UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
Form 10-Q
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
For the Quarterly Period Ended March 31, 2008
 
or
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the Transition Period From               to              
 
Commission File Number 333-131857
 
LIGHTSPACE CORPORATION
(Exact name of registrant as specified in its charter)
 
Delaware
 
04-3572975
(State or Other Jurisdiction of Incorporation or Organization)
 
(IRS Employer Identification No.)
 
 
 
529 Main Street, Ste 330, Boston, MA
 
02129
(Address of Principal Executive Offices)
 
(Zip Code)
 
617) 868-1700
Registrant’s Telephone Number, Including Area Code
 
Not Applicable
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.               Yes o No x
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large Accelerated Filer
o
Accelerated Filer
 
o
 
Non-Accelerated Filer
 
x
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).                   Yes o No x
 
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
 
Class
 
Outstanding at May 14, 2008
Common Stock, par value $0.0001
 
15,282,495 shares
 

LIGHTSPACE CORPORATION
FORM 10 - Q
FOR THE THREE MONTHS ENDED MARCH 31, 2008
INDEX
 
   
PAGE
PART I - FINANCIAL INFORMATION
   
     
Item 1 - Unaudited Consolidated Financial Statements
   
     
Consolidated Statements of Financial Position as of March 31, 2008 and December 31, 2007
 
3
     
Consolidated Statements of Operations for the Three Months
 
 
Ended March 31, 2008 and 2007
 
4
     
Consolidated Statement of Changes in Stockholders’ Equity for the Year Ended
   
December 31, 2007 and the for the Three Months Ended March 31, 2008
 
5
     
Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2008 and 2007
 
6
     
Notes to Unaudited Consolidated Financial Statements
 
7
     
Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations
 
14
     
Item 3 - Quantitative and Qualitative Disclosures about Market Risk
 
20
     
Item 4 - Controls and Procedures
 
20
     
     
PART II - OTHER INFORMATION
   
     
Item 1 - Legal Proceedings
 
  21
     
Item 1A - Risk Factors
 
21
     
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds
 
  21
     
Item 3 - Defaults upon Senior Securities
 
21
     
Item 4 - Submission of Matters to a Vote of Security Holders
 
21
     
Item 5 - Other Information
 
  21
     
Item 6 - Exhibits
 
22
     
Signatures
 
  23


PART I - FINANCIAL INFORMATION

Item 1 - Consolidated Financial Statements

PART 1. FINANCIAL INFORMATION
         
Item 1. Unaudited Financial Information
         
           
LIGHTSPACE CORPORATION and SUBSIDIARY
 
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
 
           
           
           
   
March 31,
 
December 31,
 
   
2008
 
2007
 
   
(unaudited)
 
(audited)
 
ASSETS
 
Current Assets
         
Cash and cash equivalents
 
$
28,693
 
$
585,737
 
Accounts receivable (net of allowance for doubtful accounts of
   
137,708
   
144,293
 
$59,600 and $50,130 at March 31, 2008 and December 31, 2007)
             
Inventory
   
208,043
   
193,854
 
Inventory deposits
   
172,292
   
223,033
 
Other current assets
   
75,600
   
3,404
 
Total current assets
   
622,336
   
1,150,321
 
               
Property and Equipment - Net
   
149,579
   
163,209
 
               
Security deposits
   
102,400
   
102,400
 
Intangible assets
   
35,408
   
47,211
 
                              
Total Assets
 
$
909,723
 
$
1,463,141
 
               
LIABILITIES AND STOCKHOLDERS' EQUITY
               
Current Liabilities
             
Notes payable
 
$
307,381
 
$
237,381
 
Accounts payable
   
458,754
   
514,380
 
Accrued interest
   
80,170
   
63,612
 
Accrued expenses
   
367,537
   
407,030
 
Deferred income
   
118,863
   
96,280
 
Total current liabilities
   
1,332,705
   
1,318,683
 
               
Long-term Debt
   
950,000
   
950,000
 
               
Stockholders' Equity
             
Common stock, $0.0001 par value; authorized 75,000,000 shares;
             
