##### Table of Contents



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 June 30, 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
(State or other jurisdiction of 
incorporation or organization)
    
    04-3391805
(I.R.S. Employer
Identification No.)
 
 
 
 þ o
  o þ o
  o þ




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##### Table of Contents



COLOR KINETICS INCORPORATED
FORM 10-Q
FOR THE THREE MONTHS ENDED JUNE 30, 2007
INDEX
 Page No.PART I.  FINANCIAL INFORMATIONItem 1.
    
    Unaudited Condensed Consolidated Financial StatementsCondensed Consolidated Balance Sheets as of June 30, 2007 and December 31, 2006
    
    
    3Condensed Consolidated Statements of Income for the Three and Six Months Ended June 30, 2007 and 2006
    
    
    4Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 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
    
    
    18Item 4.
    
    Controls and Procedures
    
    
    18PART II.  OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    18Item 1A.
    
    Risk Factors
    
    
    19Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    19Item 3.
    
    Defaults Upon Senior Securities
    
    
    19Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    19Item 5.
    
    Other Information
    
    
    19Item 6.
    
    Exhibits
    
    
    19Signatures
    
    
    20Ex-10.39 Form of CEO Incentive Stock Option Grant LetterEx-10.40 Form of CEO Non Statutory Stock Option Grant LetterEx-10.41 Form of Executive Officer Incentive Stock Option Grant LetterEx-10.42 Form of Executive Officer Non Statutory Stock Option Grant LetterEx-31.1 Section 302 Certification of William J. SimsEx-31.2 Section 302 Certification of David K. JohnsonEx-32.1 Section 906 Certifications
 2




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##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 Item 1. Unaudited Condensed Consolidated Financial Statements
 Color Kinetics Incorporated
 
 Condensed Consolidated Balance Sheets  (In thousands, except per share data)
 June 30,
    
    
    December 31,2007
    
    
    2006ASSETSCURRENT ASSETS:Cash and equivalents
    
    $
    41,841
    
    
    $
    60,997Investments
    
    
    59,323
    
    
    
    38,985Restricted cash
    
    
    500
    
    
    
    500Accounts receivable, net
    
    
    13,378
    
    
    
    11,480Accounts receivable from related party
    
    
    
    
    
    
    8    2Inventory
    
    
    9,255
    
    
    
    6,805Prepaid expenses and other current assets
    
    
    3,062
    
    
    
    3,159Total current assets
    
    
    127,359
    
    
    
    122,008PROPERTY AND EQUIPMENTnet
    
    
    4,733
    
    
    
    2,199INTANGIBLE ASSETSnet
    
    
    273
    
    
    
    282RESTRICTED CASHNon-current portion
    
    
    464
    
    
    
    TOTAL ASSETS
    
    $
    132,829
    
    
    $
    124,489LIABILITIES AND STOCKHOLDERS EQUITYCURRENT LIABILITIES:Accounts payable
    
    $
    6,396
    
    
    $
    3,690Accrued expenses
    
    
    2,804
    
    
    
    2,238Accrued compensation
    
    
    3,192
    
    
    
    3,073Accrued warranty
    
    
    811
    
    
    
    1,007Accrued restructuring
    
    
    61
    
    
    
    243Deferred revenue
    
    
    183
    
    
    
    195Total current liabilities
    
    
    13,447
    
    
    
    10,446COMMITMENTS AND CONTINGENCIESSTOCKHOLDERS EQUITY:Common stock, $0.001 par value
    
    
    21
    
    
    
    21Additional paid-in capital
    
    
    143,831
    
    
    
    140,498Accumulated other comprehensive loss
    
    
    (156
    )
    
    
    (112
    )Accumulated deficit
    
    
    (24,314
    )
    
    
    (26,364
    )Total stockholders equity
    
    
    119,382
    
    
    
    114,043TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    132,829
    
    
    $
    124,489
  3




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Color Kinetics Incorporated
 
 Condensed Consolidated Statements of Income (In thousands, except per share data)
 Three Months Ended June 30,
    
    
    Six Months Ended June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006REVENUES (1):Lighting systems
    
