SOURCE: ISC8, Inc.

ISC8, Inc.

February 20, 2014 06:30 ET

ISC8 Releases Fiscal 2014 First Quarter Results

COSTA MESA, CA--(Marketwired - Feb 20, 2014) - ISC8® Inc. (OTCBB: ISCI), a provider of intelligent cybersecurity solutions and supporting technologies, today reported unaudited results of its fiscal 2014 first quarter ended December 31, 2013. 

Consolidated total revenues for the three months ended December 31, 2013 and 2012 were $93,000. Net loss from continuing operations decreased $817,000 to approximately $513,000 for the three months December 31, 2013 compared to $1.3 million loss for the three months ended December 31, 2012. The decrease in continuing operation net loss for the three months ended December 31, 2013 as compared to 2012 was largely due to gain from changes in fair value of derivative instruments and gain in extinguishment of debt offset by higher interest expense associated with higher debt.

Excluding non-cash charges for changes in fair value of derivative liability, non-cash interest expense, stock-based compensation, depreciation and amortization, and net loss from discontinued operations, non-GAAP net loss was approximately $2.7 million for the three months ended December 31 2013, compared to non-GAAP net loss of approximately $5.9 million for the same period in 2012. See "Use of Non-GAAP Financial Information" below for important information regarding the Company's use of non-GAAP financial measures.

Highlights of Events Occurring During Three Months Ended December 31, 2013

  • Magnus Almquist joined our Company and in January was appointed to Head of Worldwide Sales. Magnus brings over 20 years of experience in leading global sales for technology companies including Stoke, Ericsson, and Redback Networks.
  • We completed a recapitalization that converted most of the Company's subordinated debt into our newly-issued Series D Preferred Stock or restricted stock, while providing the company with capital to progress on its sales and product development plans. The Company believes that this new capital structure is more aligned with other small public technology companies and should be more attractive to investors.
  • We expanded our presence in South East Asia by opening an office in Kuala Lumpur, Malaysia to support the projected business opportunities in the region and take advantage of the region's engineering talent.
  • ISC8 collaborated with NEC to demonstrate the power of its Cyber adAPT® malware detection solutions in a software defined networking (SDN) environment, paving the way for compatibility with the coming generation of network topologies.
  • The Company progressed in its trials of Cyber adAPT with several potential enterprise customers and is integrating the feedback from these trials to deliver a General Availability release of the software by April, 2014.

About ISC8
The Company is actively engaged in the design, development, and sale of cyber-security products and solutions for government and commercial enterprises. The Company provides hardware, software and service offerings for web filtering, deep packet inspection with big data analytics, and malware threat detection for advanced persistent threats ("APTs"). The Company's products are installed in nation-wide deployment within the Middle East, and in mobile operators in Europe and Asia Pacific. The Company is focused on delivering comprehensive security solutions, with strategic emphasis on cybersecurity, in order to provide complete visibility on mission-critical networks, and mitigation of new threats as they emerge. ISC8 was founded in 1974 and is headquartered in Plano, Texas. 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.

Use of Non-GAAP Financial Information - ISC8 reports net loss in accordance with accounting principles generally accepted in the United States ("GAAP") and supplementally on a non-GAAP basis. The Company's presentation of non-GAAP net loss attributable to the Company 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. A reconciliation of these GAAP and non-GAAP financial measures for all periods presented is found in the attached "Unaudited Reconciliation of Non-GAAP Adjustments."

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, in the changes in the fair value of derivative instruments, 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.

ISC8 Inc.
Condensed Consolidated Statements of Operations
(unaudited)
 
    Quarter Ended  
    December 31,
2013
    December 31,
2012
(1) (2)
 
             
Revenues   $ 93,000     $ 93,000  
Cost of revenues     48,000       48,000  
Gross Profit     45,000       45,000  
Operating expenses:                
  General and administrative expense     2,375,000       2,368,000  
  Research and development expense     1,898,000       1,968,000  
Total operating expenses     4,273,000       4,336,000  
Operating loss     (4,228,000 )     (4,291,000 )
  Interest and other (income) expense                
  Interest expense     3,928,000       1,987,000  
  Gain from change in fair value of derivative liability     (7,334,000 )     (4,947,000 )
  Gain on extinguishment of debt     (316,000 )     -  
  Other (income) expense     4,000       (1,000 )
Total interest and other (income) expenses     (3,718,000 )     (2,961,000 )
Loss from continuing operations before provision for income taxes     (510,000 )     (1,330,000 )
Provision for income taxes     3,000       -  
Loss from continuing operations     (513,000 )     (1,330,000 )
Loss from discontinued operations (net of $0 tax)     -       (834,000 )
Net loss   $ (513,000 )   $ (2,164,000 )
                 
Basic and diluted net loss per common share                
  Loss from continuing operations   $ -     $ (0.01 )
  Loss from discontinued operations   $ -     $ (0.01 )
  Net loss per share, basic and diluted   $ -     $ (0.02 )
                 
Basic and diluted weighted average number of common shares outstanding     224,816,000       141,394,000  
                 
(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 results of operations related to the Government Business are now presented as discontinued operations for all periods presented in the consolidated financial statements.         
     