15,282,495 and 15,282,495 shares issued and outstanding
             
at March 31, 2008 and December 31, 2007
   
1,528
   
1,528
 
Treasury stock - 24,931 shares at March 31, 2008 and December 31, 2007
   
(2
)
 
(2
)
Additional paid-in capital
   
14,397,185
   
14,305,125
 
Retained earning (deficit)
   
(15,771,693
)
 
(15,112,193
)
Total stockholders' equity (deficiency)
   
(1,372,982
)
 
(805,542
)
                             
Total Liabilities and Stockholders' Equity (Deficiency)
 
$
909,723
 
$
1,463,141
 
 
 
See notes to unaudited consolidated financial statements

3

 
CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
 
           
           
           
   
Three Months Ended March 31,
 
   
2008
 
2007
 
           
Revenues
         
Product sales
 
$
868,518
 
$
316,534
 
Other
   
91,203
   
17,425
 
Total revenues
   
959,721
   
333,959
 
               
Product Cost
   
673,588
   
271,265
 
Gross Margin
   
286,133
   
62,694
 
               
Operating Expenses
             
Research and development
   
351,119
   
250,048
 
Selling and marketing
   
299,022
   
300,943
 
General and administrative
   
267,941
   
232,343
 
Total operating expenses
   
918,082
   
783,334
 
               
Operating Loss
   
(631,949
)
 
(720,640
)
               
Other Income (Expense)
             
Interest expense - net
   
(27,551
)
 
(11,850
)
Total other income (expense)
   
(27,551
)
 
(11,850
)
               
Loss Before Provision For Income Taxes
   
(659,500
)
 
(732,490
)
               
Provision For Income Taxes
   
-
   
-
 
Net Loss
 
$
(659,500
)
$
(732,490
)
               
Basic and Diluted Net Loss Per Share
 
$
(0.04
)
$
(0.07
)
               
Weighted Average Common Shares Outstanding
   
15,282,495
   
10,593,111
 
 
See notes to unaudited consolidated financial statements

4

 
LIGHTSPACE CORPORATION and SUBSIDIARY
 
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY) (unaudited)
                                     
                                     
   
Common Stock
 
Treasury Stock
   
Additional
 
Retained
   
Stockholders'
 
   
Shares
                 
Paid-In
 
Earnings
   
Equity
 
   
Issued
 
Amount
 
Shares
   
Amount
   
Capital
 
(Deficit)
   
(Deficit)
 
Balance January 1, 2007
   
10,593,111
   
1,059
   
-
     
-
     
10,607,585
   
(10,311,635
)
   
297,009
 
                                                   
Stock option compensation
                               
40,246
           
40,246
 
                                                   
Net loss for the three months
   
  
   
  
   
  
     
  
     
  
   
(732,490
)
   
(732,490
)
Balance March 31, 2007
   
10,593,111
   
1,059
   
-
     
-
     
10,647,831
   
(11,044,125
)
   
(395,235
)
                                                   
Private placement
   
4,689,384
   
469
                   
3,751,038
           
3,751,507
 
of equity securities
                                                 
                                                   
Expenses of private placement
                               
(311,507
)
         
(311,507
)
                                                   
Stock repurchase
               
(24,931
)
   
(2
)
                 
(2
)
                                                   
Stock option compensation
                               
217,763
           
217,763
 
                                                   
Net loss
                                                     
(4,068,068
)
   
(4,068,068
)
Balance December 31, 2007
   
15,282,495
 
$
1,528
   
(24,931
)
 
$
(2
)
 
$
14,305,125
 
$
(15,112,193
)
 
$
(805,542
)
                                                   
Stock option compensation
                               
92,060
           
92,060
 
                                                   
Net loss for the three months
                                                  
$
(659,500
)
   
(659,500
)
Balance March 31, 2008
   
15,282,495
 
$
1,528
   
(24,931
)
 
$
(2
)
 
$
14,397,185
 
$
(15,771,693
)
 
$
(1,372,982
)

See notes to unaudited consolidated financial statements

5


 
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
 
           
           
       
   
Three Months Ended March 31,
 
   
2008
 
2007
 
Cash Flows (Uses) from Operating Activities:
         
