SOURCE: Nestor, Inc.

November 13, 2008 17:44 ET

Nestor, Inc. Reports 2008 Third Quarter Financial Results

Report Shows Revenues Are up 14% From Third Quarter of 2007 and Cash Flows Are Up 471% Over the Prior Year

PROVIDENCE, RI--(Marketwire - November 13, 2008) - Nestor, Inc. (OTCBB: NEST), a leading provider of advanced automated traffic enforcement solutions and services, is pleased to release financial results for the third quarter of 2008. Total revenues for the three-month period ending September 30, 2008 increased 14% to $3,827,000 from $3,349,000 in the third quarter of 2007, and increased 20% to $10,357,000 from $8,791,000 for the nine months ended September 30, 2008 and 2007, respectively. This growth reflects the continued increase in installed systems, with 338 installed CrossingGuard® units and 7 installed PoliScanSpeed™ units generating revenues at September 30, 2008 as compared to 280 installed CrossingGuard® units and 7 installed PoliScanSpeed™ units at September 30, 2007. Revenues also reflect a one-time equipment sale of $125,000 in the third quarter of 2008 to one significant customer.

Modified EBITDA for the quarter ended September 30, 2008 was $261,000 compared to $432,000 in the comparable 2007 period. For the nine months ended September 30, 2008, modified EBITDA improved to $634,000 compared to $111,000 for the comparable nine month period in 2007. The decline in Modified EBITDA for the third quarter reflects the Company's investment in its sales functions to aggressively pursue new automated traffic enforcement opportunities to accommodate future growth. The increase in modified EBITDA for the nine month period reflects the growth in recurring revenues and a one-time royalty payment received in the second quarter of 2008.

Clarence A. Davis, Chief Executive Officer of Nestor, Inc., stated, "The results reported for the third quarter of 2008 continue to show improved operating performance despite making important investments in our sales organization for future growth. In fact, we have now reported positive operating cash flow in four of our last 6 quarters. With the addition of new business in Sweetwater, Florida and Manteca, California as well as the expansion of our Delaware Department of Transportation program announced this quarter, we expect to continue to demonstrate the company's ability to grow a successful and profitable business going forward.

"The Company remains actively engaged in its efforts to effect a restructuring and financing consistent with the general terms and conditions originally disclosed in its second quarter press release. I remain optimistic that this process, once completed, will provide Nestor with the balance sheet and capital base necessary to execute on its growth plans and provide our existing customers and prospects alike with the assurance that the Company is committed to our long term success. The completion of the bridge financing in October, the majority of which was sourced from our existing debt holders, provided the Company with needed short-term capital and represented a critical step in the context of the larger transaction, which I anticipate will close in the coming months."

The Company reported a U.S. GAAP Loss from Operations (U.S. GAAP differs from modified EBITDA as indicated at the end of this press release by including a number of non-cash charges) for the quarter ended September 30, 2008 of $916,000 compared to a Loss from Operations of $612,000 in the third quarter of 2007. Loss from Operations for the nine month period ended September 30, 2008 was $2,728,000 compared to a Loss from Operations of $2,786,000 for the comparable 2007 period. The Company incurred a non-cash charge of $122,000 for share-based compensation in the third quarter of 2008 compared to $130,000 in the third quarter of 2007, and $306,000 for the nine month period ended September 30, 2008 compared to $439,000 for the comparable 2007 period. The increase in Loss from Operations for the quarter ended September 30, 2008 is a result of the Company's investments in its sales organization. The Company's results for the nine month period ended September 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 expenses.

The Company reported a U.S. GAAP net loss for the quarter ended September 30, 2008 of $3,003,000, compared to a net loss of $1,967,000 in the third quarter of 2007. Net loss for the nine month period ended September 30, 2008 was $7,252,000 compared to $5,436,000 for the comparable 2007 period. In the third quarter of 2008, non-cash derivative instrument income was $230,000 compared to $338,000 in the third quarter of 2007. For the nine months ended September 30, non-cash derivative investment income was $1,438,000 in 2008 and $2,204,000 in 2007. Also, amortization of debt discount expense was $1,008,000 for the quarters ended September 30, 2008 and 2007 and $3,023,000 and $3,024,000 for the nine months ended September 30, 2008 and 2007, respectively.

We had cash and cash equivalents of approximately $327,000 at September 30, 2008, compared to $3.1 million at December 31, 2007. More details regarding our results for the third quarter of 2008 may be found in our Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on November 13, 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 nine month periods ended September 30:

                     Three Months Ended Sept.     Nine Months Ended Sept.
                                30,                         30,
                    --------------------------  --------------------------
                        2008          2007          2008          2007
                    ------------  ------------  ------------  ------------
GAAP net income
 (loss)             $ (3,003,000) $ (1,967,000) $ (7,252,000) $ (5,436,000)
Interest expense,
 net of interest
 income                1,309,000       685,000     2,939,000     1,830,000
Income tax expense           ---           ---           ---           ---
Depreciation and
 amortization          1,055,000       914,000     3,056,000     2,458,000
                    ------------  ------------  ------------  ------------
EBITDA              $   (639,000) $   (368,000) $ (1,257,000) $ (1,148,000)
Derivative
 instrument
 (income) expense       (230,000)     (338,000)   (1,438,000)   (2,204,000)
Debt discount
 expense               1,008,000     1,008,000     3,023,000     3,024,000
Stock-based
 compensation
 expense                 122,000       130,000       306,000       439,000
                    ------------  ------------  ------------  ------------
Modified EBITDA     $    261,000  $    432,000  $    634,000  $    111,000
                    ============  ============  ============  ============

