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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 March 31, 2003
[ ] 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.
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(Exact name of registrant as specified in its charter)
DELAWARE 13-3163744
- ----------------------------------- ------------------------------------
(State of incorporation) (I.R.S. Employer Identification No.)
400 Massasoit Avenue; Suite 200; East Providence, RI 02914
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(Address of principal executive offices) (Zip Code)
401-434-5522
(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
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Common stock, par value .01 per share: 9,924,111 shares outstanding
(post-reverse stock split) as of March 31, 2003
1
NESTOR, INC.
FORM 10 Q
March 31, 2003
INDEX
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Page
Number
------
PART 1 FINANCIAL INFORMATION
Item 1 Financial Statements:
Condensed Consolidated Balance Sheets 3
-------------------------------------
March 31, 2003 (Unaudited) and December 31, 2002
Condensed Consolidated Statements of Operations (Unaudited) 4
-----------------------------------------------------------
Quarters ended March 31, 2003 and 2002
Condensed Consolidated Statements of Cash Flows (Unaudited) 5
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Quarters ended March 31, 2003 and 2002
Notes to Condensed Consolidated Financial Statements 6
----------------------------------------------------
Item 2 Management's Discussion and Analysis of
Results of Operations and Financial Condition 8
Item 3 Quantitative and Qualitative Disclosure of Market Risk 11
Item 4 Controls and Procedures 11
PART 2 OTHER INFORMATION 12
2
NESTOR, INC.
Condensed Consolidated Balance Sheets
MARCH 31, 2003 DECEMBER 31, 2002
-------------- -----------------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 870,873 $ 308,894
Accounts receivable 166,267 141,263
Unbilled contract revenue 149,245 122,684
Inventory 397,585 281,108
Other current assets 62,534 60,963
------------- -------------
Total current assets 1,646,504 914,912
NONCURRENT ASSETS:
Capitalized system costs, net of accumulated depreciation 2,372,965 1,936,783
Property and equipment, net of accumulated depreciation 456,225 486,740
Goodwill 5,580,684 5,580,684
Patent development costs, net of accumulated amortization 167,931 153,275
Other long term assets 53,237 128,570
------------- -------------
TOTAL ASSETS $ 10,277,546 $ 9,200,964
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 771,071 $ 616,878
Accrued employee compensation 319,455 354,269
Accrued liabilities 609,876 795,749
Leases payable 509,818 354,286
Restructuring reserve 330,059 365,939
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Total current liabilities 2,540,279 2,487,121
Long term leases payable 2,727,675 2,849,126
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Total liabilities 5,267,954 5,336,247
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Commitments and contingencies --- ---
STOCKHOLDERS' EQUITY:
Preferred stock, $1.00 par value, authorized 10,000,000 shares;
issued and outstanding: Series B - 235,000 shares at
March 31, 2003 and December 31, 2002 235,000 235,000
Common stock, $.01 par value, authorized 20,000,000 shares;
issued and outstanding: 9,924,111 shares at March 31, 2003
and 5,024,111 shares at December 31, 2002 99,241 50,241
Warrants 1,133,314 1,072,825
Additional paid-in capital 47,308,584 45,227,851
Accumulated deficit (43,766,547) (42,721,200)
-------------- -------------
Total stockholders' equity 5,009,592 3,864,717
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 10,277,546 $ 9,200,964
============= =============
The Unaudited Notes to the Condensed Consolidated Financial Statements are an integral part of this statement.
3
Nestor, Inc.
Condensed Consolidated Statements of Operations
(Unaudited)
Quarter Ended March 31,
------------------------------------
2003 2002
---- ----
Revenue:
Product royalties $ 23,250 $ 254,914
Product licenses and services 323,477 583,024
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Total revenue 346,727 837,938
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Operating expenses:
Cost of goods sold 250,022 676,675
Engineering services 671,642 405,839
Research and development 30,889 937,118
Selling and marketing 67,764 242,026
General and administrative 343,933 503,442
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Total operating expenses 1,364,250 2,765,100
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Loss from operations (1,017,523) (1,927,162)
Other expense - net (27,824) (81,781)
--------------- --------------
Net loss $ (1,045,347) $ (2,008,943)
=============== ==============
Loss Per Share:
Loss per share, basic and diluted $ (0.10) $ (0.40)
=============== ==============
Shares used in computing loss per share:
Basic and diluted 9,947,611 5,047,611
============== =============
The Unaudited Notes to the Condensed Consolidated Financial Statements are an
integral part of this statement.
