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ISC8 Releases Fiscal 2014 First Quarter Results

Companies mentioned in this article: ISC8, Inc.

COSTA MESA, CA -- (Marketwired) -- 02/20/14 -- 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,      December 31,
                                               2013           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
                                         ================  ================

(
1In 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.         )

(
2On 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,     December 31,
                                                  2013            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,      September 30,
                                               2013            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,      December 31,
                                                2013          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:

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