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



                                             SEPTEMBER 30,   DECEMBER 31,
                                                 2008            2007
                                            --------------  --------------
                                              (Unaudited)
ASSETS
Current assets
  Cash and cash equivalents                 $          327  $        3,135
  Accounts receivable, net                           2,762           2,806
  Inventory, net                                     1,018             922
  Other current assets                                 480             255
                                            --------------  --------------
    Total current assets                             4,587           7,118
Noncurrent assets
  Capitalized system costs, net                      9,536           9,867
  Property and equipment, net                          396             487
  Goodwill                                           5,581           5,581
  Patent development costs, net                        129             128
  Other long term assets                             1,861           1,865
                                            --------------  --------------
Total Assets                                $       22,090  $       25,046
                                            ==============  ==============

Liabilities and Stockholders’ Equity
 (DEFICIT)
Current liabilities
  Current portion of notes payable, net of
   discounts                                $       18,038  $          ---
  Current portion of derivative instruments            482             ---
  Accounts payable                                   2,058             826
  Accrued interest and penalties                     1,893             572
  Accrued expenses                                     873             763
  Accrued employee compensation                        434             366
  Deferred revenue                                     691           1,220
  Asset retirement obligation                          839             330
                                            --------------  --------------
    Total current liabilities                       25,307           4,077
Noncurrent liabilities
  Long term convertible notes payable                  ---           1,719
  Long term notes payable                              ---          13,295
  Derivative instruments - debt and warrants           161           2,081
  Long term asset retirement obligation                628             934
                                            --------------  --------------
    Total liabilities                               26,096          22,106
                                            --------------  --------------

  Commitments and contingencies                        ---             ---

Stockholders’ Equity (Deficit)
  Preferred stock, $1.00 par value,
   authorized 10,000,000 shares;
   issued and outstanding: Series
   B - 180,000 shares at September
   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 September 30, 2008
   and December 31, 2007                               290             290
  Additional paid-in capital                        79,278          78,972
  Accumulated deficit                              (83,754)        (76,502)
                                            --------------  --------------
    Total stockholders’ equity (deficit)            (4,006)          2,940
                                            --------------  --------------
Total Liabilities and Stockholders’ Equity
 (Deficit)                                  $       22,090  $       25,046
                                            ==============  ==============





                                NESTOR, INC.
               Condensed Consolidated Statements of Operations
             IN THOUSANDS, EXCEPT SHARE AND PER SHARE INFORMATION
                                (UNAUDITED)


                                Quarter Ended         Nine Months Ended
                                September 30,           September 30,
                            ----------------------  ----------------------
                               2008        2007        2008        2007
                            ----------  ----------  ----------  ----------
Revenues:
  Lease and service fees    $    3,698  $    3,329  $    9,706  $    8,771
  Product sales                    125         ---         125         ---
  Product royalties                  3          20         526          20
                            ----------  ----------  ----------  ----------
    Total revenue                3,827       3,349      10,357       8,791
                            ----------  ----------  ----------  ----------

Cost of sales:
  Lease and service fees         2,168       1,943       5,858       5,164
  Product sales                    104         ---         104         ---
  Product royalties                ---         ---         ---         ---
                            ----------  ----------  ----------  ----------
    Total cost of sales          2,273       1,943       5,962       5,164
                            ----------  ----------  ----------  ----------


Gross profit:
  Lease and service fees         1,530       1,386       3,848       3,607
  Product sales                     21         ---          21         ---
  Product royalties                  3          20         526          20
                            ----------  ----------  ----------  ----------
    Total gross profit           1,554       1,406       4,395       3,627
                            ----------  ----------  ----------  ----------


Operating expenses:
  Engineering and
   operations                    1,077         926       3,209       3,019
  Research and development          83          99         234         318
  Selling and marketing            518         181       1,282         552
  General and
   administrative                  792         812       2,398       2,524
                            ----------  ----------  ----------  ----------
    Total operating
     expenses                    2,470       2,018       7,123       6,413
                            ----------  ----------  ----------  ----------

Loss from operations              (916)       (612)     (2,728)     (2,786)

Derivative instrument
 income                            230         338       1,438       2,204
Debt discount expense           (1,008)     (1,008)     (3,023)     (3,024)
Interest and other expense,
 net                            (1,309)       (685)     (2,939)     (1,830)
                            ----------  ----------  ----------  ----------

Net loss                    $   (3,003) $   (1,967) $   (7,252) $   (5,436)
                            ==========  ==========  ==========  ==========


Loss per share:

Loss per share, basic and
 diluted                    $    (0.10) $    (0.07) $    (0.25) $    (0.24)
                            ==========  ==========  ==========  ==========

Shares used in computing
 loss per share:
  Basic and diluted         28,954,219  26,542,888  28,954,219  22,480,692
                            ==========  ==========  ==========  ==========