##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 (Mark One)
 þ
    
    Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the Quarterly Period Ended September 30, 2006
 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.)
 
 (Registrants telephone number, including area code)
 þ o
  o þ o
 o þ




---



##### 



COLOR KINETICS INCORPORATED
FORM 10-Q
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2006
INDEX
 Page No.PART I. FINANCIAL INFORMATIONItem 1.
    
    Unaudited Condensed Consolidated Financial StatementsCondensed Consolidated Balance Sheets as of September 30, 2006 and December 31, 2005
    
    3Condensed Consolidated Statements of Income for the Three and Nine Months Ended
September 30, 2006 and 2005
    
    4Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September
30, 2006 and 2005
    
    5Notes to Unaudited Condensed Consolidated Financial Statements
    
    6Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    12Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    19Item 4.
    
    Controls and Procedures
    
    20PART II. OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    20Item 1A.
    
    Risk Factors
    
    21Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    31Item 3.
    
    Defaults Upon Senior Securities
    
    31Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    31Item 5.
    
    Other Information
    
    31Item 6.
    
    Exhibits
    
    31Signatures
    
    31Ex-10.29 Amendment to the Chief Executive Officer Bonus PlanEx-31.1 Section 302 Certification of CEOEx-31.2 Section 302 Certification of CFOEx-32.1 Section 906 Certification of CEO & CFO
  2




---



##### 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)
 September 30,
    
    
    December 31,2006
    
    
    2005ASSETSCURRENT ASSETS:Cash and equivalents
    
    $
    37,964
    
    
    $
    43,032Investments
    
    
    21,673
    
    
    
    14,137Restricted cash
    
    
    693
    
    
    
    100Accounts receivable, net
    
    
    12,312
    
    
    
    7,813Accounts receivable from related party
    
    
    183
    
    
    
    249Inventory
    
    
    6,823
    
    
    
    7,159Prepaid expenses and other current assets
    
    
    1,333
    
    
    
    1,436Total current assets
    
    
    80,981
    
    
    
    73,926PROPERTY AND EQUIPMENTnet
    
    
    1,816
    
    
    
    1,026INTANGIBLE ASSETSnet
    
    
    287
    
    
    
    INVESTMENT IN JOINT VENTURE
    
    
    880
    
    
    
    887RESTRICTED CASHNon-current portion
    
    
    
    
    
    
    900TOTAL ASSETS
    
    $
    83,964
    
    
    $
    76,739LIABILITIES AND STOCKHOLDERS EQUITYCURRENT LIABILITIES:Accounts payable
    
    $
    2,392
    
    
    $
    1,019Accounts payable to related party
    
    
    698
    
    
    
    63Accrued expenses
    
    
    2,561
    
    
    
    2,169Accrued compensation
    
    
    2,558
    
    
    
    2,251Accrued restructuring
    
    
    340
    
    
    
    385Accrued warranty
    
    
    924
    
    
    
    876Deferred revenue
    
    
    353
    
    
    
    231Total current liabilities
    
    
    9,826
    
    
    
    6,994ACCRUED RESTRUCTURINGNon-current portion
    
    
    
    
    
    
    243COMMITMENTS AND CONTINGENCIESSTOCKHOLDERS EQUITY:Common stock, $0.001 par value
    
    
    19
    
    
    
    18Additional paid-in capital
    
    
    102,101
    
    
    
    99,210Accumulated other comprehensive loss
    
    
    (65
    )
    
    
    (120
    )Accumulated deficit
    
    
    (27,917
    )
    
    
    (29,606
    )Total stockholders equity
    
    
    74,138
    
    
    
    69,502TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    83,964
    
    
    $
    76,739
  3




---



##### Table of Contents



Color Kinetics Incorporated
 
 Condensed Consolidated Statements of Income
 (In thousands, except per share data)
 Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005REVENUES (1):Lighting systems
    
    $
    15,565
    
    
    $
    11,361
    
    
    $
    42,392
    
    
    $
    31,672OEM and licensing
    
    
    1,505
    
    
    
    2,697
    
    
    
    4,870
    
    
    
    6,755Total revenues
    
    
    17,070
    
    
    
    14,058
    
    
    
