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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 FORM 10-Q
 
  þ
    
    Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the Quarterly Period Ended March 31, 2007
 OR
 o
    
    Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 Commission File Number: 000-50798
 Color Kinetics Incorporated
  Delaware
    
    04-3391805(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)
 
 
 
 þ o
  o þ o
  o þ




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COLOR KINETICS INCORPORATED
FORM 10-Q
FOR THE THREE MONTHS ENDED March 31, 2007
INDEX
 Page No.PART I. FINANCIAL INFORMATIONItem 1.
    
    Unaudited Condensed Consolidated Financial StatementsCondensed Consolidated Balance Sheets as of March 31, 2007 and December 31, 2006
    
    
    3Condensed Consolidated Statements of Income for the Three Months Ended March 31, 2007 and 2006
    
    
    4Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2007 and
2006
    
    
    5Notes to Unaudited Condensed Consolidated Financial Statements
    
    
    6Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    10Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    16Item 4.
    
    Controls and Procedures
    
    
    16PART II. OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    16Item 1A.
    
    Risk Factors
    
    
    17Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    17Item 3.
    
    Defaults Upon Senior Securities
    
    
    17Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    17Item 5.
    
    Other Information
    
    
    17Item 6.
    
    Exhibits
    
    
    17Signatures
    
    
    18EX-10.2 EMPLOYEE STOCK PURCHASE PLANEX-10.33 2007 SENIOR MANAGEMENT BONUS PLANEX-31.1 SECTION 302 CERTIFICATION OF CEOEX-31.2 SECTION 302 CERTIFICATION OF CFOEX-32.1 SECTION 906 CERTIFICATION OF CEO AND CFO
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PART I. FINANCIAL INFORMATION
 
 Item 1. Unaudited Condensed Consolidated Financial Statements
 Color Kinetics Incorporated
 
 Condensed Consolidated Balance Sheets  (In thousands, except per share data)
 March 31,
    
    
    December 31,2007
    
    
    2006ASSETSCURRENT ASSETS:Cash and equivalents
    
    $
    44,522
    
    
    $
    60,997Investments
    
    
    56,882
    
    
    
    38,985Restricted cash
    
    
    500
    
    
    
    500Accounts receivable, net
    
    
    12,755
    
    
    
    11,480Accounts receivable from related party
    
    
    
    
    
    
    82Inventory
    
    
    8,963
    
    
    
    6,805Prepaid expenses and other current assets
    
    
    2,003
    
    
    
    3,159Total current assets
    
    
    125,625
    
    
    
    122,008PROPERTY AND EQUIPMENTnet
    
    
    2,592
    
    
    
    2,199INTANGIBLE ASSETSnet
    
    
    278
    
    
    
    282RESTRICTED CASHNon-current portion
    
    
    464
    
    
    
    TOTAL ASSETS
    
    $
    128,959
    
    
    $
    124,489LIABILITIES AND STOCKHOLDERS EQUITYCURRENT LIABILITIES:Accounts payable
    
    $
    5,354
    
    
    $
    3,690Accrued expenses
    
    
    2,347
    
    
    
    2,238Accrued compensation
    
    
    1,999
    
    
    
    3,073Accrued warranty
    
    
    986
    
    
    
    1,007Accrued restructuring
    
    
    152
    
    
    
    243Deferred revenue
    
    
    1,464
    
    
    
    195Total current liabilities
    
    
    12,302
    
    
    
    10,446COMMITMENTS AND CONTINGENCIESSTOCKHOLDERS EQUITY:Common stock, $0.001 par value
    
    
    21
    
    
    
    21Additional paid-in capital
    
    
    141,609
    
    
    
    140,498Accumulated other comprehensive loss
    
    
    (107
    )
    
    
    (112
    )Accumulated deficit
    
    
    (24,866
    )
    
    
    (26,364
    )Total stockholders equity
    
    
    116,657
    
    
    
    114,043TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    128,959
    
    
    $
    124,489
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Color Kinetics Incorporated
 
 Condensed Consolidated Statements of Income  (In thousands, except per share data)
 Three Months Ended March 31,2007
    
    
    2006REVENUES (1):Lighting systems
    
    $
    16,966
    
    
    $
    13,098OEM and licensing
    
    
    1,818
    
    
    
    1,560Total revenues
    
    
    18,784
    
    
    
    14,658COST OF REVENUES:Lighting systems
    
    
    7,885
    
    
    
    6,099OEM and licensing
    
    
    553
    
    
    
    540Total cost of revenues
    
    
    8,438
    
    
    
    6,639GROSS PROFIT
    
    
    10,346
    
    
    
