TMCnet News

ARKADOS GROUP, INC. - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations
[October 14, 2014]

ARKADOS GROUP, INC. - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations


(Edgar Glimpses Via Acquire Media NewsEdge) Overview The following Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is intended to help the reader understand the Company's financial condition and results of operations. The MD&A is provided as a supplement to, and should be read in conjunction with, our financial statements and the accompanying notes thereto.



We strive to be a leading software and hardware design company focused on developing solutions that enable machine to machine communications for the Internet of Things (IoT). Our solutions support smart grid and smart home applications primarily in the areas of home and building automation and energy management. The Company's solutions are uniquely designed to drive a wide variety of wireless and powerline communication (PLC)-based products, such as sensors, gateways, video cameras, appliances and other devices.

By utilizing our solutions, our goal is to have customers bring numerous sophisticated, full-featured products to market faster at a lower overall development cost. Additionally, our Linq Universal Service Platform (USP) allows for onboarding, provisioning and wellness monitoring of devices on a wireless or wired network.


While, during much of the period covered by this report, we remained engaged in the process of seeking settlements with certain of our unsecured creditors existing at the time of the asset sale to ST Microelectronics as described in the Background section, we have concurrently been pursuing product development.

We have executed several agreements that will enable us to provide the services contemplated in the home automation industry.

While we have begun to generate revenue from operations during quarter ending August 31, 2014, such revenue is not sufficient to meet our monthly operating expenses and we remain dependent on outside sources of financing to fund our operations. In addition, we remain reliant on the services of outside independent contractors engaged in developing products or services.

Corporate Background We conduct our business activities principally through Arkados, Inc., which is a wholly-owned subsidiary. In September 2006, we changed our corporate name from CDKnet.com, Inc. to its current form to align our corporate identity with the "Arkados" brand developed by our subsidiary.

We were an early adopter in the powerline communication space, and experienced in home automation. Our Arkados, Inc. subsidiary was a member of the HomePlug Powerline Alliance, an independent trade organization which has developed global specifications for high-speed powerline communications, the world's leading professional association for the advancement of technology.

The Company underwent a significant restructuring after December 23, 2010 when substantially all of its then-existing assets were acquired by STMicroelectronics N.V. (sometimes referred to hereinafter as the "Asset Sale"), as disclosed in the 8-K filed December 29, 2010 and further described (as to the closing) in the 8-K filed July 12, 2011. This restructuring, focusing on settlements with unsecured creditors of the Company existing at the time of the Asset Sale, continued through August 31, 2014 and the date of this report.

Following the sale of its assets associated with the manufacture of microchips, the Company shifted its focus towards development of software and hardware solutions that enable machine to machine communication for the Internet of Things (IoT), primarily in the areas of energy management and home automation.

During the period, the Company has been in continuous negotiations with partners and industry contacts to establish joint ventures and other commercial relationships that would enable us to sell such solutions to service providers that would include these applications in product or service offerings to their customers.

Market Opportunities We expect to develop our sales force to include a network of direct sales regions. As we develop our international relationships with Tatung Corporation ("Tatung") and STMicroelectronics, we expect to establish international sales offices and develop relationships with organizations related to our business that will be located worldwide. We anticipate supplementing our direct sales force with sales representative organizations and distributors. The scope and development of our sales and marketing organization will depend, among other things, on the amount of capital available to us and when products are ready for testing.

Industry Background While endeavoring to restructure the Company following the Asset Sale and settle obligations as a result of the Asset Sale, we retained the ability to pursue key elements of our software and platform solutions.

2 Electric meters with enhanced communication capabilities-an essential component of the smart grid-are becoming more prevalent. In 2011, more than 23% of all U.S. electrical customers had smart meters. 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.

According to research firm Zpryme, the smart grid core and enabled technology market will reach $220 billion in size by 2020. The explosive growth in this 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 it the gateway to the HAN. From the perspective of the end user (residential or industrial), in-home (or in-building) devices are not only capable to communicating with the other devices within the local network, but are also capable of communicating outward to the WAN and implementing demand response protocols.

Strategic Relationships We continue to foster our relationships with STMicroelectronics and Tatung. Each of these relationships will allow Arkados to engage in our devised strategy of developing software and platform solutions for home automation services.