4
Nestor, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Quarter Ended March 31,
---------------------------------
2003 2002
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ 1,045,347) $ (2,008,943)
Adjustments to reconcile net loss
to net cash used by operating activities:
Depreciation and amortization 153,894 122,681
Loss on disposal of fixed assets 5,291 1,300
Expenses charged to operations relating to
options, warrants and capital transactions 26,621 26,621
Increase (decrease) in cash arising from
changes in assets and liabilities:
Restricted cash --- (52,732)
Accounts receivable (25,004) (59,922)
Unbilled contract revenue (26,561) 53,615
Inventory (101,185) (11,590)
Other assets 73,762 91,267
Accounts payable and accrued expenses (66,494) (192,653)
Deferred income --- (161,811)
Restructuring reserve (35,880) ---
------------ ------------
Net cash used by operating activities 1,040,903) (2,192,167)
------------ -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in capitalized systems (537,198) (504,593)
Purchase of property and equipment (4,000) (6,207)
Patent development costs (15,602) (2,155)
------------ -------------
Net cash used by investing activities (556,800) (512,955)
------------ -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of obligations under capital leases (3,919) (25,004)
Proceeds from leases payable --- 530,530
Proceeds from issuance of common stock - net 2,163,601 ---
----------- ------------
Net cash provided by financing activities 2,159,682 505,526
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Net change in cash and cash equivalents 561,979 (2,199,596)
Cash and cash equivalents - beginning of period 308,894 2,294,987
----------- ------------
Cash and cash equivalents - end of period $ 870,873 $ 95,391
=========== ============
SUPPLEMENTAL CASH FLOWS INFORMATION:
Interest paid $ 444 $ 88,492
=========== ============
Income taxes paid $ --- $ ---
=========== ============
The Unaudited Notes to the Condensed Consolidated Financial Statements are an integral part of this statement.
5
NESTOR, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 31, 2003
Note 1 - Nature of Operations:
A. Organization
Nestor, Inc. (the "Company") was organized on March 21, 1983 in
Delaware to develop and succeed to certain patent rights and know-how
which the Company acquired from its predecessor, Nestor Associates, a
limited partnership. Two wholly-owned subsidiaries, Nestor Traffic
Systems, Inc. ("NTS") and Nestor Interactive, Inc. ("Interactive"),
were formed effective January 1, 1997. Effective November 7, 1998, the
Company ceased further investment in the Interactive subsidiary. The
Company's principal office is located in East Providence, RI.
The Company's current focus is to offer customers products to be
utilized in intelligent traffic management systems. Its leading
product is its CrossingGuard video-based red light enforcement system
and services, sold and distributed exclusively by NTS. Effective July
1, 2002, the Nestor, Inc. assigned its royalty rights in the field of
financial services, substantially eliminating ongoing product royalty
revenue.
B. Liquidity and management's plans
The Company has incurred significant losses to date and at March 31,
2003 has a significant accumulated deficit. These conditions raise
substantial doubt about the Company's ability to continue as a going
concern without additional financing to carry out product delivery
efforts under current contracts, to underwrite the delivery costs of
future systems delivered under turnkey agreements with municipalities,
for continued development and upgrading of its products, for customer
support, and for other operating uses. If the Company does not realize
additional equity and/or debt capital or revenues sufficient to
maintain its operations at the current level, management of the
Company would be required to modify certain initiatives, including the
cessation of some or all of its operating activities until additional
funds become available through investment or revenues.
The Company is actively pursuing the raising of additional equity and
debt financing. There can be no assurance, however, that the Company's
operations will be sustained or be profitable in the future, that
adequate sources of financing will be available at all, when needed or
on commercially acceptable terms or that the Company's product
development and marketing efforts will be successful.
Note 2 - Basis of Presentation:
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions
to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In
the opinion of management, all adjustments (consisting of normal
recurring adjustments) considered necessary for a fair presentation of
financial results have been included. Operating results for the
quarter ended March 31, 2003 are not necessarily indicative of the
results that may be expected for the year ended December 31, 2003.
