-13-
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QA
(Third Amendment)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 1995
[ ]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, Rhode Island 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 that 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: 7,549,210 shares
outstanding as of March 31, 1995
<PAGE>
NESTOR, INC.
FORM 10-QA - March 31, 1995
INDEX
Page
Number
PART 1 FINANCIAL INFORMATION
Item 1 Financial Statements:
Consolidated Statements of Operations
Three and Nine Months Ended
March 31, 1995 and 1994 3
Consolidated Balance Sheets (unaudited)
March 31, 1995 and June 30, 1994 4
Consolidated Statements of Cash Flows (unaudited)
Nine Months Ended March 31, 1995 and 1994 5
Notes to Consolidated Financial Statements 6
Item 2 Management's Discussion and Analysis
of Financial Condition and Results of Operations 7
PART 2 OTHER INFORMATION 11
<PAGE>
<TABLE>
NESTOR, INC.
STATEMENTS OF CONSOLIDATED INCOME
(Unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
1995 1994 1995 1994
<S> <C> <C> <C> <C>
Revenues:
Licensing fees $ 480,201 $ 273,844 $1,300,377 $ 725,529
Revenues from
services 157,325 200,125 689,171 516,675
Net sales of
tangible products 28,240 0 270,759 191,250
Total Revenue 665,766 473,969 2,260,307 1,433,454
Cost of Services
and Products Sold:
Licensing fees 693,532 293,468 1,519,415 893,084
Cost of services 185,907 181,752 550,907 408,511
Cost of
tangible
products 1,692 0 13,801 80,995
Total cost of
services and
products sold 881,131 475,220 2,084,123 1,382,590
Loss Profit
from Operations: (215,365) (1,251) 176,184 50,864
Selling and
marketing expenses 594,969 201,390 1,642,045 600,063
General and
administrative
expenses 462,295 223,754 766,547 614,536
Related party
consulting fee 25,692 0 139,836 0
Total costs
and expenses 1,082,956 425,144 2,548,428 1,214,599
(Loss) from
operations (1,298,321) (426,395) (2,372,244) (1,163,735)
Other income
(expense) 3,176 297 20,424 4,504
(Loss) for
the period before
income taxes (1,295,145) (426,098) (2,351,820) (1,159,231)
Income taxes 0 0 0 0
Net (Loss) for
the period $(1,295,145) $ (426,098)$ (2,351,820)
$ (1,159,231)
(Loss) per Share
(Note 3) $ (0.17) $ (0.06)$ (0.32) $
(0.17)
Weighted Average
Number of Shares Outstanding
(Note 3) 7,390,766 6,815,202 7,326,771 6,808,432
</TABLE>
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
Cash Position and Working Capital
The Company has experienced net losses and negative cash flow
from operations for each of its last five fiscal years and for
the nine months ended March 31, 1995, and had a negative net
worth of $2,448,738 as of March 31, 1995. The Company has
principally funded its activities through the sale of equity and
debt securities, cash derived from operations and through non-
refundable payments received under engineering and license
agreements. The Company had cash and short-term investments of
$908,273 at March 31, 1995, as compared with $416,210 at June 30,
1994, and $269,134 at June 30, 1993. At March 31, 1995, the
Company had a working-capital deficiency of $743,289, as compared
with working capital of $220,243 at June 30, 1994. Current
liabilities used to calculate working capital and net worth at
March 31, 1995 include a note payable in the amount of
$1,200,000, which management of the Company expects will be
converted to redeemable preferred stock upon the conclusion of a
proposed offering.
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, except for a
limited commitment from Wand. 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.
On April 25, 1994, the Company offered to certain warrantholders
the right to exercise their warrants at a reduced price for a
limited period of time. The Company received $641,250
representing the exercise price of warrants to acquire 320,625
shares of the Company's Common Stock.
On August 3, 1994, the Company sold to Wand $1.5 million of
Series C Convertible Preferred shares and warrants to purchase
one million shares of Common Stock. Such preferred stock is
convertible into one million shares of Common stock, and the
warrants are exercisable at $1.50 per share, subject to
adjustment. The Company received from the sale of these equities
a total of $1,500,000 (and paid $30,000 of closing costs).
The proceeds of Wand's investment in the Company were used
primarily to implement an aggressive marketing plan for the
Company's products, beginning in the second quarter of the fiscal
year ended June 30, 1995. While the marketing plan produced a
substantial increase in sales, customers for the Company's
products responded more slowly than expected, and the Company's
greatly increased expenditures resulted in the need for
additional capital.
On March 16, 1995, the Company signed an agreement with Wand
under which Wand loaned to the Company the sum of $1,200,000
evidenced by a promissory note (the "Note") which bears interest
at the rate of 10% per annum payable in shares of Common Stock.
