SOURCE: ISC8, Inc.

ISC8, Inc.

August 14, 2013 17:30 ET

ISC8 Reports Third Quarter Fiscal 2013 Results

Global Recognition Accelerates

COSTA MESA, CA--(Marketwired - Aug 14, 2013) - ISC8® Inc. (OTCBB: ISCI) ("ISC8" or the "Company"), a provider of intelligent cybersecurity solutions, today reported unaudited operating results for its fiscal 2013 third quarter ended June 30, 2013.

Key highlights for this quarter include the following:

  • ISC8 adAPT continuing its product trials at customer sites, the interest level in the product has been extraordinary.
  • Against a competitive backdrop, ISC8 was named first place in the Pipeline's Innovation and Security award.
  • Hired 3 executives as part of business expansion who enhance the ISC8 team with expertise from companies such as McAfee, Cisco and Equifax.
  • As part of the natural growth of the organization, ISC8 moved to new, larger facilities in the Dallas area of Texas.

Financial Results:

Overview of Results of Continuing Operations for Three and Nine Months Ended June 30, 2013 and July 1, 2012

The following discussions relate to our results of continuing operations after reclassifying the operations of our Thermal Imaging Business and Government Business as discontinued operations upon the sale of the Thermal Imaging Business on January 31, 2012, and the discontinuance of the Government Business on March 19, 2013.

Total revenues for the three and nine months ended June 30, 2013 was $172,000 and $368,000 respectively. The revenue was generated from sales and support of cyber security products primarily resulting from the acquisition of Bivio Software and its software maintenance revenue. Our software-related revenue did not exist in the period ended July 1, 2012. Effective March 19, 2013, we discontinued our Government Business and completed our goal of transforming the company into a pure cyber security company.

Cost of revenue includes wages and related benefits of our personnel, as well as subcontractor, independent consultant and vendor expenses directly incurred in the manufacture of products sold, plus related overhead expenses. For the three and nine months ended June 30, 2013 cost of revenue was $44,000 and $125,000, respectively. There were no software-related costs in the period ended July 1, 2012.

General and administrative expense largely consists of wages and related benefits for our executive, financial, administrative and marketing staff, as well as professional fees, primarily legal and accounting fees and costs, plus various fixed costs such as rent, utilities and telephone. For the three months ended June 30, 2013 general and administrative expenses increased $739,000 to $1.7 million or 76% from $968,000 in 2012. For the nine months end June 30, 2013 general and administrative expenses increased $2.8 million to $6.0 million or 89% from $3.2 million in 2012. The increase for three month and nine month periods consisted of a combination of increased stock-based compensation expense, marketing and legal fees, severance expense, as well as facilities expense related to cyber development in Texas. This was partially offset by a decrease in travel, bid and proposal fees, professional fees and stockholder-related expense.

Research and development expense primarily consists of wages and related benefits for our research and development staff, independent contractor consulting fees and subcontractor and vendor expenses directly incurred in support of internally funded research and development projects, plus associated overhead expenses. For the three months ended June 30, 2013 research and development expense increased $1.1 million to $2.4 million or 79% from $1.3 million in 2012. For the nine months ended June 30, 2013 research and development expenses increased $1.6 million to $5.8 million or 36% from $4.3 million in 2012. The three and nine month increases are largely related to the development expense of our Texas-based cyber security office, which we opened and began staffing in April 2011, and the acquisition of a research facility in Italy in connection with the acquisition of Bivio Software. Many of those expenses relate to hiring of highly-skilled developers and support staff, software licensing expense, consulting fees and various operating leases of facilities and equipment to support product development.

Interest expense consisted mainly of amortization of our debt discounts and financing related costs. For the three months ended June 30, 2013 interest expense increased $2.6 million to $4.1 million or 172% from $1.5 million in 2012. For the nine months ended June 30, 2013 our interest expense increased $5.2 million or 113% to $9.9 million from $4.7 million in 2012. The increase in interest expense for the three and nine months ended June 30, 2013 was primarily due to the issuance of additional debt to fund working capital.

