Quarterly report for period ended 9-30-2003

10QSB 1 lsgc10qsb093003.htm QUARTERLY REPORT FOR PERIOD ENDED 9-30-2003 Quarterly report for period ended 9-30-2003

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-QSB

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2003

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OFTHE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ____________ to ____________

Lighting Science Group Corporation

(Exact name of small business issuer as specified in its charter)

Delaware	0-20354	23-2596710
(State or other jurisdiction of incorporation of organization)	(Commission file number)	(I.R.S. Employer Identification No.)

2100 McKinney Ave., Suite 1555, Dallas, Texas	75201
(Address of principal executive offices)	(Zip Code)

214-382-3630

(Issuer’s telephone number, including area code)

The Phoenix Group Corporation

801 E. Campbell Rd., Suite 450, Richardson, Texas 75081

(Former name, former address and former fiscal year, if changed since last report)

Check whether the Issuer: (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act during the preceding 12 months (or for such shorter periods that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

____YES __X_ NO

As of January 18, 2005, there were 51,297,256 shares of Common Stock issued and outstanding and 533,333 shares of Series A Senior Convertible Preferred Stock issued and outstanding.

Transitional Small Business Disclosure Format: ____YES __X__ NO

LIGHTING SCIENCE GROUP CORPORATION AND SUBSIDIARIES

FORM 10-QSB

For the Quarter Ended September 30, 2003

TABLE OF CONTENTS

Part I. FINANCIAL INFORMATION

Item 1. Financial Statements

Consolidated Balance Sheet September 25, 2003
Consolidated Statements of Operations

for the period beginning July 1, 2003 and ended September 25, 2003

for the period beginning January 1, 2003 and ended September 25, 2003

for the three months ended September 30, 2002

for the nine months ended September 30, 2002

Consolidated Statements of Cash Flows

for period beginning January 1, 2003 and ended September 25, 2003
for the nine months ended September 30, 2002

Notes to Consolidated Financial Statements

Item 2. Management's Discussion and Analysis or Plan of Operation

Item 3. Controls and Procedures

Part II. OTHER INFORMATION

Item 1. Legal Proceedings

Item 2. Changes in Securities

Item 3. Defaults upon Senior Securities

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

Item 5. Other Information

Item 6. Exhibits and Reports on Form 8-K

Signatures

LIGHTING SCIENCE GROUP CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET SEPTEMBER 25, 2003
ASSETS
CURRENT ASSETS
Cash	$	278

OTHER ASSETS
Reorganized value in excess of amounts allocable to identifiable assets		2,793,224

TOTAL ASSETS	$	2,793,502

LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accrued interest payable, Match, Inc.	$	674,703
Note payable, Match, Inc.		1,851,299
Total current liabilities		2,526,002

STOCKHOLDERS' EQUITY
Series A Preferred Stock, $.001 par value, 5,000,000 shares authorized, 533,333 shares issued and outstanding (Note 6)		533
Common stock, $.001 par value, 500,000,000 shares authorized, 266,967,134 shares issued and outstanding		266,967

TOTAL STOCKHOLDERS' EQUITY		267,500
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	2,793,502


The accompanying notes are an integral part of the consolidated financial statements.

LIGHTING SCIENCE GROUP CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE PERIODS BEGINNING JULY 1, 2003 AND JANUARY 1, 2003 AND ENDED SEPTEMBER 25, 2003* AND FOR THE THREE AND NINE MONTHS ENDED SEPTMBER 30, 2002
		2003						2002
		Three Months Ended Sep. 25, 2003			Nine Months Ended Sep. 25, 2003			Three Months Ended Sep. 30, 2002			Nine Months Ended Sep. 30, 2002
Revenue	$	719,232		$	3,524,732		$	1,309,507		$	3,464,338

Operating expenses, selling and general & administrative		(997,285	)		(3,973,376	)		(2,029,503	)		(5,911,858	)

Operating loss		(278,053	)		(448,644	)		(719,996	)		(2,447,520	)

Interest expense		(263,310	)		(842,613	)		(335,125	)		(903,492	)

Net loss	$	(541,363	)	$	(1,291,257	)	$	(1,055,121	)	$	(3,351,012	)

Basic net loss per weighted average common share		(0.064	)		(0.155	)		(0.128	)		(0.495	)

Weighted average number of common shares outstanding		8,408,246			8,335,961			8,272,005			6,775,456
The accompanying notes are an integral part of the consolidated financial statements.
* As explained in Note 8, the Company adopted Fresh Start accounting effective September 26, 2003. As a result, the financial statements for the third quarter cover the period beginning July 1, 2003 and ended September 25, 2003. For comparative purposes, the statements reflect the activity for the full period (both three months and nine months) for the year 2002.

