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
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
Secured Debenture Holders: Those holding the 6% secured convertible debentures
due June 28, 2009.
Convertible Note Holders (unsecured): The holders of 6% convertible subordinated
Bridge Note Holders (unsecured): The holders of 8% notes issued in 2010.
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
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
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
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.
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
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.
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.
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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