We revalued our embedded derivatives contained in certain convertible notes and warrants as of June 30, 2013. For the three month period ended June 30, 2013, our gain from the change in fair value of derivative liability decreased $7.6 million to $4.4 million or 63% from $12.1 million in 2012. For the nine months ended June 30, 2013, the gain from change in fair value of derivative liability increased $13.3 million to $8.9 million or 301%, as compared to a loss of $4.4 million in 2012. This gain from change in fair value of derivative liability for the three and nine month period was mainly the result of quarterly fluctuations in our stock price. Given the price volatility of our common stock, we anticipate that there could be additional substantial changes in the fair value of our derivative liability that we will be required to record in future reporting periods, unless and until our convertible debt instruments mature, are repaid, or are converted into common stock, and/or the warrants expire or are exercised for the purchase of common stock pursuant to their respective terms. Although no assurances can be given, in the event of such conversion or exercise, the derivative liability associated with these instruments would be eliminated.

Our net loss from continuing operations increased in the three and nine month period ended June 30, 2013 compared to the three month period ended July 1, 2012, largely due to a change in fair value of derivative instruments. The net loss was increased further by an increase in total operating costs and interest expense in the comparable period because the Company continues to invest in developing the cyber products and business.

Basic income (loss) per share from continuing operations decreased $0.09 to $(0.02) for the three months ended June 30, 2013, from $0.07 in 2012, while diluted income per share from continuing operations decreased $0.04 to $(0.02) from $0.02 in 2012. For the nine months ended June 30, 2013, basic and diluted income per share from continuing operations increased $0.06 to $(0.08) from $(0.14) in 2012.

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®
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 security 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

   
ISC8 INC.  
CONDENSED CONSOLIDATED BALANCE SHEETS  
(Unaudited)  
   
    June 30,
2013 (1)
    September 30,
2012 (1)
 
Assets                
Current assets:                
  Cash and cash equivalents   $ 146,000     $ 1,738,000  
  Accounts receivable, net     127,000       -  
  Notes receivable     200,000       1,200,000  
  Prepaid expenses and other current assets     288,000       59,000  
  Current assets from discontinued operations     726,000       1,048,000  
    Total current assets     1,487,000       4,045,000  
Restricted cash     75,000       -  
Property and equipment, net     326,000       121,000  
Deferred financing costs     883,000       963,000  
Goodwill     393,000       -  
Intangible assets, net     820,000       8,000  
Deposits     64,000       63,000  
Non-current assets from discontinued operations     100,000       941,000  
    Total assets   $ 4,148,000     $ 6,141,000  
Liabilities, Non-Controlling Interest, and Stockholders' Deficit                
Current liabilities:                
  Accounts payable   $ 1,498,000     $ 604,000  
  Accrued expenses     2,882,000       2,203,000  
  Deferred revenue     354,000       -  
  Senior secured revolving credit facility, net of discount     4,820,000       4,567,000  
  Senior subordinated secured convertible promissory notes, net of discount     -       1,119,000  
  Senior subordinated secured convertible 2013 Notes, net of discount     10,927,000       -  
  Senior subordinated secured promissory notes     5,233,000       4,790,000  
  Subordinated secured convertible promissory note, net of discount     1,191,000       -  
  Other current liabilities     23,000       34,000  
  Current liabilities from discontinued operations     905,000       819,000  
    Total current liabilities     27,833,000       14,136,000  
Subordinated secured convertible promissory notes, net of discount     6,751,000       6,470,000  
Derivative liability     14,286,000       19,925,000  
Executive Salary Continuation Plan liability     974,000       975,000  
Other liabilities     50,000       65,000  
    Total liabilities     49,894,000       41,571,000  
Commitments and contingencies (Note 13)                
Stockholders' deficit:                
  Convertible preferred stock, $0.01 par value, 1,000,000 shares authorized, Series B - 900 shares issued and outstanding as of June 30, 2013 and September 30, 2012(2); liquidation preference of $866,000 and $926,000 as of June 30, 2013 and September 30, 2012, respectively     -       -  
  Common stock, $0.01 par value, 800,000,000 shares authorized, 175,312,000 and 131,559,000 shares issued and outstanding as of June 30, 2013 and September 30, 2012, respectively(3)     1,753,000       1,316,000  
  Additional paid-in capital     179,328,000       174,157,000  
  Accumulated other comprehensive loss     (181,000 )     -  
  Accumulated deficit     (226,970,000 )     (211,227,000 )
    ISC8 stockholders' deficit     (46,070,000 )     (35,754,000 )
Non-controlling interest     324,000       324,000  
    Total stockholders' deficit     (45,746,000 )     (35,430,000 )
    Total liabilities, non-controlling interest, and stockholders' deficit   $ 4,148,000     $ 6,141,000  
                 
