UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 1996
[ ] 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: 8,041,286 shares
outstanding as of March 31, 1996
NESTOR, INC.
FORM 10-Q - March 31, 1996
INDEX
PART 1 FINANCIAL INFORMATION
Item 1 Financial Statements:
Statement of Consolidated Income (unaudited)
-Three and Nine Months
Ended March 31, 1996 and 1995
Consolidated Balance Sheets (unaudited)
-March 31, 1996 and June 30, 1995
Statements of Consolidated Cash Flows (unaudited)
-Nine Months
Ended March 31, 1996 and 1995
Notes to Consolidated Financial Statements
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations
PART 2 Other Information
<TABLE>
NESTOR, INC.
STATEMENTS OF CONSOLIDATED INCOME
(Unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Revenues:
Licensing fees $ 375,380 $ 480,201 $1,277,301 $ 1,300,377
Revenues from services 547,947 157,325 1,624,124 689,171
Net Sales of tangible
products 50,726 28,240 221,716 270,759
Total Revenue 974,053 665,766 3,123,141 2,260,307
Cost of Services and
Products Sold:
Licensing fees 129,775 693,532 526,829 1,519,415
Revenues from services 507,868 185,907 1,304,459 550,907
Net sales of tangible
products 35,524 1,692 143,091 13,801
Total Cost of
Services and
Products Sold 673,167 881,131 1,974,379 2,084,123
Gross Profit
from Operations: 300,886 (215,365) 1,148,762 176,184
Selling and marketing
expenses: 381,212 594,969 1,278,701 1,642,045
General and administrative
expenses 203,242 462,295 741,988 766,547
Related party consulting fee 51,838 25,692 137,364 139,836
Total costs and expenses 636,292 1,082,956 2,158,053 2,548,428
(Loss) from operations (335,406) (1,298,321) (1,009,291) (2,372,244)
Other income (expense) 2,272 3,176 (47,070) 20,424
(Loss) for the period
before income taxes (333,134) (1,295,145) (1,056,361) (2,351,820)
Income taxes 0 0 0 0
Net (Loss) for the period $(333,134) $(1,295,145) $(1,056,361)$(2,351,820)
(Loss) Per Share $ (0.04) $ (0.17) $ (0.14) $ (0.32)
Weighted Average Number of
Shares Outstanding 7,909,010 7,390,766 7,782,124 7,326,771
</TABLE>
<PAGE>
<TABLE>
NESTOR, INC.
CONSOLIDATED BALANCE SHEETS
<CAPTION>
March 31, 1996 June 30, 1995
ASSETS (Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 515,221 $ 452,588
Accounts receivable net of
allowance for doubtful accounts 1,090,772 661,734
Unbilled contract revenue 306,592 208,352
Due from employees, officers
and directors 9,111 11,323
Other current assets 129,575 119,840
Total current assets 2,051,271 1,453,837
Property and equipment at cost-
net of depreciation 300,178 347,325
Other assets 10,483 11,333
Total Assets $ 2,361,932 $ 1,812,495
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Note Payable $ 0 $ 1,700,000
Accounts payable and
accrued expenses 813,160 1,381,457
Due to SLIGOS, S.A. 275,000 175,000
Deferred income 215,529 77,311
Other current liabilities 9,999 2,944
Total current liabilities 1,313,688 3,336,712
Noncurrent liabilities:
Long term obligations
under capital lease 9,792 0
Due to SLIGOS, S.A. 0 100,000
Total liabilities 1,323,480 3,436,712
Long term portion of
deferred income 430,899 438,896
Redeemable preferred stock
(see Note 4) 5,114,430 1,600,328
Stockholders' equity:
Preferred stock, $1.00 par value,
authorized 10,000,000 shares;
issued and outstanding:
Series A - 452,064 shares at
June 30, 1995 452,064
(liquidation value $904,128 -
$2.00 per share)
and 452,064 at March 31, 1996 452,064
(liquidation value $904,128 -
$2.00 per share)
Series B - 2,540,000 shares at
June 30, 1995 2,540,000
(liquidation value $2,540,000 -
$1.00 per share)
and 2,210,000 shares at
March 31, 1996, 2,210,000
(liquidation value $2,210,000 -
$1.00 per share)
Series D - None at June 30, 1995 0
(liquidation value $1.50 per
share plus accrued dividends)
and 186,671 shares at March 31, 1996, 290,257
(liquidation value $290,257 -
$1.50 per share)
Series C, E, F, G, and H
redeemable preferred stock
(shown above) 1,500 shares at
June 30, 1995 and 4,846 shares at
March 31, 1996 (liquidation value
$1,000 per share plus accrued
dividends) - see Note 4. -- --
Common stock, $.01 par value.
