Attached files
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EX-32.2 - 906 CERTIFICATION - CFO - IOTA COMMUNICATIONS, INC. | exh32-2_16780.htm |
EX-32.1 - 906 CERTIFICATION - CEO - IOTA COMMUNICATIONS, INC. | exh32-1_16780.htm |
EX-10.1 - SENIOR SUBORDINATED NOTE - IOTA COMMUNICATIONS, INC. | exh10-1_16780.htm |
EX-31.1 - 302 CERTIFICATION - CEO - IOTA COMMUNICATIONS, INC. | exh31-1_16780.htm |
EX-10.2 - CONSENT OF THE BOARD - IOTA COMMUNICATIONS, INC. | exh10-2_16780.htm |
EX-31.2 - 302 CERTIFICATION - CFO - IOTA COMMUNICATIONS, INC. | exh31-2_16780.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
(Mark
One)
|
x
|
QUARTERLY REPORT UNDER SECTION
13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
FOR
THE QUARTERLY PERIOD ENDED: February 28, 2010
|
o
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TRANSITION REPORT UNDER SECTION
13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
FOR
THE TRANSITION PERIOD FROM _________ TO _________
Commission
file number: 0-27587
ARKADOS
GROUP, INC.
(Exact
name of small business issuer as specified in its charter)
Delaware
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22-3586087
|
(State
or other jurisdiction of
|
(IRS
Employer
|
incorporation
or organization)
|
Identification
No.)
|
220
Old New Brunswick Road, Piscataway, NJ 08854
(Address
of principal executive offices)
(732)
465-9300
(Issuer’s
telephone number)
(Former
name, former address and former fiscal year, if changed since last
report)
Indicate
by check mark whether the registrant: (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past
90 days. Yes ý
No o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definitions of “large accelerated filer,” “accelerated filer,” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check
one):
Large
accelerated filer o
|
Accelerated
filer o
|
Non-accelerated
filer o
(Do
not check if a smaller reporting company)
|
Smaller
reporting company ý
|
Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes o
No ý
The
number of the registrant’s shares of common stock outstanding was 32,738,397
as of April 2, 2010.
Arkados
Group, Inc.
Quarterly
Report on Form 10-Q
Quarter
Ended February 28, 2010
Table of
Contents
PART
I—FINANCIAL INFORMATION
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||||
Item 1.
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Financial
Statements
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4
|
||
Consolidated
Balance Sheets as of February 28, 2010 (unaudited) and May 31,
2009
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4
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|||
Consolidated
Statements of Operations Cumulative During the Development Stage (March
24, 2004 to February 28, 2010) and for the Three and Nine Months
Ended February 28, 2010 and 2009 (UNAUDITED)
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5
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|||
Consolidated
Statements of Cash Flows – Cumulative During the Development Stage (March
24, 2004 to February 28, 2010) and for the Nine Months Ended February 28,
2010 and 2009 (UNAUDITED)
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6
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|||
Notes
to Consolidated Financial Statements (unaudited)
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7
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|||
Item 2.
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Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
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18
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||
Item 3.
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Quantitative
and Qualitative Disclosures About Market Risk
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29
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Item 4T
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Controls
and Procedures
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29
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PART II—OTHER
INFORMATION
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||||
Item
1
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Legal
Proceedings
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30
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Item 5.
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Other Information | 30 | ||
Item 6.
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Exhibits
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30
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Signatures
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31
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2
INTRODUCTORY
NOTE
This Report on Form 10-Q
for Arkados Group, Inc. (“Arkados” or the “Company”) may contain
forward-looking statements. You can identify these statements by forward-looking
words such as “may,” “will,” “expect,” “intend,” “anticipate,” “believe,”
“estimate” and “continue” or similar words. Forward-looking statements include
information concerning possible or assumed future business success or financial
results. You should read statements that contain these words carefully because
they discuss future expectations and plans, which contain projections of future
results of operations or financial condition or state other forward-looking
information. We believe that it is important to communicate future expectations
to investors. However, there may be events in the future that we are not able to
accurately predict or control. Accordingly, we do not undertake any obligation
to update any forward-looking statements for any reason, even if new information
becomes available or other events occur in the future.
The forward-looking statements
included herein are based on current expectations that involve a number of risks
and uncertainties set forth under “Risk Factors” in our Annual Report on
Form 10-K for the year ended May 31, 2009 and other periodic reports filed
with the SEC. Accordingly, to the extent that this Report contains
forward-looking statements regarding the financial condition, operating results,
business prospects or any other aspect of the Company, please be advised that
Arkados’ actual financial condition, operating results and business performance
may differ materially from that projected or estimated in such forward-looking
statements.
3
PART I.
FINANCIAL INFORMATION
Item
1. Financial Statements.
ARKADOS
GROUP, INC. & SUBSIDIARIES
CONSOLIDATED
BALANCE SHEET
(Unaudited)
28-Feb-10
|
31-May-09
|
|||||||
Assets
|
||||||||
Current
assets
|
||||||||
Cash
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$ | 533 | $ | 10,371 | ||||
Accounts
receivable
|
7,792 | 72,815 | ||||||
Inventory
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- | 29,819 | ||||||
Total
current assets
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8,325 | 113,005 | ||||||
Equipment,
net
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30,181 | 36,181 | ||||||
Deferred
financing expenses, net
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349,439 | 533,330 | ||||||
Intangible
assets, net
|
159,165 | 216,902 | ||||||
Other
assets
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35,768 | 56,228 | ||||||
$ | 582,878 | $ | 955,646 | |||||
Liabilities
and Stockholders’ Deficiency
|
||||||||
Current
liabilities:
|
||||||||
Accrued
expenses and other liabilities
|
$ | 8,588,490 | $ | 4,821,646 | ||||
Related
Party Borrowings
|
247,700 | 187,700 | ||||||
Notes
Payable
|
659,952 | 206,802 | ||||||
Current
portion convertible debentures and penalties
|
16,119,306 | 12,448,967 | ||||||
Payroll
taxes and related penalties and interest payable
|
936,906 | 936,906 | ||||||
Total
current liabilities
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26,552,354 | 18,602,021 | ||||||
Stockholders’
deficiency
|
||||||||
Convertible
preferred stock - $.0001 par value; 5,000,0000 shares authorized, zero
shares outstanding
|
||||||||
Common
stock, $.0001 par value; 100,000,000 shares authorized 32,738,397 and
32,738,397, respectively, issued and outstanding
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3,274 | 3,274 | ||||||
Additional
paid-in capital
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22,714,187 | 21,638,124 | ||||||
Treasury
stock
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(16,000 | ) | (16,000 | ) | ||||
Accumulated
Deficit during Development Stage
|
(48,670,937 | ) | (39,271,774 | ) | ||||
Total
stockholder’s deficiency
|
(25,969,476 | ) | (17,646,375 | ) | ||||
$ | 582,878 | $ | 955,646 |
The
accompanying notes are an integral part of these condensed consolidated
financial statements
4
ARKADOS
GROUP, INC. & SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS
(Unaudited)
For
the Three
Months
Ended
28-Feb-09
|
For
the Three
Months
Ended
28-Feb-10
|
For
the Nine
Months
Ended
28-Feb-09
|
For
the Nine
Months
Ended
28-Feb-10
|
Cumulative
during
the
Development
Stage
(March
24, 2004 to
February
28,2010)
|
||||||||||||||||
Net
Sales
|
$ | 198,900 | $ | 46,346 | $ | 583,325 | $ | 173,246 | $ | 2,870,374 | ||||||||||
Cost
of Goods Sold
|
197,638 | 46,346 | 473,207 | 172,352 | 1,892,556 | |||||||||||||||
Gross
Profit
|
1,262 | - | 110,117 | 894 | 977,818 | |||||||||||||||
Research
and Development Expenses
|
412,392 | 671,241 | 1,100,121 | 2,030,220 | 10,651,7140 | |||||||||||||||
General
and Administrative Expenses
|
1,399,298 | 471,637 | 3,014,936 | 1,450,585 | 20,043,586 | |||||||||||||||
Net
Loss From Operations
|
(1,810,428 | ) | (1,142,879 | ) | (4,004,939 | ) | (3,479,911 | ) | (29,717,481 | ) | ||||||||||
Other
Income (Expenses):
|
||||||||||||||||||||
Secured
Debt Default Penalty
|
||||||||||||||||||||
Interest
Expense
|
(384,645 | ) | (835,609 | ) | (1,337,944 | ) | (5,919,253 | ) | (11,517,752 | |||||||||||
Net
Loss Before Income Taxes
|
(2,195,073 | ) | (1,978,489 | ) | (5,342,883 | ) | (9,399,165 | ) | (41,235,233 | ) | ||||||||||
Benefit
for Income Taxes
|
(441,413 | ) | - | (441,413 | ) | - | (841,562 | ) | ||||||||||||
Net Loss
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$ | (1,753,660 | ) | $ | (1,978,489 | ) | $ | (4,901,470 | ) | $ | (9,399,165 | ) | $ | (40,393,671 | ) | |||||
Net
Loss per share
-
Basic and diluted
|
$ | (0.06 | ) | $ | (0.06 | ) | $ | (0.17 | ) | $ | (0.29 | ) | ||||||||
Weighted
Average of Common Shares Outstanding
|
||||||||||||||||||||
-
Basic and diluted
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31,341,162 | 32,738,697 | 29,647,141 | 32,738,697 |
The
accompanying notes are an integral part of these condensed consolidated
financial statements
5
ARKADOS
GROUP, INC. & SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(Unaudited)
For
the Nine
Months
Ended
28-Feb-09
|
For
the Nine
Months
Ended
28-Feb-10
|
Cumulative During
the Development Stage
(March 24,
2004 to
February
28, 2010)
|
||||||||||
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
||||||||||||
Net
Loss
|
$ | (4,901,471 | ) | $ | (9,399,165 | ) | $ | (40,393,671 | ) | |||
Adjustments
to reconcile net loss to net cash provided by (used) in operating
activities
|
||||||||||||
Depreciation
and Amortization
|
442,975 | 63,737 | 1,556,569 | |||||||||
Share
Based Compensation Expense
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1,629,514 | 1,076,065 | 10,947,820 | |||||||||
Warrants
and beneficial conversion rights with debt
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142,130 | 627,716 | ||||||||||
Debt
and Interest Penalty
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3,670,339 | 4,675,040 | ||||||||||
(Increase
) decrease) in:
|
||||||||||||
Accounts
Receivable
|
(122,427 | ) | 65,023 | (7,792 | ) | |||||||
Inventory
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(31,138 | ) | 29,819 | 630 | ||||||||
Deferred
Expenses
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277,583 | 183,891 | 608,933 | |||||||||
Prepaid
and Other Assets:
|
48,123 | 20,460 | (82,981 | ) | ||||||||
Increase
(decrease) in:
|
||||||||||||
Payroll
Taxes and Related Penalties and Interest
|
--- | --- | (22,916 | ) | ||||||||
Related
Party Payable
|
(23,717 | ) | --- | --- | ||||||||
Accounts
Payable and Accrued Expenses
|
1,717,300 | 3,766,844 | 8,573,775 | |||||||||
Net
Cash Provided used in Operating Activities
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(821,128 | ) | (522,987 | ) | (13,516,877 | ) | ||||||
CASH
FLOWS FROM INVESTING ACTIVITIES
|