    8,019OPERATING EXPENSES:Selling and marketing
    
    
    4,561
    
    
    
    3,755Research and development
    
    
    2,286
    
    
    
    1,604General and administrative
    
    
    3,264
    
    
    
    3,091Total operating expenses
    
    
    10,111
    
    
    
    8,450INCOME (LOSS) FROM OPERATIONS
    
    
    235
    
    
    
    (431
    )INTEREST INCOME
    
    
    1,263
    
    
    
    562EQUITY IN EARNINGS OF JOINT VENTURE
    
    
    
    
    
    
    57NET INCOME
    
    $
    1,498
    
    
    $
    188EARNINGS PER SHARE:Basic
    
    $
    0.07
    
    
    $
    0.01Diluted
    
    $
    0.07
    
    
    $
    0.01WEIGHTED AVERAGE SHARES OUTSTANDING:Basic
    
    
    21,312
    
    
    
    18,410Diluted
    
    
    22,209
    
    
    
    19,946
 Three Months Ended March 31,2007
    
    
    2006(1) Includes revenues from related parties as follows:Lighting systems
    
    $
    
    
    
    $
    778OEM and licensing
    
    
    
    
    
    
    43Total related party revenues
    
    $
    
    
    
    $
    821
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Color Kinetics Incorporated
 
 Condensed Consolidated Statements of Cash Flows  (In thousands)
 Three Months Ended March 31,2007
    
    
    2006CASH FLOWS FROM OPERATING ACTIVITIES:Net income
    
    $
    1,498
    
    
    $
    188Adjustments to reconcile net income to cash from operating activities:Depreciation and amortization
    
    
    354
    
    
    
    247Stock-based compensation
    
    
    821
    
    
    
    547Equity in earnings of joint venture
    
    
    
    
    
    
    (57
    )Common stock issued for services
    
    
    13
    
    
    
    23Changes in assets and liabilities:Accounts receivable
    
    
    (1,193
    )
    
    
    (761
    )Inventory
    
    
    (2,158
    )
    
    
    380Prepaid expenses and other current assets
    
    
    1,156
    
    
    
    (1,233
    )Accounts payable
    
    
    1,664
    
    
    
    688Accrued expenses
    
    
    (986
    )
    
    
    (787
    )Deferred revenue
    
    
    1,269
    
    
    
    24Accrued restructuring
    
    
    (91
    )
    
    
    (95
    )Cash flows from operating activities
    
    
    2,347
    
    
    
    (836
    )CASH FLOWS FROM INVESTING ACTIVITIES:Purchases of investments
    
    
    (35,057
    )
    
    
    (6,768
    )Maturities of investments
    
    
    17,164
    
    
    
    Purchases of property and equipment
    
    
    (742
    )
    
    
    (444
    )Purchase of patent
    
    
    
    
    
    
    (300
    )Restricted cash
    
    
    (464
    )
    
    
    500Cash flows from investing activities
    
    
    (19,099
    )
    
    
    (7,012
    )CASH FLOWS FROM FINANCING ACTIVITIES:Proceeds from the exercise of stock options
    
    
    139
    
    
    
    179Proceeds from issuance of common stock under the employee stock
purchase plan
    
    
    137
    
    
    
    132Cash flows from financing activities
    
    
    276
    
    
    
    311EFFECT OF EXCHANGE RATE CHANGES ON CASH
    
    
    1
    
    
    
    (2
    )DECREASE IN CASH AND EQUIVALENTS
    
    
    (16,475
    )
    
    
    (7,539
    )CASH AND EQUIVALENTSBeginning of period
    
    
    60,997
    
    
    
    43,032CASH AND EQUIVALENTSEnd of period
    
    $
    44,522
    
    
    $
    35,493
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Color Kinetics Incorporated
 
 Notes to Unaudited Condensed Consolidated Financial Statements
 1. Nature of Business and Basis of Presentation
 Nature of Business 
 Basis of Presentation 
  2. Revenue Recognition
    3. Stock-Based Compensation
 Share-Based Payment
 (in thousands)
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Three Months Ended March 31,2007
    
    
    2006Cost of revenues
    
    $
    30
    
    
    $
    19Selling and marketing
    
    
    207
    
    
    
    116Research and development
    
    
    149
    
    
    
    124General and administrative
    
    
    435
    
    
    
    288Total stock-based compensation expense
    
    $
    821
    
    
    $
    547
 4. Inventory
 in thousands
 March 31,
    
    
    December 31,2007
    
    
    2006Finished goods
    
    $
    8,447
    
    
    $
    6,587Raw material components
    
    
    516
    
    
    