The Note is callable at any time up to the commencement of a
proposed offering in the event of a material adverse change in
the condition or prospects of the Company. Upon the conclusion
of a proposed offering, Wand has agreed to cancel and surrender
the Note to the Company and to apply the principal amount, and an
additional $800,000, to the purchase of additional shares of
Series C Convertible Preferred Stock.
Deferred Income
Operations of the Company have been partly funded by prepayments
under engineering contracts and licenses of the Company's
technology. With the sole exception of an arrangement made in
December 1994 with Sligos, S.A., such prepayments have been non-
refundable. 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 completed 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
$507,789, $1,006,837 and $962,091 at March 31, 1995, June 30,
1994 and June 30, 1993, respectively.
The decrease in deferred income from March 31, 1994 to March
31,1995, occurred for three reasons: as the Company earned
revenue, deferred income was reclassified to appropriate revenue
categories; Sligos, S.A. agreed to convert $200,000 of its
prepayment into equity; and the Company agreed to refund to
Sligos, S.A. its prepayments of royalties and engineering fees
under its license agreement with the Company, in consideration of
the termination of the exclusiveness of Sligos' marketing rights
in Europe to the Company's credit-card risk-assessment
technology, which permitted the Company to market its products
directly to European customers. The amounts to be refunded are
equal to the greater of (a) seven per cent. of the Company's
revenues from licensing of its credit-card risk-assessment
products in Europe or (b) certain minimum payments aggregating
$305,000 during the period ending December 31, 1996. The portion
of such minimum payments due during the twelve months ending
March 31, 1996 have been classified as current liabilities, and
the portion due after March 31, 1996 has been classified as a
long-term liability. The refunding of Sligos' prepayments based
upon the Company's European risk-assessment revenues are expected
to continue through December 1999, but in no event shall exceed
in the aggregate prepayments made by Sligos reduced by refunds
made to Sligos and by the amount of prepayments applied to the
purchase of shares of Series A Preferred Stock of the Company.
As at March 31, 1995, such prepayments remaining on the books of
the Company amounted to $713,896, after giving effect to the
application of $200,000 of prepayments to the purchase by Sligos
of 100,000 shares of Series A Preferred Stock and to the refund
by the Company to Sligos of $30,000 of prepaid royalties and
engineering fees.
Future Commitments
The Company has no material commitments other than its obligation
to Sligos, S.A., as described above, and 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 during the
Company's fiscal year that began on July 1, 1995.
Inflation
Management believes that the rate of inflation in recent years
has not had a material effect on the Company's operations.
Results of Operations
Revenues in the quarter ended March 31, 1995, increased 40% over
the prior year while expenses increased 118% resulting in a 203%
increase in the loss for the quarter. For the nine-month period
ending March 31, 1995, revenues increased 58% over the comparable
period of the prior year. Expenses in the nine months ending
March 1995 increased 70% over the prior-year period resulting in
an 85% increase in the loss.
Revenues
During the quarter ended March 31, 1995, total revenues increased
$191,797 to $665,766 from $473,969 in the corresponding quarter
of the prior fiscal year. For the nine months ended March 31,
1995, revenues totaled $2,260,307, an increase of $826,853 from
revenues of $1,433,454 in the nine months ended March 31, 1994.
The increase in quarterly revenues from 1994 to 1995 reflects
primarily an increase in product-licensing fees, which increased
from $273,844 in the quarter ended March 31, 1994, to $480,201 in
the current-year quarter. Similarly, the increase in year-to-
date revenues from 1994 to 1995 reflects an increase in product-
licensing fees, which increased $574,848 from $725,529 for the
nine months ended March 31, 1994 to $1,300,377 in the comparable
period of 1995.
Returns of the Company's products have been insignificant.
Therefore, the Company has not had to establish an allowance for
anticipated returns at the time of sale. Products shipped
subject to customer approval do not give rise to revenues until
such products have been accepted by customers.
Licensing
Product-licensing revenues totaled approximately $508,000 in the
quarter ended March 31, 1995, as compared with $256,000 in the
same quarter of the prior year. Revenues from the Company's
NestorReader(TM) group of intelligent-character-recognition
products totaled approximately $466,000 in the quarter ended
March 31, 1995, an increase of $254,000 from $212,000 of similar
revenues in the year-earlier period.
Most of the increase in product-licensing revenues for the nine
months ended March 31, 1995 was attributable to the NestorReader
product line, which accounted for 90% of the Company's licensing
revenues in the nine months ended March 31, 1995. During that
period, revenues from this product line increased to $1,145,000
from $607,000 in the corresponding period of the prior year.
This increase in revenues reflects two factors: unit shipping
volume has increased and the Company realized revenues of
$247,923 in the nine months ended March 31, 1995 from its
OmniTools(TM) product, which was introduced in the fourth quarter
of fiscal 1994.