There were no material unusual charges or credits to operations during
the recently completed fiscal quarter.
The balance sheet at December 31, 2002 has been derived from the
audited financial statements at that date but does not include all of
the information and footnotes required by generally accepted
accounting principles for complete financial statements.
For further information, refer to the audited consolidated financial
statements and footnotes thereto included in the Registrant Company
and Subsidiaries' annual report on Form 10-K for the year ended
December 31, 2002.
6
Certain operating expenses reported at March 31, 2002 have been
reclassified to conform to the 2003 presentation. The reclassification
had no effect on results of operations. Common stock and loss per
share as previously reported at March 31, 2002 have been adjusted to a
post-reverse split basis.
Loss per share - Loss per share is computed using the weighted average
number of shares of stock outstanding during the period. Diluted per
share computations are not presented since the effect would be
antidilutive.
Stock-based compensation - The Company measures compensation expense
relative to employee stock-based compensation plans using the
intrinsic value-based method of accounting as prescribed by Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees". The Company discloses, on an annual basis, pro forma net
income and earnings per share as though the fair value-based method of
accounting prescribed by Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-based Compensation", had been applied.
See Note 2 of the December 31, 2002 Form 10-K for these disclosures.
Note 3 - One-for-Ten Reverse Stock Split:
The Company filed a certificate of amendment to its certificate of
incorporation on April 11, 2003, causing a one-for-ten reverse stock
split of the outstanding shares of the Company common stock effective
on that date. The Company's common stock began trading on a post
reverse split basis on April 21, 2003 under the new trading symbol
"NESO" (previously "NEST"). These financials reflect common stock and
loss per share on a post-split basis.
Note 4 - Second Closing of Financing:
On April 16, 2003, the Company completed the second closing of the
financing transaction with Silver Star Partners I, LLC. Silver Star
purchased an additional 4,013,557 shares (post-reverse stock split)
for $2,000,000. In the first closing on January 15, 2003, Silver Star
purchased 49 million shares of Nestor common stock for $2,300,000
(pre-reverse stock split). Danzell Investment Management, Ltd., in
which William B. Danzell, the Managing Director of Silver Star, serves
as president, has provided investment-related services (including
consulting services) to the Company and has received a fee for
services rendered in an amount equal to 3% of the cash proceeds
generated by the Company in connection with the financing transactions
with Silver Star. Upon completion of the second closing, Silver Star
owned 64.8% of the issued and outstanding shares of Company common
stock. See Form 8-K dated April 9, 2003 for further information.
Note 5 - Contingency:
A significant customer contract in the Rail line of business may be
terminated prior to its completion as a result of the Company's recent
reorganization and decision to focus on CrossingGuard systems and
services. The financial effect on the Company of the possible contract
termination cannot be determined at this time.
Note 6 - Litigation:
On July 12, 2002, Baldwin Line Construction of Maryland, Inc. filed a
lawsuit against Nestor Traffic Systems, Inc. in Fairfax County,
Virginia, seeking $117,105 plus interest related to invoices they
claimed were owed for construction work in Falls Church, Virginia. NTS
and Baldwin reached a settlement agreement on April 22, 2003 whereby
NTS paid $7,500 and all claims of each party were dismissed.
During April 2003, the former president of NTS resigned as a member of
the board of directors of the Company. This decision was made mutually
by the president and the board based on differences regarding the
future direction of the Company. The president's employment with the
Company and NTS terminated. The president has filed a complaint
against the Company and NTS in the Providence Superior Court seeking
severance benefits, including twelve months salary of $180,000, upon
termination. See Form 8-K dated April 9, 2003 for further information.
7
ITEM 2: Management's Discussion and Analysis of
Results of Operations and Financial Condition
- ------------------------------------------------------
PROSPECTIVE STATEMENTS
- ----------------------
As discussed in detail in the Company's December 31, 2002 Form 10-K, significant
operating changes took place in 2001 and 2002. The Company changed its operating
focus from financial services (related royalty revenues ended June 2002) to
intelligent traffic management products and services, primarily red-light
enforcement systems and services. In June 2002, the Company underwent a
significant restructuring involving management changes and cost control to lower
personnel and facilities expenses as efforts were focused on its contracts for
CrossingGuard installation.