    47,262
    
    
    
    38,427COST OF REVENUES:Lighting systems
    
    
    6,808
    
    
    
    5,457
    
    
    
    18,943
    
    
    
    15,145OEM and licensing
    
    
    696
    
    
    
    1,137
    
    
    
    1,871
    
    
    
    3,103Total cost of revenues
    
    
    7,504
    
    
    
    6,594
    
    
    
    20,814
    
    
    
    18,248GROSS PROFIT
    
    
    9,566
    
    
    
    7,464
    
    
    
    26,448
    
    
    
    20,179OPERATING EXPENSES:Selling and marketing
    
    
    4,081
    
    
    
    3,004
    
    
    
    12,158
    
    
    
    8,257Research and development
    
    
    1,813
    
    
    
    1,162
    
    
    
    5,218
    
    
    
    3,369General and administrative
    
    
    3,268
    
    
    
    2,587
    
    
    
    9,267
    
    
    
    6,839Total operating expenses
    
    
    9,162
    
    
    
    6,753
    
    
    
    26,643
    
    
    
    18,465INCOME (LOSS) FROM OPERATIONS
    
    
    404
    
    
    
    711
    
    
    
    (195
    )
    
    
    1,714INTEREST INCOME
    
    
    700
    
    
    
    443
    
    
    
    1,898
    
    
    
    1,147EQUITY IN EARNINGS (LOSS) OF JOINT VENTURE
    
    
    (28
    )
    
    
    96
    
    
    
    (14
    )
    
    
    110NET INCOME
    
    $
    1,076
    
    
    $
    1,250
    
    
    $
    1,689
    
    
    $
    2,971EARNINGS PER SHARE:Basic
    
    $
    0.06
    
    
    $
    0.07
    
    
    $
    0.09
    
    
    $
    0.16Diluted
    
    $
    0.05
    
    
    $
    0.06
    
    
    $
    0.08
    
    
    $
    0.15WEIGHTED AVERAGE SHARES OUTSTANDING:Basic
    
    
    18,553
    
    
    
    18,251
    
    
    
    18,501
    
    
    
    18,113Diluted
    
    
    19,930
    
    
    
    19,672
    
    
    
    19,959
    
    
    
    19,558
 Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005(1) Includes revenues from related parties as follows:Lighting systems
    
    $
    705
    
    
    $
    1,195
    
    
    $
    2,184
    
    
    $
    3,858OEM and licensing
    
    
    
    
    
    
    56
    
    
    
    43
    
    
    
    72Total related party revenues
    
    $
    705
    
    
    $
    1,251
    
    
    $
    2,227
    
    
    $
    3,930
  4




---



##### Table of Contents



Color Kinetics Incorporated
 
 Condensed Consolidated Statements of Cash Flows
 (In thousands)
 Nine Months Ended September 30,2006
    
    
    2005CASH FLOWS FROM OPERATING ACTIVITIES:Net income
    
    $
    1,689
    
    
    $
    2,971Adjustments to reconcile net income to cash from operating activities:Depreciation and amortization
    
    
    919
    
    
    
    746Stock-based compensation
    
    
    1,782
    
    
    
    24Loss on disposal of property and equipment
    
    
    
    
    
    
    4Equity in (earnings) loss of joint venture
    
    
    14
    
    
    
    (110
    )Common stock issued for services
    
    
    74
    
    
    
    37Changes in assets and liabilities:Accounts receivable
    
    
    (4,433
    )
    
    
    (2,560
    )Inventory
    
    
    336
    
    
    
    (1,511
    )Prepaid expenses and other current assets
    
    
    103
    
    
    
    (673
    )Accounts payable
    
    
    2,008
    
    
    
    428Accrued expenses
    
    
    747
    
    
    
    381Deferred revenue
    
    
    122
    
    
    
    46Accrued restructuring
    
    
    (288
    )
    
    
    (305
    )Cash flows from operating activities
    
    
    3,073
    
    
    
    (522
    )CASH FLOWS FROM INVESTING ACTIVITIES:Purchases of investments
    
    
    (20,348
    )
    
    
    (43,357
    )Maturities of investments
    
    
    12,869
    
    
    