Services
The services regularly offered by the Company consist mainly of
engineering services that are required to customize the Company's
products for particular customers or to apply the Company's
technology to the development of solutions to commercial pattern-
recognition problems. During the quarter ended March 31, 1995,
revenues from such activities totaled approximately $157,000, as
compared with $200,000 in the year-earlier period. For the nine
month period ending March 31, 1995, revenues from engineering
services totaled $689,171, an increase of $172,496 from the year-
earlier revenues of $516,675.
Revenues relating to the customization of Nestor's Fraud
Detection System totaled $43,000 in the third quarter of the
current fiscal year compared to approximately $60,000 for similar
work in the prior year. During the nine months ended March 31,
1995, such revenues totaled approximately $410,000, which were
twice as great as the revenues realized from this market segment
in the corresponding period of the prior fiscal 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 March 31, 1995,
approximately $1,623,000 had been earned. The second contract,
signed August 26, 1993, is expected to run 24 months and is
valued at approximately $776,000. As of March 31, 1995,
approximately $643,000 had been earned. Of the total ARPA
contract of $776,000, the Company had billed approximately
$766,000 to ARPA at June 30, 1995. 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 March 31, 1995, the Company recognized
revenues totaling approximately $98,000 under its government
contracts as compared with $146,000 in the year-earlier period.
During the nine months ended March 31, 1995, revenues from the
Company's government contracts totaled $220,000 as compared with
revenues of $301,000 in the corresponding period of the prior
fiscal year.
Sales of Tangible Products
The tangible products currently sold by the Company are based
upon the Company's Ni1000 Recognition Accelerator Chip, which is
marketed along with development software that enables customers
to develop high-speed recognition applications. For the three
months ending March 31, 1995, sales of the Company's Ni1000
system totaled approximately $28,000. For the nine months ended
March 31, 1995, revenues from the Company's Ni1000 Chip
Development System totaled $270,000 as compared with $191,000 in
the corresponding period of the prior fiscal year. The Ni1000
Development System was introduced in Beta in June 1993; 28% of
the revenues in the nine months ended March 31,1995 derived from
the Beta program as compared with 100% in the preceding year.
Commercial shipments of the Ni1000 Development System, which
began in June 1994, accounted for the remaining 72% of the
revenues in the current year period.
Expenses
During the quarter ended March 31, 1995, total expenses were
$1,964,087, as compared with total expenses of $1,405,858 in the
preceding quarter and $900,364 in the corresponding quarter of
the prior fiscal year. For the nine months ended March 31, 1995,
total expenses were $4,632,551. For the corresponding period of
the prior fiscal year, total expenses were $2,597,189. The
majority of the increase in expenses derived from increases in
salaries and promotional expenses as the Company increased its
investment in marketing and sales.
Labor costs continue to be the Company's single greatest expense
category. In the quarter ended March 31, 1995, the Company paid
$895,282 for wages and consulting fees, an increase of $406,474
from total wages and consulting fees of $488,808 paid in the
corresponding quarter of the prior fiscal year. For the nine
months ended March 31, 1995, the Company paid $2,321,404 for
wages and consulting fees, an increase of $929,815 from total
wages and consulting fees of $1,391,589 paid in the corresponding
period of the prior fiscal year. The increase in labor costs
reflects a growth in staff from 32 people in March 1994 to 53 in
March 1995. The marketing and sales staff grew from five in
March 1994 to 13 in March 1995; the engineering staff grew from
20 in March 1994 to 25 in March 1995; and a dedicated customer
support staff that was begun in August 1994 totaled six in March
1995.
Cost of Services and Products Sold
Operating costs and expenses, which are primarily labor costs
related to product development and engineering, increased from
$475,220 in the quarter ended March 31, 1994, to $881,131 in the
current-year quarter. For the nine months ended March 31, 1995,
such costs increased to $2,084,123 from $1,382,590 for the nine
months ended March 31, 1994, reflecting a 25% increase in staff
with proportionate increases in compensation and in allocation of
fixed costs. Approximately 70% of these costs and expenses are
related to the production of revenues from product-licensing
fees. The increase in such costs reflects the Company's
commitment to the development and continuing enhancement of it
products, primarily those related to document processing based
upon the Company's intelligent character-recognition technology.
During the quarter ended March 31, 1995, the Company's
expenditures for research and development were $792,000, as
compared with $565,000 in the quarter ended March 31, 1994. For
the nine months ended March 31, 1995, such costs totaled
$1,922,388 as compared with $1,605,436 for the nine months ended
March 31, 1994. The Company's research and development is almost
entirely product related.
The Company's tangible products have a large software component,
and the cost of goods sold amounted to approximately 5% of
revenues in the nine months ended March 31, 1995. The higher
cost component of these products in the prior-year period was
largely the result of shipments under the Company's beta program,
which had a larger hardware component of sales.