||||||||||||
Purchases
of capital expenditures and Patents
|
(5,242 | ) | --- | (140,671 | ) | |||||||
Net
Cash Used in Investing Activities
|
(5,242 | ) | --- | (140,671 | ) | |||||||
CASH
PROVIDED BY FINANCING ACTIVITIES
|
||||||||||||
Loan
payable - related party
|
10,000 | --- | 1,586,726 | |||||||||
Note
Payable
|
107,250 | 513,150 | 844,952 | |||||||||
Contribution
of capital
|
810,038 | --- | 1,232,646 | |||||||||
Exercise
of stock options
|
--- | --- | 1,756 | |||||||||
Proceeds
from convertible debt
|
--- | --- | 1,876,588 | |||||||||
Repayment
of debt
|
(125,000 | ) | --- | (469,256 | ) | |||||||
Issuance of
Debentures
|
--- | --- | 9,533,411 | |||||||||
Repayment
of related party debt
|
--- | --- | (949,027 | ) | ||||||||
Net
Cash Provided by in Financing Activities
|
802,288 | 513,150 | 13,657,796 | |||||||||
NET
(DECREASE) INCREASE IN CASH
|
(24,082 | ) | (9,838 | ) | 248 | |||||||
Cash,
beginning of the period
|
24,480 | 10,371 | 285 | |||||||||
Cash,
end of the period
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$ | 398 | $ | 533 | $ | 533 | ||||||
SUPPLEMENTAL
CASH FLOW INFORMATION
|
||||||||||||
Cash
paid for interest
|
$ | 1480 | $ | --- | ||||||||
Conversion
of accrued interest to debt
|
$ | 673,049 | $ | --- | ||||||||
The
accompanying notes are an integral part of these condensed consolidated
financial statements
6
ARKADOS
GROUP, INC. & SUBSIDIARIES
NOTES
TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
Nine
Months Ended February 28, 2010 and 2009
(Unaudited)
NOTE 1
- DESCRIPTION OF
BUSINESS
Arkados
Group, Inc. (the “Company”), a development stage enterprise, is a fabless
semiconductor company providing integrated system-on-chip solutions that
directly support networking, smart grid and multimedia
applications. Arkados, “the HomePlug Applications Company,” delivers
a universal platform that enables the effortless networking of home
entertainment and computer devices using standard electricity lines. We also
license some ingredient technologies for wireless multimedia solutions. The
Company’s system-on-chip solutions are uniquely designed to drive a wide variety
of powerline-communication solutions such as utility company applications, and
powerline-enabled consumer electronics and home computing products, such as
stereo components, radios, speakers, MP3 players, computers, televisions, gaming
consoles, security cameras and cable and DSL modems. With Arkados’ solutions,
customers can bring numerous sophisticated, full-featured products to market
faster at a lower overall development cost using a single platform: the
company’s versatile and programmable ArkTIC® platform. Arkados solutions
leverage the benefits of standard powerline communications technologies that are
used worldwide for in-building and to-the-home Broadband Powerline (“BPL”)
applications. Arkados is a founding member of the HomePlug Powerline
Alliance, “HomePlug” an independent trade organization which has developed
global specifications for high-speed powerline communications, and a founding
member of the IEEE P1901 Working Group operating under the umbrella of the IEEE
Standards Association (IEEE-SA), a major contributor to the world's leading
professional association for the advancement of technology Institute of
Electrical and Electronics Engineers (IEEE), the world’s leading professional
association for the advancement of technology.
The
attached summary consolidated financial information does not include all
disclosures required to be included in a complete set of financial statements
prepared in conformity with accounting principles generally accepted in the
United States of America. Such disclosures were included with the
financial statements of the Company at May 31, 2009, and included in its report
on Form 10-K. Such statements should be read in conjunction with the
data herein.
The
summary consolidated financial information reflects all adjustments, which, in
the opinion of management, are necessary for a fair presentation of the results
for the interim period expected for the year.
As of
February 28, 2010, $17,626,658 of secured debt, of which
$4,979,689 is held by related parties is in default, as is
$1,739,166 principal and interest on unsecured notes. In
addition, as of February 28, 2010, $3,362,528 of salary remains due to our
employees and our accounts payable was approximately $1,737,245, of which
$1,684,210 was over 90 days. In February, 2010, we entered into
agreements with the holders of the secured debt giving us until March 31, 2010
to conclude financing and debt restructuring transactions without the threat of
such holders taking action to enforce their rights under the instruments
defining the secured debt and, related transaction documents granting the
holders of such debt a security interest in substantially all of our
property and under law. The agreements expired on March 31,
2010. We are negotiating with the holders of each class of
debt to extend or fashion forbearance agreements that will
run to April 30, 2010, and compromises or conversion of outstanding
debt into equity to facilitate raising additional investor
capital. We are attempting to reach an agreement with the holders of
our secured debt as to the terms and conditions upon which they would
agree to accept partial payment of principal and convert the balance (or all) of
secured debt to equity, however, there is no binding agreement on anyone’s part
to do so and no assurance can be given that the terms will be acceptable to the
holders of all of the secured debt. If the holders of a material amount of debt
do not accept terms of settlement or conversion into equity acceptable to new
investors we will not be able to obtain financing and will have to suspend
operations or seek protection under the Bankruptcy Code.
We have
also received indications of interest from potential private investors
concerning the terms and conditions upon which they would make an investment in
Arkados, including the terms upon which the secured debt and other debt would
have to be compromised and converted for them to make such investments, but
there is no binding commitment on anyone’s part to complete the
transactions. Finally, without commitment on anyone’s part, we have
discussed converting a substantial portion of past due compensation with our
employees if the financing and restructuring of our debt can be
completed. Pending the completion of these transactions, we are
financing operations by issuing bridge notes to investors that would participate
in an equity financing if the debt can be restructured. If the
financing proceeds, these investors would be able to make the equity investment
in Arkados at a discount of 33% from the price other investors are
offered. In the event the financing is not completed, the bridge
notes are due with interest at the annual rate of 8% on March 31,
2010. The Company is presently working with the note holders to
extend the due date until April 30, 2010.
7
NOTE 2 -
SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
|
a.
|
Basis of
Presentation – The accompanying consolidated financial statements
have been prepared assuming that the Company will continue as a going
concern. The Company has incurred net losses of over $40.4
million since inception including a net loss in excess of $6.7 million for
the year ended May 31, 2009 and $9.4 million for the nine months ended
February 28th,
2010. Additionally, the Company had a net working capital
deficiency and shareholders’ deficiencies at February 28th,
2010 and May 31, 2009 and negative cash flow from operations since
inception. These conditions raise substantial doubt about the Company’s
ability to continue as a going concern. Management expects to
incur additional losses in the foreseeable future and recognizes the need
to raise capital to remain viable. The accompanying consolidated financial
statements do not include any adjustments that might be necessary should
the Company be unable to continue as a going
concern.
|
|
b.
|
Principles
of
consolidation – The consolidated financial statements include the
accounts of Arkados Group, Inc. and its wholly owned subsidiaries.
Intercompany accounts and transactions have been eliminated in
consolidation.
|
|
c.
|
Business
combinations – We account for acquired businesses using the
purchase method of accounting which requires that the assets and
liabilities assumed be recorded at the date of acquisition at their
respective fair values. Because of the expertise required to value
intangible assets and intellectual property research and
development “IPR&D”, we typically engage a third party valuation
firm to assist management in determining those values. Valuation of
intangible assets and IPR&D entails significant estimates and
assumptions including, but not limited to: determining the timing and
expected costs to complete projects, estimating future cash flows from
product sales, and developing appropriate discount rates and probability
rates by project. We believe that the fair values assigned to the assets
acquired and liabilities assumed are based on reasonable assumptions. To
the extent actual results differ from those estimates, our future results
of operations may be affected by incurring charges to our statements of
operations. Additionally, estimates for purchase price allocations may
change as subsequent information becomes
available
|
|
d.
|
Fair Value of
Financial Instruments – The carrying value of cash, accounts
receivable, other receivables, accounts payable and accrued expenses
approximate their fair values based on the short-term maturity of these
instruments. The Company can not estimate the fair value of the
remaining outstanding payroll taxes penalties and interest recorded in
connection with the merger, or its’ long term debt, as a result of the
undercapitalized nature of the
Company..
|
|
e.
|
Reclassification
– Certain amounts have been reclassified to conform to the current
period’s presentation. The allocation of costs between Research
& Development Expenses and General Administration Expenses has been
changed to incorporate all costs of Research & Development including
personnel costs, facility cost, and direct research costs for parts and
services. Formerly, only direct research expenses for parts and
services were included under the caption “Research and Development
Expenses”. These reclassifications had no effect on previously
reported net earnings.
|
|
f.
|
Revenue
Recognition – The Company derives revenues from two sources – sales
of products and revenues from services in the form of custom development
activities. For product sales, revenue is recognized when our
products are shipped to our customers. For sales related to development,
the Company has recorded revenues pursuant to a number of long term
development contracts. The revenues are earned and recorded based on
pre-determined milestones. When revenues within a pre-determined milestone
have been partially earned, the Company records such progress billings as
“Revenues earned not yet billed.” Such revenues are billable under the
terms of the arrangement once the milestone has been fully completed. The
Company also monitors estimated costs to complete its obligation to
fulfill the terms of such long term contracts and compares such costs to
the expected revenues to be earned to ensure that estimated losses are
recorded on a timely basis.
|
|
g.
|
Loss Per Share
– Basic net loss per common share is computed by dividing net loss by the
weighted average number of shares of common stock
outstanding. Vested stock options totaling 16,235,562 and
vested warrants totaling 11,735,004 have not been
included since there is a net loss and the effect of including these
options and warrants would be
anti-dilutive.
|
|
h.
|
Tax Provision –
No tax provision is required at this time since the company expects to be
in a tax loss position at year-end May 31, 2010 and has net operating
losses from previous years. The Company has established a 100% valuation
allowance against the deferred tax
asset.
|
In
December 2007, the Company sold $4,967,706 of its State Net Operating Loss carry
forwards under the State of New Jersey’s Technology Business Tax Certificate
Transfer Program (the “Program”). The Program allows qualified technology and
biotechnology businesses in New Jersey to sell unused amounts of net operating
loss carry forwards and defined research and development tax credits for cash.
