General (Policies)

9 Months Ended

Jun. 30, 2013

Organization, Consolidation and Presentation of Financial Statements [Abstract]

Revenues

Revenue – Continuing Operations.  The Company’s cyber-security business derives revenue from three principal sources, hardware, software, and maintenance, as follows:

   The Company generates revenue from the sale of licensing rights to its software products directly to end-users and through value-added resellers (“VARs”). The Company also generates revenue from sales of hardware, installation, and post contract support (maintenance), performed for clients who license its products. A typical system contract contains multiple elements of the above items. Revenue earned on software arrangements involving multiple elements is allocated to each element based on the fair values of those elements. The fair value of an element is based on vendor-specific objective evidence (“VSOE”). The Company limits its assessment of VSOE for each element to either the price charged when the same element is sold separately or the price established by management having the relevant authority to do so, for an element not yet sold separately. VSOE calculations are updated and reviewed quarterly or annually depending on the nature of the product or service. When evidence of fair value exists for the delivered and undelivered elements of a transaction, then discounts for individual elements are aggregated and the total discount is allocated to the individual elements in proportion to the elements’ fair value relative to the total contract fair value. When evidence of fair value exists for the undelivered elements only, the residual method is used. Under the residual method, The Company defers revenue related to the undelivered elements based on VSOE of fair value of each of the undelivered elements and allocates the remainder of the contract price net of all discounts to revenue recognized from the delivered elements. If VSOE of fair value of any undelivered element does not exist, all revenue is deferred until VSOE of fair value of the undelivered element is established or the element has been delivered.

    For arrangements that include both software and non-software elements, the Company allocates revenue to the software deliverables and non-software deliverables based on their relative selling prices. In such circumstances, the accounting principles establish a hierarchy to determine the selling price to be used for allocating revenue to deliverables as follows:

(i)   VSOE;

(ii)   third-party evidence of selling price (“TPE”); and

(iii)   best estimate of the selling price (“ESP”).

When the Company is unable to establish a selling price using VSOE, or TPE, the Company uses ESP to allocate the arrangement fees to the deliverables.

    Provided the fees are fixed or determinable and collection is considered probable, revenue from licensing rights and sales of hardware and third-party software is generally recognized upon physical or electronic shipment and transfer of title. In certain transactions where collection risk is high, the revenue is deferred until collection occurs or becomes probable. If the fee is not fixed or determinable, then the revenue recognized in each period (subject to application of other revenue recognition criteria) will be the lesser of the aggregate of amounts due and payable or the amount of the arrangement fee that would have been recognized on a straight line basis over the contractual period.

    Revenue – Discontinued Operations.  As a result of the discontinuation of the Company’s Government businesses during March 2013, any contractual obligations related to certain existing contracts at the point of discontinuation were subcontracted to outside parties (“Subcontracted Contracts”), thereby relieving the Company of responsibility of deliverables in business lines which were no longer part of continuing operations.  The remainder of outstanding contracts that were not subcontracted to outside parties have been terminated at the Company’s request, thereby relieving the Company of its contractual obligations.  The Subcontracted Contracts consist of cost reimbursement plus a fixed fee as well as fixed price level of effort research and development contracts.

    The Company will continue to recognize revenue from discontinued operations through the end of the subcontract periods on the Subcontracted Contracts.  The Company anticipates all such subcontracts to be completed no later than September 30, 2013.  The revenue recognized from discontinued operations related to Subcontracted Contracts is based on incurred costs plus applicable fees or profits primarily in the proportion that costs incurred bear to estimated final costs.  The Company will maintain on its balance sheet certain unbilled revenue related to contracts related to prior fiscal years which are pending the government’s evaluation and audit of final indirect rates.  The Company will continue to review the estimates of costs to complete contracts on the Subcontracted Contracts on a monthly basis, until the subcontracts are complete.  If a contract overrun is anticipated as a result of that review, the Company will record an accrual for the anticipated overrun and record a charge to earnings in the period in which the anticipated loss is first identified.

Consolidation

Consolidation. The consolidated financial statements include the accounts of ISC8 and its subsidiaries, ISC8 Europe Limited, Novalog, Inc. (“Novalog”), MicroSensors, Inc. (“MSI”), RedHawk Vision Systems, Inc. (“RedHawk”) and iNetWorks Corporation. As of and for the period ended June 30, 2013, ISC8 Europe Limited was the only Company subsidiary with operations, assets, separate employees, and facilities. As of and for the period ended June 30, 2013, ISC8 Europe Limited’s operations and assets were immaterial to the overall consolidated financial statements. All significant intercompany transactions and balances were eliminated in the consolidation.

Reportable Segments

Reportable Segments. The Company is presently managing its operations as a single business segment. The Company is continuing to evaluate the current and potential business derived from sales of its products and, in the future, may present its consolidated statement of operations in more than one segment if the Company segregates the management of various product lines in response to business and market conditions.

Reclassifications

Reclassifications. Certain previously reported amounts have been reclassified to conform to the current consolidated financial statement presentation.

