Item
1 - Consolidated Financial Statements
|
LIGHTSPACE
CORPORATION
|
|
|
CONSOLIDATED
STATEMENTS OF FINANCIAL POSITION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September
30,
|
|
December
31,
|
|
|
|
|
2007
|
|
2006
|
|
|
|
|
(unaudited)
|
|
(audited)
|
|
|
ASSETS
|
|
|
Current
Assets
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
1,189,465
|
|
$
|
879,987
|
|
|
Accounts
receivable
|
|
|
118,342
|
|
|
52,678
|
|
|
Inventory
|
|
|
629,019
|
|
|
354,234
|
|
|
Other
current assets
|
|
|
9,703
|
|
|
4,250
|
|
|
Total
current assets
|
|
|
1,946,529
|
|
|
1,291,149
|
|
|
|
|
|
|
|
|
|
|
|
Property
and Equipment - Net
|
|
|
158,759
|
|
|
82,298
|
|
|
|
|
|
|
|
|
|
|
|
Other
assets
|
|
|
161,414
|
|
|
196,822
|
|
|
|
|
|
|
|
|
|
|
|
Total
Assets
|
|
$
|
2,266,702
|
|
$
|
1,570,269
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
Current
Liabilities
|
|
|
|
|
|
|
|
|
Notes
payable
|
|
$
|
237,381
|
|
$
|
237,381
|
|
|
Accounts
payable
|
|
|
369,689
|
|
|
695,852
|
|
|
Accrued
interest
|
|
|
46,951
|
|
|
12,955
|
|
|
Accrued
expenses
|
|
|
377,983
|
|
|
200,709
|
|
|
Deferred
revenue
|
|
|
28,094
|
|
|
126,363
|
|
|
Total
current liabilities
|
|
|
1,060,098
|
|
|
1,273,260
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
Debt
|
|
|
950,000
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders'
Equity
|
|
|
|
|
|
|
|
|
Common
stock, $0.0001 par value; authorized 75,000,000 shares;
|
|
|
|
|
|
|
|
|
15,282,495
and 10,593,111 shares issued and outstanding
|
|
|
|
|
|
|
|
|
at
September 30, 2007 and December 31, 2006, respectively
|
|
|
1,528
|
|
|
1,059
|
|
|
Additional
paid-in capital
|
|
|
14,175,044
|
|
|
10,607,585
|
|
|
Retained
earning (deficit)
|
|
|
(13,919,967
|
)
|
|
(10,311,635
|
)
|
|
Total
stockholders' equity
|
|
|
256,605
|
|
|
297,009
|
|
|
|
|
|
|
|
|
|
|
|
Total
Liabilities and Stockholders' Equity
|
|
$
|
2,266,702
|
|
$
|
1,570,269
|
|
See
notes
to unaudited consolidated financial statements
|
|
|
|
CONSOLIDATED
STATEMENTS OF OPERATIONS (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended September 30,
|
|
Nine
Months Ended September 30,
|
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
Product
sales
|
|
$
|
313,432
|
|
$
|
191,371
|
|
$
|
1,114,566
|
|
$
|
406,978
|
|
|
Other
|
|
|
29,367
|
|
|
6,964
|
|
|
68,887
|
|
|
19,859
|
|
|
Total
revenues
|
|
|
342,799
|
|
|
198,335
|
|
|
1,183,453
|
|
|
426,837
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
Cost
|
|
|
324,973
|
|
|
228,647
|
|
|
949,844
|
|
|
578,051
|
|
|
Gross
Margin
|
|
|
17,826
|
|
|
(30,312
|
)
|
|
233,609
|
|
|
(151,214
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research
and development
|
|
|
280,645
|
|
|
229,927
|
|
|
2,072,383
|
|
|
726,709
|
|
|
Selling
and marketing
|
|
|
283,256
|
|
|
250,797
|
|
|
942,680
|
|
|
742,019
|
|
|
General
and administrative
|
|
|
315,861
|
|
|
122,664
|
|
|
790,247
|
|
|
576,581
|
|
|
Total
operating expenses
|
|
|
879,762
|
|
|
603,388
|
|
|
3,805,310
|
|
|
2,045,309
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Loss
|
|
|
(861,936
|
)
|
|
(633,700
|
)
|
|
(3,571,701
|
)
|
|
(2,196,523
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Income (Expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
gain on debt and equity conversion
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
402,298
|
|
|
Interest
expense - net
|
|
|
(15,257
|
)
|
|
(40,562
|
)
|
|
(36,631
|
)
|
|
(266,390
|
)
|
|
Total
other income (expense)
|
|
|
(15,257
|
)
|
|
(40,562
|
)
|
|
(36,631
|
)
|
|
135,908
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
Before Provision For Income Taxes
|
|
|
(877,193
|
)
|
|
(674,262
|
)
|
|
(3,608,332
|
)
|
|
(2,060,615
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision
For Income Taxes
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
Net
Loss
|
|
$
|
(877,193
|
)
|
$
|
(674,262
|
)
|
$
|
(3,608,332
|
)
|
$
|
(2,060,615
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and Diluted Net Loss Per Share
|
|
$
|
(0.06
|
)
|
$
|
(0.12
|
)
|
$
|
(0.27
|
)
|
$
|
(0.56
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
Average Common Shares Outstanding
|
|
|
15,282,495
|
|
|
5,793,111
|
|
|
13,198,324
|
|
|
3,652,698
|
|
See
notes
to unaudited consolidated financial statements
|
LIGHTSPACE
CORPORATION
|
|
|
CONSOLIDATED
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series
A Convertible
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
Stock
|
|
Common
Stock
|
|
Additional
|
|
|
Retained
|
|
|
Stockholders'
|
|
|
|
|
Shares
|
|
|
|
Shares
|
|
|
|
Paid-In
|
|
|
Earnings
|
|
|
Equity
|
|
|
|
|
Issued
|
|
Amount
|
|
Issued
|
|
Amount
|
|
Capital
|
|
|
(Deficit)
|
|
|
(Deficit)
|
|
|
Balance
December 31, 2005
|
|
|
133,732
|
|
|
13
|
|
|
977,182
|
|
|
98
|
|
|
2,092,612
|
|
|
|
(7,603,215
|
)
|
|
|
(5,510,492
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion
of notes payable
|
|
|
|
|
|
|
|
|
1,544,865
|
|
|
154
|
|
|
2,724,622
|
|
|
|
|
|
|
|
2,724,776
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion
of senior notes
|
|
|
|
|
|
|
|
|
3,110,585
|
|
|
311
|
|
|
2,488,160
|
|
|
|
|
|
|
|
2,488,471
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion
of preferred stock
|
|
|
(133,732
|
)
|
|
(13
|
)
|
|
160,479
|
|
|
16
|
|
|
85,586
|
|
|
|
|
|
|
|
85,589
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common warrants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
264,345
|
|
|
|
|
|
|
|
264,345
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses
of private placement
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(499,595
|
)
|
|
|
|
|
|
|
(499,595
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Public
sale of equity securities
|
|
|
|
|
4,800,000
|
|
|
480
|
|
|
3,839,520
|
|
|
|
|
|
|
|
3,840,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses
of public offering
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(468,157
|
)
|
|
|
|
|
|
|
(468,157
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
option compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
80,492
|
|
|
|
|
|
|
|
80,492
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,708,420
|
)
|
|
|
(2,708,420
|
)
|
|
Balance
December 31, 2006
|
|
|
-
|
|
$
|
-
|
|
|
10,593,111
|
|
$
|
1,059
|
|
$
|
10,607,585
|
|
|
$
|
(10,311,635
|
)
|
|
$
|
297,009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
option compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
127,927
|
|
|
|
|
|
|
|
127,927
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private
placement of equity securities
|
|
|
|
|
4,689,384
|
|
$
|
469
|
|
$
|
3,751,038
|
|
|
|
|
|
|
|
3,751,507
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses
of private placement
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(311,507
|
)
|
|
|
|
|
|
|
(311,507
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss for nine months
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(3,608,332
|
)
|
|
|
(3,608,332
|
)
|
|
Balance
September 30, 2007
|
|
|
-
|
|
$
|
-
|
|
|
15,282,495
|
|
$
|
1,528
|
|
$
|
14,175,044
|
|
|
$
|
(13,919,967
|
)
|
|
$
|
256,605
|
|
See
notes
to unaudited consolidated financial statements
|
|
|
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine
Months Ended September 30,
|
|
|
|
|
2007
|
|
2006
|
|
|
Cash
Flows (Uses) from Operating Activities:
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(3,608,332
|
)
|
$
|
(2,060,615
|
)
|
|
Adjustments
to reconcile net loss to cash used
|
|
|
|
|
|
|
|
|
in
operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
30,600
|
|
|
25,254
|
|
|
Amortization
of debt discount and expense
|
|
|
-
|
|
|
19,671
|
|
|
Amortization
of fair value of stock warrants
|
|
|
35,415
|
|
|
-
|
|
|
Debt
and preferred stock conversion adjustments:
|
|
|
|
|
|
|
|
|
Fair
value of common stock warrants issued
|
|
|
-
|
|
|
350,018
|
|
|
Fair
value of common stock issued
|
|
|
-
|
|
|
264,345
|
|
|
Non-cash
gain on debt conversion
|
|
|
-
|
|
|
(890,765
|
)
|
|
Provision
for stock option compensation
|
|
|
127,927