The proceeds from the sale in 2007 were $400,149. This amount has
been recorded as a tax benefit in the consolidated statements of operations in
2008. The State renews the Program annually and limits the aggregate proceeds to
$10,000,000. We cannot be certain if we will be able to sell any of our
remaining or future carry forwards under the Program.
8
On
September 9, 2008, the Company was approved for the sale of its 2007 Net
Operating Losses of approximately $4,200,000 under the Program in addition to
the sale of its Research and Development Tax Credits. The actual sale
and receipt of funds was received in the first half of December
2008
|
i.
|
Accounting for
Uncertainty of Income Taxes (“FIN 48”) – In June 2006, the Company
adopted guidance for the Financial Accounting Standards Board issued
Interpretation , Accounting for Uncertainty in Income Taxes (“FIN 48”).
This Interpretation clarifies the accounting for uncertainty in income
taxes recognized in an entity’s financial statements and prescribes a
recognition threshold of more-likely-than-not to be sustained upon
examination. Measurement of the tax uncertainty occurs if the recognition
threshold has been met. This Interpretation also provides guidance on
derecognition, classification, interest and penalties, accounting in
interim periods, disclosure, and transition. Arkados conducts business in
the U.S. and, therefore, files U.S. and New Jersey income tax returns. In
the normal course of business, the Company is subject to examination by
taxing authorities. At present, there are no ongoing audits or unresolved
disputes with the various tax authorities with whom the Company files.
Given the Company’s substantial net operating loss carryforwards (“NOLs”,
which are subject to a full valuation allowance) as well as the historical
operating losses, the adoption of FIN 48 on June 1, 2007 did not have any
effect on our financial position, results of operations or cash flows as
of February 28, 2010.
|
|
j.
|
Stock Options
–. The Company adopted Guidance for, “Share Based
Payments.” The guidance requires companies to expense the value
of employee stock options and similar awards and applies to all
outstanding and vested stock-based
awards.
|
In
computing the impact, the fair value of each option is estimated on the date of
grant based on the Black-Scholes options-pricing model utilizing certain
assumptions for a risk free interest rate; volatility; and expected remaining
lives of the awards. The assumptions used in calculating the fair value of
share-based payment awards represent management’s best estimates, but these
estimates involve inherent uncertainties and the application of management
judgment. As a result, if factors change and the Company uses different
assumptions, the Company’s stock-based compensation expense could be materially
different in the future. In addition, the Company is required to estimate the
expected forfeiture rate and only recognize expense for those shares expected to
vest. In estimating the Company’s forfeiture rate, the Company analyzed its
historical forfeiture rate, the remaining lives of unvested options, and the
amount of vested options as a percentage of total options outstanding. If the
Company’s actual forfeiture rate is materially different from its estimate, or
if the Company reevaluates the forfeiture rate in the future, the stock-based
compensation expense could be significantly different from what we have recorded
in the current period. The impact of applying such guidance approximated $1,
022,063, respectively, in additional compensation expense during the nine months
ended February 28, 2010. Such amount is included general and
administrative expenses on the statement of operations.
In
accordance with the guidance for share based payments, the fair value of each
option grant has been estimated as of the date of the grant using the
Black-Scholes option pricing model with the following weighted average
assumptions:
For
Nine Months Ended
|
For
Nine Months Ended
|
|||
February28,
2010
|
February
28, 2009
|
|||
Risk
free interest rate
|
2.57-2.71
|
1.94-2.76%
|
||
Expected
life
|
3-5
years
|
3-5
years
|
||
Dividend
rate
|
0.0%
|
0.00%
|
||
Expected
volatility
|
223-294%
|
64.00
- 194.00%
|
|
k.
|
Recently Issued
Accounting Pronouncements
|
In April
2009, FASB issued guidance in the Financial Instruments Topic of the
Codification on interim disclosures about fair value of financial instruments.
The guidance requires disclosures about the fair value of financial instruments
for both interim reporting periods, as well as annual reporting periods. The
guidance is effective for all interim and annual reporting periods ending after
June 15, 2009 and shall be applied prospectively. The adoption of this guidance
had no impact on our financial statements as of February 28, 2010 other than
additional disclosure.
The FASB
issued guidance in the Subsequent Events Topic of the Codification in May 2009.
The guidance is intended to establish general standards for, and disclosure of,
events that occur after the balance sheet date but before financial statements
are issued. It requires the disclosure of the date through which an entity has
evaluated subsequent events and the basis for that date. The guidance is
effective for interim or annual financial periods ending after June 15, 209 and
is required to be adopted prospectively. We adopted this guidance effective for
the quarter ended August 31, 2009. The adoption of this guidance had no impact
on our financial statements as February 28, 2010, other than the additional
disclosure.
9
In June
2009, the FASB issued guidance which will amend the Consolidation Topic of the
Codification. The guidance addresses the effects of eliminating the qualifying
special-purpose entity (QSPE) concept and responds to concerns over the
transparency of enterprises’ involvement with variable interest entities
(VIE’s). The guidance is effective beginning on January 1, 2010. We do not
expect the adoption of this guidance to have an impact on our financial
statements.
In August
2009, the FASB issued guidance for, “Measuring Liabilities at Fair Value” (ASU
2009-05) ASU 2009-05 amends the Fair Value Measurements and Disclosures Topic of
the FASB Accounting Standards Codification by providing additional guidance
clarifying the measurement of liabilities a fair value. ASU 2009-05 was
effective for us for the reporting period ending May 31, 2009. We do not expect
the adoption of ASU 2009-05 to have an impact on our financial
statements.
All other
new accounting pronouncements have been deemed not to be relevant.
NOTE 3 –
REVENUE
RECOGNITION
During
the three and nine month periods ended February 28, 2010 and 2009 and the same
periods of the prior fiscal year, the Company sold and delivered $0 and $0 of
chips and $0 and $35,115, respectively, to customers. In
addition, during the three and nine month period ended February 28, 2010 and the
same period of the prior fiscal year, the Company recognized revenues related to
development contracts in the amounts of approximately $46,346 and $173,246 and $
163,765 and $583,325 respectively. The revenue was recognized as was
an amount for cost of goods sold amount that was calculated based upon the
estimated costs the Company incurred to deliver the products. These
costs were, for the most part, related to labor, outside fabrication services,
and supplies and materials.
Note 4 - ACCRUED EXPENSES AND OTHER
LIABILITIES
As of
February 28, 2010 and May 31, 2009, accrued expenses and other liabilities
consist of the following approximate amounts:
Nine
Months Ended
February
28, 2010
|
Year
Ended
May
31, 2009
|
|||||||
Accounts
Payable
|
$ | 1,737,245 | $ | 1,743,289 | ||||
Accrued
Compensation
|
4,106,241 | 2,389,805 | ||||||
Accrued
Interest Payable
|
2,554,235 | 489,212 | ||||||
Liabilities
Assumed under Merger agreement
|
34,673 | 34,673 | ||||||
Accrued
Other
|
156,096 | 164,667 | ||||||
$ | 8,588,490 | $ | 4,821,646 |
NOTE 5 –
CONVERTIBLE DEBENTURES
AND RELATED PARTY PAYABLES
2004 6% Convertible
Notes - During the period from October to November 2005, the Company
borrowed $500,000 from certain of its existing stockholders for working capital
needs and such obligation is represented by notes. The notes, recorded as
Related Party Payables, bore interest at 6% per annum and contained certain
conversion features which would have been triggered if the Company had sold
equity at or above $1.25 per share. No expense was recorded for the beneficial
conversion feature, since conversion price was always at or above market. The
notes’ maturity was initially October 15, 2005, which was extended from time to
time by the holders. In February 2006, the Company and holders of
$175,000 of the outstanding principal of the notes agreed to discharge the
Company’s obligations for 160,765 shares of common stock and the payment of
$81,018. The remaining $325,000 of principal outstanding was held by
an affiliate of the Company’s Chairman of the Board. On June 30,
2006, the principal and interest on the remaining $325,000 due were forgiven in
exchange for an equivalent amount of 6% secured convertible debentures and
warrants.
2005 6% Convertible
Notes - During the period from July 7, 2005 to September 23, 2005, the
Company raised $912,500 and $154,000, respectively, of gross proceeds from
the private placement of an aggregate of 10.665 units (the “Units”) each
consisting of $100,000 principal amount 6% convertible subordinated promissory
notes (the “6% Notes”) and 14,286 detached warrants (the “Warrants”) to purchase
a like number of shares of the Company’s common stock, for $0.35 per
share. The Company issued an aggregate of 152,359 Warrants to the
purchasers of the Units, which have been valued at $74,802 and will be amortized
as interest expense over the term of the 6% Notes. In addition, the
Company issued 238,213 common stock warrants exercisable at $0.65 as part
compensation to the placement agent, which have been valued at $111,668 and will
be amortized as interest expense along with other
10
expenses
of the offering. Both the $0.35 and $0.65 Warrants have a “net exercise”
provision that permits the holder to convert the Warrants into shares of the
Company’s common stock. The 6% Notes (1), when issued
were due July 7, 2007 with interest at the annual rate of 6% from the date
of original issuance (increasing to 12% per annum from an event of default as
defined in the 6% Notes); (2) are unsecured obligations of the Company and
subordinated to senior secured loans to the Company (if any) from banks, finance
companies and similar institutions that extend credit in the regular cause of
such institution’s business; (3) are convertible, subject to certain conditions
and at two different price levels ($1.125 and $1.575 for a period of twenty
trading days following the bid price of common stock closing above $1.50 and
$2.50, respectively, for a period of five consecutive trading days), into shares
of common stock; and (4) may be redeemed by the Company in certain limited
circumstances described below prior to maturity. Since the beneficial conversion
feature of the 6% Notes is (at the lowest price) at a price greater than the
market price of the stock upon issuance of the 6% Notes, no value has been
estimated or recorded for the beneficial conversion feature.
