Troubled cyber-security company ISC8 Inc. says it needs to raise more funds to meet its obligations moving forward.

Costa Mesa, Calif.-based ISC8 sells cyber-security products and services for governments and businesses. The company provides hardware, software and services that are used for web filtering, inspection with big data analytics and malware-threat detection. ISC8's products, called Cybert Adapt, Cyber NetFalcon and Cyber NetControl, are used in the Middle East, as well as by mobile operators in Europe and Asia. ISC8 is controlled by Costa Brava and Griffin, the company's largest stockholders and debt holders, who together control 53 percent of ISC8's common stock.

The company has negative working capital of almost $30 million and a stockholders' deficit of about $55.5 million, which raises substantial doubt about its ability to continue as a going concern, or without the threat of liquidation, according to a report from the company's accountant, Squar Milner Peterson Miranda & Williamson LLP, a Dec. 23 filing with the U.S. Securities and Exchange Commission shows.

ISC8's management says that the losses have been caused by increased research and development spending related to cyber technology. The company will need to raise additional funds to meet its continuing obligations, according to SEC filings.

ISC8 was able to decrease losses, to $2.7 million for the three months ended Dec. 31, from $5.9 million for the same period in 2012. For all of 2013, the company had a $28 million loss.

In the fourth quarter, ISC8 completed a recapitalization that converted most of the company's subordinated debt into newly-issued Series D preferred stock or restricted stock. ISC8 says it expects the new structure will be more attractive to investors, it says in a statement.

On Dec. 6, a noteholder who chose not to convert the note into stock, notified ISC8 that the noteholder was under the impression that the company needed to use the proceeds from the Series D offering to repay outstanding debts. ISC8 says in the filing that the maturity date on the notes had been moved to Jan. 31. As of Feb. 19, the notes, totaling about $1 million, were still outstanding, and the company is still in talks with the noteholder to extend the maturity date of the note. If it turns out that ISC8 was wrong about the maturity date of the notes, the company will be considered in default.

Some of ISC8 stockholders are planning to sell about $9.8 million through a stock offering.  If those shareholders exercise warrants, then ISC8 would receive the exercise price of those warrants, but otherwise, the company won't receive proceeds from the offering, according to an SEC filing.

The company may consider divesting assets in the future to improve liquidity and focus business operations. It previously sold part of a patent portfolio in 2009, and assets related to its former thermal imaging business in 2012.

For last week's edition of Turnaround Tuesday, see "Despite Acquisition and Private Placement, Overland is Still Troubled." 

For more struggling companies, check out Mergers & Acquisitions Distressed Company Watch List


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