|
|
|
40,246
|
|
|
Emagipix
acquisition
|
|
|
950,000
|
|
|
-
|
|
|
Other
changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(65,664
|
)
|
|
(16,399
|
)
|
|
Inventory
|
|
|
(274,792
|
)
|
|
(121,577
|
)
|
|
Other
assets
|
|
|
(5,453
|
)
|
|
(291,731
|
)
|
|
Accounts
payable and accrued expenses
|
|
|
(114,893
|
)
|
|
816,251
|
|
|
Deferred
revenue
|
|
|
(98,269
|
)
|
|
217,586
|
|
|
Net
cash used in operating activities
|
|
|
(3,023,461
|
)
|
|
(1,647,716
|
)
|
|
|
|
|
|
|
|
|
|
|
Cash
Flows (Uses) From Investing Activities:
|
|
|
|
|
|
|
|
|
Purchases
of property and equipment
|
|
|
(107,061
|
)
|
|
(38,872
|
)
|
|
Net
cash used in investing activities
|
|
|
(107,061
|
)
|
|
(38,872
|
)
|
|
|
|
|
|
|
|
|
|
|
Cash
Flows (Uses) From Financing Activities:
|
|
|
|
|
|
|
|
|
Proceeds
from notes payable
|
|
|
-
|
|
|
2,067,000
|
|
|
Common
stock issuance
|
|
|
3,751,507
|
|
|
-
|
|
|
Stock
issuance costs
|
|
|
(311,507
|
)
|
|
(499,595
|
)
|
|
Net
cash provided from financing activities
|
|
|
3,440,000
|
|
|
1,567,405
|
|
|
|
|
|
|
|
|
|
|
|
Net
Increase (Decrease) in Cash and Cash Equivalents
|
|
|
309,478
|
|
|
(119,183
|
)
|
|
Cash
and Cash Equivalents - beginning of period
|
|
|
879,987
|
|
|
123,951
|
|
|
Cash
and Cash Equivalents - end of period
|
|
$
|
1,189,465
|
|
$
|
4,768
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash
financing activities
|
|
|
|
|
|
|
|
|
Issuance
of note payable
|
|
$
|
950,000
|
|
$
|
-
|
|
See
notes
to unaudited consolidated financial statements
LIGHTSPACE
CORPORATION
NOTES
TO
UNAUDITED
CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2007
1.
NATURE OF THE BUSINESS AND OPERATIONS
Lightspace
Corporation (the “Company”, “Lightspace”, “we”, “our”, “us”), incorporated in
August 2001 as a Delaware corporation, provides interactive lighting
entertainment products to numerous industries including retail stores, family
entertainment centers, theme parks, fashion shows, nightclubs, special events,
stage lighting & sound, health clubs and architectural lighting and
design.
We
are
subject to certain risks common to technology-based companies in similar stages
of development. Principal risks include uncertainty of growth in market
acceptance for our products; dependence on advances in interactive digital
environments; history of losses since inception; ability to remain competitive
in response to new technologies; costs to defend, as well as risks of losing,
patent and intellectual property rights; reliance on limited number of
suppliers; reliance on outsourced manufacture of our products for quality
control and product availability; ability to increase production capacity to
meet demand for the our products; concentration of our operations in a limited
number of facilities; uncertainty of demand for our products in certain markets;
ability to manage growth effectively; dependence on key members of our
management; limited experience in conducting operations internationally; and
ability to obtain adequate capital to fund future operations.
We
have
incurred net
operating
losses and negative operating cash flows since inception. As of September 30,
2007, we had an accumulated retained earnings deficit of $13,919,967. We have
funded our operations through September 30, 2007 through the issuance of private
and public placements of equity securities, borrowings from stockholders and
others, and sales of Lightspace products. Our long-term success is dependent
upon obtaining sufficient capital to fund operations and product development,
bringing such products to the worldwide market, and obtaining sufficient sales
volume to be profitable.
2.
BASIS OF PRESENTATION
The
accompanying consolidated financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and the satisfaction
of liabilities in the ordinary course of business. We have incurred a net loss
from operations of $877,193 and $3,608,332 for the three and nine month period
ended September 30, 2007. Further, we have accumulated net losses from
operations of $13,919,967 at that date. These factors, among others, indicate
that there is substantial uncertainty that we will continue as
a going
concern. The consolidated financial statements do not include any adjustments
related to the recovery of assets and classification of liabilities that might
be necessary should we be unable to continue as a going concern. The
consolidated financial statements at September 30, 2007 include the accounts
of
Lightspace Emagipix Corporation, a wholly-owned subsidiary, organized as of
March 29, 2007.
The
consolidated statement of financial position as of September 30, 2007, the
consolidated statements of operations and cash flows for the three months and/or
nine months ended September 30, 2007 and 2006, and the consolidated statement
of
changes in stockholders’ equity for the period from January 1, 2007 through
September 30, 2007 are unaudited. These unaudited interim consolidated financial
statements have been prepared in accordance with accounting principles generally
accepted in the United States of America and in accordance with the instructions
for Form 10-Q. Such consolidated financial statements do not include all of
the
information and disclosures required for audited consolidated financial
statements. In the opinion of our management, the unaudited interim consolidated
financial statements have been prepared on the same basis as our audited
consolidated financial statements and include all adjustments, consisting of
normal recurring adjustments, necessary for the fair presentation of our
financial position, results of operations, cash flows, and changes in
stockholders’ equity for the periods presented. The results of operations for
the interim periods are not necessarily indicative of the results that can
be
expected for any other interim period or any fiscal year.
LIGHTSPACE
CORPORATION
NOTES
TO
UNAUDITED
CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2007
3.
RECOGNITION OF SALES
We
recognize revenue from the sale of our entertainment systems when all of the
following conditions have been met: (1) evidence exists of an arrangement
with the customer, typically consisting of a purchase order or contract;
(2) our products have been delivered and risk of loss has passed to the
customer; (3) we have completed all of the necessary terms of the contract
possibly including but not limited to, installation of the product and training;
(4) the amount of revenue to which we are entitled is fixed or
determinable; and (5) we believe it is probable that we will be able to
collect the amount due from the customer. To the extent that one or more of
these conditions has not been satisfied, we defer recognition of revenue.
Revenue from maintenance contracts is recorded on a straight-line basis over
the
term of the contract. An allowance for uncollectible receivables is established
by a charge to operations, when in our opinion, it is probable that the amount
due will not be collected.
4.
TECHNOLOGY ACQUISITION AND PRIVATE PLACEMENT OF SECURITIES
On
March 29, 2007, Lightspace Emagipix Corporation (“LEC”), a newly formed
wholly-owned subsidiary of Lightspace Corporation, entered into an agreement
with Illumination Design Works, Inc. to acquire the assets related to the in
process development of its emagipix technology, an interactive lighting
technology that utilizes electroluminescent sheets. The purchase price for
the
emagipix technology consisted of an initial cash payment of $45,000 upon signing
the agreement and a cash payment of $255,000 and the issuance of a $950,000
convertible term secured non-recourse note to Illumination Design Works, Inc.
upon the closing of the technology purchase.
On
April 30, 2007, LEC completed the acquisition of the emagipix technology. In
connection with the acquisition, the developer of the emagipix technology (a
former officer and co-founder of Lightspace Corporation and the principal owner
of Illumination Design Works, Inc.), re-commenced employment with
Lightspace.