    218Total
    
    $
    8,963
    
    
    $
    6,805
 5. Intangible Assets
  6. Warranty Reserve
 in thousands
 Three Months Ended March 31,2007
    
    
    2006Balance, beginning of period
    
    $
    1,007
    
    
    $
    876Provisions in cost of revenues
    
    
    31
    
    
    
    169Expenditures
    
    
    (52
    )
    
    
    (164
    )Balance, end of period
    
    $
    986
    
    
    $
    881
 7. Income Taxes
 Accounting for Uncertainty in Income Taxes Accounting for Income Taxes
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8. Earnings per Share
  in thousands
 Three Months EndedMarch 31,2007
    
    2006Weighted average shares for basic computation
    
    
    21,312
    
    
    
    18,410Potential common shares from:Options
    
    
    810
    
    
    
    1,061Warrants
    
    
    87
    
    
    
    475Weighted average shares for diluted computation
    
    
    22,209
    
    
    
    19,946
 9. Segment Information
    in thousands
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Three Months Ended March 31,
 2007
    
    
    2006Lighting
    
    
    OEM and
    
    
    
    
    
    
    Lighting
    
    
    OEM andSystems
    
    
    Licensing
    
    
    Total
    
    
    Systems
    
    
    Licensing
    
    
    TotalRevenues
    
    $
    16,966
    
    
    $
    1,818
    
    
    $
    18,784
    
    
    $
    13,098
    
    
    $
    1,560
    
    
    $
    14,658Cost of revenues
    
    
    7,885
    
    
    
    553
    
    
    
    8,438
    
    
    
    6,099
    
    
    
    540
    
    
    
    6,639Gross profit
    
    
    9,081
    
    
    
    1,265
    
    
    
    10,346
    
    
    
    6,999
    
    
    
    1,020
    
    
    
    8,019Other direct costs
    
    
    5,049
    
    
    
    394
    
    
    
    5,443
    
    
    
    4,029
    
    
    
    388
    
    
    
    4,417Direct contribution margin
    
    $
    4,032
    
    
    $
    871
    
    
    
    4,903
    
    
    $
    2,970
    
    
    $
    632
    
    
    
    3,602Reconciling items to income (loss) from
operations:Unallocated selling and marketing
    
    
    
    
    
    
    
    
    
    
    647
    
    
    
    
    
    
    
    
    
    
    
    648Unallocated research and development
    
    
    
    
    
    
    
    
    
    
    757
    
    
    
    
    
    
    
    
    
    
    
    294Unallocated general and administrative
    
    
    
    
    
    
    
    
    
    
    3,264
    
    
    
    
    
    
    
    
    
    
    
    3,091Income (loss) from operations
    
    
    
    
    
    
    
    
    
    $
    235
    
    
    
    
    
    
    
    
    
    
    $
    (431
    )
 10. Comprehensive Income
 in thousands
 Three Months Ended March 31,2007
    
    
    2006Net income
    
    $
    1,498
    
    
    $
    188Foreign currency translation adjustments
    
    
    1
    
    
    
    (2
    )Unrealized holding gains (losses) on investments
    
    
    4
    
    
    
    (6
    )Total comprehensive income
    
    $
    1,503
    
    
    $
    180
 11. Investment in Joint Venture
  12. Commitments and Contingencies
 Commitment
 Contingencies 
 TIR Systems, Ltd.
    9




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Boca Flasher Incorporated
  
 Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 Cautionary Statements
  Overview
     10




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
    
    Lighting systems:We offer intelligent LED lighting systems sold under the Color
Kinetics brand for installation in lighting projects where their use has typically been
specified by a designer or architect. We also sell simplified LED lighting systems for
broader categories of the lighting market.
    
    OEM and licensing:We offer a standard line of LED lighting modules, custom and basic
components and other products that can be incorporated by manufacturers in products sold
under their own brands. We also license our intellectual property. We believe that our
proprietary technologies not only provide a competitive advantage in many markets where we
compete directly, but also offer increasing opportunities, through our OEM or licensing
programs, to reach markets and applications that cannot be served efficiently by our own
direct sales force.
    Description of Our Revenues, Costs and Expenses
     11




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Critical Accounting Estimates
   Revenue Recognition.
 