    35,097Purchases of property and equipment
    
    
    (1,696
    )
    
    
    (813
    )Purchase of patent
    
    
    (300
    )
    
    
    Restricted cash
    
    
    307
    
    
    
    100Cash flows from investing activities
    
    
    (9,168
    )
    
    
    (8,973
    )CASH FLOWS FROM FINANCING ACTIVITIES:Proceeds from the exercise of stock options
    
    
    775
    
    
    
    1,594Proceeds from issuance of common stock
    
    
    261
    
    
    
    277Cash flows from financing activities
    
    
    1,036
    
    
    
    1,871EFFECT OF EXCHANGE RATE CHANGES ON CASH
    
    
    (9
    )
    
    
    (37
    )DECREASE IN CASH AND EQUIVALENTS
    
    
    (5,068
    )
    
    
    (7,661
    )CASH AND EQUIVALENTSBeginning of period
    
    
    43,032
    
    
    
    26,198CASH AND EQUIVALENTSEnd of period
    
    $
    37,964
    
    
    $
    18,537
  5




---



##### Table of Contents



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
   6




---



##### Table of Contents



in thousands, except per share data
 Three Months Ended
    
    
    Nine Months EndedSeptember 30, 2005
    
    
    September 30, 2005Net income, as reported
    
    $
    1,250
    
    
    $
    2,971Add: employee stock-based compensation expense included in reported net income
    
    
    8
    
    
    
    24Less: employee stock-based compensation expense determined under fair value
method
    
    
    (406
    )
    
    
    (1,233
    )Pro forma net income
    
    $
    852
    
    
    $
    1,762Basic earnings per shareAs reported
    
    $
    0.07
    
    
    $
    0.16Pro forma
    
    $
    0.05
    
    
    $
    0.10Diluted earnings per shareAs reported
    
    $
    0.06
    
    
    $
    0.15Pro forma
    
    $
    0.04
    
    
    $
    0.09
  Stock Options
 th
 (in thousands, except per
share data)
 7




---



##### Table of Contents



WeightedAverageShares
    
    
    Exercise PriceOutstanding at December 31, 2005
    
    
    2,576
    
    
    $
    9.39Granted
    
    
    330
    
    
    
    17.03Exercised
    
    
    (235
    )
    
    
    6.25Forfeited
    
    
    (87
    )
    
    
    11.78Outstanding at September 30, 2006
    
    
    2,584
    
    
    $
    10.57Exercisable at September 30, 2006
    
    
    1,328
    
    
    $
    7.11
   2006
    
    2005Risk-free interest rate
    
    
    4.8
    %
    
    
    3.9
    %Expected volatility
    
    
    61.9
    %
    
    
    66.9
    %Expected dividend yield
    
    
    0.0
    %
    
    
    0.0
    %Expected life in years
    
    
    4.4
    
    
    
    4.0
    Employee Stock Purchase Plan
   8




---



##### Table of Contents



2006
    
    2005Risk-free interest rate
    
    
    4.6
    %
    
    
    2.9
    %Expected volatility
    
    
    61.2
    %
    
    
    66.0
    %Expected dividend yield
    
    
    0.0
    %
    
    
    0.0
    %Expected life in years
    
    
    0.5
    
    
    
    0.5
  4. Inventory
 in thousands
 September 30,
    
    
    December 31,2006
    
    
    2005Finished goods
    
    $
    5,971
    
    
    $
    6,589Raw material components
    
    
    852
    
    
    
    570Total
    
    $
    6,823
    
    
    $
    7,159
 5. Intangible Assets
  6. Warranty Reserve
 in thousands
 Nine Months Ended September 30,2006
    
    
    2005Balance, beginning of period
    
    $
    876
    
    
    $
    860Provisions in cost of revenues
    
    
    424
    
    
    
    431Expenditures
    
    
    (376
    )
    
    
    (441
    )Balance, end of period
    
    $
    924
    
    
    $
    850
 7. Earnings per Share
  in thousands
 9




---



##### Table of Contents



Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2006
    
    2005
    
    2006
    
    2005Weighted average shares for basic computation
    
    
    18,553
    
    
    
    18,251
    
    
    