On July
6, 2007, the Company reached an agreement with more than the requisite holders
of 2/3 of the outstanding $1,066,500 principal amount of 6% Notes to extend
the due date of the Notes to June 30, 2008. In exchange for the amendment, the
Company agreed to issue approximately 188,200 three year warrants to purchase
shares of the Company’s common stock for $0.85 per share and lowered conversion
prices in the Notes to $0.85. In connection with the amendments, the
Company retained entered into a Solicitation Agreement with Trident
Partners, Ltd., who served as placement agent for the Notes in 2005, to solicit
the consent of Note holders that were their customers. Under the
Solicitation Agreement, the Company paid Trident $25,000 and issued Trident
137,656 Warrants for their successful efforts.
On July
9, 2008, the Company reached an agreement with the holders
of more than the requisite of the outstanding $1,066,500 principal
amount of 6% Notes (the “Notes”) due June 30, 2008 to extend the due date
of the 6% Notes to June 30, 2009. In exchange for the amendment, the
Company agreed to exchange approximately 876,100 shares of common stock, pro
rata, for notes in the original principal amount of $313,214. The
debt was converted at $0.35 versus $0.85 in the original agreement.
The
Company did not pay the $999,733 principal and interest due on the 6% when due
on June 30, 2009 and, accordingly the 6% Notes accrue interest at the penalty
rate of 12% per annum from the date of default. The Company has discussed
forbearance or conversion with Trident, who was the placement agent for the
sales of the 6% Notes to investors and who has twice served as Solicitation
Agent in obtaining an extension of the 6% and while neither Trident or any of
the holders of the 6% have agreed to any extension or conversion, none of them
have taken any judicial collection action.
During
the first half of 2008, the Company borrowed $855,000 at the times set forth
below, on an unsecured basis from affiliates of the Company’s Chairman and two
non-employee directors, with the understanding that these advances would be
exchanged for additional 6% Secured Debentures and related
warrants. On December 15, 2007, this related party debt was converted
to additional principal of the 6% Secured Debentures on substantially the same
terms as the 6% Secured Debentures previously issued by the
Company.
From
March 1, 2008 through November 30, 2009, the Company borrowed $197,700 from two
directors. $187,700 of these advances were due on demand with
interest at the annual rate of 6%. $10,000 is due on January 31, 2010 and is at
an interest rate of 8% per annum.
6% Secured Debentures
- On December 19, 2005, the Company borrowed $267,900 from one of the accredited
investors that ultimately purchased 6% secured convertible debentures (the “6%
Secured Debentures”) in the December 28, 2005 financing. The loan was
made on an unsecured basis, was due on demand and was forgiven in exchange for
$267,900 of 6% secured convertible debenture due December 28, 2008 (the “6%
Secured Debentures”). On December 28, 2005, the Company issued $2.0 million
aggregate principal amount authorized $3.5 million 6% secured
convertible debenture due December 28, 2008 (the “6% Secured Debentures”) to
three institutional investors. The 6% Secured Debentures had, at the time
they were issued, a term of three years and were to mature on
December 28, 2008, pay interest at the rate of 6% per annum, payable
semi-annually on January 1 and July 1 of each year beginning July 1, 2006, and
are secured by a grant of a security interest into substantially all of the
Company’s assets.
The 6%
Secured Debentures were, at the time they were issued convertible at
any time at the option of the holder into shares of the Company’s common stock
at a price of $0.85 per share, subject to adjustment as set forth therein. If
after the effective date of the registration statement we agreed to file under
the Securities Act (the “Registration”), the closing price for the Company’s
common stock exceeds $1.70 for any 20 consecutive trading days, then the Company
may, within one trading day after the end of such period, require the holders of
the 6% Secured Debentures to immediately convert all or part of the then
outstanding principal amount of their 6% Secured Debentures. As a
result of later amendments to facilitate equity financing in July 2008,
principal and accrued and unpaid interest on one third of the outstanding
principal amount of 6% Secured Convertible Debentures ($2,845,815), and related
warrants were exchanged for identical securities, except that the conversion and
exercise prices of the newly issued securities is $0.25 rather than $0.85. The
terms of the conversion rights also contain certain dilution
provisions.
11
The
Company reviewed the accounting for registration rights terms relating to the
shares of common stock issuable upon the conversion and exercise, respectively,
of the 6% Secured Convertible Debentures and related warrants under the FASB
guidance. The Company granted demand registration rights to the purchasers of
the 6% Secured Debentures which requires the Company to file an initial
registration statement under the Securities Act 45 days following demand made by
the holders of 60% of the securities eligible for registration under the
agreement. Under the registration rights agreement, the Company
incurs a penalty if it fails to file such a registration statement within 45 day
following such a demand or if the SEC had not declared the registration
effective 90 days after filing. The holders of the 6% Secured
Debentures have not demanded registration. The Company believes it
can comply with a demand for registration in a timely manner and therefore no
accrual for possible penalties under the registration rights agreement has been
made.
12
On
December 28, 2005, pursuant to the purchase agreements with the purchasers of
the 6% Secured Debentures, the Company issued warrants to purchase an aggregate
of 941,176 shares of common stock for $1.00 per share, on or prior to December
28, 2010 and short term warrants to purchase up to an aggregate of 941,176
additional shares of common stock for $0.85 per share, each subject to
anti-dilution adjustments, including a “full ratchet down” to the purchasers of
the 6% Secured Debentures. The short term warrants are exercisable at
any time prior to the earlier of December 28, 2007 and twelve months after the
effective date of the Registration Statement. If no effective
registration statement is obtained after one year, then such warrants have a
cashless exercise option feature.
On March
31, 2006, the Company issued $500,000 additional principal of the 6% Secured
Debentures to a limited liability company owned equally by the wife of our
chairman and another director on substantially the same terms as the 6% Secured
Debentures issued on December 28, 2005.
A debt
discount was recorded of $47,504 and $161,640, respectively for such short and
long term warrants issued with these 6% Secured Debentures. The amortization
recorded attributed to the debt discounts amounted to $22,547 and has been
recorded as interest expense for the year ended May 31, 2006.
The
Company received an advance of $500,000 from one of the holders of 6% Secured
Debentures on June 1, 2006. The advance was due on demand and forgiven in
exchange for $500,000 principal amount of 6% Secured Debentures and related
warrants on June 30, 2006.
The
Company issued $1,773,471 aggregate principal amount of 6% Secured Debentures on
June 30, 2006. The consideration received by the Company for the
Secured Debentures consisted of $500,000 cash, forgiveness of repayment of the
$500,000 advance received June 1, 2006, forgiveness of $773,470 related party
debt due to Andreas Typaldos, the Company’s Chairman and principal shareholder
and a limited partnership controlled by his wife. The debentures have a term of
three years and mature on December 28, 2008. The 6% Secured Debentures pay
interest at the rate of 6% per annum, initially payable semi-annually on January
1 and July 1 of each year beginning January 1, 2007. In January 2007,
the 6% Secured Debentures were amended to provide that interest payable on
January 1, 2007 and July 1, 2007 would be added to principal. These
debentures are on substantially the same terms as, and rank pari passu to, an
aggregate of $3,875,884 of 6% Secured Debentures outstanding as of May 31,
2006. The Company issued 834,575 short term and 834,574 long term warrants
to the purchasers of the 6% Secured Debentures and entered into a security
agreement granting the purchasers a security interest in its assets to secure
the Company’s obligations under the debentures. Obligations under the debentures
are guaranteed by the Company’s two wholly-owned operating
subsidiaries. The debt discount for such short and long term warrants
issued with these 6% Secured Debentures and the related amortization attributed
to the debt discount amounts are reflected as interest expense for the three
month period ending August 31, 2008.
A debt
discount was recorded of $34,819 and $104,020, respectively for such short and
long term warrants issued with these 6% Secured Debentures on June 30,
2006.
On June
30, 2006, the Company signed a letter amendment to the consulting agreement with
Andreas Typaldos dated May 21, 2004. The amendment removed the condition that
the Company raise $1,000,000 of equity financing before paying consulting fees
that accrued at the rate of $15,000 per month commencing June 1, 2006 as an
inducement for Mr. Typaldos forgiving the $360,000 of accrued and unpaid fees in
exchange for the $360,000 principal amount of 6% Secured Debentures and related
warrants.
On August
18, 2006, the Company entered into an amendment agreement with the holders of
$3,875,884 principal amount of 6% Secured Debentures outstanding as of May 31,
2006, including a limited liability company owned by the wife of our Chairman,
and one of our directors. The Amendment agreement made material changes to the
securities purchase agreements, warrants, registration rights agreements,
security agreements and other ancillary documents we executed in connection with
an aggregate of $3,875,884 of 6% debentures the Company sold during the period
from December 28, 2005 to March 31, 2006. The material changes give
the holders the same rights of redemption in the event of a cash purchase of our
assets as those held by the of $1,773,470.83 aggregate principal amount of 6%
Secured Debentures issued on June 30, 2006, and thereafter. As a result of the
Amendment, all of the 6% Secured Debentures and warrants must be redeemed by the
Company at a premium if it agrees to sell all of the Company’s assets to a third
party for cash and cash equivalents. In addition, as a result of the amendment,
all holders of the 6% Secured Debentures have the right to have shares of Common
Stock issuable upon conversion of the debentures and exercise of the related
warrants registered for resale under the Securities Act of 1933 within 60 days
after receiving written demand of the holders of 60.1% of such securities and
have it declared effective 90 days thereafter.
13
March
12, 2007
|
$
|
20,000
|
||
March
28, 2007
|
150,000
|
|||
April
15, 2007
|
115,000
|
|||
April
30, 2007
|
70,000
|
|||
May
10,2007
|
380,000
|
|||
May
31, 2007
|
529,106
|
|||
Total
during the 4th quarter of 2007
|
$
|
1,264,106
|
During
the first half of 2008, the Company borrowed $855,000 at the times set forth
below, on an unsecured basis from affiliates of the Company’s Chairman and two
non-employee directors, with the understanding that these advances would be
exchanged for additional 6% Secured Debentures and related
warrants. Such an exchange is subject to the consent of the holders
of outstanding 6% Secured Debentures or the satisfaction of the holders’
pre-emptive rights.