LIGHTING SCIENCE GROUP CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE PERIOD BEGINNING JANUARY 1, 2003 AND ENDED SEPTEMBER 25, 2003* AND THE NINE MONTHS ENDED SEPTEMBER 30, 2002
		September 25, 2003			September 30, 2002
OPERATING ACTIVITIES
Net loss	$	(1,291,257	)	$	(3,351,012	)
Adjustments to reconcile net loss to net cash provided by (used by) operating activities:
Expenses paid by issuance of common stock					1,155,097
Recognition of prior period expense					(34,188	)
Reclassification of prior period activity to current period expense					19,634
Adjustments to Goodwill					14,188
Depreciation and amortization		8,335			37,547
Changes in:
Accounts receivable		454,912			(320,731	)
Prepaids and other current assets		(3,393	)		247,017
Inventory		6,693			23,830
Accounts payable		132,578			66,381
Organization costs					(161	)
Intangible assets					454,866
Accrued expenses and other liabilities		1,015,810			1,215,901
Security deposits		(3,159	)		(2,115	)
Unearned revenue					(78,948	)
Net cash provided by (used by) operating activities		320,519			(552,694	)

INVESTING ACTIVITIES
Acquisition of subsidiaries **					(10,000,000	)
Cash on hand in subsidiaries at foreclosure		(130,171	)
Purchase of property and equipment		(19,433	)		(22,134	)
Net cash used by investing activities		(149,604	)		(10,022,134	)

FINANCING ACTIVITIES
Notes payable		(122,338	)		10,599,856
Net cash provided by (used by) financing activities		(122,338	)		10,599,856

Net increase in cash		48,577			25,028
Cash at beginning of period		(48,299	)		622
Cash at end of period	$	278		$	25,650


The accompanying notes are an integral part of the consolidated financial statements.
* As explained In Note 8, the Company adopted Fresh Start accounting effective September 26, 2003. As a result, the Consolidated Statement of Cash Flows for this report covers the period beginning January 1, 2003 and ended September 26, 2003. For comparative purposes, the Consolidateed Statement of Cash Flows for the nine months ended September 30, 2002 is shown above.
** During the second quarter of 2002, the Company acquired two subsidiaries using a combination of notes and common stock. The notes were given by the Companay as a portion of the consideration in each acquistion. No cash was conveyed with respect to the acquisitions.

LIGHTING SCIENCE GROUP CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 1: NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of the Business

On December 23, 2004, The Phoenix Group Corporation published a press release announcing its decision to change its name to Lighting Science Group Corporation (the “Company” or “Lighting Science”) by means of a parent/subsidiary merger with its wholly owned subsidiary, Lighting Science, Inc. Pursuant to a resolution approved by the board of directors, The Phoenix Group Corporation filed a certificate of merger with the office of the Secretary of State of Delaware on December 23, 2004 to complete the merger of Lighting Science with and into The Phoenix Group Corporation and to change the name. The Company began conducting its operations under the name Lighting Science Group Corporation on January 1, 2005. However, as of the date of this report, the common stock of the Company continues to trade under the name “The Phoenix Group Corporation,” and the ticker symbol continues to be “PXGC.” The Company has applied with NASDAQ for a change of name and a change to its ticker symbol. The Company expects this change to be made within the first quarter of 2005. A press release will be issued by the Company announcing the effective date of the change with respect to the trading of its common stock.

Lighting Science is a Delaware Corporation organized in June 1988. The Company’s wholly owned subsidiaries during the periods presented were Lifeline Management Group, Inc., Lifeline Home Health Services, Inc., Lifeline Managed Home Care, Inc., and Americare Management, Inc. All intercompany accounts and transactions have been eliminated in the accompanying consolidated financial statements.

Except for a period spanning the years 2000 and 2001, Lighting Science has been predominately engaged in providing healthcare management and ancillary services to the long-term care industry. On or about August 20, 2002, the Company filed a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the District of Delaware. The case was subsequently transferred to the U.S. Bankruptcy Court for the Northern District of Texas - Ft. Worth Division (“the Court”). The filing was made necessary by the actions of a creditor of the Company seeking to foreclose on a judgment obtained several years earlier. The Company lacked sufficient liquidity to satisfy the judgment and sought protection as a debtor-in-possession. The Court granted the requested status.