    18,501
    
    
    
    18,113Potential common shares from:Options
    
    
    907
    
    
    
    976
    
    
    
    985
    
    
    
    1,008Warrants
    
    
    470
    
    
    
    445
    
    
    
    473
    
    
    
    437Weighted average shares for diluted computation
    
    
    19,930
    
    
    
    19,672
    
    
    
    19,959
    
    
    
    19,558
 8. Segment Information
   in thousands
 Three Months Ended September 30,
 2006
    
    
    2005Lighting
    
    
    OEM and
    
    
    
    
    
    
    Lighting
    
    
    OEM andSystems
    
    
    Licensing
    
    
    Total
    
    
    Systems
    
    
    Licensing
    
    
    TotalRevenues
    
    $
    15,565
    
    
    $
    1,505
    
    
    $
    17,070
    
    
    $
    11,361
    
    
    $
    2,697
    
    
    $
    14,058Cost of revenues
    
    
    6,808
    
    
    
    696
    
    
    
    7,504
    
    
    
    5,457
    
    
    
    1,137
    
    
    
    6,594Gross profit
    
    
    8,757
    
    
    
    809
    
    
    
    9,566
    
    
    
    5,904
    
    
    
    1,560
    
    
    
    7,464Other direct costs
    
    
    4,450
    
    
    
    360
    
    
    
    4,810
    
    
    
    3,100
    
    
    
    322
    
    
    
    3,422Direct contribution margin
    
    $
    4,307
    
    
    $
    449
    
    
    
    4,756
    
    
    $
    2,804
    
    
    $
    1,238
    
    
    
    4,042Reconciling items to income from operations:Unallocated selling and marketing
    
    
    
    
    
    
    
    
    
    
    402
    
    
    
    
    
    
    
    
    
    
    
    289Unallocated research and development
    
    
    
    
    
    
    
    
    
    
    682
    
    
    
    
    
    
    
    
    
    
    
    455Unallocated general and administrative
    
    
    
    
    
    
    
    
    
    
    3,268
    
    
    
    
    
    
    
    
    
    
    
    2,587Income from operations
    
    
    
    
    
    
    
    
    
    $
    404
    
    
    
    
    
    
    
    
    
    
    $
    711
 Nine Months Ended September 30,
 2006
    
    
    2005Lighting
    
    
    OEM and
    
    
    
    
    
    
    Lighting
    
    
    OEM andSystems
    
    
    Licensing
    
    
    Total
    
    
    Systems
    
    
    Licensing
    
    
    TotalRevenues
    
    $
    42,392
    
    
    $
    4,870
    
    
    $
    47,262
    
    
    $
    31,672
    
    
    $
    6,75
    
    
    
    5               $38,427Cost of revenues
    
    
    18,943
    
    
    
    1,871
    
    
    
    20,814
    
    
    
    15,145
    
    
    
    3,103
    
    
    
    18,248Gross profit
    
    
    23,449
    
    
    
    2,999
    
    
    
    26,448
    
    
    
    16,527
    
    
    
    3,652
    
    
    
    20,179Other direct costs
    
    
    13,267
    
    
    
    1,069
    
    
    
    14,336
    
    
    
    8,437
    
    
    
    883
    
    
    
    9,320Direct contribution margin
    
    $
    10,182
    
    
    $
    1,930
    
    
    
    12,112
    
    
    $
    8,09
    
    
    
    0                $2,76
    
    
    
    9         10,859~        ~~~~~~~~~~~~~Reconciling items to income (loss) from operations:Unallocated selling and marketing
    
    
    
    
    
    
    
    
    
    
    1,667
    
    
    
    
    
    
    
    
    
    
    
    986Unallocated research and development
    
    
    
    
    
    
    
    
    
    
    1,373
    
    
    
    
    
    
    
    
    
    
    
    1,320Unallocated general and administrative
    
    
    
    
    
    
    
    
    
    
    9,267
    
    
    
    
    
    
    
    
    
    
    
    6,839Income (loss) from operations
    
    
    
    
    
    
    
    
    
    $
    (195
    )
    
    
    
    
    
    
    
    
    
