-2-
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 1995
[X] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file Number 0-12965
NESTOR, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 13-3163744
(State of incorporation) (I.R.S. Employer
Identification No.)
One Richmond Square, Providence, RI 02906
(Address of principal executive offices)(Zip Code)
401-331-9640
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the Registrant (1) has filed
all reports required to be filed by Section 13 or 15 (d) of
the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period than the Registrant was
required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No _________
Common stock, par value .01 per share: 7,696,710 shares
outstanding as of September 30, 1995
NESTOR, INC.
FORM 10Q - September 30, 1995
INDEX
Page Number
PART 1 FINANCIAL INFORMATION
Item 1 Financial Statements:
Consolidated Statements of Operations (Unaudited) 3
Three Months Ended September 30, 1995 and 1994
Consolidated Balance Sheet (Unaudited) 5
September 30, 1995 and June 30, 1995
Statement of Consolidated Cash Flows (Unaudited)7
Three Months Ended September 30, 1995 and 1994
Notes to Consolidated Financial Statements 9
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 12
PART 2 OTHER INFORMATION
<TABLE>
Nestor, Inc.
Consolidated Statements of Operations
<CAPTION>
For the Quarter Ended September 30,
1995 1994
<S> <C> <C>
Revenues:
Licensing fees $ 470,852 $ 277,967
Revenues from services 433,185 269,243
Net sales of tangible products 108,464 133,670
Total Revenue 1,012,501 680,880
Cost of Services and Products Sold:
Licensing fees 237,744 316,027
Costs from services 309,221 205,763
Costs of tangible products 88,798 7,208
Total Cost of Services
and Products Sold 635,763 528,998
Gross Profit from Operations 376,738 151,882
Selling and marketing expenses: 506,457 487,844
General and administrative expenses 203,381 156,713
Related party consulting fee 43,200 87,926
Total costs and expenses 753,038 732,483
(Loss) from operations (376,300) (580,601)
Other income (expense) (49,209) 8,609
(Loss) for the period before
income taxes $ (425,509) $ (571,992)
Income taxes 0 0
Net (Loss) for the period $ (425,509) $ (571,992)
(Loss) per Share $ (0.06) $ (0.08)
Weighted Average Number of
Shares Outstanding (Note 3) 7,666,384 7,262,978
</TABLE>
<TABLE>
Nestor, Inc.
Consolidated Balance Sheets
<CAPTION>
Sept. 30, June 30,
1995 1995
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 276,020 $ 452,588
Accounts receivable, net of allowance for
doubtful accounts 521,621 661,734
Unbilled contract revenue 404,683 208,352
Due from employees,
officers and directors 8,748 11,323
Other current assets 137,585 119,840
Total current assets 1,348,657 1,453,837
Property and equipment at cost -
net of depreciation 334,841 347,325
Other assets 11,333 11,333
Total assets $ 1,694,831 $ 1,812,495
Liabilities and Stockholders Deficit
Current liabilities:
Notes payable $ 2,000,000 $ 1,700,000
Accounts payable
and accrued expenses 1,432,360 1,381,457
Due to Sligos, S. A. 175,000 175,000
Deferred income 155,292 77,311
Other current liabilities 2,002 2,944
Total current liabilities 3,764,654 3,336,712
Noncurrent liabilities:
Long terms obligations capital leases
Due to Sligos, S.A. 100,000 100,000
Total liabilities 3,864,654 3,426,712
Long term portion of
deferred income 430,899 438,896
Redeemable preferred stock:
Series C Convertible
Preferred Stock 1,628,334 1,600,328
Stockholders' deficit:
Preferred stock, 1.00 par value,
authorized 10,000,000 shares; issued and outstanding:
Series A - 452,064 shares at June 30, 1995
(liquidation value ($904,128 - $2.00 per share)
and 452,064 at September 30, 1995 452,064 452,064
(liquidation value
($904,128 - $2.00 per share)
Series B - 2,540,000 shares
at June 30, 1995
(liquidation value $2,540,000 -
$1.00 per share) 2,451,500 2,540,000
and 2,451,500 shares at September 30, 1995,
(liquidation value $2,451,500 - $1.00 per share)
Common stock, $.01 par value,
authorized 30,000,000 shares
issued and outstanding:
7,606,710 shares at June 30, 1995
and 7,696,710 shares at
September 30, 1995 76,967 76,067
Warrants and options 375,000 375,000
Additional paid-in capital 11,050,943 11,103,449
Retained (deficit) (18,635,530) (18,210,021)
Total stockholders'
equity (deficiency) (4,229,056) (3,663,441)
Total Liabilities and
Stockholders' Deficit $ 1,694,831 $ 1,812,495
</TABLE>
<TABLE>
Nestor, Inc.
