SOURCE: Nestor, Inc.

October 31, 2007 17:03 ET

Nestor, Inc. Reports Third Quarter 2007 Financial Results

Report Shows Revenues Up 69% and Modified EBITDA of $432,000 for Third Quarter

PROVIDENCE, RI--(Marketwire - October 31, 2007) - Nestor, Inc. (NASDAQ: NEST), a leading provider of advanced automated traffic enforcement solutions and services, is pleased to release third quarter and nine month results. Total revenues for the three-month period ended September 30, 2007 increased 69% to $3,349,000 from $1,982,000 in the third quarter of 2006, and increased 53% to $8,791,000 from $5,737,000 for the nine months ended September 30, 2007 and 2006, respectively. The growth reflects the continued increase in installed systems, with 280 installed red light units and 7 installed speed units generating revenues at September 30, 2007 as compared to 202 red light and 10 speed units at September 30, 2006.

Clarence A. Davis, Chief Executive Officer of Nestor, Inc., stated the following, "The results reported for the third quarter of 2007 represent substantial accomplishments realized by the Company during 2007. The reorganization of our operational structure coupled with the improved delivery of our systems has produced substantially higher revenues and positive operating cash flows. Our next focus is on expanding a professional sales organization and pursuing strategic relationships to take advantage of the expanding market for automated enforcement services and other security applications."

Modified EBITDA for the quarter ended September 30, 2007 was a positive $432,000 as compared to a $1,455,000 loss in the comparable 2006 quarter. For the nine months ended September 30, 2007, Modified EBITDA improved to a positive $111,000 from a $4,639,000 loss in 2006. The improvement in Modified EBITDA for the third quarter and the nine months of 2007 reflects the growth in recurring revenues being realized and the cost containment efforts initiated in the fourth quarter of 2006 and in early 2007 (See reconciliation of Modified EBITDA to GAAP below).

The Company reported a Loss from Operations the quarter ended September 30, 2007 of $612,000, as compared to a Loss from Operations of $2,768,000 in the third quarter of 2006. Loss from Operations reported for the nine months ended September 30, 2007 was $2,786,000, as compared to $8,919,000 for the nine months ended September 30, 2006. The Loss from Operations reported in 2007 and 2006 included the effect of adopting the provisions of Statement of Financial Accounting Standards No. 123(R), "Share-Based Payment," which established accounting for equity instruments exchanged for employee services. The Company expensed a non-cash charge of $130,000 for share-based compensation in the third quarter of 2007, as compared to $573,000 in 2006, and $439,000 for the nine months ended September 30, 2007, as compared to $1,894,000 in 2006. In addition to the reduction in share-based compensation, the improvement in Loss from Operations is a result of substantial improvement in the gross margins generated from ongoing operations as the Company shut down underperforming installations and is realizing improved performance from new installations. Operating expenses are also lower by $1,073,000 and $3,528,000 in the third quarter and nine months, respectively, of 2007 as compared to last year as a result of cost containment initiatives implemented in late 2006 into early 2007 and the reduction in share-based compensation.

The Company reported a net loss for the quarter ended September 30, 2007 of $1,967,000, as compared to net income of $2,648,000 in the third quarter of 2006. Net loss reported for the nine months ended September 30, 2007 was $5,436,000, as compared to a net loss of $4,848,000 for the nine months ended September 30, 2006. In the third quarter of 2007, non-cash derivative instrument income was $338,000 as compared to income of $7,145,000 in the third quarter of 2006. For the nine months ended September 30, non-cash derivative instrument income was $2,204,000 in 2007 and $10,112,000 in 2006. Also, amortization of debt discount expense was $1,008,000 and $3,024,000 for the quarter and nine months ended September 30, 2007 as compared to $1,167,000 and $4,681,000 in the comparable 2006 periods.

We had cash and cash equivalents of approximately $5.2 million at September 30, 2007 versus $3.0 million at December 31, 2006. On July 27, 2007, the Company completed a private equity placement, raising $4.95 million in cash to support its ongoing contract expansion capital needs. The Company issued 8,532,403 shares of common stock at $.01 above the closing bid price on the day prior to execution of definitive documents, or $0.5802 per share. These funds will be used to complete CrossingGuard installations on existing contracts and respond to requests from these customers to expand installations on these contracts. More details regarding our results for the third quarter of 2007 may be found in our Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on October 31, 2007.

