SOURCE: Nestor, Inc.

August 14, 2008 18:24 ET

Nestor, Inc. Reports 2008 Second Quarter Financial Results and Tentative New Capital Structure

Report Shows Revenues Are Up 19% and Cash Flow 347% From Second Quarter of 2007 and Board Approves Term Sheet to Secure Strong Balance Sheet and Long Term Future for the Company

PROVIDENCE, RI--(Marketwire - August 14, 2008) - Nestor, Inc. (OTCBB: NEST), a leading provider of advanced automated traffic enforcement solutions and services, is pleased to release financial results for the second quarter of 2008. Total revenues for the three-month period ending June 30, 2008 increased 19% to $3,632,000 from $3,061,000 in the second quarter of 2007, and increased 20% to $6,530,000 from $5,442,000 for the six months ended June 30, 2008 and 2007, respectively. This growth reflects the continued increase in installed systems, with 330 installed CrossingGuard® units and 4 installed PoliScanSpeed™ units generating revenues at June 30, 2008 as compared to 247 installed CrossingGuard® units and 4 installed PoliScanSpeed™ units at June 30, 2007. Revenues also reflect a one-time royalty payment of $500,000 in the second quarter of 2008 to transfer our remaining rights to our former fraud detection software product line. This increase in revenues is partially offset by the deferral of revenues for one significant customer, pending finalization of an amended contract.

Modified EBITDA for the quarter ended June 30, 2008 was $523,000 compared to $117,000 in the comparable 2007 period. For the six months ended June 30, 2008, modified EBITDA improved to $370,000 compared to a loss of $321,000 for the comparable six month period in 2007. The improvement in Modified EBITDA for the second quarter and the six month period reflects the growth in recurring revenues, the one-time royalty payment, and the realization of our cost containment efforts that were finalized in the first quarter of 2007.

On August 8, 2008, the Company's Board of Directors approved a term sheet for a series of transactions that would convert more than half of the Company's debt into equity, eliminate the convertible features of the remaining debt, waive or cure all existing defaults on the Company's debt and provide a minimum of $4 million of new capital to the Company, all of which would result in significant dilution of existing stockholders. The transactions are subject to a number of closing conditions, including negotiation and execution of definitive documents and approval by the existing note holders and stockholders.

Clarence A. Davis, Chief Executive Officer of Nestor, Inc., stated, "The results reported for the second quarter of 2008 continue to represent improvement realized by the Company. We are pleased to note that in the second quarter, we added 21 approaches in enforcement, primarily in Grande Prairie, Canada and signed extensions and expansions of programs in San Bernardino and Costa Mesa California resulting in 28 new approaches under contract. Over the past month, we signed an extension and expansion with the Delaware Department of Transportation resulting in 20 new approaches under contract. We also signed our first contract in a new state market for Nestor resulting in up to 12 new approaches in Sweetwater, Florida. With the company generating positive cash flow in the second quarter, these new approaches further demonstrate the company's ability to grow a successful and profitable business.

"At the same time, the Company has agreed to a term sheet with its note holders to restructure our balance sheet. More specifically, we expect the Company to soon have significantly less debt, more cash, and more equity. This deal will be dilutive to existing shareholders on a percentage ownership basis. When completed, this restructuring of our balance sheet will demonstrate to our prospects and customers that Nestor is here to stay and committed to our long term success in our industry."

The Company reported a Loss from Operations for the quarter ended June 30, 2008 of $486,000 compared to a Loss from Operations of $892,000 in the second quarter of 2007. Loss from Operations for the six month period ended June 30, 2008 was $1,814,000 compared to a Loss from Operations of $2,174,000 for the comparable 2007 period. The Company incurred a non-cash charge of $3,000 for share-based compensation in the second quarter of 2008 compared to $170,000 in the second quarter of 2007, and $183,000 for the six month period ended June 30, 2008 compared to $309,000 for the comparable 2007 period. The improvement in Loss from Operations for the quarter and six month period ended June 30, 2008 is a result of the increase in gross profit achieved through revenue growth and decreased share-based compensation expense, partially offset by increased selling and marketing expenses as the Company expanded its presence to aggressively pursue new automated traffic enforcement opportunities.

The Company reported a U.S. GAAP net loss for the quarter ended June 30, 2008 of $1,745,000, compared to a net loss of $1,959,000 in the second quarter of 2007. Net loss for the six month period ended June 30, 2008 was $4,250,000 compared to $3,469,000 for the comparable 2007 period. In the second quarter of 2008, non-cash derivative instrument income was $659,000 compared to $537,000 in the second quarter of 2007. For the six months ended June 30, non-cash derivative investment income was $1,209,000 in 2008 and $1,866,000 in 2007. Also, amortization of debt discount expense was $1,008,000 for the quarter ended June 30, 2008 and 2007 and $2,016,000 for the six months ended June 30, 2008 and 2007.

