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ARKADOS GROUP, INC. - 10-K - MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.(Edgar Glimpses Via Acquire Media NewsEdge) Readers are urged to carefully review and consider the various disclosures made by us in this Form 10-K for the fiscal year ended May 31, 2014, and our other filings with the U.S. Securities and Exchange Commission. These reports and filings attempt to advise interested parties of the risks and factors that may affect our business, financial condition and results of operations and prospects. The forward-looking statements made in this Form 10-K speak only as of the date hereof and we disclaim any obligation to provide updates, revisions or amendments to any forward-looking statements to reflect changes in our expectations or future events. Plan of Operation Ongoing Negotiations with Certain Creditors With respect to the classes of remaining creditors at the time of the Asset Sale to ST, the total debt that remained to be settled as of May 31, 2014 included approximately $927,000 due to former employees, and approximately $250,000 to Bridge Note Holders and other promissory note holders (such notes having been issued as part of those prior settlements). For the period June 1, 2014 through August 20, 2014, we settled approximately $747,000 of amounts due to former employees. This discussion, and therefore, these amounts do not include debt settled and subject to equity being issued as reflected in our financial statements, as those amounts are deemed fully resolved and settled, but for the issuance of the securities. The current CEO of the Company is working diligently to obtain the remaining releases. We anticipate that substantially all of these claims will be settled in exchange for the issuance of common stock of the Company at a price of $0.04 (of the debt settled) per one (1) share of common stock, which is consistent with the offers made to all creditors who have already completed settlements, with the exception of bridge note holders who agreed to a price of $0.027 per share, as negotiated in December, 2010. Software and Platform Solutions Development As of the date of this report, we have not had significant revenue from operations since inception. Furthermore, we have financed operations with the proceeds primarily from related party lending from our major stockholder and affiliated lenders, as well as other stockholders and lenders. We continue to seek to restructure our operations following the Asset Sale and to complete the settlement of material obligations as a result of the Asset Sale. Despite selling our patents and other intellectual property to STMicroelectronics, we retained, through a license back from STMicroelectronics, the ability to pursue key elements of our anticipated software and platform solutions. 11 Arkados intends to continue to expand its relationship with Tatung by agreeing to partner on business and product development initiatives for smart grid applications. We anticipate that our relationships will position us to be able to commercially exploit opportunities in the various smart grid-related industries. Electric meters with enhanced communication capabilities-an essential component of the smart grid-are becoming more prevalent. These meters use two-way communication to connect utilities and their customers. They support demand response and distributed generation, can improve reliability, and also provide information that consumers can use to save money by managing their use of electricity. The growth in the smart grid core and enabled technology market is driven primarily by the first wave of smart grid implementation: advanced metering infrastructure (the "AMI"). Utilities throughout the world have aggressively implemented smart meters to residential and industrial customers mainly because it is the required first step to achieve a true smart grid and, secondarily, in response to significant government incentives to do so. AMI lays the foundation as a hub for networking and communication and is the gateway to the home area network. From the perspective of the end user (residential or industrial), in-home (or in-building) devices are not only capable of communicating with the other devices within the local network, but are also capable of communicating outward to larger interconnected networks and implementing demand response protocols. Every aspect of our business remains constrained by our limited capital resources and the threat of having to cease operations as a result of our lack of capital. If we are unable to raise funds to finance our working capital needs, we will not have the capital necessary for ongoing operations. Critical Accounting Policies The discussion and analysis of the Company's financial condition and results of operations are based upon the Company's consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amount of assets and liabilities, revenues and expenses, and related disclosure on contingent assets and liabilities at the date of the financial statements. Actual results may differ from these estimates under different assumptions and conditions. Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties, and may potentially result in materially different results under different assumptions and conditions. As of May 31, 2014, management believes the critical accounting policies applicable to the Company that are reflective of significant judgments and or uncertainties are limited to equity based transactions or convertible debt instruments. Stock-Based Compensation The computation of the expense associated with stock-based compensation requires the use of a valuation model. ASC 718 is a complex accounting standard, the application of which requires significant judgment and the use of estimates, particularly surrounding Black-Scholes assumptions such as stock price volatility, expected option lives, and expected option forfeiture rates, to value equity-based compensation. We currently use a Black-Scholes option pricing model to calculate the fair value of stock options. We primarily use historical data to determine the assumptions to be used in the Black-Scholes model and have no reason to believe that future data is likely to differ materially from historical data. However, changes in the assumptions to reflect future stock price volatility and future stock award exercise experience could result in a change in the assumptions used to value awards in the future and may result in a material change to the fair