The
$950,000 convertible term secured non-recourse note bears interest a 5% per
annum, payable yearly, and is due and payable on April 30, 2011. The note is
secured by a pledge of 67% the stock of LEC. The principal of the note is
convertible at any time up and until April 30, 2011, at the option of the
holder, into the common stock of Lightspace Corporation at a conversion price
of
$0.80 per share. Upon the occurrence of certain defined events of default by
the
noteholder, Lightspace has the right to convert the note to common stock at
the
lower of the conversion price of $0.80 or current market price of the common
stock.
We
accounted for the acquisition of the emagipix technology as the acquisition
of
in process research and development and recorded a charge to operations in
the
June 30, 2007 quarter of $1,250,000 for the purchase price and $56,612 in
related legal expenses.
On
April
30, 2007 we closed a private placement of our equity units. We sold 586,173
units at the offering price of $6.40 per unit, resulting in aggregate proceeds
of $3,751,507. After expenses of the offering of $311,507, the net proceeds
were
approximately $3,440,000. Each equity unit consists of: (1) eight shares of
common stock; (2) eight warrants to purchase a total of eight shares of
common stock at an exercise price of $1.00 per warrant; (3) two warrants to
purchase a total of two shares of common stock at an exercise price of $1.25
per
warrant; and (4) two warrants to purchase a total of two shares of common
stock at an exercise price of $1.63 per warrant. The sale of 586,173 units
resulted in the issuance of: (1) 4,689,384 shares of common stock; (2) 4,689,384
warrants to purchase a total of 4,689,384 shares of common stock at an exercise
price of $1.00 per warrant; (3) 1,172,346 warrants to purchase a total of
1,172,346 shares of common stock at an exercise price of $1.25 per warrant;
and
(4) 1,172,346 warrants to purchase a total of 1,172,346 shares of common stock
at an exercise price of $1.63 per warrant. The warrants are exercisable at
the
option of the holder at any time up until April 30, 2012, at which date the
warrants expire. In the event of a division of our common stock, the warrants
will be adjusted proportionately. The warrants have been classified permanently
within stockholders’ equity, as upon exercise, the warrant holder can only
receive the specified number of common shares.
LIGHTSPACE
CORPORATION
NOTES
TO
UNAUDITED
CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2007
4.
TECHNOLOGY ACQUISITION AND PRIVATE PLACEMENT OF SECURITIES -
Continued
In
connection with the sale of the equity units, we paid Griffin Securities, Inc.,
the financial advisor for the private placement, a fee in the amount of $187,575
and issued to Griffin Securities a purchase warrant exercisable for 58,617
units, in the same form sold in the private placement, at an exercise price
of
$6.40 per unit.
We
used a
portion of the net proceeds from the private placement to complete the
acquisition of the emagipix technology by the payment of the balance of the
cash
purchase price of $255,000. The balance of the net proceeds will be used for
general working capital purposes, including payment of the expenses of
registering the private placement units for resale.
As
a
result of the private placement, issued and outstanding shares of our common
stock at September 30, 2007 increased to 15,282,495 from 10,593,111 at December
31, 2006. Additionally, issued and outstanding common stock warrants at
September 30, 2007 were 23,634,205, exercisable at prices that range from $0.80
to $7.50. At December 31, 2006, the Company had issued and outstanding common
stock warrants in the aggregate amount of 15,427,789, exercisable at prices
that
range from $0.80 to $7.50.
In
addition, as a result of the private placement, we entered into a Registration
Rights Agreement with the purchasers of the units, whereby we agreed to file
a
registration statement, within 45 days of the closing, to register for resale
the shares of common stock, warrants and shares of common stock issuable upon
exercise of the warrants, included in the units issued in the private placement.
5.
LOSS PER SHARE
Basic
and diluted net loss per common share are calculated by dividing the net loss
by
the weighted average number of common shares outstanding during the period.
Diluted net loss per share is the same as basic net loss per share, since the
effects of potentially dilutive securities are excluded from the calculation
for
all periods presented as their inclusion would be anti-dilutive. Dilutive
securities consist of common stock options, common stock warrants, preferred
stock warrants, convertible preferred stock and convertible debt.
The
following potentially dilutive securities were excluded from the calculation
of
diluted loss per share because their inclusion would be
anti-dilutive:
|
|
|
Three
Months Ended September 30,
|
|
Nine
Months Ended September 30,
|
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
|
Common
stock options
|
|
|
5,158,610
|
|
|
1,794,890
|
|
|
5,158,610
|
|
|
72,080
|
|
|
Common
stock warrants
|
|
|
23,634,205
|
|
|
6,187,789
|
|
|
23,634,205
|
|
|
99,938
|
|
|
Preferred
stock warrants
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
16,390
|
|
|
Convertible
preferred stock
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
53,493
|
|
|
Convertible
debt
|
|
|
1,187,500
|
|
|
-
|
|
|
1,187,500
|
|
|
134,497
|
|
|
Total
|
|
|
29,980,315
|
|
|
7,982,679
|
|
|
29,980,315
|
|
|
376,398
|
|
6.
STOCK OPTION BASED COMPENSATION
Statement
of Financial Accounting Standards No. 123(R),
Share-Based
Payment,
addresses
accounting for stock-based compensation arrangements, including stock options
and shares issued to employees and directors under various stock-based
compensation arrangements. This statement requires that we use the fair value
method, rather than the intrinsic-value method, to determine compensation
expense for all stock-based arrangements. Under the fair value method,
stock-based compensation expense is determined at the measurement date, which
is
generally the date of grant, as the aggregate amount by which the expected
fair
value of the equity security at the date of acquisition exceeds the exercise
price to be paid. The resulting
LIGHTSPACE
CORPORATION
NOTES
TO
UNAUDITED
CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2007
6
.
STOCK OPTION BASED COMPENSATION - Continued
compensation
expense, if any, is recognized for financial reporting over the term of vesting
or performance. This statement was first effective for us on January 1, 2006
for
all prospective stock option and share grants of stock-based compensation awards
and modifications to all prior grants, and will have the effect of increasing
our compensation costs recognized in operations from historical levels for
all
stock-based compensation awards and modifications of prior awards
granted.
In
June 2006, the our stockholders and Board of Directors approved adoption of
the 2006 Stock Incentive Plan (the “2006 Stock Plan”), pursuant to which up to
2,118,622 incentive stock options and/or nonqualified stock options may be
granted to directors, officers, key employees and consultants. In August 2007,
the Board of Directors approved adoption of the 2007 Stock Incentive Plan (the
“2007 Stock Plan”), pursuant to which up to 4,000,000 incentive stock options
and/or nonqualified stock options may be granted to directors, officers, key
employees and consultants. In 2006 and the nine months ended September 30,
2007,
under the 2006 and 2007 Stock Plans, we granted to directors, officers and
key
employees
1,836,810
and 4,075,856
options
respectively, to purchase 1,836,810 and 4,075,856 shares of common stock at
a
weighted average exercise price of $0.80 and $1.06 per option. The options
vest
ratably over a three year period and expire in ten years. Under the provisions
of Statement of Financial Accounting Standards No. 123(R), Share-Based Payment,
we determined the total stock-based compensation expense for these option grants
was approximately
$1,936,000
,
utilizing the following assumptions: volatility - 53% thru 57%; estimated option
exercise period - 2 to 3 years; risk free interest rate -4.16% thru 5.17%;
and
expected total forfeitures related to these option grant of 6.9%.
The
provision for stock-based compensation for common stock options granted under
the 2006 and 2007 Stock Plans for the nine month period ended September 30,
2007
was $127,927. We did not record a tax benefit related to the provision for
stock-based compensation due to our net operating loss carryforwards;
accordingly, the net loss for the nine month period ended September 30, 2007
was
increased by $127,927. As of September 30, 2007, total unrecognized stock-based
compensation expense related to the common stock option grants under the 2006
Stock Plan expected to be charged to operations over the next three years is
estimated to approximate $1,666,000.
For
all
periods prior to January 1, 2006, we accounted for stock-based compensation
arrangements with employees and directors utilizing the intrinsic-value method.
Under this method, stock-based compensation expense was determined at the
measurement date, which again is generally the date of grant, as the aggregate
amount by which the current market value of the equity security exceeds the
exercise price to be paid. The resulting compensation expense, if any, was
recognized for financial reporting over the term of vesting or performance.