Consolidated Statements of Cash Flows
<CAPTION>
Three Months Ended September 30,
1995 1994
<S> <C> <C>
Cash flows from operating activities:
Net (loss) $(425,509) $ (571,992)
Adjustments to reconcile net (loss)
to net cash provided by operating activities:
Depreciation and amortization 26,183 29,881
Changes in assets and liabilities:
(Increase) decrease in
accounts receivable 140,113 (244,657)
(Increase) decrease in
unbilled contract revenue (196,331) 58,565
(Increase) in due from
employees, officers, and
directors, and other
current assets (15,170) (96,036)
Increase in accounts payable
and accrued expenses 50,903 118,431
Increase in deferred income 69,984 14,104
Net cash (used) by
operating activities (349,827) (691,704)
Cash flows from investing activities:
Purchase of property and equipment (13,698) (40,160)
Net cash (used) by
investing activities (13,698) (40,160)
Cash flows from financing activities:
Repayment of obligations
under capital leases (942) (3,013)
Proceeds from note payable 300,000 0
Rights offering expense (112,101) 0
Proceeds from issuance
of common stock 0 67,531
Proceeds from issuance
of preferred stock 0 1,470,000
Net cash (used) by
financing activities 186,957 1,534,518
Net change in cash and
cash equivalents (176,568) 802,654
Cash and cash equivalents -
beginning of period 452,588 416,210
Cash and cash equivalents -
end of period $ 276,020 $ 1,218,864
Supplemental cash flows information:
Interest paid $ 3,694 $ 261
Income taxes paid $ 0 $ 0
</TABLE>
Notes to Consolidated Financial Statements
Note 1 -Financial Statements:
In the opinion of management, all adjustments,
consisting only of normal recurring adjustments
necessary for a fair presentation of (a) the
consolidated results of operations for the three months
ended September 30, 1995 and 1994; (b) the consolidated
statements of cash flows for the three months ended
September 30, 1995 and 1994; and (c) consolidated
financial position at September 30, 1995 has been made.
Note 2 -Research and Development Expenses:
Research and development expenses charged to operating
expenses are summarized as follows:
Three Months Ended
September 30,
1995 1994
Customer Funded $ 433,185 $ 269,243
Company Funded 192,423 259,758
$ 625,608 $ 529,001
For the three months ended September 30, 1995, the
Company earned $433,185 of revenue and incurred costs of
$309,221 under contracts to perform research and
development for others. At September 30, 1995, no
customer had committed itself to provide additional
funding, nor were any significant royalty arrangements,
purchase provisions or license agreements in effect with
customers for whom the Company had performed research
and development services.
Note 3 -Marketing Expenses:
Marketing expenses charged to operating expenses are
summarized as follows:
Three Months Ended
September 30,
1995 1994
$ 526,457 $ 487,844
Note 4 -Rights Offering and Note Payable:
On August 16, 1995, a registration statement of the
Company relating primarily to rights granted to the
Company's shareholders became effective. Each right
enabled the holder to purchase a Unit consisting of one
share of series D Convertible Preferred Stock,
convertible into one share of Common Stock after January
1, 1996 and one warrant to purchase one-half share of
Common Stock for three years after the effective date of
the registration statement at a price of $2 per share.
Gross proceeds of the rights offering, which closed on
September 29, 1995, totaled $285,823. In early October
the Company received the proceeds of the offering and
issued the stock. Costs of the offering, which were
charged to additional paid-in capital, totaled
approximately $146,000.
Pursuant to a Standby Financing and Purchase Agreement
dated March 16, 1995, as amended on June 30, 1995, Wand
loaned to the Company the sum of $1,700,000 evidenced by
promissory notes, which bore interest at the rate of 10%
per annum payable in shares of Common Stock of the
Company. On September 12, 1995, Wand made an additional
loan to the Company in the amount of $300,000, bringing
the principal amount of all of the Company's promissory
notes to $2,000,000. In early October, Wand exchanged
these notes for 20,000 unregistered Units and 1,970
shares of Series C Preferred Stock. The terms and
conditions of such Series C Convertible Preferred Stock
are the same as the 1,500 shares of Series C Convertible
Preferred Stock previously purchased by Wand.