Net loss
 
$
(659,500
)
$
(732,490
)
Adjustments to reconcile net loss to cash used
             
in operating activities:
             
Depreciation and amortization
   
13,628
   
10,200
 
Amortization of fair value of stock warrants
   
11,805
   
11,803
 
Provision for stock option compensation
   
92,060
   
40,246
 
Other changes in assets and liabilities:
             
Accounts receivable
   
6,585
   
(36,240
)
Inventory
   
(14,189
)
 
(2,472
)
Other assets
   
(21,455
)
 
(5,171
)
Accounts payable and accrued expenses
   
(78,561
)
 
(39,656
)
Deferred income
   
22,583
   
(8,737
)
Net cash used in operating activities
   
(627,044
)
 
(762,517
)
               
Cash Flows (Uses) From Investing Activities:
             
Purchases of property and equipment
   
-
   
(12,938
)
Net cash used in investing activities
   
-
   
(12,938
)
               
Cash Flows (Uses) From Financing Activities:
             
Proceeds from issuance of notes payable
   
70,000
   
-
 
Net cash provided from financing activities
   
70,000
   
-
 
               
Net Increase (Decrease) in Cash and Cash Equivalents
   
(557,044
)
 
(775,455
)
Cash and Cash Equivalents - beginning of period
   
585,737
   
879,987
 
Cash and Cash Equivalents - end of period
 
$
28,693
 
$
104,532
 
               
Supplemental Cash Flow Information
             
During the three months ended March 31, cash paid for the following:
             
Interest
   
-
   
-
 
Taxes
   
-
   
-
 

See notes to unaudited consolidated financial statements

6

LIGHTSPACE CORPORATION and SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2008
 
 
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 March 31, 2008, we had an accumulated retained earnings deficit of $15,771,693. We have funded our operations through March 31, 2008 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 $659,500 and $732,490 for the three months ended March 31, 2008 and 2007 respectively. Further, we have accumulated net losses from operations of $15,771,693 as of March 31, 2008 and at March 31, 2008, our cash balance was $28,693. 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 March 31, 2008 include the accounts of Lightspace Emagipix Corporation, a wholly-owned subsidiary, organized as of March 29, 2007.

The consolidated statements of financial position as of March 31, 2008, the consolidated statements of operations and cash flows for the three months ended March 31, 2008 and 2007, and the consolidated statement of changes in stockholders’ equity for the period from January 1, 2008 through March 31, 2008 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.
 
The preparation of financial statements in conformity with generally accepted accounting principles requires the Company to make estimates and assumptions that affect at the date of the financial statements the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities and the reported amounts of revenue and expenses. Actual results could differ from these estimates.
7

LIGHTSPACE CORPORATION and SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2008


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. 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 March 31,
 
   
2008
 
2007
 
Common stock options
   
2,978,452
   
1,218,685
 
Common stock warrants
   
23,634,205
   
15,427,789
 
Convertible debt
   
1,187,500
   
-
 
Total
   
27,800,157
   
16,646,474
 

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 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 the three month period ended March 31, 2008, no stock incentive options were granted. In the year ended December 31, 2007, we granted to directors, officers and key employees 4,075,856 options to purchase 4,075,856 shares of common stock at an exercise prices ranging from $0.80 to $1.10 per share.
 
8
LIGHTSPACE CORPORATION and SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2008

 
6. STOCK OPTION BASED COMPENSATION (continued)

The provision for stock-based compensation for common stock options granted under the 2006 and 2007 Stock Plans for the three month period ended March 31, 2008 was $92,060. 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 three month period ended March 31, 2008 was increased by $92,060.

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
 
Inventory is stated at lower of cost or market. At March 31, 2008 and December 31, 2007, inventory consisted of raw materials of $67,240 and $32 ,697 , and finished products of $140,803 and $161 ,157 , respectively. Additionally, at March 31, 2008 and December 31, 2007 advance payments for inventory were $172,292 and $223,033, respectively.