On or about March 7, 2003, Lifeline Managed Home Care, Inc. (“LMHC”) filed for protection from creditors under Chapter 11 of the United States Bankruptcy Code. This action was necessitated by the actions of a creditor of LHHS that was claiming a security interest in the assets of LMHC. After hearing arguments by the creditor and LMHC, the Court ruled that the assets of LMHC were not subject to the security interest that the creditor held with respect to the LHHS assets.

Summary of Significant Accounting Policies

Consolidation

The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions and select accounting policies that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

The most critical estimates relate to revenue recognition, the collectibility of accounts receivable and related reserves, the cost of claims incurred but not reported, obligations under workers compensation, professional liability and employee health and welfare insurance programs and Medicare settlement issues.

A description of the critical and other significant accounting policies and a discussion of the significant estimates and judgments associated with such policies are described below.

Revenue Recognition

Under fee-for-service agreements with patients and commercial and certain government payors, net revenues are recorded based on net realizable amounts to be received in the period in which the services and products are provided or delivered. Fee-for-service contracts with commercial payors are traditionally one year in term and renewable automatically on an annual basis, unless terminated by either party.

Under the Prospective Payment System ("PPS") for Medicare reimbursement, net revenues are recorded based on a reimbursement rate which varies based on the severity of the patient's condition, service needs and certain other factors; revenue is recognized ratably over the period in which services are provided. Revenue is subject to adjustment during this period if there are significant changes in the patient's condition during the treatment period or if the patient is discharged but readmitted to another agency within the same 60-day episodic period. Medicare billings under PPS are initially recognized as deferred revenue and are subsequently amortized into revenue over an average patient treatment period on a daily basis. The process for recognizing revenue under the Medicare program is based on certain assumptions and judgments, including the average length of time of each treatment as compared to a standard 60-day episode, the appropriateness of the clinical assessment of each patient at the time of certification, and the level of adjustments to the fixed reimbursement rate relating to patients who receive a limited number of visits, have significant changes in condition or are subject to certain other factors during the episode. Revenue adjustments result from differences between estimated and actual reimbursement amounts, an inability to obtain appropriate billing documentation or authorizations acceptable to the payor and other reasons unrelated to credit risk. Revenue adjustments are deducted from gross accounts receivable. These revenue adjustments are based on significant assumptions and judgments, which are determined by Company management based on historical trends. Third party settlements resulting in recoveries are recognized as net revenues in the period in which the funds are received.

Collectibility of Accounts Receivable

The process for estimating the ultimate collection of receivables, particularly with respect to fee-for-service arrangements, involves significant assumptions and judgments. Historical collection and payor reimbursement experience is an integral part of the estimation process related to determining the allowance for doubtful accounts. In addition, the Company assesses the current state of its billing functions in order to identify any known collection or reimbursement issues to determine the impact, if any, on its reserve estimates, which involve judgment. Revisions in reserve estimates are recorded as an adjustment to the provision for doubtful accounts that is reflected in selling, general and administrative expenses in the consolidated statements of operations.

Medicare Settlement Issues

Prior to October 1, 2000, reimbursement of Medicare home care nursing services was based on reasonable, allowable costs incurred in providing services to eligible beneficiaries subject to both per visit and per beneficiary limits in accordance with the Interim Payment System established through the Balanced Budget Act of 1997. These costs were reported in annual cost reports, which were filed with the Centers for Medicare and Medicaid Services ("CMS") and were subject to audit and adjustment by the fiscal intermediary engaged by CMS.

Cash and cash equivalents

The Company considers all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents.

The Company maintains cash in bank accounts. From time to time the balances in these accounts may exceed federally insured limits. The Company has not experienced any losses from maintaining cash accounts in excess of federally insured limits. Management believes that the Company does not have significant credit risk related to its cash accounts.

Income taxes

The Company employs the asset and liability method in accounting for income taxes pursuant to Statement of Financial Accounting Standards (SFAS) No. 109 "Accounting for Income Taxes." Under this method, deferred tax assets and liabilities are determined based on temporary differences between the financial reporting and tax bases of assets and liabilities and net operating loss carry forwards, and are measured using enacted tax rates and laws that are expected to be in effect when the differences are reversed.

Earnings per share

Basic earnings per share are computed based upon the weighted average number of common shares outstanding during the period.

Diluted earnings per share is based upon the weighted average number of common shares outstanding during the period plus the number of incremental shares of common stock contingently issuable upon the conversion of the Series A preferred stock. No effect has been given to the assumed conversion of preferred stock (Note 6) because the effect would be antidilutive.

