~~marketing~~other ~~payroll~~financial ~~expenses~~matters; and ~~increased~~other ~~advertising~~increases ~~expenses~~in ~~for~~items ~~the~~such ~~U.S.~~as ~~commercial~~audit ~~market~~and various other corporate-related expenses and fees.

~~General~~Research and ~~administrative~~development expenses for the ~~first~~three ~~quarter~~and ofsix months ended June 30, 2016 were approximately $20.13 million ~~versus~~and $10.67 million, ~~for the prior year~~respectively, orcompared anto ~~increase of~~ approximately $0.63 million. ~~The~~and ~~increase~~$0.6 ~~was~~million, ~~due~~respectively, tofor athe ~~combination~~corresponding ofprior ~~factors~~year ~~including:~~periods. The ~~increased~~increase ~~compensation~~in ~~expense~~the ~~for~~six ~~additional~~month ~~personnel~~period ~~including~~was ~~bonuses~~the ~~being~~result ~~accrued;~~of ~~higher~~additional ~~consulting~~research ~~fees for taxes~~ and ~~other~~development ~~financial~~initiatives ~~matters;~~during ~~and~~2016 ~~other increases in items such~~ as ~~audit~~compared ~~and~~to ~~various other corporate-related expenses and fees~~2015.

~~Research~~During the three and ~~development~~six ~~expenses~~months ended June 30, 2016, we recorded tax expense of approximately $~~0.4~~58,000 ~~million~~and ~~for~~$94,000, respectively, on foreign income generated by our CTSAS subsidiary. During the ~~first~~three ~~quarter~~and six months ended June 30, 2015, we recorded a tax benefit of ~~2016~~approximately ~~increased~~$6,000 ~~slightly~~and bytax expense of approximately $079,000, respectively, on foreign income generated by our CTSAS subsidiary.1 ~~million~~The ~~from~~remaining income tax expense reflected for both the ~~prior~~three ~~year~~and six months ended June 30, 2016 and 2015, respectively, reflects tax expense on U.S. Weincome ~~had~~generated. ~~additional~~We ~~research~~have ~~and~~a ~~development~~valuation ~~initiatives~~allowance ~~during~~against ~~the~~our ~~first~~U.S. ~~quarter~~deferred oftax ~~2016~~asset ~~versus~~due ~~the~~to ~~same~~management’s ~~period~~assessment that it is more likely than not that a portion of ~~the~~certain ~~prior~~deferred ~~year~~tax assets may not be realized.

~~During~~Material ~~the~~Changes ~~three~~in ~~months~~Financial ~~ended March~~Condition ~~31,~~– ~~2016~~June ~~and 2015~~30, we2016 ~~incurred~~versus ~~approximately~~December ~~$36,000 and $85,000, respectively, of foreign tax expense on CTSAS’s income. During the three months ended March~~ 31, ~~2016,~~2015 we incurred approximately $100,000 of U.S. tax expense. We have a valuation allowance against our U.S. deferred tax asset due to management’s assessment that it is more likely than not that a portion of certain deferred tax assets may not be realized.

~~Material~~Cash ~~Changes~~was inapproximately ~~Financial~~$1.3 ~~Condition~~million at –June ~~March~~30, 2016, representing a slight decrease of approximately $0.2 million from December 31, ~~2016~~2015. ~~versus~~From December 31, 2015 to June 30, 2016, combined accounts payable and accrued liabilities decreased by approximately $0.4 million; accounts receivable increased by approximately $0.2 million; and inventories increased by approximately $0.3 million.

~~Cash~~Our ~~was~~accounts ~~approximately~~receivables increased by approximately $10.12 million at ~~March~~ 31June 30, 2016, ~~representing~~compared ato ~~decrease~~December of31, ~~approximately~~2015 ~~$0.4~~due ~~million~~to ~~from~~timing ~~December~~differences ~~31,~~of ~~2015~~customer payments. ~~Combined~~Our ~~accounts~~receivables ~~payable~~are generally ~~and~~collected ~~accrued liabilities~~within ~~decreased~~30 bydays, ~~approximately~~thus ~~$1.5~~revenues ~~million;~~recorded ~~accounts~~in ~~receivable~~the ~~decreased~~30-day byperiod ~~approximately~~preceding ~~$0.6~~the ~~million;~~measurement ~~inventories~~date ~~increased~~significantly influence bythe ~~approximately~~reported $0balances.~~1 million.~~

