SOURCE: Nestor, Inc.

April 15, 2008 17:30 ET

Nestor, Inc. Reports 2007 Fourth Quarter and Year-End Financial Results

Report Shows Annual Revenues Are up 42% From 2006 and Fourth Quarter Revenues Increased by 16% From Same Time Last Year

PROVIDENCE, RI--(Marketwire - April 15, 2008) - Nestor, Inc. (NASDAQ: NEST), a leading provider of advanced automated traffic enforcement solutions and services, is pleased to release fourth quarter and 2007 year-end financial results. Total revenues for the twelve-month period ending December 31, 2007 increased 42% to $11,505,000 from $8,087,000 in 2006. This growth reflects the continued increase in installed systems, with 302 installed CrossingGuard units and 8 installed Poliscan units generating revenues at December 31, 2007 as compared to 212 installed CrossingGuard units and 11 installed Poliscan units at December 31, 2006.

Modified EBITDA for the quarter and twelve months ended December 31, 2007 was a loss of $431,000 and $252,000, respectively, compared to a loss of $1,370,000 and $6,055,000 in the comparable 2006 periods. The improvement in Modified EBITDA for the fourth quarter and full year 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 U.S. GAAP below).

Clarence A. Davis, Chief Executive Officer of Nestor, Inc., stated the following, "The results reported for the fourth quarter and full year of 2007 represent substantial improvements 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. The eight new approaches in Diboll, Texas and San Juan Capistrano, California and 22 approaches poised to go live in Grand Prairie, Canada will be reflected in our results for the second quarter of 2008. Our focus in 2008 is to expand our professional sales organization and pursue strategic relationships to take advantage of the expanding market for automated enforcement services and other security applications."

The Company reported a Loss from Operations for the quarter ended December 31, 2007 of $1,616,000 compared to a Loss from Operations of $4,983,000 in the fourth quarter of 2006. Loss from Operations reported for the twelve months ended December 31, 2007 was $4,399,000 as compared to $13,902,000 for the twelve months ended December 31, 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 incurred a non-cash charge of $213,000 for share-based compensation in the fourth quarter of 2007, as compared to $612,000 in the fourth quarter of 2006, and $614,000 for the twelve months ended December 31, 2007, as compared to $2,506,000 in 2006. In addition to the reduction in share-based compensation expense, 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. Cost of sales and operating expenses are also lower by $3,002,000 and $6,085,000 in the fourth quarter and twelve months, respectively, of 2007 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. Operating expenses included a non-cash charge of $2,191,000 and $2,366,000 for asset impairment charges in the fourth quarter and full year of 2006, respectively. No asset impairment charges were recorded in 2007.

The Company reported a U.S. GAAP net loss for the quarter ended December 31, 2007 of $2,588,000, compared to a net loss of $2,643,000 in the fourth quarter of 2006. Net loss reported for the twelve months ended December 31, 2007 was $8,023,000, as compared to a net loss of $7,491,000 in 2006. In the fourth quarter of 2007, non-cash derivative instrument income was $722,000 as compared to income of $6,829,000 in the fourth quarter of 2006. For the twelve months ended December 31, non-cash derivative instrument income was $2,926,000 in 2007 and $16,940,000 in 2006. Also, amortization of debt discount expense was $1,008,000 and $4,031,000 for the quarter and twelve months ended December 31, 2007 as compared to $3,984,000 and $8,664,000 in the comparable 2006 periods.

We had cash and cash equivalents and marketable securities of approximately $3.1 million at December 31, 2007, compared to $3.0 million at December 31, 2006. We had working capital of approximately $3.0 million at December 31, 2007 and $3.4 million at December 31, 2006. In July 2007, the Company completed a private equity placement, raising $4.8 million in cash, net of expenses, to support its ongoing contract expansion capital needs. The Company issued 8,532,403 shares of common stock at $0.01 above the closing bid price on the day prior to execution of the definitive documents, or $0.5802 per share. These funds are being used to complete CrossingGuard installations on new contracts and respond to requests from customers to expand installations on existing contracts. More details regarding our results for 2007 and the fourth quarter of 2007 may be found in our 2007 Annual Report on Form 10-K filed with the Securities and Exchange Commission on April 15, 2008.

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 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 our 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 U.S. GAAP net income (loss) for the three- and twelve-month periods ended December 31:

                        Three Months Ended          Twelve Months Ended
                             Dec. 31,                    Dec. 31,
                    --------------------------  --------------------------
                        2007          2006          2007          2006
                    ------------  ------------  ------------  ------------
GAAP net income
 (loss)             $ (2,587,000) $ (2,643,000) $ (8,023,000) $ (7,491,000)
Interest expense,
 net of interest
 income                  686,000       506,000     2,519,000     1,865,000
Income tax expense           ---           ---           ---           ---
Depreciation and
 amortization            971,000       809,000     3,533,000     2,975,000
                    ------------  ------------  ------------  ------------
EBITDA              $   (930,000) $ (1,328,000) $ (1,971,000) $ (2,651,000)

Derivative
 instrument
 (income) expense       (722,000)   (6,829,000)   (2,926,000)  (16,940,000)
Debt discount
 expense               1,008,000     3,984,000     4,031,000     8,664,000
Stock-based
 compensation
 expense                 213,000       612,000       614,000     2,506,000
Asset impairment
 charge                      ---     2,191,000           ---     2,366,000
                    ------------  ------------  ------------  ------------
Modified EBITDA     $   (431,000) $ (1,370,000) $   (252,000) $ (6,055,000)
                    ============  ============  ============  ============

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 a table in 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.