8. NOTES PAYABLE AND LONG TERM DEBT  

Notes payable and long term debt consists of the following:

       
March 31,
 
December 31,
 
       
2008
 
2007
 
Interest bearing short term notes
   
9.0 %
 
 
55,000
   
-
 
Non-interest bearing short term notes
   
0.0 %
 
 
15,000
   
-
 
Contingent promissory note
   
8.0 %
 
 
237,381
   
237,381
 
Long term debt
   
5.0 %
 
 
950,000
   
950,000
 
Total
         
1,257,381
   
1,187,381
 
 
Short term promissory note
On March 27, 2008 we received a $70,000 loan from two ex-directors and a shareholder. Two of the notes bear a 9% annual interest rate and the third note was non-interest bearing. All three notes are due and payable on April 28, 2008. The loans were made in connection with a vendor lawsuit which was settled in March 2008. These notes have been paid in full.

Contingent promissory note
In connection with the securityholder debt and equity conversion on April 27, 2006, $237,381 in principal amount of existing notes held by the former CEO were converted into a $237,381 contingent promissory note. This note bears interest at an annual rate of 8% and is payable only if the Company achieves two consecutive quarters of positive EBITDA (i.e., earnings before interest, taxes, depreciation and amortization), aggregating at least $1,000,000, or the Company raises in a registered public offering of equity cash proceeds of at least $10 million prior to December 31, 2008. If those conditions are not met by December 31, 2008, or the former CEO is found to be in breach of the terms of the severance agreement prior to such date, the note will not be payable. In addition, Lightspace issued to the former CEO warrants to purchase 361,252 shares of common stock at an exercise price of $0.80 per share. The warrants expire in five years, unless the terms for the payment of the contingent promissory note are not met, in such case, the warrants expire on March 31, 2009.
9

LIGHTSPACE CORPORATION and SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2008


8. NOTES PAYABLE AND LONG TERM DEBT (continued)

Long term debt
As part of the acquisition of the emagipix in-process research and development, we issued a $950,000 convertible term secured non-recourse note to Illumination Design Works, Inc. upon the closing of the purchase on April 30, 2007. 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 76% of 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.

9. 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 other corporate purposes. The accompanying consolidated financial statements have been updated to reflect this increase in authorized shares.

10. 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. 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 March 31, 2008 we had reserved 2,118,622 shares of common stock for issuance under the 2006 Stock Plan.

On December 10, 2007, our stockholders approved adoption of the 2007 Stock Incentive Plan (the “2007 Stock Plan”), which had been approved by our Board of Directors in August, 2007, 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 upon exercise of outstanding options.
10

LIGHTSPACE CORPORATION and SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2008

 
10. STOCK INCENTIVE PLANS (continued)

Combined i nformation with respect to stock options issued under the 2005, 2006 and 2007 Stock Plans for the three month period ended March 31, 2008 is summarized as follows:
 
   
March 31, 2008
 
       
Weighted
 
   
Number of
 
Average
 
   
Shares
 
Exercise Price
 
Options outstanding January 1, 2008
   
5,143,610
 
$
1.01
 
Options granted
   
-
   
-
 
Options exercised
   
-
   
-
 
Options cancelled
   
(2,165,158
)
 
(1.06
)
Options outstanding March 31, 2008
   
2,978,452
 
$
0.96
 
               
Options exercisable at March 31, 2008
   
447,786
 
$
0.96
 
Weighted average fair value of 2008 options granted
         
-
 
Weighted average contractual life (years) options outstanding
   
9
       
Options available for grant at March 31, 2008
   
3,191,700
       
 
11. STOCK WARRANTS

Issued and outstanding warrants to purchase Lightspace common stock are as follows:

       
Exercise
 
March 31,
 
December 31,
Type of Warrant
 
Date Issued
 
Price
 
2008
 
2007
$.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
 
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
 
13,884,905
$1.25 Unit warrant
 
2006 and April 30, 2007
 
$1.25
 
3,471,226
 
3,471,226
$1.63 Unit warrant
 
2006 and April 30, 2007
 
$1.63
 
3,471,226
 
3,471,226
Total common stock warrants outstanding
     
23,634,205
 
23,634,205

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
11

LIGHTSPACE CORPORATION and SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2008


11. STOCK WARRANTS (continued)

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 stock issuable upon exercise of the unit warrants, included in the units issued in the private placement to investors and the financial advisor.