~~Our~~Accounts ~~accounts~~payable ~~receivable~~and ~~decreased~~accrued ~~slightly~~expenses combined were approximately $4.4 million at ~~March~~June 3130, 2016 ~~compared~~versus toapproximately $4.8 million at December 31, 2015, ~~due~~a todecrease ~~timing~~of ~~differences~~approximately $0.4 million. Payments during 2016 on amounts accrued for at the end of ~~payments.~~2015, ~~Our~~such ~~receivables~~as ~~are~~the ~~generally~~2015 ~~collected~~accrued performance bonus amounts ~~within~~paid 30during ~~days~~the first quarter of 2016, ~~thus~~accounted ~~revenues~~for ~~recorded~~most of this decrease. This large decrease in ~~the~~accrued expenses was offset by an increase in accounts payable to approximately $1.6 million at June 30~~-day~~, ~~period~~2016 ~~preceding~~from ~~the~~approximately ~~measurement~~$0.9 ~~date~~million ~~significantly~~at ~~influence~~December 31, 2015, which relates to the ~~reported~~timing of recurring operational-related payables. Our line of credit, used to meet temporary working ~~balances~~capital needs, was approximately $0.5 million at June 30, 2016 and approximately $1.0 million at December 31, 2015.

~~Accounts~~The current portion of notes payable, net of the current portion of unamortized debt discount and ~~accrued~~unamortized ~~expenses~~debt ~~combined were~~issuance costs, was approximately $30.36 million at ~~March 31~~June 30, 2016 ~~versus~~compared to approximately $40.83 million at December 31, 2015,. aIn ~~decrease~~accordance ofwith ~~approximately $1.5~~ASU ~~million.~~2015-03, ~~Payments~~Interest ~~during~~– ~~2016~~Imputation of onInterest ~~amounts~~(Subtopic ~~accrued~~835-30) ~~for~~Simplifying at the ~~end~~Presentation of Debt Issuance Costs (“ASU 2015-03”), ~~such~~we asnow ~~2015~~present debt ~~accrued~~issuance ~~performance~~costs ~~bonus~~as ~~amounts~~a ~~paid during~~direct deduction from the ~~first~~carrying ~~quarter~~amount of ~~2016~~that debt liability, ~~accounted~~the ~~for~~same ~~most~~way ofdebt ~~this~~discounts ~~decrease~~have historically been handled. ~~Our~~ASU ~~line~~2015-03 ofdid ~~credit~~not change the recognition, ~~used~~measurement, toor ~~meet~~subsequent ~~temporary~~measurement ~~working~~guidance ~~capital~~for debt issuance costs. ~~needs,~~This guidance was ~~approximately~~effective ~~$1.0~~for ~~million~~us atas ~~both~~of ~~March~~January 311, 2016, and ~~December~~reduced 31total assets and total long-term debt on our condensed consolidated balance sheets by amounts classified as deferred debt issuance costs relating to our secured term loan and our delayed draw term loan, ~~2015~~but did not have any other effect on our condensed consolidated financial statements when adopted in 2016.

The current portion of notes payable, net of the current portion of unamortized debt discount and unamortized debt issuance costs, was approximately $0.4 million at March 31, 2016 compared to approximately $0.3 million at December 31, 2015.

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 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 a payment in connection with a legal settlement agreement 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.

24Under 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. 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 initially 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, with the amounts ranging from $4,750,000, increasing up to $7.0 million over the term of the loans.

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. 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, with the amounts ranging from $4,750,000, increasing up to $7.0 million 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 ~~March~~June 3130, 2016 and December 31, 2015, we had approximately $1.13 million and $1.5 million, respectively, of cash on hand. The major sources and uses of cash during 2016 were all in the normal course of business. Our availability under our revolving credit facility was approximately $34.5 million at ~~March~~June 3130, 2016 and approximately $4.0 million at December 31, 2015.