authorized 30,000,000 shares
issued and outstanding:
7,606,710 shares at June 30, 1995
and 8,041,286 shares at
March 31, 1996 80,413 76,067
Warrants and options 375,000 375,000
Additional paid-in capital 11,351,769 11,103,449
Retained (deficit) (19,266,380) (18,210,021)
Total stockholders'
equity (deficiency) (4,506,877) (3,663,441)
Total Liabilities and
Stockholders' Deficit $ 2,361,932 $ 1,812,495
</TABLE>
<TABLE>
NESTOR, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<CAPTION)
Nine Months Ended March 31,
1996 1995
<S> <C> <C>
Cash flows from operating activities:
Net (loss) $(1,056,361) $
(2,351,820)
Adjustments to reconcile net (loss)
to net cash provided by
operating activities:
Depreciation and amortization 78,738 76,536
Expenses recognized relating to options,
warrants and capital transactions 209,448 210,500
Changes in assets and liabilities:
(Increase) in accounts receivable (429,038) (96,118)
(Increase) in unbilled
contract revenue (98,240) (118,524)
(Increase) decrease in due from
employees, officers,and
directors, and other
current assets (7,523) (109,930)
(Increase) decrease in
other assets 0 (5,000)
Increase (decrease) in accounts
payable and accrued expenses (554,633) 423,816
Increase (decrease)
in deferred income 130,221 (55,548)
Net cash (used) by operating activities (1,727,388) (2,026,088)
Cash flows from investing activities:
Purchase of property and equipment (21,857) (214,702)
Net cash (used) by investing activities (21,857) (214,702)
Cash flows from financing activities:
Repayment of obligations
under capital leases (5,699) (8,209)
Proceeds of note payable 300,000 1,200,000
Rights offering expense (136,421) 0
Proceeds from issuance of common stock 2,175 71,062
Proceeds from issuance of
preferred stock 1,651,823 1,470,000
Net cash provided by financing activities 1,811,878 2,732,853
Net change in cash and cash equivalents 62,633 492,063
Cash and cash equivalents -
beginning of period 452,588 416,210
Cash and cash equivalents -
end of period $ 515,221 $ 908,273
Supplemental cash flows information:
Interest paid $ 4,356 $ 1,317
Income taxes paid $ 0 $ 0
</TABLE>
<PAGE>
FORM 10-Q
NESTOR INC.
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
and nine months ended March 31, 1996 and 1995; (b) the
Consolidated statement of cash flows for the nine months
ended March 31, 1996 and 1995; and (c) Consolidated
financial position at March 31, 1996 have been made.
Note 2 -Research and Development Expenses:
Research and development expenses charged to operating
expenses are summarized as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Customer Funded $547,947 $157,325 $1,624,124 $ 711,671
Company Funded 119,587 634,620 304,616 1,210,717
$667,534 $791,945 $1,928,740 $1,922,388
</TABLE>
For the three months ended March 31, 1996, the Company
earned $547,947 of revenue and incurred costs of
$507,868 under contracts to perform research and
development for others. For the nine months then ended
the Company earned $1,624,124 of revenue and incurred
costs of $1,304,459 for such research and development.
At March 31, 1996, a customer of the Company's Risk
Management Group had placed an order for the
installation of the Prism product. The Company expects
to recognize under this contract an additional $300,000
through July 31, 1996. At March 31, 1996, there were no
significant royalty arrangements, purchase provisions or
license agreements in effect with customers for whom the
Company had performed research and development services.
Note 3 - 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
registration statement at a price of $2 per share. As
of March 31, 1996, $10,250 of dividends was accrued and
included in the amount shown on the accompanying Balance
Sheet.
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 $136,000.