Nestor Traffic Systems provides automated traffic enforcement solutions to state and municipal governments. Our CrossingGuard® red light enforcement system uses patented multiple, time-synchronized videos to capture comprehensive evidence of red light and speed violations. In addition, CrossingGuard® offers customers a unique Collision Avoidance™ safety feature that can help prevent intersection collisions. We also offer a video-based ViDAR™ speed detection and imaging system which uses non-detectable, passive video detection and enforces multiple, simultaneous violations bi-directionally. Nestor Traffic Systems is a distributor for the Vitronic PoliScanSpeed™ scanning LiDAR, capable of tracking multiple vehicles in multiple lanes simultaneously. CrossingGuard® and ViDAR™ are registered trademarks of Nestor Traffic Systems, Inc. PoliScanSpeed™ is a trademark of Vitronic. For more information, call (401) 274-5658 or visit www.nestor.com.

Statements in this press release about future expectations, plans and prospects for Nestor, including statements containing the words "expects," "will," and similar expressions, constitute forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934. We may not achieve the plans, intentions or expectations disclosed in our forward-looking statements and investors should not place undue reliance on our forward-looking statements. Actual results may differ materially from those indicated by such forward-looking statements as a result of various factors, including: market acceptance of our products, competition, further approvals of contracted approaches, legal and legislative challenges to automated traffic enforcement, patent protection of our technology, and other factors discussed in Risk Factors in our most recent Annual Report on Form 10-K filed with the SEC. Investors are advised to read Nestor's Annual Report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K filed after our most recent annual or quarterly report. The forward-looking statements included in this press release represent our current views and we specifically disclaim any obligation to update these forward-looking statements in the future.

The table below is a reconciliation of modified EBITDA to GAAP net income (loss) for the three and nine month periods ended September 30:

                        Three Months Ended          Nine Months Ended
                          September 30,               September 30,
                    --------------------------  --------------------------
                        2007          2006          2007          2006
                    ------------  ------------  ------------  ------------
GAAP net income
 (loss)             $ (1,967,000) $  2,648,000  $ (5,436,000) $ (4,848,000)
Interest expense,
 net of interest
 income                  685,000       562,000     1,830,000     1,360,000
Income tax expense           ---           ---           ---           ---
Depreciation and
 amortization            914,000       694,000     2,458,000     2,165,000
                    ------------  ------------  ------------  ------------
EBITDA              $   (368,000) $  3,904,000  $ (1,148,000) $ (1,323,000)
Derivative
 instrument
 (income)               (338,000)   (7,145,000)   (2,204,000)  (10,112,000)
Debt discount
 expense               1,008,000     1,167,000     3,024,000     4,681,000
Stock-based
 compensation
 expense                 130,000       619,000       439,000     1,940,000
Asset impairment
 charge                      ---           ---           ---       175,000
                    ------------  ------------  ------------  ------------
Modified EBITDA     $    432,000  $ (1,455,000) $    111,000  $ (4,639,000)
                    ============  ============  ============  ============

We calculate Modified EBITDA by first calculating EBITDA, which we define as net income before interest expense, debt restructuring or debt extinguishment costs (if any during the relevant measurement period), provision for income taxes, and depreciation and amortization. Then we exclude derivative instrument income or expense, debt discount expense, share-based compensation expense, and asset impairment charges. These measures eliminate the effect of financing transactions that we enter into on an irregular basis based on capital needs and market opportunities, and these measures provide us with a means to track internally generated cash from which we can fund our interest expense and our growth. In comparing modified EBITDA from period to period, we also ignore the effect of what we consider non-recurring events not related to our core business operations to arrive at what we define as modified EBITDA. Because modified EBITDA is a non-GAAP financial measure, we include in the table at the end of this press release reconciliations of modified EBITDA to the most directly comparable financial measures calculated and presented in accordance with accounting principles generally accepted in the United States. We present modified EBITDA because we believe it provides useful information regarding our ability to meet our future debt payment requirements, capital expenditures and working capital requirements, and that it provides an overall evaluation of our financial condition. In addition, modified EBITDA is defined in certain financial covenants under our Senior Secured Convertible Notes and was used to adjust the interest rate on those notes at July 1, 2007, and will be used January 1, 2009 to determine whether the holders of those notes have a redemption right at May 25, 2009.

Modified EBITDA has certain limitations as an analytical tool and should not be used as a substitute for net income, cash flows or other consolidated income or cash flow data prepared in accordance with generally accepted accounting principles in the United States or as a measure of our profitability or our liquidity.