    $
    18,812
    
    
    $
    13,729
    
    
    $
    35,778
    
    
    $
    26,827OEM and licensing
    
    
    2,223
    
    
    
    1,805
    
    
    
    4,041
    
    
    
    3,365Total revenues
    
    
    21,035
    
    
    
    15,534
    
    
    
    39,819
    
    
    
    30,192COST OF REVENUES:Lighting systems
    
    
    8,935
    
    
    
    6,036
    
    
    
    16,820
    
    
    
    12,135OEM and licensing
    
    
    492
    
    
    
    635
    
    
    
    1,045
    
    
    
    1,175Total cost of revenues
    
    
    9,427
    
    
    
    6,671
    
    
    
    17,865
    
    
    
    13,310GROSS PROFIT
    
    
    11,608
    
    
    
    8,863
    
    
    
    21,954
    
    
    
    16,882OPERATING EXPENSES:Selling and marketing
    
    
    5,514
    
    
    
    4,322
    
    
    
    10,075
    
    
    
    8,077Research and development
    
    
    2,318
    
    
    
    1,801
    
    
    
    4,604
    
    
    
    3,405General and administrative
    
    
    4,481
    
    
    
    2,908
    
    
    
    7,745
    
    
    
    5,999Total operating expenses
    
    
    12,313
    
    
    
    9,031
    
    
    
    22,424
    
    
    
    17,481LOSS FROM OPERATIONS
    
    
    (705
    )
    
    
    (168
    )
    
    
    (470
    )
    
    
    (599
    )INTEREST INCOME
    
    
    1,257
    
    
    
    636
    
    
    
    2,520
    
    
    
    1,198EQUITY IN EARNINGS (LOSS) OF JOINT VENTURE
    
    
    
    
    
    
    (43
    )
    
    
    
    
    
    
    14NET INCOME
    
    $
    552
    
    
    $
    425
    
    
    $
    2,050
    
    
    $
    613EARNINGS PER SHARE:Basic
    
    $
    0.03
    
    
    $
    0.02
    
    
    $
    0.10
    
    
    $
    0.03Diluted
    
    $
    0.02
    
    
    $
    0.02
    
    
    $
    0.09
    
    
    $
    0.03WEIGHTED AVERAGE SHARES OUTSTANDING:Basic
    
    
    21,403
    
    
    
    18,506
    
    
    
    21,358
    
    
    
    18,458Diluted
    
    
    22,593
    
    
    
    19,974
    
    
    
    22,409
    
    
    
    19,960
 Three Months Ended June 30,
    
    
    Six Months Ended June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006(1) Includes revenues from related parties as follows:Lighting systems
    
    $
    
    
    
    $
    701
    
    
    $
    
    
    
    $
    1,479OEM and licensing
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    43Total related party revenues
    
    $
    
    
    
    $
    701
    
    
    $
    
    
    
    $
    1,522
  4




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Color Kinetics Incorporated
 
 Condensed Consolidated Statements of Cash Flows (In thousands)
 Six Months Ended June 30,2007
    
    
    2006CASH FLOWS FROM OPERATING ACTIVITIES:Net income
    
    $
    2,050
    
    
    $
    613Adjustments to reconcile net income to cash from operating activities:Depreciation and amortization
    
    
    799
    
    
    
    584Stock-based compensation
    
    
    1,711
    
    
    
    1,170Equity in earnings of joint venture
    
    
    
    
    
    
    (14
    )Common stock issued for services
    
    
    44
    
    
    
    47Changes in assets and liabilities:Accounts receivable
    
    
    (1,816
    )
    
    
    (2,214
    )Inventory
    
    
    (2,450
    )
    
    
    641Prepaid expenses and other current assets
    
    
    97
    
    
    
    (618
    )Accounts payable
    
    
    2,706
    
    
    
    659Accrued expenses
    
    
    489
    
    
    
    27Deferred revenue
    
    
    (12
    )
    
    
    203Accrued restructuring
    
    
    (182
    )
    
    
    (192
    )Cash flows from operating activities
    
    
    3,436
    
    
    
    906CASH FLOWS FROM INVESTING ACTIVITIES:Purchases of investments
    
    
    (58,763
    )
    