July
10, 2007
|
$
|
215,000
|
||
August
3, 2007
|
150,000
|
|||
August
22, 2007
|
50,000
|
|||
August
27, 2007
|
20,000
|
|||
August
31, 2007
|
50,000
|
|||
September
28, 2007
|
100,000
|
|||
October
16, 2007
|
60,000
|
|||
October
30, 2007
|
90,000
|
|||
November
7, 2007
|
70,000
|
|||
November
19, 2007
|
50,000
|
|||
Total
during the 1st half of 2008
|
$
|
855,000
|
On
December 15, 2007, this related party debt was converted to additional principal
of the 6% Secured Debentures on substantially the same terms as the 6% Secured
Debentures previously issued by the Company. The Company issued
402,353 short-term and 402,353 long-term warrants to the purchasers of the 6%
Secured Debentures. Based on the issuance date of the debentures,
debt discounts were recorded in the third quarter of 2008 in the amount of
$118,723, respectively for 402,353 short and 402,353 long term warrants issued
with these 6% Secured Debentures.
The
amortization recorded attributed to all the debt discounts amounted to $88,323
and has been recorded as interest expense for the quarter ended August 31,
2008.
The
Company also agreed to amend the 10,065,210 warrants outstanding and issued with
the then outstanding 6% Secured Debentures to be consistent with the 804,706 new
warrants issued December 15, 2007 by extending the expiration date from an
outside date of December 28, 2010 to December 28, 2012 and removing any
restriction on exercising the warrants on a cashless basis or any provision
which accelerates the expiration date if the shares issuable on exercise of the
warrants are registered for resale under the Securities Act.
During
the quarter ended February 28, 2008, a deferred expense was recorded in the
amount of $774,789 for the extension of the expiration date of the warrants to
December 28, 2012. The amortization recorded was $51,653 and has been
recorded as interest expense for the quarter ended August 31, 2008.
On April
2, 2008, the Company entered into a Waiver and Amendment Agreement with the
holders of $9,283,461 issued principal amount of 6% secured convertible
debentures due December 28, 2008. Pursuant to the Waiver and
Amendment, the Holders agreed to waive all potential defaults caused by our not
making a scheduled interest payment of approximately $255,000 which became due
under the terms of the Debentures, as previously amended on March 3,
2008. The Holders agreed to add the interest due to principal and
make such a waiver in exchange for the Company issuing additional Debentures
equal to 10% of the principal amount of the Debentures held by the Holders
(after adding the past due interest to principal).
As of
February 28, 2010, there was a total of $17,626,658 in principal and interest
due on the Secured Debentures, including an interest penalty of
$1,842,721, a default penalty of $3,622,083 and 9,328,494
warrants outstanding. The interest and default penalties resulted from the
Company’s failure to pay the interest and principal due on the Secured
Debentures on the extended due date of June 30, 2009. As a result, the principal
obligation increased to 130% of the principal balance and the interest rate
increased from 6% to 18%.
14
Other Obligations -
As a consequence of the Company raising an aggregate of $3 million of financing
since June 2004, pursuant to the Company’s May 2004 employment agreement with
its chief executive officer, $91,875 of deferred salary payments for the period
from May 2004 to January 2006 representing 24.5% of his agreed salary for such
period and a bonus of $65,333 was due December 29, 2005. While the deferred
salary of $91,875 has been paid, the bonus of $65,333 remains outstanding. The
Company’s chief executive officer temporarily waived the right to receive
immediate payment of the $65,333 until May 31, 2007. The Company’s
failure to pay this bonus and other amounts due under the employment agreement
gives the chief executive the right to terminate the agreement and continue to
receive salary at the annual rate of $300,000 for twelve months following the
date of such termination.
Included
in accrued expenses and other liabilities as of February 28, 2010 is unpaid
accrued payroll of $3,362,528 (which includes approximately seventeen months of
payroll for non-executive employees in the amount of $1,545,505 and
approximately twenty five months of unpaid executive payroll in the amount of
$1,751,690 and an unpaid bonus of $65,333 due to the Company’s CEO since
December 2005) and unpaid expense reimbursement of approximately $35,000 due to
executive officers.
Related Party Activities
- As of February 28, 2010, the Company has reported a related party
payable in the amount of $247,700 which represents funds that were advanced to
the Company by two of the Directors of the Company.
In
aggregate, $4,979,689 of the $17,626,658 of principal and interest due on the
18% Secured Debentures is due to related parties.
NOTE 6 –
PAYROLL
LIABILITIES
On
January 17, 2006, the Company paid an aggregate of $873,993 of payroll
liabilities of the company from which it acquired assets in 2004 at a public
foreclosure sale, representing all of the fiduciary funds due. The Company had
agreed to pay up to $1.2 million of such liabilities and accrued an additional
$600,000 in the event there were any additional claims related to interest and
penalties pursuant to its 2004 merger agreement. Currently, there is
$937,000 still recorded on the Company’s books as due and outstanding for the
federal and state tax authorities for penalties and interest under such
agreement. The Company does not believe that it has a legal
obligation to pay anything more to any taxing authority, but until such
clearance is received from the appropriate agencies or the statute of limitation
has expired, the Company has elected to keep the liability on its
books.
NOTE 7 –
DEFERRED FINANCING
EXPENSES
The
Company capitalizes financing expenses of legal fees, finders fees, value of
warrants as extension fees in connection with the related convertible debt
financing. These fees will be amortized over the related term of the
convertible debt instruments issued in such financing, which approximates two
years.
NOTE 8 –
EQUITY BASED
COMPENSATION
Effective
June 1, 2005, the Company adopted Guidance for “Accounting for Stock-Based
Compensation”. Compensation based stock option and warrant activity for warrants
and qualified and unqualified stock options are summarized as
follows:
Shares
|
Weighted
Average
Exercise
Price
|
|||||||
Outstanding
at May 31, 2009
|
19,961,797
|
$
|
0.27
|
|||||
Granted
|
—
|
—
|
||||||
Exercised
|
—
|
—
|
||||||
Expired
or cancelled
|
—
|
—
|
||||||
Outstanding
at February 28, 2010
|
19,961,797
|
$
|
0.27
|
15
Information,
at date of issuance, regarding stock option grants during the period ended
February 28, 2010 is summarized as follows:
Shares
|
Weighted-
Average
Exercise
Price
|
Weighted-
Average
Fair
Value
|
||||||||||
Period
ended February 28, 2010
|
||||||||||||
Exercise
price exceeds market price
|
—
|
$
|
—
|
$
|
—
|
|||||||
Exercise
price equals market price
|
—
|
$
|
$
|
—
|
||||||||
Exercise
price is less than market price
|
—
|
$
|
—
|
$
|
—
|
No stock
option grants were made during the six months period ended February 28,
2010.
The
compensation expense attributed to the issuance of the options and warrants is
recognized as they vest or are otherwise earned. The Company has
recorded $1,022,063 of compensation for options vested / earned in the nine
month period ended February 28, 2010 for employees. No options were
granted during the nine month period ended February 28, 2010. Outstanding stock
options and warrants are exercisable for three to ten years from the grant date.
The employee stock option plan stock options are exercisable for ten years from
the grant date and vest over various terms from the grant date to three
years.
The
issuance of warrants attributed to debt issuances are summarized as
follows:
Shares
|
Weighted
Average
Exercise
Price
|
|||||||
Outstanding
at May 31, 2009
|
11,735,004
|
$
|
0.63
|
|||||
Granted
|
—
|
—
|
||||||
Exercised
|
—
|
—
|
||||||
Expired
or cancelled
|
—
|
—
|
||||||
Outstanding
at February 28, 2010
|
11,735,004
|
$
|
0.63
|
Information,
at date of issuance, regarding warrant grants during the period ended February
28, 2010.
Shares
|
Weighted-
Average
Exercise
|
Weighted-
Average
Fair
Value
|
||||||||||
Period
ended February 28, 2010
|
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No
warrants were issued during the quarter ended February 28, 2010.
Interest
expense attributed to the aforementioned warrants is being amortized over the
ratable term of each respective debt arrangement. See “NOTE 4 – CONVERTIBLE
DEBENTURES AND RELATED PARTY PAYABLES,” above.
16
NOTE 9
– SUBSEQUENT EVENTS
The
Company borrowed the sum of $60,000 from Cooper Barrons, a private investment
firm, in December, 2009. Cooper Barrons is controlled by Harris
Cohen, a director of the Company. The original loan was due on
demand. On March 29, 2010, Cooper Barrons agreed to accept a
promissory note in the principal amount of $60,000 from the Company to represent
the loan. The note is due with interest at the rate of 8% per annum
on April 30, 2010, or on the earlier occurrence of a default, as defined in the
note. In the event of default, penalty interest will be due on the
note at the rate of $100 per day and the note provides for certain mandatory
pre-payments of principal in the event the Company receives financing or cash
revenue from its operations in excess of budgeted monthly operating critical
expenses. Payment of principal and interest is subordinated to the
obligation to the holders of the Company’s outstanding
Debentures. The Board of Directors of the Company determined that the
terms of the note are no more favorable to Cooper Barrons that that which could
have been obtained from an unaffiliated lender. A copy of the note is
filed as Exhibit 10.1 to this report.
On March
29, 2010, the Board of Directors approved the payment of consulting fees to
Harris Cohen in the amount of $7,000 for the period from December 1, 2009 to
January 31, 2010 and continuing fees of $3,000 per month for his service as the
sole member of a committee of independent directors to make recommendations to
the board concerning matters relating to the outstanding
Debentures. The Board granted additional compensation to Mr. Cohen in
the form of a agreement to issue a five- year warrant on the
successful debt restructuring, financing and possible recapitalization of the
Company to purchase 150,000 shares of the Company’s common equity (as
constituted after such transactions) for $0.05 per share. A copy of
the Board consent relating to this transaction is filed as Exhibit 10.2 to this
report.
17
Item
2. Management’s Discussion and Analysis of Financial Condition and Results
of Operations
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.