Upon completion of the offering and the conversion of
the notes described above, the Company issued to Wand
700,000 ten-year warrants to purchase shares of the
Common Stock of the Company at $1.00 per share. The
Company will record in the second quarter a charge of
$131,250 representing the difference between the market
value of the underlying Common Stock of the Company and
the aggregate exercise price of such warrants.
Liquidity and Capital Resources
Cash Position and Working Capital
The Company had cash and short term investments of approximately
$276,000 at September 30, 1995, as compared with $452,000 at June
30, 1995, and 908,273 at March 31, 1995. At September 30, 1995
the Company had a working-capital deficiency of $2,415,997, as
compared with a working-capital deficiency of $1,882,875 at June
30, 1995. Current liabilities used to calculate working capital
at September 30, 1995 include notes payable in the amount of
$2,000,000, which early in October 1995 were converted into
redeemable preferred stock and will be reflected on the Company's
balance sheet but will not be included in stockholders' equity.
The Company had a negative net worth of $4,229,056 at September
30, 1995, as compared with negative net worth of $3,663,441 at
June 30, 1995.
Rights offering and transactions between the Company and Wand
On August 16, 1995, a registration statement of the Company
relating primarily to rights granted to the Company's
shareholders became effective. Each right enabled the holder to
purchase a Unit consisting of one share of series D Convertible
Preferred Stock, convertible into one share of Common Stock after
January 1, 1996 and one warrant to purchase one-half share of
Common Stock for three years after the effective date of the
registration statement at a price of $2 per share.
Gross proceeds of the rights offering, which closed on September
29, 1995, totaled $285,823. In early October the Company
received the proceeds of the offering and issued the stock.
Costs of the offering, which were charged to additional paid-in
capital, totaled approximately $146,000.
Pursuant to a Standby Financing and Purchase Agreement dated
March 16, 1995, as amended on June 30, 1995, Wand loaned to the
Company the sum of $1,700,000 evidenced by promissory notes,
which bore interest at the rate of 10% per annum payable in
shares of Common Stock of the Company. On September 12, 1995,
Wand made an additional loan to the Company in the amount of
$300,000, bringing the principal amount of all of the Company's
promissory notes to $2,000,000. In early October, Wand exchanged
these notes for 20,000 unregistered Units and 1,970 shares of
Series C Preferred Stock. The terms and conditions of such
Series C Convertible Preferred Stock are the same as the 1,500
shares of Series C Convertible Preferred Stock previously
purchased by Wand.
Upon completion of the offering and the conversion of the notes
described above, the Company issued to Wand 700,000 ten-year
warrants to purchase shares of the Common Stock of the Company at
$1.00 per share. The Company will record in the second quarter a
charge of $131,250 representing the difference between the market
value of the underlying Common Stock of the Company and the
aggregate exercise price of such warrants.
Substantial additional capital will be required to enable the
Company to carry out needed marketing campaigns for its products,
for continued upgrading of its present products, and for customer
support. The Company is exploring options for the infusion of
additional funds through strategic partnerships and investments.
Although the Company has been engaged in discussions with
potential sources of funding, the Company has not to date
obtained a commitment for such additional funds. Management of
the Company is not in a position to predict the outcome of such
discussions, and there can be no assurance that such additional
financing will be available to the Company. If additional
financing is not available, there is substantial doubt as to the
Company's ability to continue as a going concern.
Deferred income
Operations of the Company have been partly funded by prepayments
under engineering contracts and licenses of the Company's
technology. Such prepayments are recognized as revenues under
the percentage-of-completion method as engineering is completed
or delivery obligations are fulfilled. The Company bases its
estimate of the percentage of completion on the amount of labor
applied to a given project, compared with the estimated total
amount of labor required. The remainder of such prepaid revenue
is reflected on the Company's balance sheet as deferred income,
and is treated as a liability. Total deferred income was
$586,191 at September 30, 1995, as compared with $516,207 at June
30, 1995.
Future commitments
During the quarter ended September 30, 1995, the Company acquired
additional property and equipment (primarily computing and
related equipment) at a cost of $13,699. The Company has no
material commitments for capital expenditures although management
expects that the Company may make future commitments for the
purchase of additional computing and related equipment, for
development of hardware, for consulting and for promotional and
marketing expenses.
The Company has no material commitments other than a commitment
to purchase from Intel Corporation a supply of Ni1000 Recognition
Accelerator chips for an aggregate purchase price of $97,500.
The Company placed a purchase order in this amount with Intel
Corporation in June 1995 and expects to take delivery of this
order in the Company's fiscal third quarter which begins January
1, 1996.