Pursuant to a Standby Financing and Purchase Agreement
dated March 16, 1995, as amended on June 30,1995, Wand
Partners loaned to the Company the sum of $1,700,000
evidenced by promissory notes, which bore interest at
the rate of 10% annum payable in shares of Common Stock
of the Company. On September 12, 1995, Wand Partners
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 Partners 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 Partners.
Upon completion of the offering and the conversion of
the notes described above, the Company issued to Wand
Partners 700,000 ten-year warrants to purchase shares of
the Common Stock of the Company at $1.00 per share. The
Company recorded 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.
Note 4 - Redeemable Preferred Stock
The Company is required to redeem all of the following
series of convertible preferred stock on or before
August 1, 2004. Accordingly, this preferred stock
subject to mandatory redemption has been presented
separately outside of permanent stockholders' equity in
the accompanying financial statements.
<TABLE>
<CAPTION>
March 31, 1996 June 30, 1995
<S> <C> <C>
Series C, par value $1.00 per share,
0 shares outstanding at March 31,
1996, and 1,500 shares issued and
outstanding at June 30, 1995. $0 and
$100,328 of accumulated dividends at
March 31, 1996 and June 30, 1995,
respectively. $ 0 $ 1,600,328
Series E, par value $1.00 per share,
1,444 shares outstanding at March 31,
1996, and 0 shares issued and
outstanding at June 30, 1995.
$105,930 and $0 of accumulated
dividends at March 31, 1996 and June
30, 1995, respectively. 1,549,930 0
Series F, par value $1.00 per share,
599 shares outstanding at March 31,
1996, and 0 shares issued and
outstanding at June 30, 1995. $9,019
and $0 of accumulated dividends at
March 31, 1996 and June 30, 1995,
respectively. 608,019 0
Series G, par value $1.00 per share,
777 shares outstanding at March 31,
1996, and 0 shares issued and
outstanding at June 30, 1995. $4,856
and $0 of accumulated dividends at
March 31, 1996 and June 30, 1995,
respectively. 781,856 0
Series H, par value $1.00 per share,
2,026 shares outstanding at March 31,
1996, and 0 shares issued and
outstanding at June 30, 1995.
$148,625 and $0 of accumulated
dividends at March 31, 1996 and June
30, 1995, respectively. 2,174,625 0
TOTAL: $5,114,430 $ 1,600,328
</TABLE>
At June 30, 1995, there were issued and outstanding
1,500 shares of Series C Convertible Preferred Stock. In
early October 1995, Wand Partners exchanged certain
Notes payable for an additional 1,970 shares of Series C
Preferred Stock. On January 31, 1996, Wand Partners
exchanged all of its Series C Convertible Preferred
Stock for 1,444 shares of Series E Convertible Preferred
Stock and 2,026 shares of Series H Convertible Preferred
Stock. On January 31, Wand Partners purchased 599
shares of Series F Convertible Preferred Stock for a
total of $599,000. On March 7, 1996, Wand purchased 777
shares of Series G Convertible Preferred Stock. Each of
these series of stock is described below.
Series F and G Convertible Preferred Stock
Except as noted below the Series F and G Preferred Stock
have the same terms and conditions. Each share of
Series F and G Preferred Stock is convertible at the
option of the holder at any time and from time to time
into shares of Common Stock at a conversion price of (a)
$1.25 per share, subject to adjustment, after June 30,
1996. With respect to dividend rights, redemption
rights and rights on liquidation, winding up or
dissolution, the Series F Preferred Stock ranks pari
passus with the Series G Preferred Stock and ranks prior
to the Series A, B, D, E, and H Preferred Stocks and the
Common Stock of the Company.
Except as provided herein, any holder of Series G
Preferred Stock that is subject to the Bank Holding
Company Act of 1956 ("BHCA Holder"), as amended, shall
have no voting rights. Each holder of Series G
Preferred Stock that is not a BHCA Holder shall be
entitled to vote on all matters as to which stockholders
of the Company are entitled to vote, and each such
holder shall be entitled to cast a number of votes equal
to the greatest number of whole shares of Common Stock
into which such holder's shares of Series G Preferred
Stock could be converted. The holders of the Series F
Convertible Preferred Stock are entitled to one vote for
each share of Common Stock into which the shares are
convertible.
