ISC8 Reports Second Quarter Fiscal 2013 Results

Global Recognition Accelerates

Marketwired

COSTA MESA, CA--(Marketwired - May 15, 2013) - ISC8® Inc. (OTCBB: ISCI) ("ISC8" or the "Company"), a provider of intelligent cybersecurity solutions, today reported unaudited operating results for its fiscal 2013 second quarter ended March 31, 2013.

"We have completed the company's transformation to commercialization, including the spinoff of our government focused business units in the second quarter, to become a pure play, global cybersecurity company solely focused on the rapidly growing market for adaptive cybersecurity products and solutions," said Bill Joll, President and CEO of ISC8 Inc. "We now provide a comprehensive offering of solutions that address key cybersecurity requirements facing enterprise, service provider and government networks such as Big Data security analytics and detection of Advanced Persistent Threats (APTs).

"We remain focused on aggressively marketing our three key cybersecurity products to accelerate revenue and continue to see positive market reception and significant opportunities. Cyber NetFalcon® and Cyber NetControl™ continue to gain traction in the global market and Cyber adAPT™ is gaining recognition as an advanced and uniquely critical solution for prevention of sophisticated malware attacks that are not immediately detectible by existing cybersecurity platforms in the marketplace."

Recent Business Highlights:

  • Established a Malware Research Team critical to the advancement of ISC8's Cyber adAPT solution to detect next generation threats
  • Continued with trial rollouts with both Cyber NetFalcon and Cyber adAPT in new markets
  • Accelerated development of the Company's three leading edge technology Cybersecurity products:
    • Cyber adAPT, to detect advanced targeted attacks such as APTs in larger corporate enterprise 
    • Cyber NetFalcon, capable of identifying perpetrators, and
    • Cyber NetControl, capable of providing more user control and security to service operators, such as Mobile Carriers

Financial Results:
In March 2013, the Company announced that it had discontinued its government focused business, including the Secure Memory Systems, Cognitive and Microsystems business units (the "Government Business"), to focus on the Company's cybersecurity business. The operations of the Thermal Imaging Business and Government Business are presented as discontinued operations. To provide comparability between the periods, the consolidated financial information for all periods presented has been reclassified to reflect the Company's results of continuing operations. As a result, the business and results of operations will be materially affected in the short-term, as the Company transitions to its cybersecurity business.

Total revenues for the second quarter of fiscal 2013 were $102,000, which was primarily the result of an increase in software maintenance revenue. Software maintenance revenue did not exist in the year ago period. Net loss from continuing operations in the second quarter of fiscal 2013 was $9.6 million, compared to a net loss of $11.3 million in the same quarter last year.

For the first six months of fiscal 2013, total revenues were $196,000. Net loss for the first six months was $11.8 million, compared to a net loss of $19.6 million for the comparable year ago period.

ISC8 believes that the Company's losses in recent years have been primarily the result of increased research and development expenditures related to the cyber technology, and efforts to productize those technologies and bring them to market. These losses were augmented by insufficient revenue to support the Company's growth in a skilled and diverse technical staff, which is considered necessary to support commercialization of the Company's technologies.

ISC8 is focused on managing costs in line with estimated future revenues, including contingencies for cost reductions if projected revenues are not fully realized.

Use of Non-GAAP Financial Information - ISC8 reports net loss in accordance with accounting principles generally accepted in the United States ("GAAP") and also on a non-GAAP basis. The Company's presentation of non-GAAP net loss in this press release excludes the impact of changes in fair value of derivative liability, non-cash interest expense, stock-based compensation, depreciation and amortization expense and net earnings from discontinued operations. Stock-based compensation expense primarily includes the impact of stock options issued by the Company and stock contributions to the employees' retirement plan.

ISC8 believes that the presentation of non-GAAP net loss provides useful supplemental information to management and investors regarding financial and business trends related to the Company's financial condition and results of operations. The Company also believes that examination of non-GAAP net loss can facilitate consistency and comparability among and between prior periods, as well as comparison with other companies that present similar non-GAAP financial measures. However, the Company's presentation of non-GAAP information is not necessarily equivalent to non-GAAP measures presented by other reporting companies and should be considered in that context. The Company's management generally uses non-GAAP loss to evaluate the Company's operating performance because management believes that the exclusion of the non-cash items described above provides insight into the Company's core ongoing operating results, particularly from a cash generation or use perspective, and underlying business trends affecting the Company's performance. ISC8 has chosen to provide this non-GAAP information to investors to enable them to perform additional analyses of past, present and future operating performance and as a supplemental means to evaluate the Company's ongoing core operations. The non-GAAP financial information presented herein should be considered supplemental to, and not as a substitute for, or superior to, financial measures calculated in accordance with GAAP.