    
    (11,228
    )Maturities of investments
    
    
    38,385
    
    
    
    3,455Purchases of property and equipment
    
    
    (3,323
    )
    
    
    (1,194
    )Purchase of patent
    
    
    
    
    
    
    (300
    )Restricted cash
    
    
    (464
    )
    
    
    500Cash flows from investing activities
    
    
    (24,165
    )
    
    
    (8,767
    )CASH FLOWS FROM FINANCING ACTIVITIES:Proceeds from the exercise of stock options
    
    
    1,441
    
    
    
    528Proceeds from issuance of common stock
    
    
    137
    
    
    
    132Cash flows from financing activities
    
    
    1,578
    
    
    
    660EFFECT OF EXCHANGE RATE CHANGES ON CASH
    
    
    (5
    )
    
    
    (2
    )DECREASE IN CASH AND EQUIVALENTS
    
    
    (19,156
    )
    
    
    (7,203
    )CASH AND EQUIVALENTSBeginning of period
    
    
    60,997
    
    
    
    43,032CASH AND EQUIVALENTSEnd of period
    
    $
    41,841
    
    
    $
    35,829
  5




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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 
  Pending Merger with Philips 
    2. Revenue Recognition
    6




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3. Stock-Based Compensation
 Share-Based Payment
 (in thousands)
 Three Months Ended June 30,
    
    
    Six Months Ended June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Cost of revenues
    
    $
    32
    
    
    $
    17
    
    
    $
    62
    
    
    $
    36Selling and marketing
    
    
    228
    
    
    
    117
    
    
    
    435
    
    
    
    233Research and development
    
    
    184
    
    
    
    97
    
    
    
    333
    
    
    
    221General and administrative
    
    
    446
    
    
    
    392
    
    
    
    881
    
    
    
    680Total stock-based
compensation expense
    
    $
    890
    
    
    $
    623
    
    
    $
    1,711
    
    
    $
    1,170
 4. Inventory
 in thousands
 June 30,
    
    
    December 31,2007
    
    
    2006Finished goods
    
    $
    8,913
    
    
    $
    6,587Raw material components
    
    
    342
    
    
    
    218Total
    
    $
    9,255
    
    
    $
    6,805
 5. Intangible Assets
  6. Warranty Reserve
 in thousands
 Six Months Ended June 30,2007
    
    
    2006Balance, beginning of period
    
    $
    1,007
    
    
    $
    876Provisions in cost of revenues
    
    
    46
    
    
    
    303Expenditures
    
    
    (242
    )
    
    
    (317
    )Balance, end of period
    
    $
    811
    
    
    $
    862
 7




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7. Income Taxes
 Accounting for Uncertainty in Income Taxes, Accounting for Income Taxes,
    8. Earnings per Share
  in thousands
 Three Months Ended June 30,
    
    
    Six Months Ended June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Weighted average shares for basic computation
    
    
    21,403
    
    
    
    18,506
    
    
    
    21,358
    
    
    
    18,458Potential common shares from:Options
    
    
    1,100
    
    
    
    994
    
    
    
    962
    
    
    
    1,028Warrants
    
    
    90
    
    
    
    474
    
    
    
    89
    
    
    
    474Weighted average shares for diluted computation
    
    
    22,593
    
    
    
    19,974
    
    
    
    22,409
    
    
    
    19,960
 9. Segment Information
   8




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in thousands
 2007
    
    
    2006Three Months Ended June 30,
    
    Lighting Systems
    
    
    OEM and Licensing
    
    
    Total
    
    
    Lighting Systems
    
    
    OEM and Licensing
    
    
    TotalRevenues
    
    $
    18,812
    
    
    $
    2,223
    
    
    $
    21,035
    
    
    $
    13,729
    
    
    $
    1,805
    
    
    $
    15,534Cost of revenues
    
    
    8,935
    
    
    
    492
    
    
    
    9,427
    
    
    
    6,036
    
    
    
    635
    
    
    
    6,671Gross profit
    
    
    9,877
    
    
    
    1,731
    
    
    
    11,608
    
    
    