Goodwill and Other Intangible Assets

Goodwill and Other Intangible Assets.  The Company acquired goodwill as a result of its purchase of Bivio Software.  As a result, the Company tested goodwill for impairment at the end of the third fiscal quarter ended June 30,2013.  The Company’s annual test date is at the end of the third fiscal quarter, however it will also test for impairment between annual test dates if an event occurs or circumstances arise that would indicate the carrying amount may be impaired.  Goodwill impairment testing is performed as a single reporting unit. 

The Company has two approaches to evaluate the impairment of goodwill.  The first approach is a qualitative assessment.  The Company accumulates the relevant events and circumstances for each reporting unit subject to the qualitative assessment.  If the Company determines it is more likely than not that the fair value is higher than the carrying value, no additional evaluation is necessary. If the goodwill evaluation does not pass the step zero assessment, the Company is required to use the quantitative measurement of the fair value of the reporting unit. Under this approach, the first step of the impairment test involves comparing the fair values of the single reporting unit with its carrying value.  If the carrying amount of the single reporting unit exceeds its fair value, the Company performs the second step of the goodwill impairment test. The second step of the goodwill impairment test involves comparing the implied fair value of the single reporting unit’s goodwill with the carrying value of that goodwill. Any amount by which the carrying value of the goodwill exceeds its implied fair value, if any, is recognized as an impairment loss. Based on the results of the Company’s qualitative assessment, the Company does not believe its goodwill or intangible assets to be impaired as of June 30, 2013.

Intangible assets with definite lives at June 30, 2013 consist principally of software technology, trade names, and customer relationship, which were acquired as a result of the business combination with Bivio Software or developed internally.  These assets are amortized on a straight-line basis over their estimated useful lives. The Company will test for impairment between annual test dates if an event occurs or circumstances arise that would indicate the carrying amount may be impaired.  There was no impairment to the Company’s definite lived intangible assets as of June 30, 2013.

Deferred Costs

Deferred Costs. Financing costs associated with the Company's debt issuances are capitalized as deferred costs and amortized using straight line amortization as interest expense over the debt period, which approximates the effective interest method due to the short term of the instrument.

Derivatives

Derivatives. A derivative is an instrument whose value is derived from an underlying instrument or index such as a future, forward, swap, option contract, or other financial instrument with similar characteristics, including certain derivative instruments embedded in other contracts (the “Embedded Derivatives”) and for hedging activities. As a matter of policy, the Company does not invest in separable financial derivatives or engage in hedging transactions. However, the Company has entered into complex financing transactions that involve financial instruments containing certain features that have resulted in the instruments being deemed derivatives or containing Embedded Derivatives. The Company may engage in other similar complex debt transactions in the future, but not with the intention to enter into derivative instruments. Derivatives and Embedded Derivatives, if applicable, are measured at fair value using the Binomial Lattice pricing model and marked to market through earnings. However, such new and/or complex instruments may have immature or limited markets. As a result, the pricing models used for valuation of derivatives often incorporate significant estimates and assumptions, which may impact the level of precision in the financial statements. Furthermore, depending on the terms of a derivative or Embedded Derivative, the valuation of derivatives may be removed from the financial statements upon conversion of the underlying instrument into some other security or the terms of the underlying instrument becoming fixed.

Deferred Compensation

Deferred Compensation. The Company has a deferred compensation plan, the Executive Salary Continuation Plan Liability (the “ESCP”), for key employees. Presently, two of the Company’s retired executives are receiving benefits aggregating $184,700 per annum under the ESCP and is considered a current liability which is included in accrued expenses in the attached Condensed Consolidated Balance Sheets. The remaining long term portion is held under the ESCP Liability.

Foreign Currency Translation

Foreign Currency Translation. Assets and liabilities denominated in foreign currency are translated into U.S. dollars using the exchange rates in effect at the balance sheet date. Statements of operations accounts are translated at the average exchange rates during the year. The impact of exchange rate fluctuations from translation of assets and liabilities is included in accumulated other comprehensive income (loss), a component of stockholders' equity. Realized gains and losses resulting from foreign currency transactions are included in other income (expense) in the Condensed Consolidated Statements of Operations.

Income (Loss) Per Share

Income (Loss) Per Share. Basic income (loss) per share is computed by dividing income (loss) available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted income (loss) per share are calculated utilizing the treasury stock method for options and warrants, and the if-converted method for convertible instruments.  Under this method the weighted average number of common shares is adjusted for common stock issuable upon exercise of stock options, warrants, and other commitments to issue common stock in periods in which they have a dilutive effect, and when the stock awards exercise price is lower than the Company's average share price for the period.  Since the Company incurred a net loss for the three and nine months ended June 30, 2013 basic and diluted loss per share were the same. Inclusion of such awards would be anti-dilutive. See Note 10.

Subsequent Events

    Subsequent Events. Management evaluated events subsequent to June 30, 2013 through the date the accompanying consolidated financial statements were filed with the Securities and Exchange Commission for transactions and other events that may require adjustment of and/or disclosure in such financial statements. See Note 17.