    $
    1,714
 10




---



##### Table of Contents



9. Comprehensive Income
 in thousands
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Net income
    
    $
    1,076
    
    
    $
    1,250
    
    
    $
    1,689
    
    
    $
    2,971Foreign currency translation adjustments
    
    
    24
    
    
    
    (8
    )
    
    
    (2
    )
    
    
    (82
    )Unrealized holding gains (losses) on investments
    
    
    52
    
    
    
    (19
    )
    
    
    57
    
    
    
    60Total comprehensive income
    
    $
    1,152
    
    
    $
    1,223
    
    
    $
    1,744
    
    
    $
    2,949
 10. Investment in Joint Venture
  (in thousands)
 September 30,
    
    
    December 31,2006
    
    
    2005Current assets
    
    $
    5,036
    
    
    $
    6,327Non-current assets
    
    
    516
    
    
    
    617Current liabilities
    
    
    6,643
    
    
    
    5,042Non-current liabilities
    
    
    149
    
    
    
    129
 Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2006
    
    2005
    
    2006
    
    2005Revenues
    
    $
    2,198
    
    
    $
    2,709
    
    
    $
    6,509
    
    
    $
    7,546Gross profit
    
    
    656
    
    
    
    1,242
    
    
    
    2,280
    
    
    
    3,599Income (loss) from operations
    
    
    (77
    )
    
    
    341
    
    
    
    (175
    )
    
    
    484Net income (loss)
    
    
    (56
    )
    
    
    191
    
    
    
    (28
    )
    
    
    220
 11. Contingencies
 Super Vision International, Inc.
  11




---



##### Table of Contents



Super Vision International, Inc. (High End)
     TIR Systems, Ltd.
   
 Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 Cautionary Statements
 12




---



##### Table of Contents



Overview
  
    
    Lighting systems:we offer intelligent LED lighting systems sold under the Color
Kinetics brand for installation in lighting projects where their use has been specified,
typically by a designer or architect. We also similarly sell, under the Color Kinetics
brand, 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 access to our intellectual property portfolio.
      Description of Our Revenues, Costs and Expenses
 13




---



##### Table of Contents



Adoption of SFAS No. 123R
   14




---



##### Table of Contents



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.
 15




---



##### Table of Contents



Product Warranty.
 Inventory Reserves.
 Accounting for Income Taxes.
 Stock-Based Compensation
 Results of Operations
  Percentage of Total RevenuesThree Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2006
    
    2005
    
    2006
    
    2005Revenues:Lighting systems
    
    
    91
    %
    
    
    81
    %
    
    
    90
    %
    
    
    82
    %OEM and licensing
    
    
    9
    
    
    
    19
    
    
    
    10
    
    
    
    18Total revenues
    
    
    100
    
    
    
    100
    
    
    
    100
    
    
    
    100Cost of revenues:Cost of lighting systems, as a percentage of
lighting systems revenues
    
    
    44
    
    
    
    48
    
    
    
    45
    
    
    
    48Cost of OEM and licensing, as a percentage
of
OEM and licensing revenues
    
    
    46
    
    
    
    42
    
    
    
    38
    
    
    
    46Total cost of revenues
    
    
    44
    
    
    
    47
    
    
    
    44
    
    
    
    47
 16




---



##### Table of Contents



Percentage of Total RevenuesThree Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2006
    
    2005
    
    2006
    
    2005Gross profit
    
    
    56
    
    
    
    53
    
    
    
    56
    
    
    
    53Operating expenses:Selling and marketing
    
    
    24
    
    
    
    21
    
    
    
    26
    
    
    
    21Research and development
    
    
    11
    
    
    
    8
    
    
    
    11
    
    
    
    9General and administrative
    
    
    19
    
    
    
    19
    
    
    
    19
    
    
    
    18Total operating expenses
    
    
    54
    
    
    
    48
    
    
    
    56
    
    
    
    48Income (loss) from operations
    
    
    2
    
    
    
    5
    
    
    
    
    
    
    
    5Interest income
    
    
    4
    
    
    
    3
    
    
    
    4
    
    
    
    3Equity in earnings (loss) of joint venture
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    Net income
    