(2) On June 28, 2013, the Company changed its fiscal year end-date from the last Sunday of September to September 30. Accordingly, the first fiscal quarter of 2012 was previously reported as December 30, 2012. We did not change the prior period presentation to reflect the change in fiscal year as the difference is not material. See Note 1 of the Notes to the Condensed Consolidated Financial Statements.         
     
     
ISC8 Inc.  
UNAUDITED RECONCILIATION OF NON-GAAP ADJUSTMENTS  
   
The following non-GAAP adjustments are based upon the Company's audited 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.  
   
    Fiscal Years Ended  
    December 31,
2013
     December 31, 2012  
GAAP net loss   $ (513,000 )   $ (2,164,000 )
Plus:                
  Gain on change in fair value of derivative instrument     (7,334,000 )     (4,947,000 )
  Non-cash interest expense     3,448,000       1,674,000  
  Stock-based compensation     1,535,000       235,000  
  Depreciation and amortization expenses     168,000       97,000  
  Net loss from discontinued operations     -       (834,000 )
Non-GAAP net loss attributable to ISC8   $ (2,696,000 )   $ (5,939,000 )
                 
                 
ISC8 INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
 
    December 31, 2013     September 30, 2013 (1)  
Assets            
Current assets:            
  Cash and cash equivalents   $ 375,000     $ 136,000  
  Accounts receivable, net     -       119,000  
  Deposit on PFG credit line     500,000       1,000,000  
  Prepaid expenses and other current assets     574,000       561,000  
    Total current assets     1,449,000       1,816,000  
Restricted cash     75,000       75,000  
Property and equipment, net     693,000       753,000  
Goodwill     393,000       393,000  
Intangible assets, net     758,000       790,000  
Deferred financing costs, net     64,000       715,000  
Other assets     89,000       126,000  
Non-current assets of discontinued operations     293,000       297,000  
  Total assets   $ 3,814,000     $ 4,965,000  
Liabilities and Stockholders' Deficit                
Current liabilities:                
  Accounts payable   $ 823,000     $ 1,024,000  
  Accrued expenses     1,538,000       3,066,000  
  Deferred revenue     134,000       221,000  
  Senior secured revolving credit facility, net of discount     3,073,000       4,908,000  
  Senior subordinated secured convertible promissory notes, net of discount     1,610,000       15,793,000  
  Senior subordinated secured promissory notes     -       5,392,000  
  Capital lease obligations, current portion     415,000       447,000  
  Current liabilities from discontinued operations     625,000       678,000  
    Total current liabilities     8,218,000       31,529,000  
Subordinated secured convertible promissory notes, net of discount     782,000       8,570,000  
Capital lease obligations, less current portion     86,000       77,000  
Derivative liability     124,000       19,245,000  
Executive salary continuation plan liability     942,000       957,000  
Other liabilities     75,000       139,000  
    Total liabilities     10,227,000       60,517,000  
Commitments and contingencies                
Stockholders' deficit:                
Convertible preferred stock, $0.01 par value, 1,000,000 shares authorized, 900 shares of Series B Convertible Cumulative Preferred Stock issued and outstanding as of December 31, 2013 and September 30, 2013, liquidation preference of $866,000, and 2,757 and 0 shares of Series D Convertible Preferred Stock issued and outstanding, liquidating preference of $27,570,000 and $0, as of December 31, 2013 and September 30, 2013, respectively(2)     -       -  
Common stock, $0.01 par value, 2,000,000,000 and 800,000,000 shares authorized; 231,681,000 and 205,581,000 shares issued and outstanding at December 31, 2013 and September 30, 2013, respectively (3)     2,317,000       2,056,000  
  Paid-in capital     230,688,000       181,443,000  
  Accumulated other comprehensive loss     23,000       (123,000 )
  Accumulated deficit     (239,765,000 )     (239,252,000 )
    ISC8 stockholders' deficit     (6,737,000 )     (55,876,000 )
Noncontrolling interest     324,000       324,000  
    Total stockholders' deficit     (6,413,000 )     (55,552,000 )
    Total liabilities and stockholders' deficit   $ 3,814,000     $ 4,965,000  
   
(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 shares of Convertible Preferred Stock issued and outstanding has been rounded to the nearest one hundred (100).
   