The following discussion contains prospective statements regarding Nestor, Inc.
and its subsidiaries, its business outlook and results of operations that are
subject to certain risks and uncertainties and to events that could cause the
Company's actual business, prospects and results of operations to differ
materially from those that may be anticipated by, or inferred from, such
prospective statements. Factors that may affect the Company's prospects include,
without limitation: the Company's limited liquidity, the Company's ability to
finance delivery of current contracts, the Company's ability to successfully
realize new contracts; the impact of competition on the Company's revenues or
market share; delays in the Company's introduction of new products; and failure
by the Company to keep pace with emerging technologies.
The Company's quarterly revenues and operating results have varied significantly
in the past and may do so in the future. A significant portion of the Company's
business has been derived from individually substantial contracts, and the
timing of such installations and licenses has caused material fluctuations in
the Company's operating results. In addition, because the Company provides
certain of its products to customers under licenses with no significant
continuing obligations, it recognizes a significant portion of its revenue upon
the delivery of the product and acceptance by the customer. Thus, revenues
derived by the Company may be more likely to be recognized in irregular patterns
that may result in quarterly variations in the Company's revenues.
The Company's expense levels are based in part on its product development
efforts and its expectations regarding future revenues and in the short term are
generally fixed. Therefore, the Company may be unable to adjust its spending in
a timely manner to compensate for any unexpected revenue shortfall. As a result,
if anticipated revenues in any quarter do not occur or are delayed, the
Company's operating results for the quarter would be disproportionately
affected. Operating results also may fluctuate due to factors such as the demand
for the Company's products, product life cycles, the development, introduction
and acceptance of new products and product enhancements by the Company or its
competitors, changes in the mix of distribution channels through which the
Company's products are offered, changes in the level of operating expenses,
customer order deferrals in anticipation of new products, competitive conditions
in the industry and economic conditions generally or in various industry
segments.
The Company expects quarterly fluctuations to continue for the foreseeable
future. Accordingly, the Company believes that period-to-period comparisons of
its financial results should not be relied upon as an indication of the
Company's future performance. No assurance can be given that the Company will be
able to achieve or maintain profitability on a quarterly or annual basis in the
future.
Readers are cautioned not to place undue reliance on these prospective
statements, which speak only as of the date of this report. The Company
undertakes no obligation to revise any forward-looking statements in order to
reflect events or circumstances that may subsequently arise. Readers are urged
to carefully review and consider the various disclosures made by the Company in
this report and in the Company's reports filed with the Securities and Exchange
Commission, including Exhibit 99.1 to the Company's December 31, 2002 Form 10-K
and the Company's Schedule 14C Definitive Information Statement filed on March
14, 2003.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
- ------------------------------------------
Nestor's consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States, which require the
Company to make estimates and assumptions (see Note 2 to the December 31, 2002
Form 10-K). The Company believes that of its significant accounting policies,
the following may involve a higher degree of judgment and complexity.
8
REVENUE RECOGNITION
The Company's CrossingGuard product generates product licenses and service fee
revenue. Management estimates the percentage of citations that are expected to
be collectible and recognizes revenue accordingly. To the extent these estimates
are not accurate, the Company's operating results may be significantly and
negatively affected.
In arrangements, some of which include software, or where software services are
deemed essential, revenue is recognized using contract accounting. This
methodology involves a percentage-of-completion approach, based on
progress-to-completion measures on estimated total costs. If the Company does
not accurately estimate these total costs, or the projects are not properly
managed to planned periods and expectations, then future margins may be
significantly and negatively affected or losses on existing contracts may need
to be recognized.
LONG TERM ASSET IMPAIRMENT
In assessing the recoverability of the Company's long term assets, management
must make assumptions regarding estimated future cash flows and other factors to
determine the fair value. If these estimates change in the future, the Company
may be required to record impairment charges that were not previously recorded.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
CASH POSITION AND WORKING CAPITAL
The accompanying financial statements have been prepared assuming that Nestor,
Inc. will continue as a going concern. As discussed in Note 1 of the Form 10-K
financial statements, the Company is currently expending cash in excess of cash
generated from operations, as revenues are not yet sufficient to support future
operations. These conditions raise substantial doubt about the Company's ability
to continue as a going concern without additional financing. Management's plans
in regard to these matters are discussed in Note 1 of the Form 10-K financial
statements and in the Company's Schedule 14C Definitive Information Statement
filed on March 14, 2003. The quarterly financial statements do not include any
adjustments to reflect the possible future effects on the recoverability and
classification of assets or the amounts and classification of liabilities that
may result from the outcome of the Company's ultimate ability to raise
additional financing and/or capital.