Arkados
Products
Our
highly integrated semiconductors provide the internet or network connections
over existing electric lines for new consumer electronic products (such as
stereo systems, television sets, intercoms and personal iPods®) and smart grid
applications. Our solutions can also be used for bridging legacy products with
newer home networking and broadband communications technologies.
We have
designed our turnkey solutions to be used inside products for both consumers and
industry. For example, consumer products can use Arkados solutions as part of a
connected home entertainment and computing network, while industry can implement
Arkados solutions as a part of a utility company’s “smart grid” and “green
energy” solutions.
We are a
“fabless” semiconductor company, meaning we design semiconductors without the
capital requirements of owning and operating a fabrication
facility; Arkados semiconductors are made from our designs by independent
fabricators. We offer our customers complete hardware and software
design solutions that allow them to build devices that will distribute audio,
video, voice, and data content throughout the whole house, building, or
“smart-grid” infrastructure.
Arkados
solutions offer a completely different approach than our
competitors. Our solutions incorporate a processor and multiple
interfaces into the same chip that houses HomePlug communication technology, as
well as provide application-level software that runs on the chip. We
believe this “system-on-a-chip” approach provides a more cost-effective and more
flexible strategy to bring products to market for our customers.
● Comprehensive platform
solutions.
Our
platform solutions consist of an integrated package of hardware, firmware and
software designed to enable our customers to develop differentiated products in
a cost-effective manner with a short time-to-market. In addition to a
high-performance SoC, we plan to provide our customers with customizable, high
functionality firmware, and software development kits to allow them to rapidly
develop and differentiate their products. As a result, we would be able to
reduce our customers’ investment in costly and time-consuming internal firmware
and software development for their products, and from having to source different
firmware and software for their end products from multiple
suppliers.
● Customizable firmware and
software.
Our
firmware, which is sold as a bundled solution with our SoCs, includes a
real-time operating system and a set of application-specific modules that
support a wide range of functions including Web-based management, audio
distribution, traffic classifications, etc. Our software platform includes a
comprehensive suite of components, such as device link libraries and drivers,
tools, sample code and documentation to create applications that would allow a
wide range of networking devices and networked multimedia
appliances.
● Targeted, high-performance
SoCs.
Our SoC
solutions are specifically designed for the powerline communication
market. They are driven by function-specific blocks that allow
simultaneous execution of complex operations, such as transmission of data over
power lines and MPEG audio decoding and playback. Our SoCs support most major
peripheral connection protocols, including USB, Ethernet, Infrared, I2S, and
a number of specialized and general purpose interfaces. This support enables
connectivity to a variety of playback, display and content-creation devices
including cameras, PCs, televisions and car and home audio systems.
Arkados
solutions have been shown in a number of public venues, including the
2008/2009/2010 International Consumer Electronics Show, Computex 2009, CeBIT
2009, CEDIA Expo 2009, Electronic House Expo 2009, and other conferences. The
Company’s prototypes or products have been publicly announced and/or
demonstrated by Analog Devices, Channel Vision, Checkolite, Corporate Systems
Engineering, devolo AG, Freescale, GigaFast, GoodWay, IOGEAR, NuVo, Meiloon, PAC
Electronics, Russound, Tatung, Zinwell, and Zylux. Many of these companies are
suppliers to top tier brands in the market place. Tatung’s service provider
business has used the Arkados chip in WiMAX-to-Powerline demonstrations. Several
of these relationships, among others, have progressed into sales of chips,
software development services, and related revenue.
We have
also been involved with our customers in projects related to Smart Grid
applications. Smart Grids have received increased attention due to the recently
enacted American Recovery and Reinvestment Act (ARRA) of 2009. The act includes
$4.5
18
billion
focused on smart grid related activities and smart meters, and $7.3 billion to
support expanding access to broadband in underserved communities. Arkados has
already reported service revenue related to smart grid development projects. As
early as October 2007, Arkados and MainNet Communications announced plans to
jointly develop applications to improve the reliability and efficiency of
electrical grids, connect consumer electronic devices over power lines, enable
energy-saving initiatives, and deliver Broadband content to homes and offices.
Arkados has also provided solutions for components intended to implement
energy-saving programs (such as temperature control, smart thermostats, and
demand-driven load control) that were used in trials of a “green power”
application with Corporate Systems Engineering.
Excellent
User Experience
We
believe our solutions create easy-to-install and easy-to-use products since
connectivity occurs through the existing electrical outlets and electrical
wires. For the end user, products that use Arkados solutions connect to each
other by simply plugging in, while also being reliable and secure.
Volume
Semiconductor Sales
We have
experienced the beginning of semiconductor sales. Most of our current
revenue has come from design and development agreements, but we expect that such
agreements will lead to volume semiconductor orders, but we cannot assure you
that they will. We are targeting the sale of our powerline connectivity products
to a broad range of communications, computing and consumer electronics
ODMs/OEMs, but we have not yet derived significant product revenue from these
customers, partly due to the lengthy process of developing and producing
finished products.
Technology
Arkados
is committed to building standards-based solutions. Currently,
Arkados SoCs are based on the specifications developed by the HomePlug Powerline
Alliance and TIA-1113 standards. Our planned HomePlug® AV based AI-2100 SoC,
which is being developed and manufactured under an agreement with
STMicroelectronics, is designed be interoperable with many established powerline
standards: TIA-1113/HomePlug 1.0, HomePlug AV, HomePlug GP (“Green PHY”), and
the recently confirmed IEEE 1901 Draft Standard. The chip also designed to offer
support for the Inter System Communication Protocol (ISP) as defined by the IEEE
P1901 Working Group.
System-on-Chip
Semiconductors
Arkados
has a number of design wins that employ our first SoC, the Arkados AI-1100,
which we started marketing in Fiscal 2007. The device supports
applications such as whole-house music streaming, whole-house internet access,
and can be used in IPTV set-top boxes designed to decode and display standard
definition video content -- from sources as varied as surveillance cameras and
YouTube -- on regular TVs throughout the home. This turnkey solution features a
programmable MAC and an on-chip ARM 9 application processor. Its fully HomePlug
1.0 compliant MAC/PHY and Arkados extensions and software provide increased
performance and future proofing.
Our next
generation SoC, the AI-2100, will be backwards compatible with our current chip
and it will feature an enhanced embedded Quality of Service (QoS) engine which
supports video flows for low jitter, lip synch and low latency delivery. The
chip is being developed and manufactured under an agreement with
STMicroelectronics.
Software
In our
view, today’s digital products are incomplete without an array of software
components that enable both device-to-device communications and robust product
features. We provide our customers with a host of software components
that run directly on our chips, further reducing development
time. These software components include application-level features
(such as our Direct-to-Speaker™ multi-channel audio synchronization, networking
and internet, online gaming, etc.) embedded application support software (audio
compression/decompression, internet radio support, GUI support, video drivers,
etc.), Quality of Service engine, traffic management, and TCP/IP
components.
Market
Opportunities
Arkados
solutions are offered to the following markets:
●
|
the
retail consumer electronics market and the whole-home custom installation
market
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the
smart grid market
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the
subscription services market.
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19
The
Growing Digital Home: Networked Consumer Electronics
As
broadband access to the home is becoming ubiquitous, home networking and
connectivity demands for digital home applications continues to grow – extending
the internet, and the services that travel on it, to every corner of the
house.
The
promise of sending high-speed digital communications over common power lines is
now being realized, and Arkados’ products serve several large and growing
markets: retail consumer electronic products, whole-house audio installations,
smart-grid utility company applications, broadband-over-powerline internet
access, and the distribution of internet-based services.
The
Arkados AI-1100 is the first HomePlug 1.0 compliant system-on-chip targeted for
the retail consumer electronics market.
Coupled
with software to create full turnkey solutions for its customers, the Arkados
AI-1100 has already received a number of design wins, and is the engine behind
the creation of reasonably-priced multi-room audio and video distribution
products for the retail consumer market. Products in the market now feature
iPod® docking stations and powered speakers that can be placed anywhere in the
home, with no additional wiring needed.
As a
subset of this market, the whole-house audio market category has been
particularly active. Arkados’ solutions offer a way to create both retail and
custom audio systems with features and functionality heretofore available only
in multi-thousand dollar custom audio installations. Arkados’
customers include Devolo AG, Checkolite, IOGEAR, Gigafast, Nuvo, Russound,
Tatung, and Zinwell.
Two
customers in particular, Russound and Nuvo have begun marketing campaigns for
their whole-house systems that use the Arkados chips and software. Both systems
have won major industry awards from CEDIA, CePRO, and CES. Russound selected the
AI-1100 for use in its iBridge Power Dock, and Russound’s Collage Powerline
Media and Intercom System system is currently shipping, and in the hands of
custom installers..
These
high-end custom audio systems, which address the existing home market (expanding
from their primary market target of newly constructed homes), can feature up to
12 separate audio zones and can process a wide range of sources of audio content
which can be streamed from any digital or legacy analog
source.
Arkados’
chips can also power cameras, video endpoints, and sensors for other installed
home systems, such as for surveillance systems.
Smart
Energy and Utility Company Applications
Another
large potential market for Arkados’ solutions relates to energy conservation,
the “green” applications that help utility companies and their customers save
both money and energy. For example, “Smart Grid” applications (Green
Energy, demand response, energy efficiency and grid modernization – i.e.,
reduction of carbon emissions) and home/building automation (such as controlling
air conditioner thermostats remotely) represent large and attractive
opportunities given today’s surging energy costs. Arkados has design wins at
MainNet and Corporate Systems Engineering.
Services
An
additional immediate potential market for the Arkados platform is for
subscription music services. Arkados software and chips enable the distribution
of Internet music services (e.g., Rhapsody, Yahoo! Music, AOL Music, Shoutcast
services). The Company is actively working on reference designs and
business strategies to address this rapidly developing market. Russound’s
Collage system already offers a feature that connects to Rhapsody music
service.
20
Corporate
Background
On May
24, 2004, we filed a merger certificate completing the acquisition of Miletos,
Inc., a previously unaffiliated Delaware corporation (the “Merger”). The
consideration for this Merger was 16,090,577 restricted shares of our common
stock and the assumption of certain liabilities of Miletos’ predecessor and
former controlling equity holders. The merger was completed according to the
terms of an Agreement and Plan of Merger dated as of May 7, 2004. Miletos merged
into a wholly owned subsidiary we formed for the merger which then changed its
name to “Arkados, Inc.”.