Results of Operations
Revenues in the quarter ended September 30, 1995, increased 49%
over the corresponding quarter of last year. Expenses increased
10%, resulting in a 25% decrease in the loss for the quarter.
Revenues
The Company's revenues arise from licensing of the Company's
products and technology, from the sale of tangible products, and
from contract engineering services and are discussed separately
below. During the quarter ended September 30, 1995, total
revenues increased $331,621 to $1,012,501 from $680,880 in the
corresponding quarter of the prior fiscal year. The increase in
revenues in 1995 over 1994 reflects the net of an increase in
revenues from licensing fees and services and a decrease in sales
of tangible products.
Licensing fees
Product-licensing revenues totaled approximately $471,000 in the
quarter ended September 30, 1995, as compared with $278,000 in
the same quarter of the prior year.
Most of the increase in product-licensing revenues for the
quarter ended September 30, 1995 was attributable to the
Company's NestorReader group of intelligent-character-recognition
products, which accounted for 80% of the Company's licensing
revenues during the quarter then ended. Revenues from this
product line totaled approximately $375,000 in the quarter ended
September 1995, an increase of $120,000 from $255,000 of similar
revenues in the year-earlier period. The increase in year-to-
year revenues reflects two factors: unit shipping volume has
increased and the Company realized significant growth in royalty
revenues from its OEMs.
Services
Revenues from engineering contracts totaled $433,000 in the
quarter ended September 30, 1995, as compared with $269,000 in
the year-earlier period.
Revenues relating to the customization of Nestor's Fraud
Detection System totaled $356,000 in the first quarter of the
current fiscal year compared to $182,000 for similar work in the
prior year.
The Company's contracts with the Advanced Research Projects
Agency (ARPA), formerly called the Defense Advanced Research
Projects Agency, require engineering services rendered by the
Company to develop a generic commercial application of the
Company's technology to high-speed pattern recognition through
the creation of an integrated circuit, associated circuit boards,
and supporting development software. The Company has two
contracts with ARPA. The first contract, which was signed in
April 1990, is valued at $1,630,000; as of September 30, 1995
approximately $1,623,000 had been earned. The second contract,
signed August 26, 1993, is expected to run for 30 months from
that date and is valued at approximately $776,000. As of
September 30, 1995, approximately $773,000 had been earned. The
terms of both contracts call for delivery of prototype products,
but do not specify any subsequent purchasing or licensing
provisions.
During the quarter ended September 30, 1995, the Company
recognized revenues totaling $6,935 under its government
contracts. In the year-earlier period such revenues totaled
$28,243.
Sales of tangible products
The tangible products currently sold by the Company are circuit
boards incorporating the Company's Ni1000 Recognition Accelerator
Chip, which are marketed along with development software that
enables customers to develop high-speed recognition applications.
Revenues from the Company's Ni1000 Development System totaled
$108,464 in the quarter ended September 30, 1995, as compared
with $133,670 in the corresponding quarter of the prior year.
Approximately 60%, or $80,000, of Ni1000 Development System
revenues in the year-earlier period derived from the Company's
Beta program, which was completed during that quarter.
Commercial shipments accounted for the remaining 40% of revenues
in that quarter.
Expenses
Total expenses - consisting of operations, selling and marketing,
and general and administrative expenses - amounted to $1,388,801
in the quarter ended September 30, 1995, as compared with
$2,009,907 in the preceding quarter and $1,261,481 in the
corresponding quarter of the prior fiscal year. The increase in
year-to-year costs reflects primarily the net of an increase in
salaries and consulting costs and a decrease in promotional
costs.
Labor costs continue to be the Company's single greatest expense
category. In the quarter ended September 30, 1995, the Company
paid $805,302 for wages and consulting fees, an increase of
$137,751 from total wages and consulting fees of $667,551 paid in
the corresponding quarter of the prior fiscal year. The increase
in labor costs reflects the growth in staffing: full-time
employees totaled 49 at September 30, 1995 as compared with 37 at
September 30, 1994. The marketing and sales staff grew from 10
in September 1994 to 12 in September 1995; the engineering staff
grew from 20 in September 1994 to 24 in September 1995; and a
dedicated customer support staff that was begun in August 1994
totaled 6 in September 1995.
The decrease in costs from the preceding quarter to the current
quarter reflects a broad effort to reduce costs that began in the
fourth quarter of the prior fiscal year. Expenses decreased in
all areas - operations, sales and marketing, and general and
administrative. Staffing decreased from 53 full-time employees
in June 1995 to 49 in September 1995 to 43 at the end of October
1995. This reduction in staffing reflects the layoff of
employees and attrition without replacement throughout the period
from June 1995 to November 1995. Further, the Company has
reduced its promotional expenditures since the fourth quarter of
the prior fiscal year.