    
    6
    %
    
    
    9
    %
    
    
    4
    %
    
    
    8
    %
 Revenues.
      17




---



##### Table of Contents



Gross Profit.
   Selling and Marketing Expenses.
 Research and Development Expenses.
 General and Administrative Expenses.
 18




---



##### Table of Contents



Interest Income.
 Equity in Earnings (Loss) of Joint Venture.
 Provision for Income Taxes.
 Liquidity and Capital Resources
      
 Item 3. Quantitative and Qualitative Disclosures About Market Risk
  19




---



##### Table of Contents



Item 4. Controls and Procedures
     
 PART II. OTHER INFORMATION
 
 Item 1. Legal Proceedings
 Super Vision International, Inc.
    20




---



##### Table of Contents



Super Vision International, Inc. (High End)
     TIR Systems, Ltd.
   
 Item 1A. Risk Factors
 21




---



##### Table of Contents



If LED lighting in general, and our intelligent LED lighting systems in particular, do not achieve
greater market acceptance, prospects for our growth and profitability
may be limited.
  If advances in LED technology do not continue, we may be unable to increase our penetration of our
existing markets or expand into new markets.
  If we are unable to respond effectively as new lighting technologies and market trends emerge, our
competitive position and our ability to generate revenues and profits may be harmed.
  If demand for our white light products in the general lighting market fails to emerge, we may not
be able to carry out long-term business strategies.
  22




---



##### Table of Contents



Because we have a limited history of profitable operations and typically do not have a substantial
back log, it is difficult to evaluate the likelihood that we will maintain profitability in any
future period.
  Our products could contain defects, which could reduce sales of those products or result in claims
against us.
  If the companies to which we outsource the manufacture of our products fail to meet our
requirements for quality, quantity and timeliness, our revenues and reputation in the marketplace
could be harmed.
  23




---



##### Table of Contents




    
    lack of direct control over production capacity and delivery schedules;
    
    lack of direct control over quality assurance, manufacturing yields and production costs;
    
    risk of loss of inventory while in transit by ship from China; and
    
    risks associated with international commerce, particularly with China, including
unexpected changes in legal and regulatory requirements, changes in tariffs and trade
policies, risks associated with the protection of intellectual property and political and
economic instability.
  We face
substantial competition, and our failure to compete effectively could
harm our business and future prospects.
     We may incur substantial costs or lose important rights as a result of litigation or other
proceedings relating to patent and other intellectual property rights.
  24




---



##### Table of Contents




    
    stop selling LED lighting systems or using technology that contains the allegedly
infringing intellectual property;
    
    attempt to obtain a license to the relevant intellectual property, which may not be
available on reasonable terms or at all; and
    
    attempt to redesign products that embody the allegedly infringing intellectual
property.
   If we are unable to obtain and maintain patent protection for our technologies and otherwise
protect our intellectual property, the value of our technologies and products will be adversely
affected.
  25




---



##### Table of Contents



If critical components that we currently purchase from a small number of suppliers become
unavailable, we may incur delays in shipment, which could damage our business.
    If we are unable to increase production capacity for our products in a timely manner, we may incur
delays in shipment and our revenues and reputation in the marketplace could be harmed.
  
    
    identification and availability of appropriate and affordable contract
manufacturers;
    
    ability of our current contract manufacturers to allocate more existing capacity to
us or their ability to add new capacity quickly;
    
    availability of critical components used in the manufacture of our products;
 26




---



##### Table of Contents




    
    establishment of adequate management information systems, financial controls and
supply chain management and quality control procedures; and
    
    ability of our future contract manufacturers to implement our manufacturing
processes.
  Our gross margins are subject to variability.
  
    
    factors that affect the prices we can charge, including the features and
performance of the products, the nature of the end user and application, and competitive
pressures;
    
    factors that affect our cost of revenues, including costs of raw materials and
components, manufacturing costs and costs of shipping;
    
    factors that affect the quality of our products;
    
    in the case of our OEM business, the nature of the market served by our OEM
customer and expected volume of its sales of our products; and
    
    in the case of our licensing business, the extent to which our technologies are
protected by patents, which influences the royalty rates we can obtain.
  We have relied on Color Kinetics Japan, a joint venture in which we hold a 50% equity interest, to
distribute our products in Japan, and inadequate performance of this distributor, or our inability
to make other satisfactory arrangements for distribution of our products in Japan, could
substantially reduce our revenues and adversely affect our results of operations.
     27