We
have historically granted stock-based compensation awards to employees and
directors at an exercise price equal to the current market value of our equity
security at the date of grant. Accordingly, no compensation expense has been
recognized or will be recognized in the financial statements for stock-based
compensation arrangements with employees and directors for grants prior to
January 1, 2006.
7.
INVENTORY
At
September 30, 2007 and December 31, 2006, inventory consisted of raw materials
of $380,596 and $
274,570
,
and
finished products of $248,423 and $
79,664
,
respectively. Included in raw materials at September 30, 2007 and December
31,
2006 are $214,418 and $202,810 of advance payments to suppliers for the purchase
of component parts, respectively.
8.
COMMON STOCK
On
April 30, 2007 the our stockholders approved resolutions to increase the
authorized shares of our $0.0001 par value common stock to 75,000,000 authorized
shares from 30,000,000 authorized shares to provide for the issuance of the
equity units in the private placement that closed as of April 30, 2007 and
for
LIGHTSPACE
CORPORATION
NOTES
TO
UNAUDITED
CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2007
8.
COMMON STOCK - Continued
other
corporate purposes. The accompanying consolidated financial statements have
been
updated to reflect
this
increase in authorized shares.
As
a
result of the private placement, issued and outstanding shares of our common
stock at September 30, 2007 were 15,282,495 from 10,593,111 at December 31,
2006. Additionally, issued and outstanding common stock warrants at September
30, 2007 were 23,634,209, exercisable at prices that range from $0.80 to $7.50.
This was an increase from 15,427,789 issued and outstanding common stock
warrants on December 31, 2006.
9.
STOCK INCENTIVE PLANS
In
September 2005,
our
stockholders and Board of Directors approved the 2005 Stock Incentive Plan
(the
“2005 Stock Plan”). The 2005 Plan provides that the Board of Directors may grant
up to 72,080 incentive stock options and/or nonqualified stock options to
directors, officers, key employees and consultants. The 2005 Stock Plan provides
that the exercise price of each option must be at least equal to the fair market
value of the common stock at the date such option is granted. Options expire
in
ten years or less from the date of grant and vest over a period not to exceed
four years. At June 30, 2007, we have reserved 51,530 shares of common stock
for
issuance under the 2005 Stock Plan. Concurrent with the approval and adoption
of
the 2006 Stock Incentive Plan in June of 2006, no additional options can be
granted under the 2005 Stock Plan.
In
June 2006, our stockholders and Board of Directors approved adoption of the
2006 Stock Incentive Plan (the “2006 Stock Plan”), pursuant to which up to
2,118,622 incentive stock options and/or nonqualified stock options may be
granted to directors, officers, key employees and consultants. The 2006 Stock
Plan provides that the exercise price of each option must be at least equal
to
the fair market value of the common stock at the date such option is granted.
Options expire in ten years or less from the date of grant and vest over a
period not to exceed four years. As of September 30, 2007 we had reserved
2,118,622 shares of common stock for issuance under the 2006 Stock
Plan.
In
August
2007, our Board of Directors approved adoption of the 2007 Stock Incentive
Plan
(the “2007 Stock Plan”), pursuant to which up to 4,000,000 incentive stock
options and/or nonqualified stock options may be granted to directors, officers,
key employees and consultants. In 2007, under the 2007 Stock Plan, we granted
to
directors, officers and key employees 3,245,856 options to purchase 3,245,856
shares of common stock at an exercise price of $1.10 per option. The options
vest ratably over a three year period and expire in ten years. We have reserved
4,000,000 shares of common stock for issuance under the 2007 Stock Plan.
LIGHTSPACE
CORPORATION
NOTES
TO
UNAUDITED
CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2007
9.
STOCK INCENTIVE PLANS - Continued
Combined
i
nformation
with respect to stock options issued under the 2005, 2006 and 2007 Stock Plans
for the nine month period ended September 30, 2007 is summarized as
follows:
|
|
|
September
30, 2007
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
Number
of
|
|
Average
|
|
|
|
|
Shares
|
|
Exercise
Price
|
|
|
Options
outstanding January 1, 2007
|
|
|
1,820,490
|
|
$
|
0.80
|
|
|
Options
granted
|
|
|
4,075,856
|
|
|
1.06
|
|
|
Options
exercised
|
|
|
-
|
|
|
-
|
|
|
Options
cancelled
|
|
|
(737,736
|
)
|
|
(0.80
|
)
|
|
Options
outstanding September 30, 2007
|
|
|
5,158,610
|
|
$
|
0.83
|
|
|
|
|
|
|
|
|
|
|
|
Options
exercisable at September 30, 2007
|
|
|
378,834
|
|
$
|
0.83
|
|
|
Weighted
average fair value of 2007 options granted
|
|
|
|
|
$
|
0.38
|
|
|
Weighted
average contractual life (years) options outstanding
|
|
|
9
2/3
|
|
|
|
|
|
Options
available for grant at September 30, 2007
|
|
|
1,011,542
|
|
|
|
|
10.
STOCK WARRANTS
Issued
and outstanding warrants to purchase
Lightspace
common stock are as follows:
|
|
|
|
|
Exercise
|
|
September
30,
|
|
December
31,
|
|
|
Type
of Warrant
|
|
Date
Issued
|
|
Price
|
|
2007
|
|
2006
|
|
|
$.80
Exchange warrant
|
|
|
April
27, 2006
|
|
$
|
0.80
|
|
|
361,252
|
|
|
361,252
|
|
|
$1.00
Exchange warrant
|
|
|
April
27, 2006
|
|
$
|
1.00
|
|
|
276,370
|
|
|
276,370
|
|
|
$3.00
Exchange warrant
|
|
|
April
27, 2006
|
|
$
|
3.00
|
|
|
649,892
|
|
|
649,892
|
|
|
$7.50
Exchange warrant
|
|
|
April
27, 2006
|
|
$
|
7.50
|
|
|
234,398
|
|
|
234,398
|
|
|
$0.80
Unit warrant
|
|
|
April
30, 2007
|
|
$
|
0.80
|
|
|
468,936
|
|
|
-
|
|
|
$0.96
Unit warrant
|
|
|
November
2, 2006
|
|
$
|
0.96
|
|
|
816,000
|
|
|
816,000
|
|
|
$1.00
Unit warrant
|
|
|
2006
and April 30, 2007
|
|
$
|
1.00
|
|
|
13,884,905
|
|
|
8,726,585
|
|
|
$1.25
Unit warrant
|
|
|
2006
and April 30, 2007
|
|
$
|
1.25
|
|
|
3,471,226
|
|
|
2,181,646
|
|
|
$1.63
Unit warrant
|
|
|
2006
and April 30, 2007
|
|
$
|
1.63
|
|
|
3,471,226
|
|
|
2,181,646
|
|
|
Total
common stock warrants outstanding
|
|
|
|
|
23,634,205
|
|
|
15,427,789
|
|
On
April
27, 2006 in connection with the conversion and exchange under the Securityholder
Debt and Equity Conversion and Exchange Agreement, we issued 1,160,660 exchange
warrants to purchase a total of 1,160,660 shares of common stock at exercise
prices ranging from $1.00 to $7.50 per warrant. The exchange warrants are
exercisable at the option of the holder at any time up until April 30, 2011,
at
which date the warrants expire. In the event of a division of our common stock,
the warrants will be adjusted proportionately. The value of the warrants at
April 27, 2006 was determined to be $138,449 under the fair value computation
method utilizing a 4.89% risk free interest rate assumption, 59% volatility
factor and an expected life of three years. The $138,449 has been charged to
operations as debt conversion expense and as an increase to additional
paid-in-capital.
Additionally,
in connection with the securityholder conversion and exchange, $237,381 in
principal amount of existing notes held by the former CEO were converted into
a
$237,381 contingent promissory note. We issued to the former CEO 361,252
exchange warrants to purchase a total of 361,252 shares of common stock at
an
exercise price of $0.80 per warrant. The warrants expire on April 30, 2011,
unless the terms for payment of the contingent promissory note are not met,
in
which case the warrants will expire on
LIGHTSPACE
CORPORATION
NOTES
TO
UNAUDITED
CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2007
10.
STOCK WARRANTS - Continued
June
30,
2009. The value of the warrants at April 27, 2006 was determined to be $125,896
under the fair value computation method utilizing a 4.89% risk free interest
rate assumption, 59% volatility factor and an expected life of three years.