The Company had consolidated cash and cash equivalents of approximately $871,000
at March 31, 2003 as compared with approximately $309,000 at December 31, 2002.
At March 31, 2003, the Company had a working capital deficit of $894,000 as
compared with a working capital deficit of $1,572,000 at December 31, 2002.
The Company's net worth at March 31, 2003 was $5,010,000, as compared with a net
worth of $3,865,000 at December 31, 2002. The increase in net worth is primarily
the result of the Silver Star equity transaction in January 2003 offset by the
net operating loss reported for the quarter.
Additional capital will be required to enable the Company to carry out product
delivery efforts under current contracts, to underwrite the costs of future
systems delivered under turnkey agreements with municipalities, for continued
development and upgrading of its products, for customer support, and for other
operating uses. If the Company does not realize additional equity and/or debt
capital and revenues sufficient to maintain its operations at the current level,
management of the Company would be required to modify certain initiatives
including the cessation of some or all of its operating activities until
additional funds become available through investment or revenues.
The Company is actively pursuing the raising of additional equity, debt or lease
financing. The possible success of these efforts, and the effect of any new
capital on the current structure of the Company, cannot be determined as of the
date of this filing.
FUTURE COMMITMENTS
During the quarter ended March 31, 2003, the Company invested $537,000 in
capitalized systems as compared to $505,000 in the same quarter last year.
Management expects that NTS will make future commitments for capitalized systems
related to its CrossingGuard contracts.
9
RESULTS OF OPERATIONS
- ---------------------
The January through June 2002 reported operations included ACI royalty revenues
and significantly higher operating expenses than experienced after the June 2002
restructuring to lower ongoing personnel and facilities costs. Effective July 1,
2002, the Company assigned its ACI royalty rights to Churchill Lane Associates.
For the quarter ended March 31, 2003, the Company realized consolidated revenues
totaling $347,000 and expenses of $1,364,000, which resulted in a consolidated
operating loss for the quarter of $1,017,000. The Company reported a
consolidated net loss of $1,045,000 for the current quarter after recording a
$28,000 of other expenses. In the corresponding quarter of the prior year,
consolidated revenues and expenses totaled $838,000 and $2,765,000,
respectively, producing a loss from operations of $1,927,000; and after other
expenses of $82,000, the Company reported net income of $2,009,000.
Revenues
- --------
The Company's consolidated revenues arose (i) through NTS services, software
licensing, equipment leasing, and support activities regarding its CrossingGuard
and other traffic management products, and, to a lesser degree (ii) directly
from licensing of Nestor, Inc.'s technology and products in specific fields of
use (primarily risk management with ACI) or a related royalty stream.
During the quarter ended March 31, 2003, consolidated revenues decreased 59% to
$347,000 from $838,000 in the quarter ended March 31, 2002. Fiscal 2003 revenues
included $323,000 of traffic related revenues and no royalty revenues from ACI.
PRODUCT LICENSES AND SERVICES
During the quarter ended March 31, 2003, revenues from product licenses and
services decreased 45% to $323,000 from $583,000 in the corresponding quarter of
the prior year. Included in 2002 revenues was approximately $349,000 realized
from Rail projects substantially completed during the first quarter. In 2003,
CrossingGuard installations contributed the substantially all of the revenue.
Operating Expenses
- ------------------
Total operating expenses amounted to $1,364,000 in the quarter ended March 31,
2003, a decrease of $1,401,000 (51%) from total operating costs of $2,765,000 in
the corresponding quarter of the prior year. The 2002 operating expenses reflect
higher costs than the current post restructuring level.
COST OF GOODS SOLD
Cost of goods sold (CGS) totaled $250,000 in the 2003 quarter as compared
$677,000 in the prior year. The 2003 CGS relates to CrossingGuard products while
2002 CGS is primarily higher cost Rail product deployment, coupled with
Electronic Data Systems monthly minimum processing fees of $35,000 which were
significantly lower in 2003 on a per-ticket fee basis.