---



##### Table of Contents



We depend for a substantial portion of our revenue on sales made by distributors and independent
sales representatives, and the failure to manage successfully our relationships with these third
parties, or the termination of these relationships, could cause our revenue to decline and harm our
business.
  Our OEM business consumes significant time and resources with no guarantee of revenues; OEM and
licensing revenues are generally not subject to our control.
  The loss of the services of any members of our key management team could adversely affect our
ability to execute our business strategy and, as a result, adversely affect our sales and
profitability.
 28




---



##### Table of Contents



We may pursue acquisitions and investments in new businesses, products or technologies that involve
numerous risks, which could disrupt our business and may harm our financial condition.
  We may relocate our principal executive offices, which could disrupt our operations and harm our
business.
  If we are unable to manage our growth effectively, our future growth, profitability and liquidity
could be adversely affected.
  If we are unable to obtain additional capital as needed in the future, our growth could be limited
and we may be unable to pursue our current business strategy.
  29




---



##### Table of Contents



We have limited experience conducting operations internationally, which may make overseas expansion
more difficult and costly than we expect and adversely affect our revenue growth and profitability.
   
    
    costs of customizing products for foreign countries;
    
    foreign currency risks;
    
    dependence on local OEMs, distributors and resellers;
    
    compliance with multiple, conflicting and changing governmental laws and regulations;
    
    longer sales cycles; and
    
    import and export restrictions and tariffs.
  We must comply with new regulatory requirements regarding internal control over financial reporting
and corporate governance, which will cause us to incur significant costs, and our failure to comply
with these requirements could cause our stock price to decline.
    Our operations are concentrated in a small number of facilities, and unavailability of one or more
of these facilities could interrupt our business.
  The
    market price of our common stock may be volatile, which could
    result in substantial losses for investors holding our
    shares.
  
    
    general fluctuations in stock market prices and volume, which
    are particularly common among highly volatile securities of
    technology companies like ours;
    
    actual or anticipated fluctuations in our quarterly operating
    results or changes in expectations as to our future financial
    performance or changes in securities analysts estimates of
    our financial performance;
    
    changes in market valuations of similar companies;
    
    announcements by us or our competitors of significant products,
    contracts, acquisitions or strategic partnerships;
    
    developments or disputes concerning patents or proprietary
    rights, including increases or decreases in litigation expense
    associated with patent lawsuits we have initiated, or in which
    we are named as defendants;
    
    failure to complete significant sales;
    
    additions or departures of key personnel; and
    
    sales of our stock by our executive officers.
   We could
    be the subject of securities class action litigation due to
    future stock price volatility.
  Anti-takeover
    provisions in our charter documents and Delaware law could
    prevent or delay a change in control of our company.
  
    
    authorizing the issuance of blank check preferred
    stock;
    
    providing for a classified board of directors with staggered,
    three-year terms;
    
    providing that directors may only be removed for cause by a
    two-thirds vote of stockholders;
    
    limiting the persons who may call special meetings of
    stockholders;
    
    prohibiting stockholder action by written consent; and
    
    establishing advance notice requirements for nominations for
    election to the board of directors and for proposing matters to
    be submitted to a stockholder vote.
  30




---



##### Table of Contents



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
  
 Item 6. Exhibits
 Exhibit No.
    
    Description3.2
    
    Seventh Amended and Restated Certificate of Incorporation of Color Kinetics
Incorporated (1)3.4
    
    Second Amended and Restated By-Laws of Color Kinetics Incorporated (1)*10.29
    
    Amendment to the Chief Executive Officer Bonus Plan.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. Johnson31.3
    
    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. 
 SIGNATURES
  Date: October 31, 2006
    COLOR KINETICS INCORPORATED(Registrant)By:
    /s/ William J. SimsWilliam J. SimsChief Executive Officer By:
    /s/ David K. JohnsonDavid K. JohnsonChief Financial Officer 31