At March 31, 2008 and December 31, 2007, the weighted average exercise price of the common stock warrants outstanding was $1.24 and $1.24, respectively. At March 31, 2008, the common stock warrants had an average remaining life of approximately four years.
 
12. 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 December 31, 2007, we had operating loss carryforwards of approximately $7,299,000 available to offset future taxable income for United States federal and state income tax purposes. At December 31, 2007, approximately $4,231,000 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.

The deferred tax asset related to the operating loss carryforwards, tax credits and other items deductible against future taxable income was $3,314,458 at December 31, 2007. The Company has provided a valuation allowance at those dates equal to the full amount of the deferred tax asset, and will continue to fully reserve the deferred tax asset until it can be ascertained that all or a portion of the asset will be realized.

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 March 31, 2008 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.

13. COMMITMENTS AND CONTINGENCIES
 
Effective May 1, 2006, the Company 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 a defined base year operating costs.

The Company leases its facilities and certain equipment under non-cancelable operating leases expiring through May 2011. Rent expense was $316,424, $364,875, and $329,754 for the years ended December 31, 2007, 2006 and 2005, respectively.
12

LIGHTSPACE CORPORATION and SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2008


13. COMMITMENTS AND CONTINGENCIES (continued)

On March 31, 2008, we have approximately $1,073,000 in purchase order commitments to our vendors. The majority of this is to our tile supplier for the purchase of our interactive tiles.

The table below sets forth our known contractual obligations as of March 31, 2008

Contractual Obligation
 
Payments Due by Period
 
   
Total
 
1 Year
 
2-3 Years
 
4-5 Years
 
Thereafter
 
Facility lease
 
$
1,055,770
 
$
319,458
 
$
679,433
 
$
56,879
   
-
 
Purchase orders
 
$
1,073,038
 
$
1,073,038
                   
Other leases
   
7,862
   
3,931
   
3,931
   
-
   
-
 
Total
 
$
2,136,670
 
$
1,396,427
 
$
683,364
 
$
56,879
   
-
 
 
14. 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 March 31,
 
   
2008
 
2007
 
           
United States
 
$
242,813
 
$
220,959
 
Europe
   
467,054
   
26,000
 
Asia/Africa/Australia
   
-
   
24,500
 
South America
   
175,619
   
42,000
 
Canada
   
74,235
   
20,500
 
Total
 
$
959,721
 
$
333,959
 
 

13

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, 2007. 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.
 
Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to reports filed or furnished pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), are available free of charge at an Internet website maintained by the Securities and Exchange Commission (the “SEC”) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC at http://www.sec.gov ; and on our website at http://www.Lightspacecorp.com as soon as reasonably practicable after such reports are filed with the Securities and Exchange Commission. The information posted on our web site is not incorporated into this Quarterly Report.

You may read and copy any materials that we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549, on official business days during the hours of 10:00 a.m. to 3:00 p.m. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The Annual Report and our other public reports may also be obtained without charge upon written request to Lightspace Corporation, 529 Main Street, Suite 330, Boston, Massachusetts 02129, Attention, Investor Relations.

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.

Results of Operations for the Three and Nine Months Ended March 31, 2008 and 200 6

Revenue and Operating Results
 
For the three months ended March 31, 2008, revenue was $959,721, an increase of $625,762 or approximately 187% from revenue of $333,959 recorded in the three months ended March 31, 2007. The net loss for the three months ended March 31, 2008 was $659,500, as compared to a net loss for the three months ended March 31, 2007 of $732,490.

The revenue for the three months ended March 31, 2008 was comprised of revenue from the sale of products, $868,518, and other revenue of $91,203, as represented by deferred maintenance revenue, sales of miscellaneous parts and other services. In the three months ended March 31, 2008, there were six Lightspace Dance/Design new installation sites and eight Lightspace Play new installation sites, representing 1,856 interactive tiles. For the three months ended March 31, 2008, sales of Lightspace products were made to customers in the United States - $242,813; South America - $175,619; Europe - $467,054 and Canada - $74,235. During this period, two Lightspace customers comprised more than 10% of revenues individually with the top customer accounting for approximately 49% or $451,059. Sales to these two customers aggregated $550,502 or approximately 60% of total revenue.
 