    7,693
    
    
    
    1,170
    
    
    
    8,863Other direct costs
    
    
    5,538
    
    
    
    553
    
    
    
    6,091
    
    
    
    4,788
    
    
    
    322
    
    
    
    5,110Direct contribution margin
    
    $
    4,339
    
    
    $
    1,178
    
    
    
    5,517
    
    
    $
    2,905
    
    
    $
    848
    
    
    
    3,753Reconciling items to loss from operations:Unallocated selling and marketing
    
    
    
    
    
    
    
    
    
    
    691
    
    
    
    
    
    
    
    
    
    
    
    617Unallocated research and development
    
    
    
    
    
    
    
    
    
    
    1,050
    
    
    
    
    
    
    
    
    
    
    
    396Unallocated general and administrative
    
    
    
    
    
    
    
    
    
    
    4,481
    
    
    
    
    
    
    
    
    
    
    
    2,908Loss from operations
    
    
    
    
    
    
    
    
    
    $
    (705
    )
    
    
    
    
    
    
    
    
    
    $
    (168
    )
 2007
    
    
    2006Six Months Ended June 30,
    
    Lighting Systems
    
    
    OEM and Licensing
    
    
    Total
    
    
    Lighting Systems
    
    
    OEM and Licensing
    
    
    TotalRevenues
    
    $
    35,778
    
    
    $
    4,041
    
    
    $
    39,819
    
    
    $
    26,827
    
    
    $
    3,365
    
    
    $
    30,192Cost of revenues
    
    
    16,820
    
    
    
    1,045
    
    
    
    17,865
    
    
    
    12,135
    
    
    
    1,175
    
    
    
    13,310Gross profit
    
    
    18,958
    
    
    
    2,996
    
    
    
    21,954
    
    
    
    14,692
    
    
    
    2,190
    
    
    
    16,882Other direct costs
    
    
    10,587
    
    
    
    947
    
    
    
    11,534
    
    
    
    8,817
    
    
    
    710
    
    
    
    9,527Direct contribution margin
    
    $
    8,371
    
    
    $
    2,049
    
    
    
    10,420
    
    
    $
    5,875
    
    
    $
    1,480
    
    
    
    7,355Reconciling items to loss from operations:Unallocated selling and marketing
    
    
    
    
    
    
    
    
    
    
    1,338
    
    
    
    
    
    
    
    
    
    
    
    1,265Unallocated research and development
    
    
    
    
    
    
    
    
    
    
    1,807
    
    
    
    
    
    
    
    
    
    
    
    690Unallocated general and administrative
    
    
    
    
    
    
    
    
    
    
    7,745
    
    
    
    
    
    
    
    
    
    
    
    5,999Loss from operations
    
    
    
    
    
    
    
    
    
    $
    (470
    )
    
    
    
    
    
    
    
    
    
    $
    (599
    )
 10. Comprehensive Income
 in thousands
 Three Months Ended June 30,
    
    
    Six Months Ended June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Net income
    
    $
    552
    
    
    $
    425
    
    
    $
    2,050
    
    
    $
    613Foreign currency translation adjustments
    
    
    (4
    )
    
    
    (23
    )
    
    
    (5
    )
    
    
    (26
    )Unrealized holding gains (losses) on investments
    
    
    (44
    )
    
    
    11
    
    
    
    (40
    )
    
    
    5Total comprehensive income
    
    $
    504
    
    
    $
    413
    
    
    $
    2,005
    
    
    $
    592
 9




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11. Investment in Joint Venture
  12. Commitments and Contingencies
 Commitment
 Contingencies 
 TIR Systems, Ltd.
     Boca Flasher Incorporated
  Renaissance Lighting
  
 Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 Cautionary Statements
  10




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Pending Merger with Philips
     Overview
     11




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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
     12




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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.
 13




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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
  14




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Percentage of Total RevenuesThree Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2007
    
    2006
    
    2007
    
    2006Revenues:Lighting systems
    
    
    89
    %
    
    
    88
    %
    
    
    90
    %
    
    
    89
    %OEM and licensing
    
    
    11
    
    
    
    12
    
    
    