During the quarter ended September 30, 2004, the shareholders of the Company approved a proposal by management to undertake a reverse split of the shares of the Company’s common stock in the ratio of one share of new common stock for every 16 shares of old common stock. All per-share amounts in this report have been adjusted for the reverse split of the Company’s shares. All other references in this report to shares of the Company’s stock have been adjusted to a post reverse-split basis unless otherwise noted.

NOTE 2: GOING CONCERN

For the approximate nine-month period ended September 25, 2003, the Company reported a net loss from continuing operations of $1,291,000. Of this amount, $375,000 (including interest expense of $73,000) of the loss is attributable to the operations of the health care subsidiaries, while $916,000 of the loss is attributable to the operations of the parent company. Of the parent company loss, $772,000 is attributable to interest expense, and $144,000 is attributable to rent expense.

During the bankruptcy proceedings discussed in Note 1, the Company continued to operate its core health care businesses, but the negative connotations associated with a bankruptcy were adversely affecting the level of new patients that the operating companies were able to obtain. Given this impediment, it began to appear unlikely that the Company would be able to achieve profitability during the bankruptcy proceedings. Likewise, given the lack of capital available to the Company at that time, it was proving to be impossible to acquire or establish a new business base.

On or about September 15, 2003, the Company had a working capital deficit of $28.6 million. In light of the Company’s then current financial position, the ongoing expenses associated with three bankruptcy cases, its inability to independently meet its short-term corporate obligations, its need to further capitalize existing operations, and its dependency on revenue growth to support continuing operations, the Company closed its home health care operations during September 2003. As a result of having no operations at the subsidiary level or within the parent itself, as of the foregoing date, the Company essentially reentered the development stage. Management of the Company began devoting most of its efforts to evaluating potential acquisitions of operating businesses.

As described in further detail in Note 8, on June 1, 2004 the Company acquired 100% of the outstanding common stock of Lighting Science, Inc. (“Lighting Science”), a Las Vegas, Nevada-based corporation, which owned certain intellectual property related to the design and development of a light bulb utilizing light emitting diodes as a source of light. Following the date of acquisition, the Company raised capital through a private placement and provided Lighting Science with resources to develop and manufacture prototype light bulbs. Staff has been added to support the development process. As of the date of this report, the Company continues with its plans to develop and sell products based upon the technology acquired in the acquisition of Lighting Science.

Management of the Company believes that its current and projected operating capital position is sufficient to sustain its operations for the next twelve months ending December 31, 2005.

NOTE 3: FAIR VALUE OF FINANCIAL INSTRUMENTS

Statement of Financial Accounting Standards No. 107, “Disclosures About Fair Value of Financial Instruments,” requires that the Company disclose estimated fair values of financial instruments.

Cash and cash equivalents, notes and accounts payable, accrued expenses and other current liabilities are carried at amounts that approximate their fair values because of the short-term nature of these instruments.

NOTE 4: INCOME TAXES

The Company accounts for corporate income taxes in accordance with Statement of Financial Accounting Standards (SFAS) No. 109. Under SFAS No. 109, deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. In addition, future tax benefits, such as those from net operating loss carry-forwards, are recognized to the extent that realization of such benefits is more likely than not. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the period that includes the enactment date. Other than the deferred tax asset relating to the Company’s net operating losses, which totaled approximately $19,400,000 at September 25, 2003 and which has been fully offset by a valuation allowance, the Company does not have any other significant deferred tax assets or liabilities.

The net operating loss carry-forwards are available to offset future taxable income of the Company. These net operating losses expire from 2008 through 2018 and are subject to annual limitations.

NOTE 5: NOTES PAYABLE - RELATED PARTIES

As of September 25, 2003, Notes Payable - Related Parties totaled $1,851,299. This amount is payable to Match, Inc., (“Match”) which is owned by a revocable trust that is itself controlled by the Company’s chairman and chief executive officer. The note consists of a line of credit up to a maximum of $2,000,000, bears interest at prime rate plus 1% (5.25% at September 25, 2003) and interest on unpaid interest at prime rate plus 2%, is due on demand, and is unsecured. As of the ending date of the period covered by this report, no interest payments had been made. The accrued interest of $674,703 reflected on the accompanying consolidated balance sheet is owed to Match.