value calculation of stock-based awards. ASC 718 requires the recognition of the fair value of stock compensation in net income. Although every effort is made to ensure the accuracy of our estimates and assumptions, significant unanticipated changes in those estimates, interpretations and assumptions may result in recording stock option expense that may materially impact our financial statements for each respective reporting period. Development Stage Activities The Company adopted the new accounting guidance related to development stage enterprises. The new guidance eliminates the distinction of a development stage entity and certain related disclosure requirements, including the elimination of inception-to-date information on the statements of operations, cash flows and stockholders' deficiency. The Company's consolidated financial statements will be impacted by the adoption of this guidance primarily by the removal of inception-to-date information in the Company's consolidated statements of operations, cash flows, stockholders' deficiency, and related disclosures. 12 Impact of Debt with Conversion Features The Company at times enters into financing transactions whereby such debt instruments contain conversion features into common stock and or may contain detachable equity rights. These debt inducement features may be considered freestanding and or beneficial conversion features in our financial statements pursuant to the accounting guidance under ASC 470-20. These features would be fair valued and recorded as a discount to the debt instrument and amortized over the life of the instrument. Additional valuation features of warrants, conversion features in debt, and similar terms that include "full-ratchet" or reset provisions, which mean that the exercise or conversion price adjusts to pricing in subsequent sales or issuances, no longer meet the definition of indexed to a company's own stock and are not exempt from equity classification provided in ASC Topic 815-15. This means that instruments that were previously classified in equity are reclassified to liabilities and ongoing measurement under ASC Topic 815. The amount of quarterly non-cash gains or losses we will record in future periods will be based upon the fair market value of our common stock on the measurement date. The Year ended May 31, 2014 During the year ended May 31, 2014, we had revenues of $0 compared to $0 for the same period in 2013. We did not have any revenue during the current period, although management has focused on development of software that we anticipate, although cannot guarantee, will produce revenue in near-term future quarters. Total operating expenses for the year ended May 31, 2014 were $2,437,665 compared to $394,953 in the same period of fiscal year 2013. In both periods, the most significant expenses were personnel, professional fees and related expenses. During the fiscal year ended May 31, 2014 however, we did incur research and development expense in the amount of $200,626 to develop new products and services. In addition, the most significant part of our operating expenses related to compensation for our management and employees. Given our reliance on outside sources of capital, we expect significant additional charges relating to stock compensation. We also incurred $416,672 in interest expense on our outstanding convertible notes for the period ended May 31, 2014 as compared to $124,002 for the year ended May 31, 2013. In addition, as we have filed all tax returns that were previously outstanding, we may have an amount due of approximately $63,000 for state income taxes for periods of operation for the fiscal year ended May 31, 2011. Liquidity and Capital Resources Our principal source of operating capital has been provided in the form of the private placement of convertible debt securities. We did not have any significant sources of revenue from our operations during the period. In October, 2013, as disclosed in our report for the 2nd quarter ended November 30, 2013, we issued convertible notes at 6% interest per annum in the principal amount totaling $400,000 to two investors who had previously invested in the Company. These notes are convertible at any time after issuance into common stock at a rate of $0.02 per share for each $1.00 of principal and interest converted. In March 2014, we engaged in a private offering of unregistered (restricted) common stock to accredited investors. This offering was on a best efforts, any or none basis and we had hoped to raise $3,000,000 to fund our general working capital. During the period of the offering, which subsequently closed at the end of April 2014, we raised $400,000 from three investors, all of which had invested previously in the Company. Through the date of this report, we have depended, in part, upon loans from investors and there can be no assurances that investors will make any additional loans to us. Our present material commitments are the compensation of our employees, including our executive officers, and professional and administrative fees and expenses associated with the preparation of our filings with the Securities and Exchange Commission and other regulatory requirements. As of May 31, 2014, we had cash of $118,505 and negative working capital of ($3,798,774) compared to cash of $345,126 and negative working capital of ($9,146,637) at May 31, 2013, an overall reduction in the working capital deficit of $5,347,863. The change in working capital since May 31, 2013 has resulted from $800,000 received in new financing during the year as described above, a decrease of approximately $226,000 in cash used to pay current expenses, and an increase of approximately $11,000 in prepaid expenses. In addition, however, we experienced net decreases in our liabilities as follows: $368,818 of notes payable (net of debt discount) that are now classified as short-term liabilities that were previously long-term liabilities, a net decrease of $779,295 in accounts payable and accrued expenses (resulting from a $234,596 increase in accounts payable and accrued expenses from operations and reduction of $1,013,891 settled in exchange for equity issued), $3,765,052 decrease in our debt which was settled in exchange for equity issued, and $429,612 decrease in notes payable which was settled in exchange for equity issued. Commitments We do not have any commitments which are required to be disclosed in tabular form as of May 31, 2014. Off Balance Sheet Arrangements We do not have any off balance sheet arrangements. |