The
$125,896 has been classified as deferred financing costs, chargeable to
operations as additional interest expense over three years, and as an increase
to additional paid-in-capital. The exchange warrants have been classified
permanently within stockholders’ equity, as upon exercise, the warrant holder
can only receive the specified number of shares of common stock.
On
May 3, 2006, we and noteholders holding $2,400,000 in principal amount of senior
secured notes agreed to convert $2,488,471 of senior secured note principal
and
accrued interest, at a conversion price of $6.40 per unit, into 388,821 units
plus fractional shares and warrants. The units that we issued to the senior
secured note holders are comprised of: (1) 3,110,585 shares of common stock;
(2)
3,110,585 unit warrants to purchase a total of 3,110,585 shares of common stock
at an exercise price of $1.00 per warrant; (3) 777,646 unit warrants to purchase
a total of 777,646 shares of common stock at an exercise price of $1.25 per
warrant; and (4) 777,646 unit warrants to purchase a total of 777,646 shares
of
common stock at an exercise price of $1.63 per warrant. The unit warrants are
exercisable at the option of the holder at any time up until April 30, 2011,
at
which date the warrants expire. In the event of a division of our common stock,
the warrants will be adjusted proportionately. No value has been assigned to
the
unit warrants issued in connection with the conversion. The unit warrants have
been classified permanently within stockholders’ equity, as upon exercise, the
warrant holder can only receive the specified number of shares of common
stock.
On
November 2, 2006 we closed the initial public offering period for the sale
of
our securities. We sold 600,000 units, the maximum allowed, at an offering
price
of $6.40 per unit, resulting in aggregate proceeds of $3,840,000. The sale
of
600,000 units, including warrants issued to the underwriter as compensation,
resulted in the issuance of: (1) 4,800,000 shares of common stock; (2) 816,000
unit warrants to purchase a total of 816,000 shares of common stock at an
exercise price of $0.96 per warrant (pursuant to the unit warrants issued to
the
underwriter); (3) 5,616,000 unit warrants to purchase a total of 5,616,000
shares of common stock at an exercise price of $1.00 per warrant; (4) 1,404,000
unit warrants to purchase a total of 1,404,000 shares of common stock at an
exercise price of $1.25 per warrant; and (5) 1,404,000 unit warrants to purchase
a total of 1,404,000 shares of common stock at an exercise price of $1.63 per
warrant.
The
unit warrants are exercisable at the option of the holder at any time up until
April 30, 2011, at which date the warrants expire. In the event of a division
of
our common stock, the warrants will be adjusted proportionately. No value has
been assigned to the unit warrants issued in connection with the sale of units.
The unit warrants have been classified permanently within stockholders’ equity,
as upon exercise, the warrant holder can only receive the specified number
of
shares of common stock.
On
April
30,
2007 we closed the offering period for the private sale of equity units. We
sold
586,173 units at the offering price of $6.40 per unit, resulting in gross
proceeds of $3,751,507. The sale of 586,173 units and the issuance to the
financial advisor of a unit purchase warrant exercisable for 58,617 units
identical to the units sold in the private placement resulted in the issuance
of: (1) 4,689,384 shares of common stock; (2) 468,936 unit warrants to purchase
a total of 468,936 shares of common stock at an exercise price of $0.80 per
warrant (3) 5,158,320 unit warrants to purchase a total of 5,158,320 shares
of
common stock at an exercise price of $1.00 per warrant; (4) 1,289,580 unit
warrants to purchase a total of 1,289,580 shares of common stock at an exercise
price of $1.25 per warrant; and (5) 1,289,580 unit warrants to purchase a total
of 1,289,580 shares of common stock at an exercise price of $1.63 per warrant.
The unit warrants are exercisable at the option of the holder at any time up
until April 30, 2012, at which date the warrants expire. In the event of a
division of our common stock, the warrants will be adjusted proportionately.
The
warrants
have been classified permanently within stockholders’ equity, as upon exercise,
the warrant holder can only receive the specified number of common shares.
We
had entered into a Registration Rights Agreement with the purchasers of the
units, whereby we had agreed to file a registration statement, within 45 days
of
the closing, to register for resale the shares of common stock, warrants and
shares of common
LIGHTSPACE
CORPORATION
NOTES
TO
UNAUDITED
CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2007
10.
STOCK WARRANTS - Continued
stock
issuable upon exercise of the unit warrants, included in the units issued in
the
private placement to investors and the financial advisor.
At
September 30, 2007 and December 31, 2006, the weighted average exercise price
of
the common stock warrants outstanding was $1.24 and $1.30, respectively. At
September 30, 2007, the common stock warrants had an average remaining life
of
approximately four years.
11.
INCOME TAXES
We
have
recorded no provisions or benefits for income taxes for any period presented
due
to the net operating losses incurred and the uncertainty as to the recovery
of
such net operating losses and other deferred tax assets as a reduction of
possible future taxable income, if any.
At
September 30, 2007 and December 31, 2006, we had operating loss carryforwards
of
approximately $6,427,000 and $3,384,000, respectively, available to offset
future taxable income for United States federal and state income tax purposes.
At September 30, 2007 and December 31, 2006, approximately $4,231,000 and
$1,846,000 of the operating loss carryforwards were restricted as to yearly
usage, as discussed hereafter. The United States federal tax operating loss
carryforwards expire commencing in 2021 through 2027. The state tax operating
loss carryforwards expire commencing in 2007 through 2011. Additionally we
had
research and development credit carryforwards of approximately $84,000 available
to be used as a reduction of federal income taxes.
Our
ability to use the operating loss carryforwards and tax credit carryforwards
to
offset future taxable income is subject to restrictions enacted in the United
States Internal Revenue Code of 1986. These restrictions severely limit the
future use of the loss carryforwards if certain ownership changes described
in
the code occur. The common stock ownership changes occurring as a result of
the
securityholder debt and equity conversion on April 27, 2006, the conversion
of
senior secured notes on May 3, 2006, and the private placement on April 30,
2007
have resulted in reductions and in limitations in the use of the operating
loss
and tax credit carryforwards. The value of the operating loss carryforwards
on
April 30, 2007, $8,699,000, was reduced to $4,231,000. In future years, such
reduced operating loss carryforwards of $4,231,000 can be used only to offset
approximately $441,000 of taxable income per year, if any. We may use operating
losses and tax credits generated subsequent to the date of the ownership change
without limitation. Unrestricted carryforwards generated in the period
subsequent to the April 30
th
ownership change to September 30, 2007 are approximately $2,196,000. Therefore,
in future years, we may be required to pay income taxes even though significant
operating loss and tax credit carryforwards exist.
12.
COMMITMENTS AND CONTINGENCIES
At
September 30, 2006, we leased our office and manufacturing space and certain
office equipment. Total rent expense for the three and nine months ended
September 30, 2007 and 2006 was $74,380, $238,019, $82,708 and $271,238
respectively.
Effective
May 1, 2006, we entered into a five-year lease for approximately 16,000 square
feet to be used for office and manufacturing operations. The terms of this
new
lease provide for average annual base rental payments of approximately $293,500
per year, plus an allocated percentage of the increase in the building operating
costs over defined base year operating costs.
LIGHTSPACE
CORPORATION
NOTES
TO
UNAUDITED
CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2007
12.
COMMITMENTS AND CONTINGENCIES - Continued
The
table
below sets forth our known contractual obligations as of December 31,
2006
|
|
|
Payments
Due by Period
|
|
|
|
|
Total
|
|
1
Year
|
|
2-3
Years
|
|
4-5
Years
|
|
Thereafter
|
|
|
Facility
lease
|
|
$
|
1,408,123
|
|
$
|
259,976
|
|
$
|
657,867
|
|
$
|
490,280
|
|
|
-
|
|
|
Other
leases
|
|
|
15,008
|
|
|
15,008
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
Total
|
|
$
|
1,423,131
|
|
$
|
274,984
|
|
$
|
657,867
|
|
$
|
490,280
|
|
|
-
|
|
In
addition, as of September 2007 we have an inventory purchase obligation to
a
vendor for approximately $885,000 to cover most of our inventory requirements
for the first half of 2008.
13.
SEGMENT INFORMATION
We
conduct our operations and manage our business in one segment, the manufacture
of hardware and development of software for interactive lighting entertainment.