On October 20, 2004, the Company made a payment of $30,000 to Match in partial payment of the outstanding balance of accrued but unpaid interest on the note. On November 17, 2004, the Company reduced by $500,000 the amount that it owed to Match with respect to accrued but unpaid interest on the note. In lieu of disbursing cash in payment of the interest expense, the Company issued stock to the Ronald E. Lusk Revocable Trust (“the Trust”) the owner of Match, Inc. Mr. Lusk is the chairman of the Company and the settlor of the Trust. The Trust had contemporaneously subscribed to purchase $500,000 of stock under the terms of the private placement transaction discussed in Note 8.

NOTE 6: PREFERRED STOCK

On July 25, 1994, the Company sold 533,333 shares of 8% cumulative Series A Senior Convertible Preferred Stock, including voting rights, cumulative dividends at $0.30 per annum for each share and conversion rights to common stock at the conversion price of $3.75 per share before reduction by an anti-dilution provision for certain shares of common stock issued by the Company. At September 25, 2003, the 533,333 shares of Series A Senior Convertible Preferred Stock were convertible into 1,947,565 shares of common stock. At September 25, 2003, dividends in arrears but not declared by the Company on the 8% Cumulative Series A Senior Convertible Preferred Stock totaled $1,438,137. The liquidation preference of each Senior Preferred Convertible share is $3.75 per share plus the undeclared dividends, which totals $3,438,137 at September 25, 2003. This issue of preferred stock is owned by Match.

NOTE 7: COMMITMENTS AND CONTINGENCIES

Leased office space

During the periods covered by this report, the Company leased office space in Richardson, Texas for its headquarters operation and for one of its three locations for its home health care operations. The two home health care subsidiaries were leasing additional office space in Ft. Worth, Texas and in Eastland, Texas. During the quarter ended September 30, 2003, the Company accrued rental expense on the portion of the premises in Richardson, Texas occupied by the parent company. Prior to the commencement of bankruptcy proceedings by the parent, common stock of the Company had been issued to the landlord in lieu of rent. It was contemplated that stock of the Company would be issued in payment for the rental expense accrued during the period that the Company was in bankruptcy. During the quarter, the Company was advised by counsel not to issue stock of the Company until the completion of the bankruptcy proceedings. Common stock of the Company was subsequently issued in September 2003 to the landlord in payment of the rental expense accrued during the periods covered by this report.

On November 13, 2004 the Company moved its offices from Richardson, Texas to Dallas, Texas where it occupies excess office space that is leased by an institutional shareholder of the Company. The shareholder allows the Company to occupy the space on a rent-free basis. The Company leases office space in Ft. Lauderdale, Florida for its research and development activities on a month-to-month basis at a rate of $4,200 per month. The Company also leases space in Hong Kong on a month-to-month basis at the rate of approximately $250 per month.

Executive Compensation

As of September 25, 2003, the Company was obligated under the terms of employment contracts for four of its executive officers. The terms of the contracts generally range from between one and three years, and provided for annual salaries ranging from between $100,000 and $250,000. In addition, these employment contracts provided for the payment of all or a portion of the executives’ base salary compensation in the form of common stock of the Company. The total annual compensation for the Company’s executive officers was approximately $800,000 during the periods covered by the report. No deferred compensation was owed to officers as of September 25, 2003.

NOTE 8: SUBSEQUENT EVENTS

During the summer of 2003, the Company filed a Disclosure Statement and Plan of Reorganization for the parent company only (collectively “the Plan”) that was confirmed by the Court on September 16, 2003 with an effective date of September 26, 2003. Under the terms of the Plan, the creditors of the Company received a total of approximately 51% of the common stock of the restructured entity in exchange for notes, accounts payable, and other forms of debt held at the time of the filing of the petition. This feature of the Plan - the exchange of debt for greater than 50% of the deficiency in the restructured entity - qualifies the Company to utilize the reporting guidelines of the “Fresh Start” accounting rules contained in Statement of Position (“SOP”) 90-7.

As the result of actions by certain competitors, LHHS suffered considerable attrition in its professional nursing staff and its administrative staff during the latter part of the summer of 2003. On September 15, 2003, LHHS made the decision that it was in the best interest of its patients to cease operations and to discharge its patients to other home health care agencies. LHHS subsequently requested that the Chapter 11 bankruptcy case be converted to a proceeding under Chapter 7. The remaining assets of LHHS were liquidated by a United States Trustee under the supervision of the Court.

