TMCNet:  ARKADOS GROUP, INC. - 10-K - MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.

[August 30, 2013]

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, 2012 (including the fiscal year ended May 31, 2011), 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 As noted earlier in this report, a detailed description of the terms and conditions of the Asset Purchase Agreement was set forth in our Information Statement on Form 14C filed with the Commission on April 21, 2011.

In connection with and following the date of the Asset Purchase Agreement (December 23, 2010), and as part of the conditions contained in the transaction documents, our management proceeded to attempt to obtain settlements and releases from all of its secured and unsecured creditors. The Company laid out a process that entailed dividing the creditors into the following internally-determined categories: Secured Debenture Holders: Those holding the 6% secured convertible debentures due June 28, 2009.

Convertible Note Holders (unsecured): The holders of 6% convertible subordinated notes.

Bridge Note Holders (unsecured): The holders of 8% notes issued in 2010.

12 General Unsecured Creditors: These consisted mainly of contracted service providers, various legal counsel (general and special), accounting and tax professionals, and vendors.

Employees: Our prior full time staff.

Settlement and releases from all of the Secured Debenture Holders were obtained by December 23, 2010. Approximately half of the total amount due to Bridge Note holders was settled by April 8, 2011, approximately half of the total amount due the Convertible Note Holders by May 12, 2011, and all of the Employees by May 31, 2011. Certain of the creditors in each of the Convertible Note Holders, Bridge Note Holder and General Unsecured Creditor categories agreed to partial settlements that included a forbearance of enforcing claims, but did not settle the claims in their entirety. Following the date of the Asset Sale through January 2, 2013, we did not have a full time CEO, any legal counsel, or any other staff. As such, it became difficult to obtain the settlement and releases for the remaining creditors.

With respect to the classes of creditors stated above, the total debt that remains to be settled includes approximately $502,000 to Convertible Note Holders, $642,000 to Bridge Note Holders, and $37,298 to General Unsecured Creditors.

The current CEO of the Company is working diligently to obtain those releases.

We anticipate that 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.

Software and Platform Solutions Development As of the date of this report, we have not had significant revenue from operations since inception and, as of May 31, 2012, we were still a development stage company. 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.

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 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, 2012, 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.

13 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.

The Year ended May 31, 2012 During the year ended May 31, 2012, we had revenues of $0 compared to $134,480 for the same period in 2011. We did not have any revenue during the period as a result of the Asset Sale that occurred December 23, 2010 and the efforts of management devoted solely to obtaining settlement and releases of our creditors.

Total operating expenses for the year ended May 31, 2012 were $300,250 compared to $2.2 million in the same period of fiscal year 2011. In both periods, the most significant expenses were personnel, professional fees and related expenses. We had no research and development expenses during the year. Given our reliance on outside sources of capital, we expect significant additional charges relating to stock compensation. We also incurred approximately $47,400 in interest expense on our outstanding bridge and other promissory notes. We received $4.0 million, which was the balance of the consideration for the Asset Sale from STMicroelectronics in June, 2011. All of these proceeds were applied to settlements with our secured and unsecured creditors (including former employees). As a result of the settlement of our outstanding debt, we may recognize approximately $480,000 in additional income from the release of debt.

We have not, as yet, filed our tax returns for this period, however.

The Year ended May 31, 2011 During the year ended May 31, 2011, we had $134,480 of revenues compared to $295,870 for the same period in 2010. Revenues were a combination of revenues from chip sales and revenues from service contracts related to the achievement of certain milestones remaining under a number of long term development contracts. The chips manufactured were to be used in audio adaptors and docking stations, as well as in other applications. Total operating expenses for the year ended May 31, 2011 were $2.2 million compared to total operating expenses for the same period of 2010 of $4.6 million. We also incurred approximately $2.6 million in interest expense on our outstanding bridge and promissory notes.

We received $7.0 million, which was the first tranche of the consideration for the Asset Sale from STMicroelectronics in December, 2010. All of these proceeds were applied to settlements with our secured and unsecured creditors (including former employees). As a result of the settlement of our outstanding debt, we may recognize approximately $11.3 million in income from the release of debt. We have not, as yet, filed our tax returns for this period, however.

Liquidity and Capital Resources Our principal source of operating capital has been provided in the form of equity investments and, the private placement of debt securities coupled with warrants and related party loans. We do not have any significant sources of revenue from our operations. No assurance can be given that we can engage in any public or private sales of our equity or debt securities to raise working capital. We have depended, in part, upon loans from our present stockholders or management and there can be no assurances that our present stockholders or management will make any additional loans to us.

14 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, 2012, we had cash of approximately $4,913 and negative working capital of ($9,292,384) compared to cash of $2,586 and negative working capital of ($13,502,128) at May 31, 2011.

Commitments We do not have any commitments which are required to be disclosed in tabular form as of May 31, 2012 or May 31, 2011.

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

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