Revenues, denominated in U.S. dollars, by geographical region are as
follows:
|
|
|
Three
Months Ended September 30,
|
|
Nine
Months Ended September 30,
|
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
United
States
|
|
$
|
209,072
|
|
$
|
59,812
|
|
$
|
739,325
|
|
$
|
288,314
|
|
|
Europe
|
|
|
475
|
|
|
40,413
|
|
|
203,675
|
|
|
40,413
|
|
|
Asia/Africa/Australia
|
|
|
101,253
|
|
|
49,010
|
|
|
145,953
|
|
|
49,010
|
|
|
South
America
|
|
|
32,000
|
|
|
-
|
|
|
74,000
|
|
|
-
|
|
|
Canada
|
|
|
-
|
|
|
49,100
|
|
|
20,500
|
|
|
49,100
|
|
|
Total
|
|
$
|
342,799
|
|
$
|
198,335
|
|
$
|
1,183,453
|
|
$
|
426,837
|
|
Item 2.
Management’s Discussion of Financial Condition and Results of Operations
The
following discussion of the financial condition and results of operations should
be read in conjunction with the unaudited
consolidated
financial statements and the related notes thereto included elsewhere in this
Form 10-Q. Except for the historical information contained herein, the following
discussion, as well as other information in this report, contains
forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended, and is subject to the “safe harbor” created by
those sections. Some of the forward-looking statements can be identified by
the
use of forward-looking terms such as “believes,” “expects,” “may,” “will,”
“should,” “could,” “seek,” “intends,” “plans,” “estimates,” “anticipates” or
other comparable terms. Forward-looking statements involve inherent risks and
uncertainties. A number of important factors could cause actual results to
differ materially from those in the forward-looking statements. Management
urges
you to consider the risks and uncertainties described in “Risk Factors” in this
report and in our Annual Report on Form 10-K for the year ended December 31,
2006. Management undertakes no obligation to update forward-looking statements
to reflect events or circumstances after the date of this report. Management
cautions readers not to place undue reliance upon any such forward-looking
statements, which speak only as of the date made.
Overview
Lightspace
provides interactive lighting entertainment products to family entertainment
centers,
retail
stores, theme parks, fashion shows, nightclubs, special events, stage lighting
and sound providers, health clubs and architectural lighting and design. Our
current product lines include: (a) Lightspace Play, an interactive 36 tile
gaming platform for children and adult recreation; (b) Lightspace Dance, an
interactive floor, generally in sizes of 86 tiles and larger, that displays
customizable lights and effects; and (c) Lightspace Design, an interactive
tile
system that displays customizable lights and video effects that can be mounted
on any flat surface.
During
the first quarter of 2007, we completed and introduced a new generation of
our
interactive tile with added software enhancements. The new interactive tile
and
enhanced software, in addition to increased product reliability and reduced
manufacturing cost, is significantly more illuminative and is now available
in
clear plastic in addition to the traditional off white.
On
April
30, 2007, we completed the acquisition of the in process development emagipix
technology from Illumination Design Works, Inc. emagipix technology is an
interactive lighting technology that utilizes electroluminescent sheets. The
purchase price for the emagipix technology consisted of a cash payment of
$300,000 and the issuance of a $950,000 convertible term secured non-recourse
note. In connection with the acquisition, the developer of the emagipix
technology (a former officer and co-founder of Lightspace Corporation and the
principal owner of Illumination Design Works, Inc.), re-commenced employment
with Lightspace. We accounted for the acquisition of the emagipix technology
as
the acquisition of in process research and development and recorded a charge
to
operations in the June 30, 2007 quarter of the $1,250,000 purchase price and
$56,612 in related legal expenses.
On
April
11, 2007, we commenced the private placement of up to 600,000 equity units
at an
offering price of $6.40 per unit. Each equity unit consists of: (1) eight
shares of common stock; (2) eight warrants to purchase a total of eight
shares of common stock at an exercise price of $1.00 per warrant; (3) two
warrants to purchase a total of two shares of common stock at an exercise price
of $1.25 per warrant; and (4) two warrants to purchase a total of two
shares of common stock at an exercise price of $1.63 per warrant. On April
30,
2007 we closed the offering period for our equity units. We sold 586,173 units
at the offering price of $6.40 per unit, resulting in aggregate proceeds of
$3,751,507. After expenses of the offering of $311,507, the net proceeds were
approximately $3,440,000.
Results
of Operations for the Three and Nine Months Ended September 30, 2007 and
200
6
Revenue
and Operating Results
For
the
three months ended September 30, 2007, revenue was $342,799, an increase of
$144,464 from revenue of $198,335 recorded in the three months ended September
30, 2006. The net loss for the three months ended September 30, 2007 was
$877,193, as compared to a net loss for the three months ended September 30,
2006 of $674,262.
The
revenue for the three months ended September 30, 2007 was comprised of revenue
from the sale of products, $313,432, and other revenue of $29,367, as
represented by deferred maintenance revenue, sales of miscellaneous parts and
other services. In the three months ended September 30, 2007, there were ten
Lightspace Play new installation sites and two Lightspace Dance new installation
site, representing 472 interactive tiles. For the three months ended September
30, 2007, sales of Lightspace products were made to customers in the United
States - $209,072; Asia/Africa/Australia - $101,253; South America - $32,000
and
Europe - $475. During this
period,
four Lightspace
customers comprised more
than
10% of
revenues
individually. Sales to these customers aggregated $204,532 or approximately
60%
of total revenue.
The
revenue for the three months ended September 30, 2006 was comprised of revenue
from the sale of products, $191,371, and other revenue of $6,964, as represented
by deferred maintenance revenue, sales of miscellaneous parts and other
services. In the three months ended September 30, 2006, there were four
Lightspace Play or Design new installation sites and two Lightspace Dance new
installation sites, representing 287 interactive tiles. For the three months
ended September 30, 2006, sales of Lightspace products were made to customers
in
United States - $59,812; Canada - $49,100; Asia - $49,010 and Europe - $40,413.
During this
period,
four Lightspace customers comprised more than 10% of revenues individually.
Sales to these customers aggregated $185,780 or 94% of total revenue in the
2006
three-month period.
For
the
nine months ended September 30, 2007, revenue was $1,183,453, an increase of
$756,616 or 177% from revenue of $426,837 recorded in the nine months ended
September 30, 2006. The net loss for the nine months ended September 30, 2007
was $3,608,332, as compared to a net loss for the nine months ended September
30, 2006 of $2,060,615. The difference of $1,547,717 or 75% can be primarily
attributed to the purchase of the emagipix technology for which we recorded
a
charge of $1,306,612.
The
revenue for the nine months ended September 30, 2007 was comprised of revenue
from the sale of products, $1,114,566, and other revenue of $68,887, as
represented by deferred maintenance revenue, sales of miscellaneous parts and
other services. In the nine months ended September 30, 2007, there were 33
Lightspace Play new installation sites and one Lightspace Design and three
Lightspace Dance new installation site, representing 1,709 interactive tiles.
For the nine months ended September 30, 2007, sales of Lightspace products
were
made to customers in the United States - $739,325; Europe - $203,675;
Asia/Africa/Australia - $145,953; South America - $74,000 and Canada - $20,500.
During this period, two Lightspace customers comprised more than 10% of revenues
individually, with the top customer comprising approximately 22% of total
revenues. Sales to these customers aggregated $378,372 in the 2007 nine-month
period.
The
revenue for the nine months ended September 30, 2006 was comprised of revenue
from the sale of products, $406,978, and other revenue of $19,859, as
represented by deferred maintenance revenue, sales of miscellaneous parts and
other services. In the nine months ended September 30, 2006, there were 11
Lightspace Play or Design new installation sites and two Lightspace Dance new
installation sites, representing 565 interactive tiles. For the nine months
ended September 30, 2006, sales of Lightspace products were made to customers
in
United States - $288,314; Canada - $49,100; Asia - $49,010 and Europe - $40,413.
During this period, two Lightspace customers comprised more than 10% of
revenues. Sales to these two customers aggregated $95,313 in the 2006 nine-month
period.
Our
product backlog at September 30, 2007 was $36,607, representing 76 interactive
tiles. We expect that this backlog will be shipped and installed in the December
2007 quarter. Product backlog at September 31, 2006 was $281,934,
representing 409 interactive tiles. Cancellation of a signed contract or order
included in product backlog requires the consent of Lightspace.
Product
Cost and Gross Margin
For
the
quarters ended September 30, 2007 and 2006, we recorded gross margins of
$17,826, or 5%, and a negative $30,312 or negative 15%, respectively. Product
cost includes the direct cost of materials, associated freight charges, and
the
allocated per unit cost of the contractor's manufacturing labor, overhead and
profit associated with products sold. For the most part, these costs are
variable and increase or decrease with volume. Product cost also includes our
personnel and related expenses assigned to manufacturing and customer service.