In the event the Company is in default with respect to
the payment of (i) two consecutive cash dividends after
the "Restricted Period" as hereinafter defined or (ii)
two dividends within any six consecutive dividend
periods the holders of the Series F and G Preferred
Stock shall have the right to elect two directors for so
long as the default continues. In the event the Company
is in default with respect to the payment of (i) four
consecutive cash dividends after the Restricted Period
as hereinafter defined or (ii) four dividend payments
within any eight consecutive quarterly dividend periods,
the holders shall have the right to elect four directors
for so long as the default continues.
In the event the Company violates the provisions of, or
is in default under the terms of any loan agreement or
in the event a judgment is entered against the Company
or any subsidiary in the amount of $50,000 or more, the
holders of the Series C Convertible Preferred Stock
shall have the right to elect four directors.
The holders of the Series F and G Preferred Stock,
except during the Restricted Period, are entitled to
receive out of funds of the Company legally available
for such purpose as and when declared by the Board of
Directors of the Company quarterly dividends in cash at
a rate of nine percent (9%) compounded daily per annum
of the stated value per share ($1,000.00 on original
issuance) of Series F and G Preferred Stocks. Dividends
shall accrue, be accumulated and added to the stated
value whether or not declared. So long as any of the
shares of Series F and G Preferred Stock are
outstanding, the Company shall not declare or pay any
dividends on any outstanding Common or Preferred Stock,
other than the Series F and G Preferred Stock. The
Restricted Period as it relates to the payment of
dividends on the Series F and G Preferred Stock means
the period beginning on the date of issuance of the
Series F or G Preferred Stock and ending on September
30, 1997. While no dividends are payable during the
Restricted Period, they will accrue and accumulate
during the Restricted Period.
The Company is obligated to redeem all the outstanding
shares of Series F and G Preferred Stock outstanding at
the stated value plus accrued dividends on August 1,
2004. The holders of the F and G Preferred Stock have
the right to require that the Company redeem, to the
extent the Company may lawfully do so, all or a portion
of the then outstanding shares of Series C Convertible
Preferred Stock at the stated value plus accrued and
unpaid dividends in the event of a merger,
reorganization, transfer of the majority of the voting
securities of the Company, or sale of more than 25% of
the assets of the Company.
Series E and Series H Convertible Preferred Stock
Except as noted below, the Series E and Series H
Preferred Stock have the same terms and conditions.
Each share of Series E and H Preferred Stock is
convertible at the option of the holder at any time and
from time to time into shares of Common Stock at a
conversion price of (a) $1.50 per share subject to
adjustment prior to August 1, 2004 or (b) on or after
August 1, 2004 at a conversion price which is the lower
of $1.00 or the conversion price in effect pursuant to
(a). With respect to dividend rights, redemption rights
and rights on liquidation, winding up or dissolution,
the Series E and H Preferred Stocks rank (i) junior to
the Series F Preferred Stock and the Series G Preferred
Stock; (ii) pari passus with the Series A Preferred
Stock; and (iii) rank prior to the Series B Preferred
Stock and the Series D Preferred Stock and the Common
Stock of the Company.
Except as provided herein, any holder of Series E
Preferred Stock that is subject to the Bank Holding
Company Act of 1956 ("BHCA Holder"), as amended, shall
have no voting rights. Each holder of Series E
Preferred Stock that is not a BHCA Holder shall be
entitled to vote on all matters as to which stockholders
of the Company are entitled to vote, and each such
holder shall be entitled to cast a number of votes equal
to the greatest number of whole shares of Common Stock
into which such holder's shares of Series E Preferred
Stock could be converted. The holders of the Series H
Convertible Preferred Stock are entitled to one vote for
each share of Common Stock into which the shares are
convertible.
Except as hereinafter provided, the holders of the
Series E Preferred Stock and the Series H Preferred
Stock shall have the right, voting separately as a
class, to elect two directors to the Board of Directors
of the Company. However, in the event the Company is in
default with respect to the payment of (i) two
consecutive cash dividends after the "Restricted Period"
as hereinafter defined or (ii) payments within any six
consecutive quarterly dividend periods, the holders
shall have the right to elect four directors for so long
as the default continues. In the event the Company is
in default with respect to the payment of (i) four
consecutive cash dividends after the 'Restricted Period"
as hereinafter defined or (ii) four dividend payments
within any eight consecutive quarterly dividend periods,
the holders shall have the right to elect six directors
for so long as the default continues.