The revenue for the three months ended March 31, 2007 was comprised of revenue from the sale of products, $316,534, and other revenue of $17,425, as represented by deferred maintenance revenue, sales of miscellaneous parts and other services. In the three months ended March 31, 2007, there was one Lightspace Dance/Design new installation sites and 12 Lightspace Play new installation sites, representing 509 interactive tiles. For the three months ended March 31, 2007, sales of Lightspace products were made to customers in United States - $220,959; South America - $42,000; Canada - $20,500; Asia/Africa - $24,500 and Europe - $26,000. During this period, three Lightspace customers comprised more than 10% of revenues. Sales to these customers aggregated $126,334 in the 2007 three-month period.

Our product backlog at March 31, 2008 was $56,485, representing 111 interactive tiles. We expect that this backlog will be shipped and installed in the June 2008 quarter. Product backlog at March 31, 2007 was $163,200, representing 261 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 March 31, 2008 and 2007, we recorded gross margins of $286,133, or approximately 30%, and $62,694 or approximately 19%, 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.

Inflation

In the opinion of management, inflation has not had a material impact on our operations.
 
Operating Expenses
 
Research and development spending for the three months ended March 31, 2008 and March 31, 2007 respectively were $351,119 and $250,048, an increase of $101,071 or approximately 40%. Research and development spending for 2008 will focus 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 $299,022 for the three months ended March 31, 2008 as compared to $300,943 for the three months ended March 31, 2007, a decrease of $1,921, or approximately 1%.

General and administrative expenses were $267,941 for the three months ended March 31, 2008 as compared to $232,343 for the three months ended March 31, 2007, an increase of $35,598, or 15%. This is primarily due to an increase of $60,309 in stock option compensation expense offset by reductions in other administrative expenses.

Interest Expense
 
Net interest expense was $27,551 for the three months ended March 31, 2008 as compared to $11,850 for the three months ended March 31, 2007, an increase of $15,701, or 133%. This can be primarily attributed the three month interest of $11,875 on the $950,000 loan resulting from the April 2007 purchase of the emagipix technology, an interactive lighting technology that uses electroluminescent sheets, from Illumination Design Works, Inc.

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 December 31, 2007, we had operating loss carryforwards of approximately $7,299,000 available to offset future taxable income for United States federal and state income tax purposes. At December 31, 2007, approximately $4,231,000 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.

The deferred tax asset related to the operating loss carryforwards, tax credits and other items deductible against future taxable income was $3,314,458 at December 31, 2007. The Company has provided a valuation allowance at those dates equal to the full amount of the deferred tax asset, and will continue to fully reserve the deferred tax asset until it can be ascertained that all or a portion of the asset will be realized.

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 March 31, 2008 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.

Net Loss

The net loss for the three months ended March 31, 2008 was $659,500 as compared to a net loss of $732,490 in the three months ended March 31, 2007. Impacting the three months ended March 31, 2008 was an increased focus on cost reduction and rationalization of our existing resources.

Liquidity, Capital Resources and Cash Flow

We have incurred net operating losses and negative operating cash flows since inception. As of March 31, 2008, we had an accumulated retained earnings deficit of $15,771,693. We have funded our operations through March 31, 2008 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. Additionally, a t March 31, 2008, the company’s cash balance was $28,693. These factors, among others, indicate that there is substantial uncertainty that we will continue as a going concern.

16
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..

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 March 31, 2008 and December 31, 2007 was $56,485 and $96,280, respectively.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements other than normal lease arrangements.