These latter costs tend to be a fixed cost that decreases on a per unit basis
as
volume increases. The September 2007 gross margin was affected by a one-time
$21,192 vendor cancellation charge as a result of an engineering design change
that is expected to lower production costs going forward.
For
the
nine months ended September 30, 2007 and 2006, we recorded gross margins of
$233,609, or 20%, and a negative $151,214 or negative 35%, respectively.
Operating
Expenses
Research
and development spending for the three months ended September 30, 2007 and
September 30, 2006 respectively were $280,645 and $229,927, an increase of
$50,718 or approximately 22%. Research and development spending was $2,072,383
for the nine months ended September 30, 2007 as compared to $726,709 for the
nine months ended September 30, 2006. The difference of $1,345,674 can be
attributed primarily to the acquisition of the emagipix technology, which we
took a charge to operations in April 2007 of 1,306,612. Research and development
spending for 2007 has focused primarily on hardware and software enhancements
for our current generation of tile as well as expenditures on the development
of
the next generation of our interactive tile.
Selling
and marketing expenditures were $283,256 for the three months ended September
30, 2007 as compared to $250,797 for the three months ended September 30, 2006,
an increase of $32,459, or 13%. Selling and marketing expenditures were $942,680
for the nine months ended September 30, 2007 as compared to $742,019 for the
nine months ended September 30, 2006, an increase of $200,661, or 27%. The
increased expenditures was a result of added sales and customer service staff
and increased spending for trade shows, advertising, print publications, and
employee travel expenses.
General
and administrative expenses were $315,861 for the three months ended September
30, 2007 as compared to $122,664 for the three months ended September 30, 2006,
an increase of $193,197, or 158%. Administrative expenses were $790,247 for
the
nine months ended September 30, 2007 as compared to $576,581 for the nine months
ended September 30, 2006, an increase of $213,666, or 37%. Increases in
personnel costs, audit, legal and patent filing costs constitute approximately
$183,000 of the increase in administrative expenses in the 2007 nine month
period compared to the same period in 2006.
Interest
Expense
Net
interest expense was $15,257 for the three months ended September 30, 2007
as
compared to $40,562 for the three months ended September 30, 2006, a decrease
of
$25,305, or 62%. Interest expense was $36,631 for the nine months ended
September 30, 2007 as compared to $266,390 for the nine months ended September
30, 2006, a decrease of $229,759, or 86%. The decreases in the nine month
periods from 2006 to 2007 is due to the conversion to common stock on April
27,
2006 of $2,701,853 in principal amount of convertible and demand notes, and
the
conversion to common stock on May 3, 2006 of $2,488,471 in principal amount
and
accrued interest of bridge notes.
Income
Taxes
At
September 30, 2007 and December 31, 2006, we had operating loss carryforwards
of
approximately $6,427,000 and $3,384,000, respectively, available to offset
future taxable income for United States federal and state income tax purposes.
At September 30, 2007 and December 31, 2006, approximately $4,231,000 and
$1,846,000 of the operating loss carryforwards were restricted as to yearly
usage, as discussed hereafter. The United States federal tax operating loss
carryforwards expire commencing in 2021 through 2027. The state tax operating
loss carryforwards expire commencing in 2007 through 2011. Additionally we
had
research and development credit carryforwards of approximately $84,000 available
to be used as a reduction of federal income taxes.
Our
ability to use the operating loss carryforwards and tax credit carryforwards
to
offset future taxable income is subject to restrictions enacted in the United
States Internal Revenue Code of 1986. These restrictions severely limit the
future use of the loss carryforwards if certain ownership changes described
in
the code occur. The common stock ownership changes occurring as a result of
the
securityholder debt and equity conversion on April 27, 2006, the conversion
of
senior secured notes on May 3, 2006, and the private placement on April 30,
2007
have resulted in reductions and in limitations in the use of the operating
loss
and tax credit carryforwards. The value of the operating loss carryforwards
on
April 30, 2007, $8,699,000, was reduced to $4,231,000. In future years, such
reduced operating loss carryforwards of $4,231,000 can be used to offset only
about $441,000 of taxable income per year, if any. We may use operating losses
and tax credits generated subsequent to the date of the ownership change without
limitation. Unrestricted carryforwards generated in the period subsequent to
the
April 30
th
ownership change to September 30, 2007 are approximately $2,196,000.
Restrictions on the use of operating loss carryforwards would mean that we
may
be required to pay income taxes even though significant operating loss and
tax
credit carryforwards exist.
Net
Loss
The
net
loss for the nine months ended September 30, 2007 was $3,608,332 as compared
to
a net loss of $2,060,615 in the nine months ended September 30, 2006. Impacting
the nine months ended September 30, 2007, in addition to the preceding
discussion, was a charge in the amount of 1,306,612 related to the acquisition
of the emagipix technology.
Liquidity,
Capital Resources and Cash Flow
We
have
incurred net operating losses and negative operating cash flows since inception.
At September 30, 2007and December 31, 2006, we had an accumulated retained
deficit of $13,919,967and $10,311,635. We expect to incur additional losses
and
negative operating cash flows through at least the September quarter of 2008.
We
will continue thereafter to incur losses and negative operating cash flows
until
our revenue growth reaches that level that is able to support our operating
expenses.
We
have
funded operations through September 30, 2007 through the private and public
issuances of common stock and warrants, Series A Preferred Stock, borrowings
from stockholders and others pursuant to convertible and demand notes, bridge
notes and senior notes, and sales of our products.
On
April
30, 2007 we sold in a private placement 586,173 units, in the same form sold
in
our public offering, at the offering price of $6.40 per unit, resulting in
aggregate proceeds of $3,751,507. After expenses of the offering of $311,507,
the net proceeds were approximately $3,440,000. The sale of 586,173 units
resulted in the issuance of: (1) 4,689,384 shares of common stock; (2) 4,689,384
warrants to purchase a total of 4,689,384 shares of common stock at an exercise
price of $1.00 per warrant; (3) 1,172,346 warrants to purchase a total of
1,172,346 shares of common stock at an exercise price of $1.25 per warrant;
and
(4) 1,172,346 warrants to purchase a total of 1,172,346 shares of common stock
at an exercise price of $1.63 per warrant. The warrants are exercisable at
the
option of the holder at any time up until April 30, 2012, at which date the
warrants expire. In the event of a division of our common stock, the warrants
will be adjusted proportionately. The warrants have been classified permanently
within stockholders’ equity, as upon exercise, the warrant holder can only
receive the specified number of common shares. We have entered into a
Registration Rights Agreement with the purchasers of the units, whereby we
have
agreed to file a registration statement, within 45 days of the closing, to
register for resale the shares of common stock, warrants and shares of common
stock issuable upon exercise of the warrants, included in the units issued
in
the private placement to investors and the financial advisor.
In
connection with the sale of the equity units, we paid Griffin Securities, Inc.,
the financial advisor for the private placement, a fee in the amount of $187,575
and issued to Griffin Securities a purchase warrant exercisable for 58,617
units, in the same form sold in the private placement, at an exercise price
of
$6.40 per unit.
We
used a
portion of the net proceeds from the private placement to complete the
acquisition of the emagipix technology by the payment of the balance of the
cash
purchase price of $255,000. The balance of the net proceeds will be used for
general working capital purposes, including payment of the expenses of
registering the private placement units for resale.
We
believe that the proceeds from the April 30, 2007 private placement, together
with anticipated revenues from sales of our products, will be sufficient to
meet
our liquidity requirements for the next 8 - 10 months. Our long-term success
is
dependent bringing our products to the worldwide market and obtaining sufficient
sales volume to be profitable. To achieve these objectives, we may be required
to raise additional capital through public or private financings or other
arrangements. It cannot be assured that such financings will be available on
terms attractive to us, if at all. Such financings may be dilutive to
stockholders and may contain restrictive covenants.
Technology
Acquisition
On
March
29, 2007, Lightspace Emagipix Corporation (“LEC”), a newly formed wholly-owned
subsidiary of Lightspace Corporation, entered into an agreement with
Illumination Design Works, Inc. to acquire the assets related to the in process
development of its emagipix technology, an interactive lighting technology
that
utilizes electroluminescent sheets. The purchase price for the emagipix
technology consisted of an initial cash payment of $45,000 upon signing the
agreement, a subsequent cash payment of $255,000 and the issuance of a $950,000
convertible term secured non-recourse note to Illumination Design Works, Inc.
upon the closing of the technology purchase.