In the event the Company violates the provisions of, or
is in default under the terms of any loan agreement or
in the event a judgment is entered against the Company
or any subsidiary in the amount of $50,000 or more, the
holders of the Series C Convertible Preferred Stock
shall have the right to elect eight directors.
The holders of the Series E Preferred Stock and the
Series H Preferred Stock, except during the Restricted
Period, are entitled to receive out of funds of the
Company legally available for such purpose as and when
declared by the Board of Directors of the Company
quarterly dividends in cash at a rate of seven percent
(7%) compounded daily per annum of the stated value per
share ($1,000.00 on original issuance) of Series E and H
Preferred Stocks. Dividends shall accrue, be
accumulated and added to the stated value whether or not
declared. So long as any of the shares of Series E and
H Preferred Stock are outstanding, the Company shall not
declare or pay any dividends on any outstanding Common
or Preferred Stock, other than the Series F and G
Preferred Stock. The Restricted Period as it relates to
the payment of dividends on the Series E and H Preferred
Stock means the period beginning on the date of issuance
of the Series E and H Preferred Stock and ending on the
earlier of (a) the first day of the calendar quarter in
which the Company first pays cash dividends on its
Common Stock or (b) June 30, 1998. While no dividends
are payable during the Restricted Period, they will
accrue and accumulate during the Restricted Period.
The Company is obligated to redeem all the outstanding
shares of Series E and H Preferred Stock outstanding at
the stated value plus accrued dividends on August 1,
2004. The holders of the E and H Preferred Stock have
the right to require that the Company redeem, to the
extent the Company may lawfully do so, all or a portion
of the then outstanding shares of Series C Convertible
Preferred Stock at the stated value plus accrued and
unpaid dividends in the event of a merger,
reorganization, transfer of the majority of the voting
securities of the Company, or sale of more than 25% of
the assets of the Company.
Liquidity and Capital Resources
Cash and Working Capital
The Company had cash and short-term investments of approximately
$515,000 at March 31, 1996, as compared with $68,000 at December
31, 1995, and $276,000 at September 30, 1995. At March 31, 1996,
the Company had working capital of $737,000, as compared with a
working-capital deficiency of $307,000 at December 31, 1995.
The Company had a negative net worth (stockholders' equity) of
$4,507,000 at March 31, 1996, as compared with negative net worth
of $4,117,000 at December 31, 1995, and negative net worth of
$3,663,000 at September 30, 1995. Stockholders' equity does not
include redeemable preferred shares in the amounts of $5,114,430
at March 31, 1996, and $3,689,635 at December 31, 1995. At June
30, 1995, there were $1,600,328 of redeemable preferred shares
outstanding. See Note 4 to Consolidated Financial Statements.
Sale of Redeemable Preferred Stock
On January 31, 1996, the Company sold to Wand Partners $599,000
of Series F Convertible Preferred Stock and warrants to purchase
173,710 shares of Common Stock. Each share of Series F Preferred
stock is convertible, after June 30, 1996, into Common Stock at
the rate of $1.25 per share of Common Stock, subject to
adjustment. The warrants are exercisable at $1.25, subject to
adjustment. The Series F Convertible Preferred Stock has the
right to receive dividends at the rate of 9% per annum of their
stated value.
On March 7, 1996, the Company sold to Wand Partners $777,000 of
Series G Convertible Preferred Stock and warrants to purchase
225,330 shares of Common Stock. Each share of Series G Preferred
stock is convertible, after June 30, 1996, into Common Stock at
the rate of $1.25 per share of Common Stock, subject to
adjustment. The warrants are exercisable at $1.25, subject to
adjustment. The Series G Convertible Preferred Stock has the
right to receive dividends at the rate of 9% per annum of their
stated value.
Additional capital may be required to enable the Company to carry
out 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. 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 discussions with potential strategic partners, and
there can be no assurance that additional financing will be
available to the Company. If additional financing is not
available, management of the Company would have to curtail
certain of the Company's operations until additional funds become
available from outside sources or from revenues.