ENGINEERING SERVICES
Costs related to engineering services totaled $672,000 in the quarter ended
March 31, 2003, as compared to $406,000 in the corresponding quarter of the
prior year. These costs include the salaries of field and office personnel as
well as operating expenses related to product design, delivery, configuration,
maintenance and service. This expense increased in 2003, as there were more
customers to support, requiring some staff realignments from R&D to assist in
the engineering efforts.
RESEARCH AND DEVELOPMENT
Research and development expenses totaled $31,000 in the quarter ended March 31,
2003, as compared with $937,000 in the year-earlier period. R&D efforts were
10
significant to rollout Rail and CrossingGuard products, which occurred in 2002.
The Company will continue its R&D activities on a smaller scale and as deemed
necessary. In March 2002, management took steps to reduce the heavy use of third
party contractors to support development projects.
SELLING AND MARKETING
Selling and marketing costs totaled $68,000 in the quarter ended March 31, 2003,
as compared with $242,000 in the corresponding quarter of the prior year, a
decrease of 72%. The decrease reflects the reduction in expenses after the June
2002 reorganization.
GENERAL AND ADMINISTRATIVE
General and administrative expenses totaled $344,000 in the quarter ended March
31, 2003, as compared with $503,000 in the corresponding quarter of the prior
year, representing a decrease of 32%. The June 2002 reorganization significantly
reduced ongoing general and administrative expenses.
Other Expense - Net
- -------------------
Other expenses totaled $29,000 in the quarter ended March 31, 2003, as compared
with $82,000 in the corresponding quarter of the prior year, representing a
decrease of 65%. The higher prior year amount includes $62,000 of EDS interest
expense on leases payable. The EDS lease agreement was amended on January 10,
2003 to provide a moratorium on NTS' interest obligations under the lease for
the period from July 1, 2002 through June 30, 2003.
Loss Per Share
- --------------
During the quarter ended March 31, 2003, the Company reported a net loss of
$1,045,000, or ($.10) per share as compared with a net loss of $2,009,000, or
($.40) per share in the corresponding period of the prior year. During the
quarter ended March 31, 2003, there were outstanding 9,948,000 basic and diluted
shares of common stock as compared with 5,048,000 basic and diluted shares
during the corresponding quarter of the previous year. These financials reflect
common stock and loss per share on a post-split basis. The increase in the
outstanding shares reflects the additional shares issued in connection with the
first closing of the Silver Star financing in January 2003.
ITEM 3: QUANTATIVE AND QUALITATIVE DISCLOSURE OF MARKET RISK
- -------------------------------------------------------------
The Company has long term lease obligations, however the interest rate is fixed.
Therefore, management assesses their exposure to these risks as immaterial.
ITEM 4: CONTROLS AND PROCEDURES
- --------------------------------
The Company maintains disclosure controls and procedures that are designed to
ensure that information required to be disclosed in the Company's Exchange Act
reports is recorded, processed, summarized and reported within the time periods
specified in the SEC's rules and forms, and that such information is accumulated
and communicated to the Company's management, including its President/Chief
Executive Officer/Chief Financial Officer, as appropriate, to allow timely
decisions regarding required disclosures. In designing and evaluating the
disclosure controls and procedures, management recognized that any controls and
procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control objectives, and management
necessarily was required to apply its judgment in evaluating the cost-benefit
relationship of possible controls and procedures.
Within 90 days prior to the date of this report, the Company carried out an
evaluation, under the supervision and with the participation of the Company's
management, including the Company's President/Chief Executive Officer/Chief
Financial Officer, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures. Based on the foregoing, the
President/Chief Executive Officer/Chief Financial Officer concluded that the
Company's disclosure controls and procedures were effective.
There have been no significant changes in the Company's internal controls or in
other factors that could significantly affect the internal controls subsequent
to the date the Company completed its evaluation.
11
PART 2: OTHER INFORMATION
- --------------------------
NESTOR, INC.
FORM 10 Q - March 31, 2003
Item 1: Legal Proceedings
On July 12, 2002, Baldwin Line Construction of Maryland, Inc. filed a
lawsuit against Nestor Traffic Systems, Inc. in Fairfax County,
Virginia, seeking $117,105 plus interest related to invoices they
claimed were owed for construction work in Falls Church, Virginia. NTS
and Baldwin reached a settlement agreement on April 22, 2003 whereby
NTS paid $7,500 and all claims of each party were dismissed.