    
    evidence exists of an arrangement with the customer, typically consisting of a
purchase order;
    
    our products have been delivered and risk of loss has passed to the customer, which
typically occurs when a product is shipped under our customary terms, generally FOB
shipping point;
    
    the amount of revenue to which we are entitled is fixed or determinable; and
    
    we believe it is probable that we will be able to collect the amount due us from our customer.
    Allowance for Doubtful Accounts.
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Product Warranty.
 Inventory Reserves.
 Accounting for Income Taxes.
 Accounting for Uncertainty in Income Taxes Accounting for Income Taxes
 Stock-Based Compensation Share-Based Payment
 Results of Operations
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Percentage of Total RevenuesThree Months Ended March 31,2007
    
    2006Revenues:Lighting systems
    
    
    90
    %
    
    
    89
    %OEM and licensing
    
    
    10
    
    
    
    11Total revenues
    
    
    100
    
    
    
    100Cost of revenues:Cost of lighting systems, as a percentage of lighting systems revenues
    
    
    46
    
    
    
    47Cost of OEM and licensing, as a percentage of OEM and licensing revenues
    
    
    30
    
    
    
    35Total cost of revenues
    
    
    45
    
    
    
    45Gross profit
    
    
    55
    
    
    
    55Operating expenses:Selling and marketing
    
    
    24
    
    
    
    26Research and development
    
    
    12
    
    
    
    11General and administrative
    
    
    18
    
    
    
    21Total operating expenses
    
    
    54
    
    
    
    58Income (loss) from operations
    
    
    1
    
    
    
    (3
    )Interest income
    
    
    7
    
    
    
    4Equity in earnings of joint venture
    
    
    
    
    
    
    Net income
    
    
    8
    %
    
    
    1
    %
 Revenues.
      Gross Profit.
   14




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Selling
and Marketing Expenses.
 Research and Development Expenses.
 General and Administrative Expenses.
 Interest Income.
 Equity in Earnings of Joint Venture.
 Provision for Income Taxes.
 Liquidity and Capital Resources
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
  
 Item 4. Controls and Procedures
      
 PART II. OTHER INFORMATION
 
 Item 1. Legal Proceedings
 TIR Systems, Ltd.
 16




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Boca Flasher Incorporated
  
 Item 1A. Risk Factors
   
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  
 Items 3. Defaults Upon Senior Securities
  
 Item 4. Submission of Matters to a Vote of Security Holders
  
 Item 5. Other Information
 Compensatory arrangements of
certain officers
 
 Item 6. Exhibits
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Exhibit No.
    
    Description3.2
    
    Seventh Amended and Restated Certificate of Incorporation of Color Kinetics
Incorporated (1)3.4
    
    Third Amended and Restated By-Laws of Color Kinetics Incorporated (2)*10.2
    
    Employee Stock Purchase Plan10.31
    
    Lease Agreement with Three Burlington Woods LLC dated January 8, 2007(3)10.32
    
    Expansion Option Agreement with Burlington Woods Office Trust No. 2, dated January 8,
2007(3)*10.33
    
    2007 Senior Management Bonus Plans*10.34
    
    Letter Agreement by and between Color Kinetics Incorporated and William J. Sims,
dated May 1, 2007 (4)*10.35
    
    Letter Agreement by and between Color Kinetics Incorporated and David K. Johnson,
dated May 1, 2007 (4)*10.36
    
    Letter Agreement by and between Color Kinetics Incorporated and Jeffrey Cassis,
dated May 1, 2007 (4)*10.37
    
    Letter Agreement by and between Color Kinetics Incorporated and Frederick M. Morgan,
dated May 1, 2007 (4)*10.38
    
    Letter Agreement by and between Color Kinetics Incorporated and Ihor Lys, dated May
1, 2007 (4)31.1
    
    Certification Pursuant to Section 302 of Sarbanes-Oxley Act of 2002  William J. Sims.31.2
    
    Certification Pursuant to Section 302 of Sarbanes-Oxley Act of 2002  David K. Johnson32.1
    
    Certification Pursuant to Section 906 of Sarbanes-Oxley Act of 2002
 
 *
    
    Management contract or compensatory plan or arrangement(1)
    
    Incorporated by reference to the similarly numbered exhibit to our Registration Statement on
Form S-1, File No. 333-114386.(2)
    
    Incorporated by reference to Exhibit 99.1 on Form 8-K filed May 1, 2007(3)
    
    Incorporated by reference to Exhibit 99.1 on Form 8-K filed January 10, 2007(4)
    
    Incorporated by reference to Exhibit 99.1 on Form 8-K filed May 1, 2007 
 SIGNATURES
  COLOR KINETICS INCORPORATED(Registrant)By:
    /s/    William J. SimsWilliam J. SimsChief Executive Officer By:
    /s/    David K. JohnsonDavid K. JohnsonChief Financial Officer 18