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 revenue 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
$646,000 at March 31, 1996, as compared with $516,000 at June 30,
1995.
Future commitments
During the quarter ended March 31, 1996, the Company acquired
property and equipment (primarily computing and related
equipment) at a cost of $18,000. 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. The Company placed a purchase order in the
amount of $97,500 with Intel Corporation in June 1995, took
delivery of half of this order in the quarter ended March 1996,
and expects to take delivery of the balance of this order in the
Company's fourth fiscal quarter which begins April 1, 1996.
Results of Operations
Revenues in the quarter ended March 31, 1996, increased 46% over
the corresponding quarter of the prior year while expenses
decreased 33%, resulting in a 74% decrease in the loss for the
quarter. For the nine month period ending March 31, 1996,
revenues increased 38% over the prior year, while expenses in the
nine months ending March 1996, decreased 11% compared to the
prior year, resulting in a 55% decrease in the loss for the
period.
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 March 31, 1996, total revenues increased
$308,000 to $974,000 from $666,000 in the corresponding quarter
of the prior fiscal year. The increase in revenues from 1995 to
1996 reflects the net of an increase in engineering-service
revenues and a decrease in licensing revenues.
For the nine months ended March 31, 1996, revenues totaled
$3,123,000, an increase of $863,000 from revenues of $2,260,000
in the nine months ended March 31, 1995. The increase in nine-
month revenues from 1995 to 1996 reflects the net of an increase
in engineering-service revenues and a decrease in revenues from
licensing and sales of tangible products.
Services
Revenues from engineering contracts increased $390,000 to
$548,000 in the quarter ended March 31, 1996, from $157,000 in
the year-earlier period. During the nine months ended March 31,
1996, revenues from engineering contracts totaled $1,624,000, an
increase of $935,000 over revenues of $689,000 in the
corresponding period of the prior fiscal year.
Revenues relating to the customization of Nestor's Fraud
Detection System totaled $282,000 in the third quarter of the
current fiscal year, compared to $44,000 for similar work in the
prior year. During the nine months ended March 31, 1996, such
revenues totaled $1,025,000, as compared with $410,000 in the
corresponding period of the prior fiscal year.
Revenues from engineering contracts with industrial customers
totaled $114,000 in the quarter ended March 31, 1996, as compared
with $15,000 in the year earlier period. For the nine months
ended March 1996, revenues from engineering contracts totaled
$347,000, an increase of $266,000 over year-earlier revenues of
$81,000.
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 in the amount of $1,630,000; as of March 31,
1996, approximately $1,623,000 had been earned. The second
contract, signed August 26, 1993, is in the amount of $776,000;
as of March 31, 1996, approximately $773,000 had been earned.
On September 1, 1995, the Company signed a contract with the Jet
Propulsion Laboratory (JPL) to develop a prototype sensor system
designed for vehicular-traffic surveillance and detection. The
contract, valued at approximately $597,000, is expected to run
for 11 months from September 1995. The terms of the ARPA and JPL
contracts call for delivery of prototype products, but do not
specify any subsequent purchasing or licensing provisions.
During the quarter ended March 31, 1996, the Company recognized
revenues totaling $152,000 under its ARPA and JPL contracts, as
compared with $99,000 in the corresponding quarter of the prior
fiscal year. During the nine months ended March 31, 1996,
revenues from the Company's ARPA and JPL contracts totaled
$249,000, as compared with revenues of $220,000 in the year-
earlier period.
Licensing Fees
Product-licensing revenues totaled $375,000 in the quarter ended
March 31, 1996, as compared with $480,000 in the year-earlier
period. The Company's NestorReader group of intelligent-
character-recognition products accounted for all of the licensing
revenues in both periods. The decrease in year-to-year product-
licensing revenues reflects the net of an increase in royalty
revenues from the Company's OEMs and a decrease in revenues from
shipments of NestorReader products to individual customers.