We had cash and cash equivalents of approximately $1.0 million at June 30, 2008, compared to $3.1 million at December 31, 2007. More details regarding our results for the second quarter of 2008 may be found in our Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on August 14, 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 U.S. GAAP net loss to modified EBITDA for the quarter and six month periods ended June 30:

                      Three Months Ended June 30, Six Months Ended June 30,
                        ------------------------  ------------------------
                            2008         2007         2008         2007
                        -----------  -----------  -----------  -----------
GAAP net income (loss)  $(1,745,000) $(1,959,000) $(4,250,000) $(3,469,000)
Interest expense, net of
 interest income            910,000      596,000    1,629,000    1,145,000
Income tax expense              ---          ---          ---          ---
Depreciation and
 amortization             1,006,000      839,000    2,001,000    1,544,000
                        -----------  -----------  -----------  -----------
EBITDA                  $   171,000  $  (524,000) $  (620,000) $  (780,000)
Derivative instrument
 income                    (659,000)    (537,000)  (1,209,000)  (1,866,000)
Debt discount expense     1,008,000    1,008,000    2,016,000    2,016,000
Stock-based compensation
 expense                      3,000      170,000      183,000      309,000
                        -----------  -----------  -----------  -----------
Modified EBITDA         $   523,000  $   117,000  $   370,000  $  (321,000)
                        ===========  ===========  ===========  ===========

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 at 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 accounting principles generally accepted in the United States or as a measure of our profitability or our liquidity.

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


                                                    June 30,   December 31,
                                                      2008        2007
                                                  -----------  -----------
                                                  (Unaudited)
ASSETS
Current assets
   Cash and cash equivalents                      $     1,064  $     3,135
   Accounts receivable, net                             2,713        2,806
   Inventory, net                                         909          922
   Other current assets                                   389          255
                                                  -----------  -----------
      Total current assets                              5,075        7,118
Noncurrent assets
   Capitalized system costs, net                        9,602        9,867
   Property and equipment, net                            471          487
   Goodwill                                             5,581        5,581
   Patent development costs, net                          131          128
   Other long term assets                               1,584        1,865
                                                  -----------  -----------
Total Assets                                      $    22,444  $    25,046
                                                  ===========  ===========

Liabilities and Stockholders' Equity (DEFICIT)
Current liabilities
   Current portion of notes payable, net of
    discounts                                     $    17,030  $       ---
   Current portion of derivative instruments              838          ---
   Accounts payable                                     1,330          826
   Accrued liabilities                                  1,450        1,335
   Accrued employee compensation                          366          366
   Deferred revenue                                     1,080        1,220
   Asset retirement obligation                            815          330
                                                  -----------  -----------
      Total current liabilities                        22,909        4,077
Noncurrent liabilities
   Long term convertible notes payable                    ---        1,719
   Long term notes payable                                ---       13,295
   Derivative financial instruments - debt and
    warrants                                               34        2,081
   Long term asset retirement obligation                  627          934
                                                  -----------  -----------
      Total liabilities                                23,570       22,106
                                                  -----------  -----------

Stockholders' Equity (Deficit)
   Preferred stock, $1.00 par value, authorized
    10,000,000 shares; issued and outstanding:
    Series B - 180,000 shares at June 30, 2008
    and December 31, 2007                                 180          180
   Common stock, $0.01 par value, authorized
    50,000,000 shares issued and outstanding:
    28,954,219 shares at June 30, 2008 and
    December 31, 2007                                     290          290
   Additional paid-in capital                          79,156       78,972
   Accumulated deficit                                (80,752)     (76,502)
                                                  -----------  -----------
      Total stockholders' equity (deficit)             (1,126)       2,940
                                                  -----------  -----------
Total Liabilities and Stockholders' Equity
 (deficit)                                        $    22,444  $    25,046
                                                  ===========  ===========







                               NESTOR, INC.
              Condensed Consolidated Statements of Operations
           In Thousands, Except Share And Per Share Information
                                (Unaudited)


                           Quarter Ended June 30, Six Months Ended June 30,
                            ----------------------  ----------------------
                               2008        2007        2008        2007
                            ----------  ----------  ----------  ----------

Revenues:
  Lease and service fees    $    3,131  $    3,061  $    6,007  $    5,442
  Product royalties                501         ---         523         ---
                            ----------  ----------  ----------  ----------
      Total revenue              3,632       3,061       6,530       5,442
                            ----------  ----------  ----------  ----------

Cost of sales:
  Lease and service fees         1,862       1,756       3,690       3,221
  Product royalties                ---         ---         ---         ---
                            ----------  ----------  ----------  ----------
      Total cost of sales        1,862       1,756       3,690       3,221
                            ----------  ----------  ----------  ----------

Gross profit:
  Lease and service fees         1,269       1,305       2,317       2,221
  Product royalties                501         ---         523         ---
                            ----------  ----------  ----------  ----------
      Total gross profit         1,770       1,305       2,840       2,221
                            ----------  ----------  ----------  ----------


Operating expenses:
  Engineering and operations     1,062       1,004       2,078       2,093
  Research and development         116          82         205         219
  Selling and marketing            381         175         764         371
  General and administrative       697         936       1,607       1,712
                            ----------  ----------  ----------  ----------
      Total operating
       expenses                  2,256       2,197       4,654       4,395
                            ----------  ----------  ----------  ----------

Loss from operations              (486)       (892)     (1,814)     (2,174)

Derivative instrument
 income                            659         537       1,209       1,866
Debt discount expense           (1,008)     (1,008)     (2,016)     (2,016)
Interest and other expense,
 net                              (910)       (596)     (1,629)     (1,145)
                            ----------  ----------  ----------  ----------

Net loss                    $   (1,745) $   (1,959) $   (4,250) $   (3,469)
                            ==========  ==========  ==========  ==========

Loss per share, basic and
 diluted                    $    (0.06) $    (0.10) $    (0.15) $    (0.17)
                            ==========  ==========  ==========  ==========

Shares used in computing
 loss per share:
  Basic and diluted         28,954,219  20,421,816  28,954,219  20,415,983
                            ==========  ==========  ==========  ==========