                               NESTOR, INC.
                        Consolidated Balance Sheets
                  In Thousands, Except Share Information


                                             December 31,    December 31,
                                                 2007            2006
                                            --------------  --------------

ASSETS
Current Assets
   Cash and cash equivalents                $        3,135  $        2,952
   Marketable securities                               ---              58
   Accounts receivable, net                          2,806           2,343
   Inventory, net                                      922           1,950
   Other current assets                                255             197
                                            --------------  --------------
      Total current assets                           7,118           7,500
Noncurrent assets
   Capitalized system costs, net                     9,867           8,185
   Property and equipment, net                         487             789
   Goodwill                                          5,581           5,581
   Patent development costs, net                       128             125
   Other long term assets                            1,865           2,331
                                            --------------  --------------
Total Assets                                $       25,046  $       24,511
                                            ==============  ==============

Liabilities and Stockholders’ Equity
Current liabilities
   Accounts payable                         $          826  $        1,325
   Accrued liabilities                               1,335           1,493
   Accrued employee compensation                       366             351
   Deferred revenue                                  1,220             712
   Asset retirement obligation                         330             186
                                            --------------  --------------
      Total current liabilities                      4,077           4,067
Noncurrent Liabilities:
   Long term convertible notes payable               1,719             920
   Long term notes payable                          13,295           8,563
   Derivative financial instruments - debt
    and warrants                                     2,081           4,971
   Long term asset retirement obligation               934             488
                                            --------------  --------------
      Total liabilities                             22,106          19,009
                                            --------------  --------------

   Commitments and contingencies                       ---             ---

Stockholders’ Equity:
   Preferred stock, $1.00 par value,
    authorized 10,000,000 shares;
    issued and outstanding: Series B -
    180,000 shares at December 31, 2007
    and December 31, 2006                              180             180
   Common stock, $0.01 par value,
    authorized 50,000,000 shares issued
    and outstanding: 28,954,219 shares at
    December 31, 2007 and 20,386,816
    shares at December 31, 2006                        290             204
   Warrants                                            ---             ---
   Additional paid-in capital                       78,972          73,597
   Accumulated deficit                             (76,502)        (68,479)
                                            --------------  --------------
      Total stockholders’ equity                     2,940           5,502
                                            --------------  --------------
Total Liabilities and Stockholders’ Equity  $       25,046  $       24,511
                                            ==============  ==============



                               NESTOR, INC.
                  Consolidated Statements of Operations
           In Thousands, Except Share And Per Share Information



                                Quarter Ended             Year Ended
                                 December 31,            December 31,
                            ----------------------  ----------------------
                               2007        2006        2007        2006
                            ----------  ----------  ----------  ----------

Revenues:
   Lease and service fees   $    2,712  $    2,346  $   11,483  $    8,079
   Product royalties                 2           3          22           8
                            ----------  ----------  ----------  ----------
      Total revenue              2,714       2,349      11,505       8,087
                            ----------  ----------  ----------  ----------

Cost of sales:
   Lease and service fees        1,963       1,772       7,127       6,313
   Product royalties               ---         ---         ---         ---
                            ----------  ----------  ----------  ----------
      Total cost of sales        1,963       1,772       7,127       6,313
                            ----------  ----------  ----------  ----------


Gross profit:
   Lease and service fees          749         574       4,356       1,766
   Product royalties                 2           3          22           8
                            ----------  ----------  ----------  ----------
      Total gross profit           751         577       4,378       1,774
                            ----------  ----------  ----------  ----------


Operating expenses:
   Engineering and
    operations                   1,017       1,211       4,026       4,373
   Research and development         87         246         414       1,383
   Selling and marketing           304         582         856       2,180
   General and
    administrative                 959       1,330       3,481       5,374
   Impairment charge for
    long-lived assets              ---       2,191         ---       2,366
                            ----------  ----------  ----------  ----------
      Total operating
       expenses                  2,367       5,560       8,777      15,676
                            ----------  ----------  ----------  ----------

Loss from operations            (1,616)     (4,983)     (4,399)    (13,902)

Derivative instrument
 income                            722       6,829       2,926      16,940
Debt discount expense           (1,008)     (3,984)     (4,031)     (8,664)
Other expense, net                (686)       (506)     (2,519)     (1,865)
                            ----------  ----------  ----------  ----------

Net loss                    $   (2,588) $   (2,643) $   (8,023) $   (7,491)
                            ==========  ==========  ==========  ==========


Loss per share:

Loss per share, basic and
 diluted                    $    (0.09) $    (0.13) $    (0.33) $    (0.37)
                            ==========  ==========  ==========  ==========

Shares used in computing
 loss per share:
   Basic and diluted        28,954,219  20,386,816  24,112,378  20,277,770
                            ==========  ==========  ==========  ==========