On March
3, 2007 we completed the merger of Arkados Wireless Technologies, Inc., our
wholly owned subsidiary (“Merger Sub”) with Aster Wireless, Inc. a Delaware
corporation (“Aster”) pursuant to an Agreement and Plan of Merger dated February
13, 2007 by and among Merger Sub and Arkados Group, Inc. In this merger, we
acquired synergistic talent and technology which has helped improve the
reliability and quality of audio streaming in our current generation chipset and
we believe will help deliver our next-generation chips to market more quickly,
with richer capabilities. This will translate to a better competitive position
in the marketplace. The technology enhances the reliable distribution
of multimedia content, potentially over multiple distribution media, and is
designed to be embedded in new consumer electronics products and accessories for
audio, video distribution, set-top boxes and other multimedia entertainment
appliances.
Industry
Background
Music,
movies, the electrical “smart grid”, and a wide range of communication services
are experiencing a fundamental shift. The distribution of content to products,
and in some cases the products themselves, is transitioning from traditional
methods. Digital content is requires a new digital distribution
model.
Arkados’
Standards-based Solutions
Arkados’
solutions are designed to directly address this opportunity by enabling
electrical power sockets to be turned into high-speed network ports, thereby
providing a high-speed pathway through which digital information can travel
inside a home, to the home, and on the smart grid. We believe that this shift
creates demand for new products, and new products will require new types of
advanced semiconductors that incorporate digital technologies, supporting such
functions as communication, application processing, and media
rendering.
Our
ArkTIC® family of turnkey hardware and software solutions is designed to address
these requirements. In particular, Arkados has implemented a method that uses
power lines as a pathway for digital information, allowing end users to truly
achieve “plug-and-play” simplicity without the hassles of custom-installed
networks, or the problems associated with wireless solutions such as dropouts,
unreliable coverage, and security issues.
Standards-compliance
Creates Market and Product Confidence
Members
of the Arkados team have been active in establishing standards for the powerline
communications industry since the year 2000.
Standards
are important for a number of reasons, but especially when both consumers and
service providers or utility companies may be installing different pieces of the
ecosystem. This is the case within the powerline communications and smart grid
industries. Wireless standards, for example, have brought about a ubiquitous,
interoperable and affordable standard for portable data communication, which
resulted in greatly accelerated market growth.
Members
of the Arkados team participated in the creation of the HomePlug Powerline
Alliance, an independent industry association. The Alliance’s mission
is to enable and promote rapid availability, adoption and implementation of cost
effective, interoperable and standards-based home powerline networks and
products. Formed in 2000, the Alliance developed the HomePlug 1.0
specification that unified product vendors in support of a single powerline
solution for home networking. In 2008, the technology of the HomePlug 1.0
specification was adopted by the Telecommunication Industry Association as
TIA-1113 standard. In 2005, the Alliance ratified HomePlug AV specification that
enables 200Mbps class communication over power lines. In March 2010, the IEEE
(the world’s leading standards-setting body) announced that the draft IEEE P1901
Broadband over Power Line (BPL) standard, which contains HomePlug AV technology,
entered the final stage before it is an official IEEE standard. Arkados HomePlug
AV chips will be interoperable with the IEEE 1901 standard.
Market
Analyst In-Stat believes that powerline communication will be a potentially
important technology for multimedia networking, as the technology could provide
a home network backbone. Arkados has worked in significant ways to develop the
HomePlug specifications including in-home technologies (HomePlug 1.0, HomePlug
AV, and HomePlug AV2), to-the-home technologies ( HomePlug BPL for broadband
over powerline), and HomePlug Command &Control (C&C) and HomePlug GP
(“Green PHY”) for low-speed command and control and Smart Grid
applications.
21
Arkados
is a Contributing Member of the HomePlug alliance. Members of the Arkados team
hold leadership positions in the Alliance and in several HomePlug working
groups. Oleg Logvinov, our president and CEO, serves as the Chief Strategy
Officer of the HomePlug Alliance. Mr. Logvinov is also a past president of the
Alliance, having been succeeded by Matthew Theall of Intel. Additionally, Jim
Reeber, our Director of Marketing has served as Chair of the Worldwide Marketing
Working Group since 2003; Grant Ogata, our Executive Vice President of Worldwide
Operations, has served as the Chairman of HomePlug Command and Control Working
Group and was instrumental in spearheading the alliance’s efforts to develop a
specification for a low-cost command and control technology in his role as the
working group chair. Jim Allen, our Vice President of Standardization and
Advance Planning, is the chair of the HomePlug Smart Energy Technical Working
Group.
The
HomePlug technology now dominates the marketplace. Market analyst In-Stat
forecasted that by 2010, the technology based on HomePlug specifications will
hold 85% of the worldwide market for powerline communications. The HomePlug
Powerline Alliance has brought together both personal computer and consumer
electronics companies on a global scale. Membership in the Alliance has grown to
include over 70 industry-leading companies. HomePlug Sponsor companies
include Atheros,
Cisco; Comcast; Duke Energy, GE Energy, part of General Electric Co.; Gigle
Networks; Motorola; NEC Electronics; and SPiDCOM Technologies. Besides Arkados,
contributor members include Corporate Systems Engineering; Renesas; Texas
Instruments; and YiTran Communications.
Arkados
is also a member of the IEEE P1901 working group that is focused on the
development of powerline communication Physical Layer (PHY) and Media Access
Control (MAC) specifications. Jim Allen was recently elected to serve as Vice
Chair of the Working Group. Mr. Logvinov was recently elected to serve as a
member of IEEE SA Standards Board.
Working
with the HomePlug Powerline Alliance, the Arkados team has contributed to the
development of a number of specifications that were contributed to standards
organizations, such as the Telecommunications Industry Association.
Strategic
Relationships
Fiscal
2009 brought a number of significant announcements that solidified our
relationships with STMicroelectronics, and Tatung. Each of these relationships
allows Arkados to bring value to our customers.
In
October 2008, Arkados and STMicroelectronics announced that they reached an
agreement to develop and manufacture a 200 Mbit per second, HomePlug AV wideband
powerline modem System-on-Chip (SoC). The introduction of this device is timed
to take place to meet the market’s needs for communications solutions that help
to implement Smart Grid and Green Energy applications. The agreement specifies
that both ST and Arkados will market a version of the device specifically
targeted at “bridging” applications such as Ethernet-to-Powerline adapters, or
other applications where only a MAC/PHY implementation is needed. Arkados will
continue to focus on marketing the chip for more full-featured connected media
applications such as whole-house audio, IPTV, and segments of the smart-grid
market. This agreement allows Arkados to complete the design and manufacturing
of the state-of-the-art chip without making the costly investment of taping out
a new chip. ST is contributing to the investment for the development and
manufacturing for the Arkados-designed chip. In return, ST receives the rights
to market the chip through its worldwide distribution network.
We have
also entered into go-to-market strategies with a number of ODMs and other
technology companies. Since many companies in this space target the same
customer base as we do, we plan to collaborate to create solutions and offer
even greater turnkey value for OEMs. We have announced relationships and
strategies with several companies, including GigaFast and Tatung.
Arkados’
relationship with Tatung, the $7B global ODM, constitutes a one-stop shop for
the industry’s technology and manufacturing needs for distributing digital
content in homes. Together, the companies deliver complete product solutions to
consumer product manufacturers. Tatung has used Arkados
chips to publically demonstrate products that combine HomePlug® powerline
communications, WiMAX technologies, and fully connected solutions (including
Smart Meters and In-home Displays) that bridge Smart Energy, Internet
connectivity, and connected consumer electronics.
Manufacturing
We
currently use Fujitsu Japan for all of our wafer fabrication and assembly, and
Fujitsu and GDA Technologies for a portion of our design and testing. This
“fabless” manufacturing strategy is designed to allow us to concentrate on our
design strengths, minimize fixed costs and capital expenditures, access advanced
manufacturing facilities, and provide flexibility on sourcing multiple
leading-edge technologies through strategic alliances. We expect to qualify each
product, participate in process and package development, define and control the
manufacturing process at our suppliers where possible and practicable, develop
or participate in the development of test programs, and perform production
testing of products in accordance with our quality management system. If
possible, we plan to use multiple foundries, assembly houses, and test houses.
Our efforts to develop multiple sources of supply have been hindered by our lack
of adequate working capital.
22
In
connection with the development of our next generation chip, we have entered
into a development agreement with STMicroelectronics. The agreement
allows Arkados to complete the design and manufacturing of without making the
costly investment of taping out a new chip. STMicroelectronics is contributing
to the investment for the development and manufacturing for the Arkados-designed
chip. The new chips will be sold by ST Microelectronics, under its
own branding, and by Arkados as the next generation ArkTIC® chip.
Research
and Development
We have
focused on R&D since our inception. Our company has placed significant value
on the work done by our engineering staff, and we continue to create new
software solutions, technology implementations, system-on-chip semiconductors,
and the creation and development of intellectual property, that focus on helping
our customers to get full-featured connected products to market quickly and at a
lower cost.
We
concentrate our research and development efforts on the design and development
of new products for each of our principal markets. As of February 2, 2010, 12 of
our 16 employees are dedicated to research and development. Research
and development expenditures were $2,069,179, $1,987,313, and $1,920,898 in the
years ended May 31, 2009, 2008 and 2007, respectively.
Our 2007
acquisition of Aster Wireless, near Rochester, NY strengthened our intellectual
property portfolio and added three R&D employees to those working in New
Jersey. Since the acquisition, one member of the group has left the
company. The intellectual property that was developed by Aster
through years of R&D under the guidance of industry giants such as Kodak®
has allowed us to introduce new products complementary to our existing product
offerings. An example is our offering of a license to an implementation of the
802.15.3b Wireless Multimedia MAC, which is available to any developer
interested in jumpstarting their development process, and bringing digital home
multimedia products to market more quickly. With these developments, Arkados
continues to offer a best-in-class platform for media-centric applications that
demand reliable delivery of time-sensitive data.
We also
fund certain research activities focused on other emerging product
opportunities. Our future success is highly dependent upon our ability to
develop complex new products, to transfer new products to volume production in a
timely fashion, to introduce them to the marketplace ahead of the competition,
to maintain competitive features, and to have them selected for design into
products of leading systems manufacturers, all of which are challenged by our
lack of working capital and diversion of management’s time and attention from
Arkados’ business to emergency financing and debt restructuring.