On
April
30, 2007, LEC completed the acquisition of the emagipix technology. In
connection with the acquisition, the developer of the emagipix technology (a
former officer and co-founder of Lightspace Corporation and the principal owner
of Illumination Design Works, Inc.), re-commenced employment with
Lightspace.
The
$950,000 convertible term secured non-recourse note bears interest a 5% per
annum, payable yearly, and is due and payable on April 30, 2011. The note is
secured by a pledge of 67% the stock of LEC. The principal of the note is
convertible at any time up and until April 30, 2011, at the option of the
holder, into the common stock of Lightspace Corporation at a conversion price
of
$0.80 per share. Upon the occurrence of certain defined events of default by
the
noteholder, we have the right to convert the note to common stock at the lower
of the conversion price of $0.80 or current market price of the common
stock.
We
have
accounted for the acquisition of the emagipix technology as the acquisition
of
in process research and development and recorded a charge to operations in
the
June 30, 2007 quarter of $1,306,612.
Manufacturing
Operations
We
currently contract for the production and assembly of interactive tiles from
an
independent manufacturing company and have had discussions with other contract
manufacturers as secondary sources for the production and assembly of our
interactive tiles. The current contract manufacturer is ISO certified and,
to
date, we have not experienced either quality or production difficulties. The
production run is scheduled for a minimum of 200 interactive tiles per week,
with the ability to increase the weekly production to 400 to 500 interactive
tiles, if required.
Deferred
Revenue and Backlog
Deferred
revenue is represented by: (1) advance deposits received from customers for
the
future purchase and installation of a Lightspace system and (2) the balance
of
deferred maintenance revenue to be recognized as income over the remaining
term
of the maintenance contract. Our product backlog at September 30, 2007 and
December 31, 2006 was $36,607 (76 interactive tiles) and $208,134 (343
interactive tiles), respectively.
Off-Balance
Sheet Arrangements
We
have
no off-balance sheet arrangements other than normal lease
arrangements.
At
September 30, 2006, we leased our office and manufacturing space and certain
office equipment. Total rent expense for the three and nine months ended
September 30, 2007 and 2006 was $74,380, $238,019, $82,708 and $271,238
respectively.
Effective
May 1, 2006, we entered into a five-year lease for approximately 16,000 square
feet to be used for office and manufacturing operations. The terms of this
new
lease provide for average annual base rental payments of approximately $293,500
per year, plus an allocated percentage of the increase in the building operating
costs over defined base year operating costs.
The
table
below sets forth our known contractual obligations as of December 31,
2006
|
Contractual
Obligation
|
|
Payments
Due by Period
|
|
|
|
|
Total
|
|
1
Year
|
|
2-3
Years
|
|
4-5
Years
|
|
Thereafter
|
|
|
Facility
lease
|
|
$
|
1,408,123
|
|
$
|
259,976
|
|
$
|
657,867
|
|
$
|
490,280
|
|
|
-
|
|
|
Other
leases
|
|
|
15,008
|
|
|
15,008
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
Total
|
|
$
|
1,423,131
|
|
$
|
274,984
|
|
$
|
657,867
|
|
$
|
490,280
|
|
|
-
|
|
In
addition, as of September 2007 we have an inventory purchase obligation to
our
vendor for approximately $885,000 to cover our inventory requirements for the
first half of 2008.
Recent
Accounting Pronouncements
In
July 2006, the FASB issued FIN 48, which clarifies the accounting for
uncertainty in income taxes recognized in an entity’s financial statements in
accordance with SFAS No. 109, :Accounting for Income Taxes” and prescribes a
recognition threshold and measurement attribute for financial statement
disclosure of income tax positions taken or expected to be taken on an income
tax return. Additionally, FIN 48 provides guidance on derecognition,
classification, interest and penalties, accounting in interim periods,
disclosure and transition. FIN 48 is effective for fiscal years beginning after
December 15, 2006, with early adoption permitted. Lightspace adopted this
interpretation on January 1, 2007. See Note 11, “Income Taxes” above for a
discussion of its effect on the Company’s financial condition, its results of
operations or liquidity.
In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” which
defines fair value, establishes a framework for consistently measuring fair
value under GAAP, end expands disclosures about fair value measurements. SFAS
No. 157 is effective for the Company beginning January 1, 2008, and the
provisions of SFAS No. 157 will be applied prospectively as of that date. We
are
currently evaluating whether the adoption of this statement will have a material
effect on our financial condition, our results of operations or
liquidity.
On
February 15, 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities - Including an Amendment of FASB
Statement No. 115.” This standard permits an entity to choose to measure many
financial instruments and certain other items at fair value. Most of the
provisions in SFAS No. 159 are elective; however, the amendment to SFAS No.
115,
“Accounting for Certain Investments in Debt and Equity Securities,” applies to
all entities with available-for-sale and trading securities. The fair value
option established by SFAS No. 159 permits all entities to choose to measure
eligible items at fair value at specified election dates. A business entity
will
report unrealized gains and losses on items for which the fair value option
has
been elected in earnings at each subsequent reporting date. The fair value
option: (a) may be applied instrument by instrument, with a few exceptions,
such
as investments otherwise accounted for by the equity method; (b) is irrevocable
(unless a new election date occurs); and (c) is applied only to entire
instruments and not to portions of instruments. SFAS No. 159 is effective as
of
the beginning of an entity’s first fiscal year that begins after November 15,
2007. Early adoption is permitted as of the beginning of the previous fiscal
year provided that the entity makes that choice in the first 120 days of the
fiscal year and also elects to apply the provisions of SFAS No. 157, “Fair Value
Measurements”. Lightspace is currently evaluating whether the adoption of this
statement will have a material effect on its financial condition, its results
of
operations or liquidity.
Critical
Accounting Policies and Estimates
The
consolidated financial statements of Lightspace are prepared in conformity
with
accounting principles generally accepted in the United States of America. These
accounting principles require us to make estimates and assumptions that affect
the reported amounts of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the financial statements. We are also
required to make certain judgments that affect the reported amounts of revenues
and expenses during the reporting period. On an on-going basis, we evaluate
our
estimates and the process under which those estimates are formulated. We develop
our estimates based upon historical experience as well as assumptions that
are
considered to be reasonable under the circumstances. Actual results may differ
from these estimates.
We
believe that the following critical accounting policies impact the more
significant judgments and estimates used in the preparation of the financial
statements:
Revenue
Recognition
.
We recognize revenue from the sale of our entertainment systems when all of
the
following conditions have been met: (1) evidence exists of an arrangement with
the customer, typically consisting of a purchase order or contract; (2) our
products have been delivered and risk of loss has passed to the customer; (3)
we
have completed all of the necessary terms of the contract possibly including
but
not limited to, installation of the product and training; (4) the amount of
revenue to which we are entitled is fixed or determinable; and (5) we believe
it
is probable that we will be able to collect the amount due from the customer.
To
the extent that one or more of these conditions has not been satisfied, we
defer
recognition of revenue. Revenue from maintenance contracts is recorded on a
straight-line basis over the term of the contract. An allowance for
uncollectible receivables is established by a charge to operations, when in
our
opinion it is probable that the amount due will not be collected.
Warranty
Reserve
.
Our products are warranted against defects for twelve months following the
sale.
Reserves for potential warranty claims are provided at the time of revenue
recognition and are based on several factors including historical claims
experience, current sales levels and our estimate of repair costs.
Stock-Based
Compensation
.
Effective January 1, 2006, we adopted the provisions of Financial
Accounting Standards No. 123(R), Share-Based Payment. This statement requires
that the fair value of stock-based awards be measured at the grant date,
recognized as compensation expense over the defined service period, and be
adjusted for anticipated forfeitures. We estimate the fair value of each
stock-based award on the date of grant using a stock option valuation model.
The
valuation model incorporates assumptions for stock price volatility, the
expected exercise period, risk-free interest rate and dividend yield. Some
of
these assumptions are subjective and require the exercise of judgment.
Additionally we must estimate the number of grants that may be forfeited. If
actual experience differs significantly from our estimates, compensation expense
that we record in future periods may differ materially from that recorded in
the
current period and that amount projected for future periods.