Concurrent with the closing of the operations of LHHS, LHMC was also forced to cease its operations because the two companies shared office space, employees, and other resources. On or about September 15, 2003, LMHC withdrew its Chapter 11 petition. The primary creditor of Lifeline Management Group, Inc. (the parent of LHHS and LMHC) was Match, Inc. (“Match”), which is a related party to the chairman of the Company, Ronald E. Lusk. Match foreclosed upon the stock of Lifeline Management Group, Inc. on or about September 15, 2003.

Thus, as of the effective date of the plan of reorganization (September 26, 2003) for The Phoenix Group Corporation (the predecessor to Lighting Science Group Corporation), the Company was left with one subsidiary, Americare Management, Inc., which had no assets and no operations. As a result of having no operations at the subsidiary level or within the parent itself, as of the foregoing date, the Company essentially reentered the development stage. Management of the Company began devoting most of its efforts to evaluating potential acquisitions of operating businesses.

On June 1, 2004, the Company acquired 100% of the outstanding common stock of Lighting Science, Inc. (“Lighting Science”), a Las Vegas, Nevada-based corporation, which owns certain intellectual property related to the design and development of a light bulb utilizing light emitting diodes as a source of light. The Company acquired all of the issued and outstanding capital stock of Lighting Science from Phibian S Trust, Edward I. Lanier, and John Collingwood in exchange for 4,796,275 shares of the Company’s common stock and the Company’s obligation to issue up to an additional 4,499,966 shares of the Company’s common stock upon the satisfaction of certain conditions under the stock purchase agreement. The Company accounted for the acquisition as a purchase using the accounting standards established in Statements of Financial Accounting Standards No. 141, Business Combinations, and No. 142, Goodwill and Other Intangible Assets.

By September, 2004, the Company had satisfied the remaining terms of the stock purchase agreement, and the additional shares were issued to the sellers. On October 6, 2004, Lighting Science announced the introduction of ODL^TM (Optimized Digital Lighting^TM) light bulbs for both commercial and residential applications that are expected to use significantly less energy and produce less light pollution than incandescent and fluorescent bulbs. As of the date of this report, the Company continues to develop new forms of Optimized Digital Lighting based upon its patent pending technology.

Management of the Company believes that its current and projected capital position is sufficient to sustain its operations for the next twelve months. Based upon its current cash on hand generated from a private placement, its anticipated product releases, and its discussions with investment bankers, management does not anticipate a problem in funding its planned research and development program, its sales and marketing efforts, or other programs scheduled for implementation later in the year. Near-term launches of consumer-oriented products are anticipated to generate revenue by the end of the first quarter or early second quarter of this year. In addition, the company contemplates the possibility of raising additional equity through the efforts of its retained investment advisors should the need arise. Preliminary discussions have been held with potential investors with indications of interest should the Company decide to proceed with an additional capital infusion.

ITEM 2. Management's Discussion and Analysis or Plan of Operation

Results of Operations

[Preliminary Note: The reporting period of this Form 10-QSB for Lighting Science Corporation is for the three-month period ended September 30, 2003 (not September 30, 2004). The reason that this report is only now being filed is that the Company was involved in bankruptcy proceedings during the referenced time period. During that period, sufficient funds were not available to retain independent accountants to review the filings of the Company. The cash position of the Company has improved to the point that the company has retained knowledgeable professionals to assist the Company with its regulatory obligations. The Company is current with all of its Form 10-QSB and Form 10-KSB filings since the company emerged from bankruptcy on September 26, 2003 under the rules of “fresh-start” accounting.]

For the approximate nine-month period beginning January 1, 2003 and ended September 25, 2003, the Company reported a net loss from continuing operations of $1,291,000. Of this amount, $375,000 (including interest expense of $73,000) of the loss is attributable to the operations of the health care subsidiaries, while $916,000 of the loss is attributable to the operations of the parent company. Of the parent company loss, $772,000 is attributable to interest expense, and $144,000 is attributable to rent expense.

Liquidity and Capital Resources

During the bankruptcy proceedings discussed in Note 1 to the financial statements, the Company continued to operate its core health care businesses, but the negative connotations associated with a bankruptcy were adversely affecting the level of new patients that the operating companies were able to obtain. Given this impediment, it began to appear unlikely that the Company would be able to achieve profitability during the bankruptcy proceedings. Likewise, given the lack of capital available to the Company at that time, it was proving to be impossible to acquire or establish a new business base.

On or about September 15, 2003, the Company had a working capital deficit of $28.6 million. In light of the Company’s then current financial position, the ongoing expenses associated with three bankruptcy cases, its inability to independently meet its short-term corporate obligations, its need to further capitalize existing operations, and its dependency on revenue growth to support continuing operations, the Company closed its home health care operations during September 2003. As a result of having no operations at the subsidiary level or within the parent itself, as of September 15, 2003, the Company essentially reentered the development stage. Management of the Company began devoting most of its efforts to evaluating potential acquisitions of operating businesses.