Research and Development Research and development in a rapidly changing technology environment is one of the keys to our success. We allocate resources as much as possible without our current operational limits to explore and exploit advancements in mobile and cloud computing, data processing technologies, wireless and broadband technologies and energy storage technologies that will lead to new products and services within our core competencies. These include the development of new software with a focus on M2M bridges, home area networks (HA) and the Internet of Things within the smart home/smart grid industries via our strategic partnerships. We may engage in certain activities in pursuit of further commercial development as opportunities arise from these relationships.

Patents, Licenses and Trademarks We will continue to maintain our provisional application (Application No.

61/873,249) for a patent covering systems and methods for provisioning of electronic devises onto a network and the subsequent monitoring and operation of the devices, as filed with the U.S. Patent and Trademark Office on September 3, 2013.

We continue to maintain our license with STMicroelectronics for patents relating to home automation services.

In addition, we maintain the federal registration of our "Arkados" and "ArkTIC" marks as well as a stylized "a" design mark.

Other than as stated above, the Company did not acquire any patents, licenses or trademarks during the period of this report.

Competition We face competition both from established device management and cloud service providers both nationally and internationally, as well as recent entrants in the field. Some of these competitors create solutions that are compliant with existing standards and specifications, while other competitors' products are based on proprietary technologies.

Since our operations are still developing, and therefore, somewhat in flux, it is difficult to pinpoint direct competitors, however, companies such as Arkessa that provides device operation for IoT, LogMeIn that provides public cloud services for IoT, Microstrain, which provides cloud and data analytics for IoT, and Thingworx, which provides application development platforms are some of those providing goods and services within our space. A more complete listing has been provided in our annual report on Form 10-K filed August 27, 2014. There has been no change during the period covered by this report to our competitive analysis.

3 Results of Operations We have been diligently undertaking negotiations with partners and industry contacts to establish joint ventures and other commercial relationships that would enable us to sell solutions in the energy management and home automation industries to service providers that would include these applications in product or service offerings to their customers.

Since inception, we have incurred accumulated operating losses of approximately $37,000,000. Since May 31, 2014, our operating loss increased by approximately $1,000,000 over the same quarterly period last year, mostly as a result of ramping up of operations. We have financed operating losses since January 2013 with the proceeds primarily from related party lending from our major stockholders and affiliated lenders, as well as other stockholders and lenders.

If we are unable to raise funds to finance our working capital needs, we will not have the capital necessary for ongoing operations and developing and readying our products for market, we could lose professional staff necessary to develop our products and the value of our technology could be impaired. In addition, the lack of adequate funding could jeopardize our development and delivery schedule of our planned products. Such delays could in turn jeopardize relationships with our current customers, strategic partners and prospective suppliers.

For The Three Months Ended August 31, 2014 and August 31, 2013 During the three months period ended August 31, 2014 we recorded revenue of $40,000, as compared to $-0- revenue for the three months ended August 31. 2013.

Total operating expenses for the three month period ended August 31, 2014 was $1,239,366, consisting mainly of salaries of our management, as well as consulting expenses and professional fees. During this period, we also incurred net research and development expenses of $52,192 relating to development of new technology. This is compared to total operating expenses for the three month period ended August 31, 2013 of $225,936, consisting mainly of consulting expenses and professional fees and net research and development expenses of $3,781 for the three month period ended August 31, 2013.

Interest expense on our existing debt for the three month periods ended August 31, 2014 and August 31, 2013 was $115,664 and $99,454, respectively. Interest expense includes the amortization of beneficial conversion features on certain convertible debt securities. Amortization amounted to $93,866 and $77.004 for the three months ended August 31, 2014 and 2013, respectively.

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. We have remained dependent, in part, upon loans from investors, including a convertible note issuance in the principal amount of $200,000 made in August, 2014 and maturing in October, 2015. 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 August 31, 2014, we had cash of $123,045 and negative working capital of ($2,683,408) compared to cash of $118,505 and negative working capital of ($3,798,774) at May 31, 2014, an overall reduction in the working capital deficit of $1,115,366. The change in working capital since May 31, 2014 has resulted from $200,000 received in new financing during the year as described above, a decrease of $195,460 in cash used to pay current expenses, and a decrease of $7,757 in prepaid expenses. In addition, however, we experienced net decreases in our liabilities as follows: $747,536 decrease in our debt which was settled in exchange for equity issued, $466,000 decrease in notes payable which was settled in exchange for equity issued net of an increase of $17,947 in accounts payable and accrued expenses.

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 August 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.

4 Accounting for 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.

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.

Off Balance Sheet Arrangements We do not have any off balance sheet arrangements.

[ Back To TMCnet.com's Homepage ]