For more information on ISC8 and its products, visit www.ISC8.com.

About ISC8®
ISC8 is actively engaged in the development and sale of intelligent cybersecurity solutions for commercial and government environments worldwide. ISC8's Cyber products are aimed at detecting next-generation malware and Advanced Persistent Threats (APTs). ISC8 provides hardware, software and service offerings for Malware Threat Detection leveraging its history in anti-tamper, secure memories, high-speed processors, and miniaturized sensors -- all technologies it has developed. ISC8 was founded in 1974 and is headquartered in Costa Mesa, California. For more information about ISC8 visit www.isc8.com.

SAFE HARBOR STATEMENT

Statements in this press release that relate to future plans, objectives, expectations, performance, events and the like are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 and the Securities Exchange Act of 1934. Future events, risks and uncertainties, individually or in the aggregate, could cause actual results to differ materially from those expressed or implied in these statements. Factors that could cause actual results to differ are identified in our public filings with the Securities and Exchange Commission (SEC), and include the fact that we have disclosed that you should not rely upon our previously published financial statements and the fact that we have not filed all of our reports required by the Securities Exchange Act of 1934. More information about factors that could affect our business and financial results are included in our public filings with the SEC, which are available on the SEC's website located at www.sec.gov.

The words "should," "believe," "estimate," "expect," "intend," "anticipate," "foresee," "plan" and similar expressions and variations thereof identify certain of such forward-looking statements, which speak only as of the dates on which they were made. Additionally, any statements related to future improved performance and estimates of revenues and earnings per share are forward-looking statements. We undertake no obligation to publicly update or revise any forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements.

   
ISC8 INC.  
CONDENSED CONSOLIDATED BALANCE SHEETS  
(Unaudited)  
   
    March 31,     September 30,  
2013 (1)     2012 (1)  
Assets                
Current assets:                
    Cash and cash equivalents   $ 322,000     $ 1,738,000  
    Accounts receivable, net     127,000       -  
    Due from Vectronix, Inc.     -       1,200,000  
    Prepaid expenses and other current assets     264,000       59,000  
    Current assets from discontinued operations     1,047,000       1,048,000  
      Total current assets     1,760,000       4,045,000  
Property and equipment, net     147,000       121,000  
Deferred financing costs     908,000       963,000  
Goodwill     393,000       -  
Intangible assets, net     851,000       8,000  
Deposits     58,000       63,000  
Non-current assets from discontinued operations     602,000       941,000  
      Total assets   $ 4,719,000     $ 6,141,000  
Liabilities, Non-Controlling Interest, and Stockholders' Deficit                
    Current liabilities:                
    Accounts payable   $ 853,000     $ 604,000  
    Accrued expenses     2,391,000       2,203,000  
    Deferred revenue     306,000       -  
    Senior secured revolving credit facility, net of discount     4,733,000       4,567,000  
    Senior subordinated secured convertible promissory notes, net of discount     -       1,119,000  
    Senior subordinated secured convertible 2013 Notes, net of discount     7,104,000       -  
    Senior subordinated secured promissory notes     5,081,000       4,790,000  
    Other current liabilities     27,000       34,000  
  Current liabilities from discontinued operations     1,001,000       819,000  
      Total current liabilities     21,496,000       14,136,000  
Subordinated secured convertible promissory notes, net of discount     7,336,000       6,470,000  
Derivative liability     17,893,000       19,925,000  
Executive Salary Continuation Plan liability     968,000       975,000  
Other liabilities     55,000       65,000  
      Total liabilities     47,748,000       41,571,000  
Commitments and contingencies (Note 11)                
Stockholders' deficit:                
    Convertible preferred stock, $0.01 par value, 1,000,000 shares authorized, Series B - 900 shares issued and outstanding as of March 31, 2013 and September 30, 2012 (2); liquidation preference of $866,000 and $926,000 as of March 31, 2013 and September 30, 2012, respectively     -       -  
    Common stock, $0.01 par value, 800,000,000 shares authorized, 165,529,000 and 131,559,000 shares issued and outstanding as of March 31, 2013 and September 30, 2012, respectively(3)     1,679,000       1,316,000  
    Additional paid-in capital     178,087,000       174,157,000  
    Accumulated other comprehensive loss     (137,000 )     -  
    Accumulated deficit     (222,982,000 )     (211,227,000 )
      ISC8 stockholders' deficit     (43,353,000 )     (35,754,000 )
Non-controlling interest     324,000       324,000  
      Total stockholders' deficit     (43,029,000 )     (35,430,000 )
      Total liabilities, non-controlling interest, and stockholders' deficit   $ 4,719,000     $ 6,141,000  
                 
(1)   In March 2013, the Company ceased operations of its government focused business, including Secure Memory Systems, Cognitive Systems and Microsystems business units (the "Government Business"). In accordance with the provisions of the Presentation of Financial Statements Topic 205 of the Accounting Standards Codification ("ASC"), the assets and liabilities related to the Government Business are now presented as discontinued operations for all periods presented in the consolidated financial statements.
     