At March 31, 2008, we leased our office and manufacturing space and certain office equipment. Total rent expense for the three months ended March 31, 2008 and 2007 was $78,247 and $80,360 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 March 31, 2008

 
Payments Due by Period
 
   
Total
 
1 Year
 
2-3 Years
 
4-5 Years
 
Thereafter
 
Facility lease
 
$
1,055,770
 
$
319,458
 
$
679,433
 
$
56,879
   
-
 
Purchase orders
 
$
1,073,038
 
$
1,073,038
                   
Other leases
   
7,862
   
3,931
   
3,931
   
-
   
-
 
Total
 
$
2,136,670
 
$
1,396,427
 
$
683,364
 
$
56,879
   
-
 
 
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
The Company recognizes revenue from the sale of its 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) the Company’s products have been delivered and risk of loss has passed to the customer; (3) the Company has completed all of the necessary terms of the contract generally including but not limited to, installation of the product and training; (4) the amount of revenue to which the Company is entitled is fixed or determinable; and (5) the Company believes it is probable that it 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, the Company defers 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 the opinion of the Company, it is probable that the amount due to the Company will not be collected.
17

Inventory
Inventories are stated at the lower of cost or market value.

Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires the Company to make estimates and assumptions that affect at the date of the financial statements the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities and the reported amounts of revenue and expenses. Actual results could differ from these estimates.

Property and Equipment
Property and equipment are recorded at cost. For financial reporting, depreciation is provided utilizing the straight-line method over the estimated three-year life for equipment and furniture and fixtures. Leasehold improvements are depreciated over the term of the lease. The Company utilizes accelerated methods of depreciation for tax reporting.

Freight Costs
Incoming freight costs are capitalized with inventory cost. Outgoing freight is primarily billed back to customers and included in revenue and the corresponding costs in cost of sales.

Warranty Reserve
The Company’s products are warranted against manufacturing 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 the Company’s estimate of repair costs.

Advertising Expenditures
Advertising costs are expensed as incurred and are included in sales and marketing operating expenses.

Research and Development
Research and development costs are expensed as incurred.

Patent Expenditures
The legal expenses and filing fees associated with the prosecution of patent applications are expensed as incurred.

Income Taxes
Deferred tax assets and liabilities relate to temporary differences between the financial reporting bases and the tax bases of assets and liabilities, the carryforward tax losses and available tax credits. Such assets and liabilities are measured using enacted tax rates and laws expected to be in effect at the time of their reversal or utilization. Valuation allowances are established, when necessary, to reduce the net deferred tax asset to an amount more likely than not to be realized. For interim reporting periods, the Company uses the estimated annual effective tax rate.

Loss per Share
Basic and diluted net losses 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 convertible debt, convertible preferred stock, stock options, and stock warrants.

18
Stock-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 the Company 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 future value of the equity security at the date of acquisition exceeds the exercise price to be paid. The resulting compensation expense, if any, is recognized for financial reporting over the term of vesting or performance. This statement was first effective for the Company 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 the Company’s compensation costs recognized in operations from historical levels for all stock-based compensation awards and modifications of prior awards granted.

For all periods prior to January 1, 2006, the Company 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, is recognized for financial reporting over the term of vesting or performance. The Company has historically granted stock-based compensation awards to employees and directors at an exercise price equal to the current market value of the Company’s 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 directors, officers and employees for grants prior to January 1, 2006.

Stock-based compensation arrangements with nonemployees or associated with borrowing arrangements are accounted for utilizing the fair value method or, if a more reliable measurement, the value of the services or consideration received. The resulting compensation expense, if any, is recognized for financial reporting over the term of performance or borrowing arrangement.

Consolidation
The Company’s 2007 consolidated financial statements include the accounts of Lightspace Corporation and its subsidiary, Lightspace Emagipix Corporation (LEC), which was established in April 2007. All significant inter-company accounts and transactions have been eliminated in consolidation.

Fair Value of Financial Instruments
The carrying amounts of the Company’s financial instruments, which include cash equivalents, accounts receivable, accounts payable, accrued expenses and notes payable approximate their fair values due to the short term nature of the instruments.

Concentration of Credit Risk
Financial instruments that potentially subject the Company to significant concentration of credit risk consist primarily of cash and cash equivalents. The Company’s cash and cash equivalents are generally on deposit at one financial institution and, at times, exceed the federal insured limits. The Company believes that the financial institution is of high credit quality and that the Company is not subject to unusual credit risk beyond the normal credit risk associated with commercial banking relationships.