Cost of services and products sold
The cost of services and products sold, which is primarily labor
cost related to product development and engineering, totaled
$635,763 during the quarter ended September 30, 1995, as compared
with $688,752 in the preceding quarter and $528,998 in the year-
earlier period.
Operating costs and expenses related to the production of
revenues from product-licensing fees and sales of tangible
products remained essentially flat on a year-to-year basis: such
costs totaled $326,542 in the quarter ended September 1995 as
compared with $323,235 in the year-earlier period.
Costs related to engineering services totaled $309,221 in the
quarter ended September 30, 1995, as compared to $205,763 in the
corresponding quarter of the prior fiscal year. As a percentage
of revenues, these costs decreased from last year to this year,
reflecting the growth in engineering revenues relating to
customizing the Company's fraud-detection system, where the
Company has been able to price its services more aggressively
than in other market segments.
The Company's expenditures for research and development were
$625,776 in the quarter ended September 30, 1995, as compared
with $529,001 in the year-earlier period.
Selling and marketing
Selling and marketing expenses totaled $506,457 in the quarter
ended September 30, 1995, as compared with $905,866 in the
preceding quarter and $487,844 in the corresponding quarter of
the prior year, when a ramp-up of marketing expenses was begun.
The increase in year-to-year costs reflects primarily the net of
an increase in wages, consulting and related fringe benefits
costs and a decrease in promotional costs. The significant
decrease in these expenses from last year's fourth quarter to
this year's first quarter reflects a decrease in virtually every
category of selling and marketing expenses.
Sales compensation, consisting of salaries, fringe benefits, and
commissions totaled $337,053 in the quarter ended September 30,
1995, as compared with $354,629 in the preceding quarter and
$177,112 in the year-earlier period. Promotional expenses -
comprising advertising, promotion, conventions and meetings -
totaled $52,655 in the quarter ended September 30, 1995, as
compared with $284,716 in the preceding quarter and $143,818 in
the quarter ended September 30, 1994.
General and administrative expenses
General and administrative expenses totaled $203,381 in the
quarter ended September 30, 1995, as compared with $287,193 in
the preceding quarter and $156,713 in the quarter ended September
30, 1994.
Other expense
Other expenses, consisting of the net of interest income and
interest expense, totaled $49,209 of net interest expense in the
quarter ended September 30, 1995, as compared with net interest
income of $8,609 in the year-earlier period. Over 93%, or
approximately $46,000, in net interest expense in the current
year's quarter relates to interest on the notes payable from
Wand. Early in October those notes were converted into
Convertible Preferred Stock and the accumulated interest was paid
to Wand, which agreed to accept Common Stock as payment for most
of the accrued interest.
Investment in product development and marketing
The Company has continued to invest in product development and in
marketing of its products and technology, and such expenses are
not capitalized.
Revenues relating to the Company's Fraud Detection System
exceeded expenses by approximately $82,000 in the quarter ended
September 30, 1995.
The largest investment made by the Company has been in its
NestorReader character-recognition product. During the quarter
ended September 30, 1995, the Company's NestorReader product-
development and marketing expenses exceeded revenues by
approximately $154,000. Most of the reduction in staffing and in
promotional expenditures has come from this group.
Expenses of the Company's generic products (the Ni1000
Recognition Accelerator and the Company's proprietary software
development tools) exceeded revenues by approximately $57,000
during the quarter ended September 30, 1995.
Net Income Per Share
During the quarter ended September 30, 1995, the Company
experienced a loss of $425,509 or $.06 per share, as compared
with a loss of $1,105,602 or $.15 per share for the preceding
quarter and a loss of $571,992 or $.08 per share for the quarter
ending September 30, 1994.
During the quarter ended September 30, 1995, there were
outstanding a weighted average of 7,666,384 shares of Common
Stock, as compared with 7,262,978 during the corresponding
quarter of the previous year.
NESTOR, INC.
FORM 10-Q - SEPTEMBER 30, 1995
Item 6 Exhibits and reports on Form 8-K
(a) Securities Purchase Agreement dated August 1, 1994,
between the Company and Wand/Nestor Investments L. P.
filed as Item 5 of the Company's report on Form 8-K
dated August 8, 1994.
FORM 10-Q
NESTOR, INC.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
NESTOR, INC.
(REGISTRANT)
DATE: November ___, 1995 By:
Simon Heifetz
Vice Chairman and
Principal Financial Officer