Selling and marketing expenses
The largest year-to-year percentage increase in expenses for the
three and nine months ended March 31,1995 was in selling and
marketing expenses. The increase reflected an aggressive
marketing plan for the Company's NestorReader products. As noted
above, the Company has increased its sales staff, its marketing
expenditures, and its staffing of a customer-support group. For
the quarter ended March 31, 1995, the Company's total marketing
expenses, including salaries and fringes, promotional expenses
and related overhead, were $594,969, as compared with marketing
expenses of $201,390 in the year-earlier period. For the nine
months ended March 31, 1995, the Company's marketing expenses
totaled $1,642,045 as compared with $600,063 in the year-earlier
period. Sales compensation, consisting of salaries, fringe
benefits, and commissions, increases from $86,911 in the three
months ended March 31, 1994, to $209,387 in the quarter ended
March 31, 1995. Such costs increased from $306,180 for the nine
months ended March 31, 1994 to $693,794 in the comparable period
of 1995. Consulting increased from $22,767 in the first nine
months of fiscal 1994 to $241,311 in the same period of fiscal
1995, including $139,836 paid and accrued to Hill & Partners in
connection with the development and implementation of a marketing
plan.
Promotional expenses, comprising advertising, promotion,
conventions and meetings, increased approximately $161,000 from
$52,000 in the three months ended March 31, 1994 to $213,000 in
the current-year quarter. For the nine months ended March 1995,
promotional costs totaled $479,000, an increase of $353,000 from
$126,000 in the corresponding period of the fiscal year.
Increased attendance at trade shows, media advertising and direct-
mail expenses accounted for the increase in promotional expenses
in the current fiscal period. Of this amount, expenditures for
advertising and meetings increased from $115,202 to $460,725.
General and administrative expenses
General and administrative expenses totaled $462,295 for the
three months ending March 31, 1995, including approximately
$209,000 of non-cash charges related to the expense represented
by the market value of 100,000 shares of Common stock issued to
Wand as a commitment. In the three-month period ended March 31,
1994, general and administrative costs totaled $223,754 For the
nine months ended March 31, 1995, general and administrative
expenses totaled $791,547 including the non-cash charge mentioned
above. In the corresponding period of the prior fiscal year,
general and administrative charges totaled $614,536.
Investment in Product Development and Marketing
As noted above, the Company has continued to invest in internally
funded product development and in marketing of its products and
technology. The Company's development projects are entirely
product-oriented, and the development of these products has not
entailed a "working model" or "technological feasibility" phase
because the capabilities of the Company's technology are well
understood. As a result, development is continuous from
inception to finished product, which is ready for marketing when
development is completed. For this reason, development expenses
have not been capitalized to date, and costs of product
development and marketing have been charged to their respective
product lines.
The largest investment made by the Company has been in its
NestorReader character-recognition product. During the quarter
ended March 31, 1995, the Company's NestorReader product-
development and marketing expenses exceeded revenues by
approximately $462,000 and such expenses exceeded revenues for
the nine months then ended by approximately $977,000. Much of
the Company's increased investment in marketing and sales was
related to the NestorReader product line, which _ as noted above
_ accounts for the bulk of the Company's licensing revenues.
Expenses of the Company's generic products (the ARPA hardware and
the Company's proprietary software-development tools) exceeded
revenues by approximately $202,000 for the quarter ended March
31, 1995, and such expenses exceeded revenues for the nine months
then ended by $394,000. The Company began commercial shipping of
the chip and related products in June 1994.
Expenses relating to the Company's Fraud Detection System
exceeded revenues by approximately $158,000 during the quarter
ended March 31, 1995. For the nine month period ended March 31,
1995, expense exceeded revenues by approximately $94,000. The
Company has license agreements with Mellon Bank, with Europay
International, an association of 700 banks in Europe, and with a
European financial-services company for the use of this system.
Net Income Per Share
During the quarter ended March 31, 1995, the Company experienced
a loss of $1,295,145 or $.17 per share, as compared with a loss
of $484,558 or $.07 per share for the preceding quarter and a
loss of $426,098 or $.06 per share for the quarter ending March
31, 1994. For the nine months ended March 31, 1995, the Company
experienced a loss of $2,351,820 or $.32 per share, as compared
with a loss of $1,159,231 or $.17 per share for the corresponding
period in its prior fiscal year.
During the quarter ended March 31, 1995, there were outstanding a
weighted average of 7,390,766 shares, as compared with 6,815,202
during the corresponding quarter of the previous year. For the
nine months ended March 31, 1995, there were outstanding a
weighted average of 7,326,771 shares, as compared with 6,808,432
during the corresponding period of the previous year.
<PAGE>
FORM 10-QA
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: April 12, 1996 BY:
David Fox
President and CEO