At approximately the same time that the Company closed its operating subsidiaries, the bankruptcy court confirmed the parent company’s plan of reorganization. The effective date of the plan was September 26, 2003 at which time the company issued or was deemed to have issued 134,147,664 shares of common stock (an amount which comprised 51% of the of the then outstanding shares of the Company) to the creditors of The Phoenix Group Corporation (the predecessor to Lighting Science Group Corporation) in satisfaction of the terms of the plan of reorganization and to qualify for “fresh-start” accounting.

As described in further detail in Note 8 to the financial statements, on June 1, 2004 the Company acquired 100% of the outstanding common stock of Lighting Science, Inc. (“Lighting Science”), a Las Vegas, Nevada-based corporation, which owned certain intellectual property related to the design and development of a light bulb utilizing light emitting diodes as a source of light. Following the date of acquisition, the Company raised capital and provided Lighting Science with resources to develop and manufacture prototype light bulbs. Staff has been added to support the development process. As of the date of this report, the Company continues with its plans to develop and sell products based upon the technology acquired in the acquisition of Lighting Science.

ITEM 3: Controls and Procedures

The management of the Company, with the participation of the Company’s chief executive officer and chief financial officer, evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this Report. Based on that evaluation, the chief executive officer and chief financial officer concluded that the Company’s disclosure controls and procedures were effective in enabling the Company to record, process, summarize, and report information required to be included in the Company’s periodic SEC filings.

In addition, the management of the Company, with the participation of the Company’s chief executive officer and chief financial officer, has evaluated whether any change in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) occurred during the time period covered by this Report. Based on that evaluation, the Company’s chief executive officer and chief financial officer have concluded that there has been no change in the Company’s internal control over financial reporting during the time period covered by this Report that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

The delay in the filing of this report was not caused by lack of adequate disclosure procedures or the inability to maintain adequate financial records. The delay was caused by the lack of financial resources necessary to obtain proper financial review of the report by an independent auditing firm and outside counsel. As of the date of this report, the Company’s financial status has improved to the point that independent review of the Company’s required filings can now be obtained.

Part II. Other Information

Item 1: Legal Proceedings

Bankruptcy Proceedings of The Phoenix Group Corporation (predecessor to Lighting Science Group Corporation, and hereinafter “Phoenix” for purposes of this Part II).

On or about August 20, 2002, the Company filed a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the District of Delaware. The case was subsequently transferred to the U.S. Bankruptcy Court for the Northern District of Texas - Ft. Worth Division (“the Court”). The filing was made necessary by the actions of a creditor of the Company seeking to foreclose on a judgment obtained several years earlier. The Company lacked sufficient liquidity to satisfy the judgment and sought protection as a debtor-in-possession. The Court granted the requested status.

On March 24, 2003, the Company filed with the Court a plan of reorganization. During September 2003, the creditors of the Company approved the plan. The order confirming the plan was entered by the Court on September 16, 2003 with an effective date of September 26, 2003. The material features of the plan were as follows: The plan provided for the payment of administrative claims and the issuance of an additional 134,147,664 shares on a pre-reverse-split basis or 8,384,229 shares on a post-reverse split basis (one-for-sixteen) to creditors holding approved claims.

Bankruptcy Proceedings of Lifeline Home Health Services, Inc.

On or about October 15, 2002, three creditors of Lifeline Home Health Services, Inc. (“LHHS”) filed with the Court an involuntary petition under Chapter 7 of the United States Bankruptcy Code. LHHS requested the Court to convert the case to a Chapter 11 debtor-in-possession proceeding. The Court granted this request on December 2, 2002. On or about December 9, 2002 the senior lender to LHHS filed a motion with the Court seeking adequate protection payments of $7,622.50 per month. The Court approved the motion, and these payments commenced in January 2003. Other fees associated with the bankruptcy proceedings include legal fees to outside counsel to represent the two operating companies as well as the parent company. In addition, a creditors committee was established by the Court in the LHHS case, and counsel to the committee was appointed. LHHS is responsible for fees incurred by and approved by the Court.

Bankruptcy Proceedings of Lifeline Managed Home Care, Inc.