(1)   The condensed consolidated balance sheet as of September 30, 2012 has been derived from the audited consolidated financial statement included in the Company's 2012 Annual Report on Form 10-K, adjusted to reflected discontinued operations. 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)  
   
    Three Months Ended     Nine Months Ended  
    June 30,
2013
(1)
    July 1,
2012
(1) (2)
    June 30,
2013
(1)
    July 1,
2012
(1) (2)
 
Revenues   $ 172,000     $ -     $ 368,000     $ -  
Cost of revenues     44,000       -       125,000       -  
Gross profit     128,000       -       243,000       -  
Operating expenses:                                
    General and administrative expense     1,707,000       968,000       5,998,000       3,174,000  
    Research and development expense     2,378,000       1,330,000       5,842,000       4,280,000  
Total operating expenses     4,085,000       2,298,000       11,840,000       7,454,000  
Operating Loss     (3,957,000 )     (2,298,000 )     (11,597,000 )     (7,454,000 )
Interest and other (income) expense                                
    Interest expense     4,097,000       1,508,000       9,890,000       4,648,000  
    (Gain) loss from change in fair value of derivative liability     (4,404,000 )     (12,051,000 )     (8,885,000 )     4,419,000  
    Other (income) expense, net     4,000       (11,000 )     66,000       (14,000 )
Total interest and other (income) expenses     (303,000 )     (10,554,000 )     1,071,000       9,053,000  
Income (loss) from continuing operations before provision for income taxes     (3,654,000 )     8,256,000       (12,668,000 )     (16,507,000 )
Provision for income taxes     -       -       (3,000 )     (3,000 )
Income (loss) from continuing operations     (3,654,000 )     8,256,000       (12,671,000 )     (16,510,000 )
Loss from discontinued operations (net of $0 tax)     (64,000 )     (1,317,000 )     (3,072,000 )     (3,876,000 )
Gain (loss) on disposal of discontinued operations (net of $0 tax)     (270,000 )     -       -       7,748,000  
Net income (loss) from discontinued operations (net of $0 tax)     (334,000 )     (1,317,000 )     (3,072,000 )     3,872,000  
Net income (loss)   $ (3,988,000 )   $ 6,939,000     $ (15,743,000 )   $ (12,638,000 )
                                 
Basic income (loss) per share:                                
  Income (loss) from continuing operations   $ (0.02 )   $ 0.07     $ (0.08 )   $ (0.14 )
  Income (loss) from discontinued operations   $ (0.00 )   $ (0.01 )   $ (0.02 )   $ 0.03  
  Basic net income (loss) per share   $ (0.02 )   $ 0.06     $ (0.10 )   $ (0.11 )
Diluted income (loss) per share:                                
  Income (loss) from continuing operations   $ (0.02 )   $ 0.02     $ (0.08 )   $ (0.14 )
  Income (loss) from discontinued operations   $ (0.00 )   $ (0.00 )   $ (0.02 )   $ 0.03  
  Diluted net income (loss) per share   $ (0.02 )   $ 0.02     $ (0.10 )   $ (0.11 )
Weighted average number of common shares outstanding, basic     176,531,500       125,865,300       157,098,400       119,539,400  
Weighted average number of common shares outstanding, diluted     176,531,500       364,002,900       157,098,400       119,539,400  
                                 
(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 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 Company's third quarter of fiscal 2013 ended on June 30, 2013 and fiscal 2013 will end on September 30, 2013, rather than September 29, 2013. The Company did not change its prior period presentation to reflect the change in fiscal year, as the difference is immaterial.
     
     
     
ISC8 INC.  
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS  
(Unaudited)  
    Nine Months Ended  
       
    June 30, 2013 (1)     July 1, 2012 (1) (2)  
Cash flows from operating activities:                
Net loss   $ (15,743,000 )   $ (12,638,000 )
Add: loss (income) from discontinued operations (net of $0 tax)     3,072,000       (3,872,000 )
Loss from continuing operations     (12,671,000 )     (16,510,000 )
                 