(3) The number of shares of Common Stock issued and outstanding has been rounded to the nearest one thousand (1000).
   
   
ISC8 Inc.
Consolidated Statements of Cash Flows
(unaudited)
 
    Quarter Ended  
    December 31,
2013
   December 31,
2012
(1)(2)
 
Cash flows from operating activities:            
Net loss   $ (513,000 )   $ (2,164,000 )
(Income) loss from discontinued operations     -       (834,000 )
Loss from continuing operations     (513,000 )     (1,330,000 )
Adjustments to reconcile loss from continuing operations to net cash used in operating activities:                
  Depreciation and amortization     168,000       97,000  
  Provision for bad debt     83,000       -  
  Non-cash interest expense     3,448,000       1,674,000  
  Gain on extinguishment of debt     (316,000 )        
  Change in fair value of derivative liability     (7,334,000 )     (4,947,000 )
  Non-cash stock-based compensation     1,535,000       235,000  
  Loss on disposal of property and equipment     4,000          
  Changes in assets and liabilities:                
  Accounts receivable     36,000       -  
  Prepaid expenses and other current assets     (45,000 )     (124,000 )
  Other assets     181,000       -  
  Accounts payable and accrued expenses     255,000       654,000  
  Deferred revenue     (87,000 )     (42,000 )
  Executive Salary Continuation Plan liability     (15,000 )     (1,000 )
Net cash used in operating activities     (2,600,000 )     (3,784,000 )
                 
Cash flows from investing activities:                
  Property and equipment expenditures     -       (53,000 )
  Net cash paid related to acquisition of Bivio     -       (569,000 )
Net cash used in investing activities     -       (622,000 )
      -          
Cash flows from financing activities:                
  Proceeds from unsecured convertible promissory notes     200,000       4,210,000  
  Proceeds from Series D convertible preferred stock     4,440,000       -  
  Proceeds from warrants exercised     6,000       -  
  Debt issuance costs paid     (132,000 )     -  
  Net Change in deposit on PFG credit line     500,000       -  
  Principal payments on PFG credit line     (2,000,000 )     -  
  Principal payments on notes payable     (25,000 )     (4,000 )
  Principal payments on capital leases     (103,000 )     (4,000 )
Net cash provided by financing activities     2,886,000       4,202,000  
                 
Cash flows from discontinued operations:                
  Net cash used in operating activities     (49,000 )     (1,109,000 )
Net cash used in discontinued operations     (49,000 )     (1,109,000 )
Effect of exchange rate changes on cash     2,000       2,000  
Net increase (decrease) in cash and cash equivalents     239,000       (1,311,000 )
Cash and cash equivalents at beginning of period     136,000       1,738,000  
Cash and cash equivalents at end of period   $ 375,000     $ 427,000  
                 
Non-cash investing and financing activities:                
  Equipment financed with capital leases   $ 80,000     $ -  
  Conversion of notes and accrued interest to Series D Preferred stock   $ 23,056,000     $ -  
  Conversion of notes to restricted stock   $ 14,503,000     $ -  
  Employee stock based plan contribution   $ 272,000     $ -  
  Conversion of notes and accrued interest to common stock   $ -     $ 30,000  
  Common stock issued to pay accrued interest   $ 487,000     $ 483,000  
  Issuance of warrants to acquire Bivio Software assets   $ -     $ 85,000  
  Senior Subordinated Note issued to settle accrued interest   $ -     $ 143,000  
  Issuance of warrants in connection with Forbearance agreements     33,000       324,000  
                 
Supplemental cash flow information:                
  Cash paid for interest   $ 149,000     $ 152,000  
  Cash paid for income taxes   $ 3,000     $ 3,000  
  (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. See Note 13 of the Notes to the Condensed Consolidated Financial Statements.     
     
  (2) On June 28, 2013, The Company changed its fiscal year end-date from the last Sunday of September to September 30. We did not change its prior period presentation to reflect the change in fiscal year as the difference is not material.     
     
     

Contact Information

  • For more information, please contact:
    John Vong
    Chief Financial Officer
    (714) 444-8753
    jvong@isc8.com