Concurrent with the closing of the operations of LHHS, LHMC was also forced to cease its operations because the two companies shared office space, employees, and other resources. On or about September 15, 2003, Match, Inc. exercised its perfected security interest in all the shares of Lifeline Management Group, Inc., which was, prior to such exercise, a wholly owned subsidiary of Phoenix. Lifeline Management’s sole business was comprised of the two operating companies, LHHS and LMHC. Match, Inc. is owned by The Ronald E. Lusk Revocable Family Trust. Ron, Lusk, chairman and director of Phoenix disclaimed any beneficial interest therein. Mr. Lusk abstained from voting on the resolution by Phoenix to not contest the exercise of the security interest by Match, Inc.

Item 2: Changes In Securities

During the quarter ended September 30, 2003, the Company issued or was deemed to have issued a total of 134,147,664 shares on a pre-reverse-split basis or 8,384,229 shares on a post-reverse split basis (one-for-sixteen) to creditors holding approved claims in connection with the confirmation by the Court of the Plan of Reorganization.

Item 3: Defaults Upon Senior Securities

None

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

(1) During the quarter, the Company submitted to its creditors the Proposed Plan of Reorganization along with a ballot to vote for or against the proposed plan. The plan was approved by the required margins in terms of both the number of holders and the amount of debt represented by the class of allowed claims.

(2) A Special Meeting of Shareholders of The Phoenix Group Corporation was held on September 22, 2003. At that meeting, the two proposals set out below were submitted to a vote of the Company’s stockholders.


(1)	Proposal 1 (Election of Directors) — A proposal for the election of the persons who would serve as directors of The Phoenix Group Corporation for a two-year period. Seven nominees were proposed: Ronald E. Lusk, Robert L. Woodson, J. Michael Poss, Donald R. Harkleroad, Daryl N. Snadon, Robert E. Bachman, and Frank “Duke” Yetter.

(2)	Proposal 2 (Increase of Authorized Number of Shares) — A proposal to amend the Company’s certificate of incorporation to increase the number of shares authorized to 500,000,000 shares from 250,000,000 shares. Such increase was necessary to accommodate the number of shares proposed to be issued

At the close of business on the record date for the meeting (which was September 2, 2003), there were 132,842,865 shares of the Company’s common stock issued and outstanding and entitled to be voted (the “Common Stock”) and 533,333 shares of the Company’s Series A Senior Convertible Preferred Stock issued and outstanding and entitled to be voted (“the Preferred Stock”) at the meeting.

Each nominee for director included in Proposal 1 received more than the number of favorable votes required for approval and was therefore duly and validly approved by the shareholders.

Proposal 2 received more than the number of favorable votes required for approval and was therefore duly and validly approved by the shareholders.

Item 5: Other Information

None

Item 6: Exhibits and Reports on Form 8-K

(a)

Exhibits required by Item 601 of Regulation S-K


		Exhibit No.		Document
		31.1*		Rule 13a-14 Certification dated January 18, 2005, by Ronald E. Lusk, Chief Executive Officer

		31.2*		Rule 13a-14 Certification dated January 18, 2005, by J. Michael Poss, Chief Financial Officer.

		32.1**		Section 1350 Certification dated January 18, 2005, by Ronald E. Lusk, Chief Executive Officer.

		32.2**		Section 1350 Certification dated January 18, 2005, by J. Michael Poss, Chief Financial Officer.

(b)

Reports on Form 8-K

On July 30, 2003, Phoenix filed a Current Report on Form 8-K to submit therewith certain periodic financial statements previously filed with the United States Trustee’s office in connection with the three bankruptcy cases in which the Company and its subsidiaries were involved during the third quarter of 2003. Each of the bankruptcy cases was resolved during the third quarter of 2003 as detailed in Item II, Part I, above.

On September 18, 2003, Phoenix filed a Current Report on Form 8-K to report that the independent director of the company had determined not to contest the exercise by Match, Inc. of its perfected security interest in all of the shares of Lifeline Management Group, Inc.

On September 30, 2003, Phoenix filed a Current Report on Form 8-K to report a change in control and the conclusion of the Phoenix bankruptcy case. The change in control resulted from the approval of the Plan of Reorganization by the creditors wherein approved creditors of Phoenix received 51% of the Company’s post-confirmation authorized and issued shares. The report also disclosed the material features of the Plan.

* Filed herewith.

** Furnished herewith.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	LIGHTING SCIENCE GROUP CORPORATION (Registrant)
Date: January 18, 2005	By /s/ J. MICHAEL POSS
	J. Michael Poss
	Chief Financial Officer and Principal Accounting Officer