For the nine months ended March 31, 1996, product-licensing
revenues decreased to $1,277,000 from $1,300,000 in the
corresponding period of the prior fiscal year. Revenues relating
to NestorReader products decreased $95,000, from $1,199,000 to
$1,104,000, again reflecting an increase in royalty revenues from
the Company's OEMs and a decrease in revenues from direct
shipments of NestorReader products.
Licensing fees from the Company's Fraud Detection System doubled
from $75,000 in the nine months ended March 31, 1995, to $150,000
in the comparable period ending March 31, 1996.
Sales of tangible products
The tangible products currently sold by the Company are circuit
boards incorporating the Company's Ni1000 Recognition Accelerator
Chips, 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
$51,000 in the quarter ended March 31, 1996, as compared with
$28,000 in the corresponding quarter of the prior year. For the
nine months ended March 31, 1996, Ni1000 Development System
revenues totaled $222,000, a decrease of approximately $49,000
from revenues of $271,000 in the year-earlier period.
Approximately $79,000 of total revenues in the year-earlier
period derived from a Beta program which concluded in the period
ending December 31, 1994.
Expenses
Total expenses -- consisting of operations, selling and
marketing, and general and administrative expenses -- amounted to
$1,309,000 in the quarter ended March 31, 1996, as compared with
$1,303,000 in the preceding quarter (excluding a $131,000 non-
cash charge relating to the issuance in that quarter of warrants
exercisable below market - see Note 3 to Consolidated Financial
Statements), and $1,964,000 in the corresponding quarter of the
prior fiscal year. In the nine months ended March 31, 1996,
expenses totaled $4,132,000, a decrease of $501,000 from total
expenses of $4,633,000 in the year-earlier period. Expenses in
the current year include the non-cash charge mentioned above;
expenses in the year-earlier period include $210,000 of non-cash
charges relating to the issuance of 100,000 shares of Common
stock issued to Wand Partners as a commitment fee.
Labor costs continue to be the Company's single greatest expense
category. In the quarter ended March 31, 1996, the Company paid
$746,000 for wages and consulting fees, a $149,000 decrease from
$895,000 of such costs paid in the corresponding quarter of the
prior fiscal year. For the nine months ending March 31, 1996,
wages and consulting fees totaled $2,321,000, essentially
unchanged as compared with $2,320,000 of wages and consulting
fees in the year-earlier period.
The decrease in costs from comparable periods of the prior year
reflects the results of 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 42 at the end of March 1996. This
reduction in staffing reflects the layoff of employees and
attrition without replacement throughout the period of June 1995
to February 1996. Further, the Company had 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
$673,000 or 69% of related revenues during the quarter ended
March 31, 1996, as compared with $665,000 or 59% of related
revenues in the preceding quarter and $881,000 or 132% of related
revenues in the year-earlier period. During the nine months
ending March 31, 1996, the cost of services and products sold
totaled $1,974,000 or 63% of related revenues, as compared with
$2,084,000 or 92% of related revenues n the year-earlier period.
Operating costs and expenses related to the production of
revenues from product-licensing fees decreased $564,000 to
$130,000 (35% of related revenues) in the quarter ended March 31,
1996, from $694,000 (145% of related revenues) in the
corresponding quarter of the prior fiscal year. For the nine
months ending March 31, 1996, such costs decreased $992,000 to
$527,000 (41% of related revenues) from $1,519,000 (117% of
related revenues) in the year-earlier period. The decrease
reflects a shift in the allocation of engineering resources away
from internally funded product-development efforts to customer-
funded engineering projects.
Costs related to engineering services totaled $508,000 (93% of
related revenues) in the quarter ended March 31, 1996, an
increase of $322,000 over costs of $186,000 (118% of related
revenues) in the corresponding quarter of the prior fiscal year.
For the nine months ending March 31, 1996, costs related to
engineering services totaled $1,304,000 or 80% of related
revenues, an increase of $753,000 over costs of $551,000 or 80%
of related revenues for similar work in the year-earlier period.
The Company's expenditures for research and development were
$660,000 in the quarter ended March 1996, as compared with
$792,000 in the corresponding quarter of the prior fiscal year.
For the nine months ending March 31, 1996, research and
development costs totaled $1,929,000, as compared with $1,922,000
in the year-earlier period.