Capital expenditures and payments for intangibles were approximately $0.13 million for the ~~three~~six months ended ~~March~~June 3130, 2016 and approximately $0.36 million for the three months ended ~~March~~June 3130, 2015. We expect to fund capital expenditures for the remainder of 2016 from existing cash and operating cash flows.

We were in compliance with our financial covenants relating to our loans as of ~~March~~June 3130, 2016. We expect to meet our financial covenants for 2016 and we also expect that cash provided by the business will be adequate to meet our planned needs.

Pursuant to the terms of the Monroe Credit Agreement, we made excess cash payments of approximately $0.3 million on February 19, 2016, ~~and~~ $0.5 million on May 10, 2016, ~~which~~and approximately ~~reduced~~$0.7 million will be paid on or before August 18, 2016, which all reduce the principal of our Term A Loan. The excess cash payment is calculated based on the definition of excess cash flow under the Monroe Credit Agreement and is related to favorable financial performance, primarily relating to cash flow generation.

We did not pay a dividend in 2016 and we do not have plans to pay a common dividend in the future. We are accruing dividends in connection with the Series A Convertible Preferred Stock issued on November 19, 2013, and we are accruing dividends in connection with the Series C Preferred Stock issued on July 30, 2014.

Critical Accounting Policies

Use of Estimates

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

2523

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.

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.

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

We also provide research and development services for customers for which we earn payments that are contingent upon achieving a specific result (“milestones”). Upon achieving such milestones, revenue is recognized 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~~We ~~Company~~use ~~uses~~ fair values as determined by significant unobservable inputs. These estimated values are significant inputs into the Black Scholes pricing model used to calculate the estimated fair value of warrants potentially settleable in cash, which are recorded as warrants liability. The estimated fair value of the common warrants are determined at each balance sheet date and the change in the estimated fair value of the warrants is reflected within ~~the~~our ~~Company’s~~ statements of comprehensive income.

Income Taxes

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

In assessing the realization of long-term deferred income tax assets, we consider whether it is more likely than not that the deferred income tax assets will be realized. The realization of deferred income tax assets depends upon future taxable income in years before net operating loss 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~~ 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~~ measured as described above, if such a position existed, would be reflected as a liability for unrecognized tax benefits in the ~~accompanying~~ 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 ~~March~~June 3130, 2016 or December 31, 2015.

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 amortization. Goodwill is subject to an annual impairment review, and, if conditions warrant, interim impairment reviews. Impairment charges, if any, are recorded in the period in which the impairment is determined.

We perform the traditional two-step process for assessing goodwill for impairment.. The first step of the two-step process requires a comparison of our estimated fair value for each reporting unit versus our carrying (book) value. If our carrying value exceeded our fair value, further analysis (step 2 of the two-step process) is required to determine the amount, if any, that our goodwill was impaired. To determine the amount of fair value, we used a discounted cash flow analysis.24

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

Intangible Assets

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

Inventories

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

Foreign Operations and Currency

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

27Recent Accounting Pronouncements

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

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~~Operating Officer (our principal financial officer), of the effectiveness of our disclosure controls and procedures as of ~~March~~June 3130, 2016. Based upon that evaluation, our management, including our Chief Executive Officer and Chief ~~Financial~~ Operating Officer, concluded that the design and operation of our disclosure controls and procedures were effective as of ~~March 31~~June 30, 2016.

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~~June 3130, 2016 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

None.

ITEM 1A. RISK FACTORS

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

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

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

None.

Purchases of Equity Securities by the Company and Affiliated Purchasers

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

~~None~~The information contained in Item 1 of Part II of this quarterly report is incorporated in this Item by reference.

ITEM 6. EXHIBITS

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

Filed herewith.

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SIGNATURES

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

	Cyalume Technologies Holdings, Inc.
Date: May 18, 2016	By:	/s/ Zivi Nedivi
Date: August 10, 2016	By:	/s/ Zivi Nedivi
		Zivi Nedivi, Chief Executive Officer
		(Principal Executive Officer)

Date: May 18, 2016	By:	/s/ Michael Bielonko
Date: August 10, 2016	By:	/s/ Dale Baker
		Michael Bielonko, Chief Financial Officer
		Dale Baker, Chief Operating Officer
		(Principal Financial Officer)

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Filing Compare · Cyalume Technologies Holdings, Inc.