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ISC8 Releases Fiscal 2014 First Quarter Results

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Posted: Feb 20, 2014 4:42 AM

Updated: Feb 20, 2014 4:43 AM

COSTA MESA, CA -- (Marketwired) 02/20/14 -- ISC8(R) 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(R) 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.

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

Topics: CA-ISCI-ISC8

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