(2)   The number of preferred stock issued and outstanding are rounded to the nearest hundred (100).
     
(3)   The number of shares of common stock issued and outstanding are rounded to the nearest one thousand (1000).
     
     
     
ISC8 INC.  
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS  
(Unaudited)  
   
    13 Weeks Ended     26 Weeks Ended  
    March 31,
2013 (1)
    April 1,
2012 (1)
    March 31,
2013 (1)
    April 1,
2012 (1)
 
Total revenues   $ 102,000     $ -     $ 196,000     $ -  
                                 
Cost and expenses                                
Cost of revenues     44,000       -       81,000       -  
General and administrative expense     2,320,000       1,094,000       4,290,000       2,206,000  
Research and development expense     1,799,000       1,504,000       3,464,000       2,950,000  
Total costs and expenses     4,163,000       2,598,000       7,835,000       5,156,000  
                                 
Loss from operations     (4,061,000 )     (2,598,000 )     (7,639,000 )     (5,156,000 )
Interest expense     (3,806,000 )     (1,470,000 )     (5,793,000 )     (3,139,000 )
Gain (loss) from change in fair value of derivative liability     (466,000 )     (14,160,000 )     4,481,000       (16,470,000 )
Other income (expense), net     (64,000 )     1,000       (63,000 )     2,000  
                                 
Loss from continuing operations before provision for income taxes     (8,397,000 )     (18,227,000 )     (9,014,000 )     (24,763,000 )
Provision for income taxes     (3,000 )     -       (3,000 )     (3,000 )
Loss from continuing operations     (8,400,000 )     (18,227,000 )     (9,017,000 )     (24,766,000 )
  Loss from discontinued operations (net of $0 tax)     (1,191,000 )     (848,000 )     (2,738,000 )     (2,559,000 )
  Gain on disposal of discontinued operations (net of $0 tax)     -       7,748,000       -       7,748,000  
Net earnings (loss) from discontinued operations (net of $0 tax)     (1,191,000 )     6,900,000       (2,738,000 )     5,189,000  
                                 
Net loss   $ (9,591,000 )   $ (11,327,000 )   $ (11,755,000 )   $ (19,577,000 )
                                 
Basic and diluted earnings (loss) per share:                                
  Loss from continuing operations   $ (0.05 )   $ (0.15 )   $ (0.06 )   $ (0.21 )
  Earnings (loss) from discontinued operations   $ (0.01 )   $ 0.05     $ (0.02 )   $ 0.04  
  Net loss per share   $ (0.06 )   $ (0.10 )   $ (0.08 )   $ (0.17 )
                                   
Weighted average number of common shares outstanding, basic and diluted     153,688,000       119,037,000       147,541,000       116,376,000  
                                 
(1)   In March 2013, the Company ceased operations of its Government Business, and in January 2012 the Company ceased operations of its thermal imaging products business (the "Thermal Imaging Business"). In accordance with the provisions of the Presentation of Financial Statements Topic 205 of the ASC, the assets and liabilities related to the Government Business are now presented as discontinued operations for all periods presented in the consolidated financial statements.
     
     
     
ISC8 INC.  
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS  
(Unaudited)  
   
    26 Weeks Ended  
    March 31,
2013 (1)
    April 1,
2012 (1)
 
Cash flows from operating activities:                
Net loss   $ (11,755,000 )   $ (19,577,000 )
Add: loss (income) from discontinued operations (net of $0 tax)     2,738,000       (5,189,000 )
Loss from continuing operations     (9,017,000 )     (24,766,000 )
                 