During April 2003, the former president of NTS resigned as a member of
the board of directors of the Company. This decision was made mutually
by the president and the board based on differences regarding the
future direction of the Company. The president's employment with the
Company and NTS terminated. The president has filed a complaint
against the Company and NTS in the Providence Superior Court seeking
severance benefits, including twelve months salary of $180,000, upon
termination. See Form 8-K dated April 9, 2003 for further information.
Item 2: Changes in Securities
(a) One-for-Ten Reverse Stock Split
The Company filed a certificate of amendment to its certificate
of incorporation on April 11, 2003, causing a one-for-ten reverse
stock split of the outstanding shares of the Company common stock
effective on that date. The Company's common stock began trading
on a post reverse split basis on April 21, 2003 under the new
trading symbol "NESO" (previously "NEST").
(c) Sale of Securities
On January 15, 2003, the Company completed the first closing of
the financing transaction with Silver Star Partners I, LLC, and
issued 49,000,000 shares of Nestor common stock (pre-reverse
split) to Silver Star at a purchase price of $.0485 per share. On
April 16, 2003, the Company completed the second closing of the
financing transaction with Silver Star, and issued 4,013,557
shares of common stock (post-reverse split) at a purchase price
of $.485 per share. The Company received $4,323,075 in aggregate
cash proceeds which, after payment of financing fees, will be
used for working capital purposes.
This sale was made without general solicitation or advertising
and no underwriters received fees in connection with this
security sale. The purchaser was an accredited and sophisticated
investor with access to all relevant information necessary to
evaluate the merits and risks of the investment in the
securities. The shares were issued pursuant to exemptions from
registration under Rule 506 of Regulation D and Section 4(2) of
the Securities Act of 1933, as amended, as a transaction not
involving any public offering.
As part of the financing transaction, the Company granted Silver
Star the right to require Nestor to file a registration statement
with the SEC as soon as practicable after Silver Star exercises
its demand registration right. The registration statement will
cover Silver Star's resale of common stock purchased at the first
closing and second closing.
Item 3: Defaults on Senior Securities - None
Item 4: Submission of Matters to a Vote of Security Holders - None
12
Item 5: Other Information
On February 7, 13 and March 6, 2003 the Corporation filed with the
Securities and Exchange Commission a Schedule 14C Preliminary
Information Statement, which is hereby incorporated by reference.
On March 14, 2003, the Corporation filed with the Securities and
Exchange Commission a Schedule 14C Definitive Information Statement,
which is hereby incorporated by reference.
Item 6: Exhibits and reports on Form 8-K
(b) Exhibits - None
(c) On January 6, 2003, the Corporation filed with the Securities and
Exchange Commission a current report on Form 8-K dated January 2,
2003, which is hereby incorporated by reference.
On January 17, 2003, the Corporation filed with the Securities
and Exchange Commission a current report on Form 8-K dated
January 15, 2003, which is hereby incorporated by reference.
On April 21, 2003, the Corporation filed with the Securities and
Exchange Commission a current report on Form 8-K dated April 9,
2003, which is hereby incorporated by reference.
13
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)
By: /s/ William B. Danzell
---------------------------------------------
William B. Danzell, Chief Executive Officer
DATE: May 13, 2003 By: /s/ Nigel P. Hebborn
---------------------------------------------
Nigel P. Hebborn
President and Chief Financial Officer
14
CERTIFICATIONS PURSUANT TO
SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
CERTIFICATION
I, William B. Danzell, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Nestor, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report; 4. The registrant's other certifying officer and I am
responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the
registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions): a) all significant deficiencies in the design or
operation of internal controls which could adversely affect the
registrant's ability to record, process, summarize and report financial
data and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 13, 2003
/s/ William B. Danzell
- -------------------------------------------
William B. Danzell, Chief Executive Officer
15
CERTIFICATION
I, Nigel P. Hebborn, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Nestor, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report; 4. The registrant's other certifying officer and I am
responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the
registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 13, 2003
/s/ Nigel P. Hebborn
- -------------------------------------------------------
Nigel P. Hebborn, President and Chief Financial Officer
16