COSTA MESA, CA — (Marketwired) — 08/14/13 — 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.
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.
– 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 .
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 , and malware threat detection for (“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 .
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 .
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
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.
John Vong
Senior Vice President and CFO
714.444.8753
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