Adjustments to reconcile loss from continuing operations to net cash used in operating activities:                
  Depreciation and amortization     95,000       22,000  
  Non-cash interest expense     5,255,000       2,779,000  
  (Gain) loss from changes in fair value of derivative liability     (4,481,000 )     16,470,000  
  Common stock and warrants issued to pay operating expenses     139,000       -  
  Non-cash stock-based compensation     300,000       330,000  
Changes in assets and liabilities:                
  (Increase) in accounts receivable     (127,000 )     -  
  (Increase) in prepaid expenses and other assets     (60,000 )     (97,000 )
  Increase in accounts payable and accrued expenses     504,000       935,000  
  (Decrease) in Executive Salary Continuation Plan liability     (7,000 )     (29,000 )
  Increase in deferred revenue     67,000       -  
Net cash used in operating activities     (7,332,000 )     (4,356,000 )
Cash flows from investing activities:                
  Property and equipment expenditures     (45,000 )     (60,000 )
  Proceeds from sale of Thermal Imaging Business     1,200,000       -  
  Net cash paid related to acquisition of Bivio     (569,000 )     -  
Net cash provided(used) in investing activities     586,000       (60,000 )
Cash flows from financing activities:                
  Proceeds from issuances of debt     7,380,000       -  
  Proceeds from revolving credit line     -       5,000,000  
  Proceeds from options and warrants exercised     103,000       197,000  
  Debt issuance costs paid     -       (143,000 )
  Principal payments of notes payable and settlement agreements     (9,000 )     (2,497,000 )
  Principal payments of capital leases     (8,000 )     (6,000 )
Net cash provided by financing activities     7,466,000       2,551,000  
Cash flows from discontinued operations:                
  Net cash used in operating activities     (1,965,000 )     (1,854,000 )
  Net cash used in investing activities     (8,000 )     8,165,000  
Net cash provided (used) in discontinued operations     (1,973,000 )     6,311,000  
                 
Effect of foreign currency translation     (163,000 )     -  
Net increase (decrease) in cash and cash equivalents     (1,416,000 )     4,446,000  
  Cash and cash equivalents at beginning of period     1,738,000       2,735,000  
  Cash and cash equivalents at end of period   $ 322,000     $ 7,181,000  
                 
Non-cash investing and financing activities:                
  Non-cash conversion of preferred stock to common stock   $ 60,000     $ 250,000  
  Conversion of Subordinated Secured Convertible Promissory Notes and accrued interest to common stock   $ 30,000     $ -  
  Non-cash conversion of 2012 Notes to 2013 Notes   $ 5,571,000     $ -  
  Common stock issued to pay accrued interest and board fees   $ 963,000     $ 482,000  
  Issuance of warrants to acquire Bivio Software assets   $ 85,000     $ -  
  Senior subordinated secured promissory notes issued to settle accrued interest   $ 291,000     $ -  
  Issuance of warrants in connection with the Forbearance agreements   $ 721,000     $ -  
Supplemental cash flow information:                
  Cash paid for interest   $ 303,000     $ 267,000  
  Cash paid for income taxes   $ 3,000     $ 3,000  
                 
(1)   In March 2013, the Company ceased operations of its Government Business, and in January 2012 the Company ceased operations of its thermal imaging products business (the "Thermal Imaging Business"). In accordance with the provisions of the Presentation of Financial Statements Topic 205 of the ASC, the assets and liabilities related to the Government Business are now presented as discontinued operations for all periods presented in the consolidated financial statements.
     
     
     
ISC8 Inc.
UNAUDITED RECONCILIATION OF NON-GAAP ADJUSTMENTS
 

The following non-GAAP adjustments are based upon the Company's unaudited consolidated statements of operations for the periods shown. These adjustments are not in accordance with or an alternative for GAAP. The non-GAAP financial information presented herein should be considered supplemental to, and not as a substitute for, or superior to, financial measures calculated in accordance with GAAP. ISC8 intends to continue to assess the potential value of reporting non-GAAP results consistent with applicable rules, regulations and guidance, and may change its reporting of such non-GAAP results in the future as a result of such assessment.

             
    13 Weeks Ended     26 Weeks Ended  
    March 31,
2013
    April 1,
2012
    March 31,
2013
    April 1,
2012
 
GAAP net loss from continuing operations attributable to ISC8   $ (8,400,000 )   $ (18,227,000 )   $ (9,017,000 )   $ (24,766,000 )
Non-GAAP adjustments:                                
  Non-cash interest expense     3,581,000       1,314,000       5,255,000       2,779,000  
  (Gain)loss from changes in fair value of derivative liability     466,000       14,160,000       (4,481,000 )     16,470,000  
  Stock-based compensation     171,000       164,000       300,000       330,000  
  Depreciation and amortization     48,000       12,000       95,000       22,000  
                                 
Non GAAP net loss from continuing operations attributable to ISC8   $ (4,134,000 )   $ (2,577,000 )   $ (7,848,000 )   $ (5,165,000 )
                                 
                                 
                                 
Contact:
For more information, please contact:
John Vong
Senior Vice President and CFO
714.444.8753
IR@isc8.com

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