Selling and marketing
Selling and marketing expenses totaled $381,000 or 39% of
revenues in the quarter ended March 31, 1996, as compared with
$391,000 or 34% of revenues in the preceding quarter and $595,000
or 89% of revenues in the corresponding quarter of the prior
year. For the nine months ending March 31, 1996, selling and
marketing costs totaled $1,279,000 (41% of revenues) as compared
with $1,642,000 (73% of revenues) in the same period of last
fiscal year. The quarter-to-quarter and year-to-year decreases
reflect the results of the broad effort to reduce costs noted
earlier.
Sales compensation, consisting of salaries, fringe benefits, and
commissions totaled $226,000 in the quarter ended March 31, 1996,
as compared with $248,000 in the preceding quarter and $262,000
in the quarter ended March 31, 1995. For the nine months ended
March 1996, such costs totaled $811,000, as compared with
$680,000 in the corresponding period of the prior fiscal year.
Promotional expenses -- comprising advertising, promotion,
conventions and meetings -- totaled $52,000 in the quarter ended
March 31, 1996, as compared with $55,000 in the preceding quarter
and $213,000 in the corresponding quarter of the prior fiscal
year. During the nine months ended March 31, 1996, such costs
totaled $163,000, as compared with $461,000 in the year-earlier
period.
General and administrative expenses
General and administrative expenses totaled $203,000 in the
quarter ended March 31, 1996, as compared with $335,000 in the
preceding quarter, and $462,000 in the corresponding quarter of
the prior fiscal year. Non-cash charges of $131,000 and $209,000
relating to the issuance of warrants at below market-value and
the issuance of Common stock to Wand Partners are included in the
quarters ended December 31, 1995, and March 31, 1996,
respectively. During the nine months ended March 31, 1996,
general and administrative expenses totaled $742,000, including
the $131,000 non-cash expense, as compared with $767,000 of
general and administrative expenses in the corresponding period
of the prior year, including the $209,000 relating to the
issuance of Common stock.
Other income (expense)
Other expenses, consisting of the net of interest income and
interest expense, totaled approximately $2,000 of net interest
income in the quarter ending March 31, 1996, as compared with
$3,000 in the year-earlier quarter. During the nine months
ending March 31, 1996, net interest expense totaled $47,000, as
compared with net interest income of $20,000 in the corresponding
period of the prior fiscal year. Approximately $48,000 in net
interest expense in the nine months ended March 31, 1996, relates
to interest on notes payable from Wand Partners that were
converted into Convertible Preferred Stock in early October. The
accumulated interest was paid to Wand Partners in Common Stock.
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.
Expenses relating to the Company's Fraud Detection System
exceeded revenues by $92,000 in the quarter ended March 31, 1996.
For the nine month period then ended, revenues exceeded expenses
by $113,000.
During the quarter ended March 31, 1996, revenues from the
NestorReader group of products exceeded expenses by $10,000. For
the nine months ended March 1996, expenses of this group exceeded
revenues by $133,000.
For the quarter ended March 31, 1996, revenues of the Company's
generic products (the Ni1000 Recognition Accelerator and the
Company's proprietary software-development tools) exceeded
expenses by $1,000. During the nine months ended March 31, 1996,
expenses of this group exceeded its revenues by $110,000.
Net Income Per Share
During the quarter ended March 31, 1996, the Company experienced
a loss of $333,000 or $.04 per share, as compared with a loss of
$298,000 or $.04 per share for the preceding quarter and a loss
of $1,295,000 or $.17 per share for the quarter ended March 31,
1995.
During the quarter ended March 31, 1996, there were outstanding a
weighted average of 7,909,010 shares of Common stock, as compared
with 7,390,766 shares during the corresponding quarter of the
previous year.
Nestor, Inc.
Form 10-Q -- March 31, 1996
Item 6. Exhibits and reports on form 8-K
(a) Exhibits - None
(b) Reports on Form 8-K: On February 5, 1996,
the Corporation filed with the Securities and
Exchange Commission a current report on form 8-K
dated January 30, 1996.
(c) Reports on Form 8-K: On March 21, 1996, the
Corporation with the Securities and Exchange
Commission filed a current report on form 8-K
dated March 7, 1996.
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: May 15, 1996 BY:
/s/ Charles Elbaum
Co-Chairman
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