    10
    
    
    
    11Total revenues
    
    
    100
    
    
    
    100
    
    
    
    100
    
    
    
    100Cost of revenues:Cost of lighting systems, as a percentage of
lighting systems revenues
    
    
    47
    
    
    
    44
    
    
    
    47
    
    
    
    45Cost of OEM and licensing, as a percentage
of
OEM and licensing revenues
    
    
    22
    
    
    
    35
    
    
    
    26
    
    
    
    35Total cost of revenues
    
    
    45
    
    
    
    43
    
    
    
    45
    
    
    
    44Gross profit
    
    
    55
    
    
    
    57
    
    
    
    55
    
    
    
    56Operating expenses:Selling and marketing
    
    
    26
    
    
    
    28
    
    
    
    25
    
    
    
    27Research and development
    
    
    11
    
    
    
    12
    
    
    
    12
    
    
    
    11General and administrative
    
    
    21
    
    
    
    18
    
    
    
    19
    
    
    
    20Total operating expenses
    
    
    58
    
    
    
    58
    
    
    
    56
    
    
    
    58Loss from operations
    
    
    (3
    )
    
    
    (1
    )
    
    
    (1
    )
    
    
    (2
    )Interest income
    
    
    6
    
    
    
    4
    
    
    
    6
    
    
    
    4Equity in earnings of joint venture
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net income
    
    
    3
    %
    
    
    3
    %
    
    
    5
    %
    
    
    2
    %
 Revenues.
     15




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Gross Profit.
   Selling and Marketing Expenses.
   Research and Development Expenses.
  General and Administrative Expenses.
 16




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Interest Income.
 Equity in Earnings of Joint Venture.
 Provision for Income Taxes.
 Liquidity and Capital Resources
      17




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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.
     Boca Flasher Incorporated
  18




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Renaissance Lighting
  
 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
  Nominee
    
    For
    
    Withhold AuthorityGaro H. Armen
    
    
    15,232,298
    
    
    
    62,850William K. OBrien
    
    
    15,235,375
    
    
    
    59,773
 
 Item 5. Other Information
  
 Item 6. Exhibits
 Exhibit No.
    
    Description2.3
    
    
    Agreement and Plan of Merger by and among Color Kinetics Incorporated, Philips Holding
USA, Inc. and Black & White Merger Sub, Inc. dated as of June 18, 2007 (1)3.2
    
    
    Seventh Amended and Restated Certificate of Incorporation of Color Kinetics
Incorporated (2)3.4
    
    
    Third Amended and Restated By-Laws of Color Kinetics Incorporated (3)*10.34
    
    
    Letter Agreement by and between Color Kinetics Incorporated and William J. Sims, dated
May 1, 2007 (3)*10.35
    
    
    Letter Agreement by and between Color Kinetics Incorporated and David K. Johnson,
dated May 1, 2007 (3)*10.36
    
    
    Letter Agreement by and between Color Kinetics Incorporated and Jeffrey Cassis, dated
May 1, 2007 (3)*10.37
    
    
    Letter Agreement by and between Color Kinetics Incorporated and Frederick M. Morgan,
dated May 1, 2007 (3)*10.38
    
    
    Letter Agreement by and between Color Kinetics Incorporated and Ihor Lys, dated May 1,
2007 (3)*10.39
    
    
    Form CEO Incentive Stock Option Grant Letter
 19




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##### Table of Contents



Exhibit No.
    
    Description*10.40
    
    
    Form CEO Non Statutory Stock Option Grant Letter*10.41
    
    
    Form Executive Officer (non-CEO) Incentive Stock Option Grant Letter*10.42
    
    
    Form Executive Officer (non-CEO) Non Statutory Stock Option Grant Letter31.1
    
    
    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 Exhibit 2.3 on Form 8-K filed June 20, 2007. Exhibits and
schedules are omitted but will be furnished to the Commission supplementally upon request.(2)
    
    Incorporated by reference to the similarly numbered exhibit to our Registration Statement on
Form S-1, File No. 333-114386.(3)
    
    Incorporated by reference to similarly numbered exhibit to our Current Report 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 20