Adjustments to reconcile loss from continuing operations to net cash used in operating activities:                
  Depreciation and amortization     254,000       34,000  
  Non-cash interest expense     8,516,000       4,003,000  
  (Gain) loss from changes in fair value of derivative liability     (8,885,000 )     4,419,000  
  Common stock and warrants issued to pay operating expenses     183,000       -  
  Non-cash stock-based compensation     453,000       471,000  
Changes in assets and liabilities:                
  (Increase) in accounts receivable     (127,000 )     -  
  (Increase) in prepaid expenses and other assets     (138,000 )     (136,000 )
  Increase in accounts payable and accrued expenses     1,638,000       1,164,000  
  Increase (decrease) in Executive Salary Continuation Plan liability     (1,000 )     19,000  
  Increase in deferred revenue     115,000       -  
Net cash used in operating activities     (10,663,000 )     (6,536,000 )
Cash flows from investing activities:                
  Property and equipment expenditures     (152,000 )     (98,000 )
  Increase in note receivable from sale of fixed assets     (200,000 )     -  
  Proceeds from sale of Thermal Imaging Business     1,200,000       -  
  Net cash paid related to acquisition of Bivio     (569,000 )     -  
Net cash provided by (used in) investing activities     279,000       (98,000 )
Cash flows from financing activities:                
  Proceeds from issuances of debt     10,770,000       -  
  Proceeds from revolving credit line     -       5,000,000  
  Proceeds from options and warrants exercised     103,000       246,000  
  Debt issuance costs paid     (209,000 )     (143,000 )
  Principal payments of notes payable and settlement agreements     (13,000 )     (2,727,000 )
  Principal payments of capital leases     (13,000 )     (10,000 )
Net cash provided by financing activities     10,638,000       2,366,000  
Cash flows from discontinued operations:                
  Net cash used in operating activities     (1,702,000 )     (3,005,000 )
  Net cash provided by investing activities     62,000       8,198,000  
Net cash provided by (used in) discontinued operations     (1,640,000 )     5,193,000  
                 
Effect of foreign currency translation     (206,000 )     -  
Net increase (decrease) in cash and cash equivalents     (1,592,000 )     925,000  
  Cash and cash equivalents at beginning of period     1,738,000       2,735,000  
  Cash and cash equivalents at end of period   $ 146,000     $ 3,660,000  
                 
Non-cash investing and financing activities:                
  Non-cash conversion of preferred stock to common stock   $ 60,000     $ 785,000  
  Conversion of Subordinated Secured Convertible Promissory Notes and accrued interest to common stock   $ 30,000     $ -  
  Non-cash conversion of 2012 Notes to 2013 Notes, including paid in kind interest   $ 5,571,000     $ -  
  Common stock issued to pay accrued interest and board fees   $ 1,444,000     $ 991,000  
  Issuance of warrants to acquire Bivio Software assets   $ 85,000     $ -  
  Senior subordinated secured promissory notes issued to settle accrued interest   $ 291,000     $ 394,000  
  Warrants issued to lending institutions   $ 1,148,000     $ 432,000  
Supplemental cash flow information:                
  Cash paid for interest   $ 455,000     $ 427,000  
  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 and 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 Company's third quarter of fiscal 2013 ended on June 30, 2013 and fiscal 2013 will end on September 30, 2013, rather than September 29, 2013. The Company did not change its prior period presentation to reflect the change in fiscal year, as the difference is immaterial.
     
     
     
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.

             
    Three Months Ended     Nine Months Ended  
    June 30,
2013
    July 1,
2012
(1)
    June 30,
2013
    July 1,
2012
(1)
 
GAAP net income (loss) from continuing operations attributable to ISC8   $ (3,654,000 )   $ 8,256,000     $ (12,671,000 )   $ (16,510,000 )
Non-GAAP adjustments:                                
  Non-cash interest expense     3,261,000       583,000       8,516,000       4,003,000  
  (Gain)loss from changes in fair value of derivative liability     (4,404,000 )     (12,051,000 )     (8,885,000 )     4,419,000  
  Stock-based compensation     153,000       141,000       453,000       471,000  
  Depreciation and amortization     159,000       12,000       254,000       34,000  
                                 
Non GAAP net loss from continuing operations attributable to ISC8   $ (4,485,000 )   $ (3,059,000 )   $ (12,333,000 )   $ (7,583,000 )
                                 
(1)   On June 28, 2013, the Company changed its fiscal year end-date from the last Sunday of September to September 30. Accordingly, the Company's third quarter of fiscal 2013 ended on June 30, 2013 and fiscal 2013 will end on September 30, 2013, rather than September 29, 2013. The Company did not change its prior period presentation to reflect the change in fiscal year, as the difference is immaterial.
     

Contact Information

  • For more information, please contact:
    John Vong
    Senior Vice President and CFO
    714.444.8753
    IR@isc8.com