Comprehensive Loss
Comprehensive loss is the same as net loss for all periods presented.
19

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Market risk represents the risk of loss arising from adverse changes in interest rates and foreign exchange rates. We do not have any material exposure to interest rate risk. All of our products and services are denominated in U.S. dollars, as a result of which we are not exposed to foreign currency risk with respect to our accounts receivable. All materials and components that we buy for the manufacturing of our products are also priced in U.S. dollars. We also did not have any operations outside the United States. Accordingly, we do not have any material foreign currency risk at this time.

Item 4. Controls and Procedures
 
(a) Evaluation of disclosure controls and procedures.
 
We conducted an evaluation, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. Based on this evaluation, we concluded that our disclosure controls and procedures are effective, as of the end of the period covered by this report, to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms, and that the information is accumulated and communicated to our management, including our Chief Executive Officer, as appropriate to allow timely decisions regarding required disclosure.

On April 16, 2008, Louis Nunes, our Chief Financial Officer was released as a Lightspace employee. Accordingly, our Chief Executive Officer is serving as both the Company’s principal executive officer and principal financial officer.
 
(b) Changes in internal control over financial reporting.

There have been no changes in our internal control over financial reporting in connection with the evaluation required under paragraph (d) of Rule 13a-15 of the Exchange Act that occurred during the quarter ended March 31, 2008 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting, other than the departure of Louis Nunes as our Chief Financial Officer and the assumption of the duties of Chief Financial Officer by Gary Florindo, our Chief Executive Officer. As a result of Mr. Florindo assuming such duties while also serving as our Chief Executive Officer and our lack of financial and accounting resources, the Company's internal control over financial reporting may be reasonably likely materially affected. 
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PART II - OTHER INFORMATION

Item 1. Legal Proceedings

In October 2007, we were served notice of a wrongful termination claim against us by a former employee. The former employee is seeking damages in the amount of lost compensation. We believe there is no merit to the lawsuit and intend to defend against it. A contingency accrual for the potential litigation was established in the June 2007 quarter. Given our current cash balance, any significant judgment against us could have severe financial implications.

In March 2008, we received a letter from a vendor claiming breach of contract and non-payment of bills due. As of March 28, 2008 approximately $76,000 was owed to this vendor, and this amount was not in dispute. Additionally, the vendor claimed to have purchased approximately $36,000 in materials on our behalf which as of March 28, 2007, had not been invoiced to the Company. On March 28, 2007, the case was settled and we agreed to the payment of the $76,000 to be made by March 31, 2008. The additional $36,000 allegedly owed was settled for approximately $28,000 to be paid within 90 days. On March 28, 2007, the Company obtained short term loans due April 28, 2008 for $70,000 from a shareholder and ex-directors, the proceeds of which are to be used in payment of the $76,000.

During the normal course of business, we may at times be involved in disputes and/or litigation with respect to our products, operations or employees. We are not currently involved in any other significant litigation.

Item 1A. Risk Factors

There have been no material changes from the risk factors set forth on the Company’s Annual Report on Form 10K for the year ended December 31, 2007 filed with the Securities and Exchange Commission on March 26, 2007. Management urges you to consider the risks and uncertainties described in “Risk Factors” in this Annual Report on Form 10-K for the year ended December 31, 2007.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None

Item 3. Defaults upon Senior Securities

None

Item 4. Submission of Matters to a Vote of Security Holders

None
 
Item 5. Other Information

On April 16, 2008, Louis Nunes, our Chief Financial Officer was released as a Lightspace employee. There were no disagreements between Mr. Nunes and the Company and his release was not based on his performance. Mr. Nunes has agreed to provide financial and accounting services to the Company on an outsourced basis.
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Item 6. Exhibits

The following is a complete list of exhibits filed with the Form 10-Q.

     
Description
31.1
 
*
 
Certification Pursuant to Section 302 of Sarbanes-Oxley Act of 2002 - Gary Florindo
32.1
 
*
 
Certification Pursuant to Section 906 of Sarbanes-Oxley Act of 2002 - Gary Florindo
         
* Filed herewith
   

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SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
     
 
LIGHTSPACE CORPORATION
 
  		 
  		 
 
Date: May 14, 2008 By:   /s/ GARY FLORINDO
 
Gary Florindo
President, Chief Executive Officer and
Chief Financial Officer

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