Our
future success may also depend on assisting our customers with integration of
our components into their new products, including providing support from the
concept stage through design, launch, and production ramp. In this new converged
marketplace, we believe the role of the traditional semiconductor provider is
changing, and we have positioned ourselves as a platform provider that becomes
an integral part of our customer’s product development process. We believe that
our focus on application related features and software may contribute to our
success.
Patents,
Licenses and Trademarks
Our
patent portfolio reflects our innovative development efforts and our forecasts
of how we envision the market will evolve. We have been awarded 12 U.S. Patents,
which we believe is an indicator that we have developed a good understanding
regarding key industry developments. We believe our patents not only help us to
safeguard our intellectual property, but will help us to position our company as
a leader in this space. We believe that some of our recently awarded patents are
integral to the implementation of powerline communication networks, which may
create value in our company given the global market for this technology and the
vast number of potential players in the marketplace.
We rely
on trade secret, patent, copyright, and trademark laws to protect our
intellectual property in our products and technology. We intend to continue this
practice in the future. In addition to our issued U.S. patents, we have multiple
pending U.S. patent applications, and various corresponding international
patents and applications.
Intellectual
Property Portfolio
Examples
of our IP portfolio include methods for increasing resistance to noise, allowing
more robust transmissions, maximizing throughput, and several product-level
applications such as adaptors and connectivity devices. We believe our patent
portfolio will provide a competitive edge in the areas of the technology based
on such new standards such as IEEE1901 and upcoming ITU G.hn
standards.
23
Our IP
Portfolio continues to grow. We diligently protect our inventions with US and
International patents. Currently, we have been issued 12 patents by the United
States Patent & Trademark Office, and have 22 pending applications. We also
prosecute our valuable IP on an international basis, and currently have 7
Pending International Applications.
We have
registered trademarks for Arkados® and ArkTIC® and the Arkados logo. We have
other trademark applications pending: Direct to Speaker™ and Whole House Audio
in a Box™.
As a
member of the HomePlug Alliance, we are obligated to license Necessary Patent
Claims (intellectual property rights without the use of which products cannot
conform to the HomePlug specifications) to any member of the alliance (including
competitors) on a reasonable and non-discriminatory basis (known as RaND) as
defined in the alliance’s Sponsor Agreement and Contributor Agreement. Under our
license and development agreements, we retain title to our patents, patent
applications and other licensed technology, and to any improvements that we
develop.
To
complement our own research and development efforts, we have also licensed, and
expect to continue to license, from third parties a variety of intellectual
property and technologies important to our business.
Although
we have not received any notification from third parties that we are infringing
any of their intellectual property, there may be third party patents or other
intellectual property that we are infringing. If that were the case, third
parties could assert infringement claims against us or seek an injunction on the
sale of any of our products in the future. If such infringement were found to
exist, we may attempt to acquire the requisite licenses or rights to use such
technology or intellectual property. However, we cannot assure you that such
licenses or rights could be obtained on favorable terms or at all.
Competition
Arkados
faces intense competition as a solution provider, a technology developer of
standards-based powerline technologies, as well as from other technologies also
focused on our target markets. We believe we have had success despite
our lack of capital and therefore manpower because of our ability to develop
SoC/software solutions that help our customers to create full-featured products
that are cost-effective and can be brought to market quickly.
Differentiation
of Arkados Solutions
Some
manufacturers have attempted to add HomePlug-based chips to their existing
products. This “bolt-on” approach often leads to products that are
functional; however, the end product can be very expensive with decreased
margins.
Arkados’
solutions offer a completely different approach. By incorporating a
processor and multiple interfaces into the same chip that houses HomePlug
communication technology, and by providing application level software that runs
on the chip, Arkados presents a more cost-effective and more flexible strategy
to bring products to market.
Building
on the architecture of the HomePlug 1.0 chip that offered a wide range of
advantages over the competition, Arkados recently announced a HomePlug AV
System-on-Chip to provide an even greater range of differentiation and
advantages. This chip is called the AI-2100, which will be developed and
marketed in conjunction with STMicroelectronics.
Business
Environment
Markets
for our products are highly competitive and we expect that competition will
continue to increase. We compete with other semiconductor suppliers that offer
standard semiconductors, application-specific integrated circuits, and fully
customized integrated circuits, including embedded software, chip, and
board-level products.
Our
competitive strategy has been to provide cost-effective integrated products
bundled with software that is designed to support a turnkey approach for a
variety of applications. We believe this approach, coupled with the benefits of
powerline communications technology, allows us to effectively compete due the
following aspects:
●
|
Due
to embedded HomePlug standard technology, we believe our product
performance includes unique features such as whole-house connectivity,
high throughput, ease of setup, and Quality-of-service mechanisms that
preserve a positive end-user
experience
|
●
|
Due
to the integration of our system-on-chip and firmware solutions, we
believe our potential customers will benefit from quicker time-to-market,
a competitive bill-of-materials cost, an enhanced feature set, and lower
development costs
|
●
|
Due
to our reliance on international technology standards, we believe our
solutions are able comply with regulatory requirements on a global
basis
|
24
We face
competition both from established players that are beginning to focus on
powerline networking technology, as well as recent entrants in the field. Some
of these competitors create solutions that are compliant with HomePlug
Alliance
specifications, while other competitors’ products are based on proprietary
technologies. Immediate key competitors in the HomePlug powerline networking
portion include Afa Technologies, Atheros Communications, Inc. (who recently
acquired HomePlug chipmaker Intellon Corporation), Gigle Networks, Maxim
Integrated Products Inc., Sigma Designs (who recently acquired Coppergate, a
company that previously acquired a team of HomePlug technology specialists from
Conexant) and SPiDCOM Technologies. DS2 and Panasonic build powerline ICs
that are incompatible with the HomePlug standard.
We expect
to face additional competition from new entrants in each of our markets, which
may include both large domestic and international integrated circuit
manufacturers and smaller, emerging companies. Many of our competitors have
substantially greater financial, engineering, manufacturing, marketing,
technical, distribution and other resources, broader product lines, greater
intellectual property rights, and longer relationships with customers than we
have.
In
addition, there are organizations worldwide may attempt to create technology
standards that compete with the industry specifications established by the
HomePlug Powerline Alliance. These include the Institute of Electrical and
Electronics Engineers (IEEE) and the International Telecommunication Union (ITU)
which may adopt standards different from, and incompatible with, the technology
inside our products. We also participate in these standards efforts. Other
industry organizations promote powerline communications, such as the Universal
Powerline Association, the Consumer Electronics Powerline Communication Alliance
(CEPCA) and the High Definition Powerline Communications (HD-PLC) Alliance. They
have also established technology or coexistence specifications that may conflict
with the HomePlug specifications.
As a
provider of powerline home connectivity integrated circuits, we face additional
competition from other home connectivity technologies such as twisted pair
cable, coaxial cable and wireless media. Despite the broad array of different
technologies deployed to date, we believe those technologies that do not require
new wires such as HomePNA, MoCA, 802.11 and other wireless alternatives, will
provide competition to powerline solutions.
In
network and media processors, its competitors include Conexant, Cirrus Logic,
Micrel, Texas Instruments, Atmel, and Sharp.
Results
of Operations
We have
not had significant revenue from operations since inception and, as of February
28, 2010, we are still a development stage company. Furthermore, we have
financed operating losses since September 2004 with the proceeds primarily from
related party lending from our major stockholder and affiliated lenders, as well
as other stockholders and lenders, and from a capital raise to qualified
investors through a retail brokerage firm. From December 2005 to December 31,
2007, we sold an aggregate $9,283,461 of 6% secured convertible debentures due
December 28, 2008 of which $6,145,884 was purchased by institutional investors,
$3,092,577 by our directors and their relatives and $45,000 was issued to settle
an equivalent amount of legal fees.. During the fiscal year 2006, we paid down a
substantial portion of outstanding short term debt and other liabilities and
have issued approximately 600,000 shares of our common stock in satisfaction of
approximately $406,000 of short term liabilities. During the period from June 1,
2007 to August 31, 2008, we raised $855,000 in cash from advances that were
satisfied by issuing 6% secured convertible debentures. Despite these
milestones in improving our financial position, our business plan to
aggressively market our chips remains constrained by our limited capital
resources.
We
require additional funding to finance inventory, support operations for the
expansion of our research and development efforts, and the expansion of our
management team and sales and marketing organization. In March, 2007, we
acquired the assets of Aster Wireless, Inc., retained four of the engineering
staff as employees and one person as a consultant, which significantly added to
our engineering capability and skill sets. The acquisition has added
approximately $45,000 of monthly operating expenses and no material
revenue.
We use
Fujitsu Japan for all of our wafer fabrication and assembly, and Fujitsu and GDA
Technologies for a portion of our design and testing. This “fabless”
manufacturing strategy is designed to allow us to concentrate on our design
strengths, minimize fixed costs and capital expenditures, access to advanced
manufacturing facilities, and provide flexibility on sourcing multiple
leading-edge technologies through strategic alliances. We expect to qualify each
product, participate in process and package development, define and control the
manufacturing process at our suppliers where possible and practicable, develop
or participate in the development of test programs, and perform production
testing of products in accordance with our quality management system. If
possible, we plan to use multiple foundries, assembly houses, and test
houses.
If we are
unable to raise funds to finance our working capital needs, we will not have the
capital necessary for ongoing operations and for making our chip ready for mass
production, 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.
25
Risk
Factors
In
addition to the other information set forth in this report, you should carefully
consider the factors discussed in Part I, “Item 1A. Risk Factors” in
our Annual Report on Form 10-K for the year ended May 31, 2009 which could
materially affect our business, financial condition or future results. There
have been no other material changes during the quarter ended February 28,
2010 to the risk factors discussed in the periodic reports noted
above that have not already been disclosed in the Company’s most recently filed
10-K.
Results
of Operations
For The
Three Months Ended February 28, 2010
During
the three month period ended February 28, 2010, we had total revenue of $46,346
compared to $198,900 for the same period in 2009. As of February 28, 2010, there
was approximately $0 in backlog. Total operating expenses for the
three month period ended February 28, 2010 were $1,142,879 compared to total
operating expenses for the same period in fiscal 2009 of
$1,811,691. In both periods, the most significant expenses were
personnel, professional fees and research related
expenses.
We failed
to pay the interest and principal due on the Secured Debentures on the extended
due date of June 30, 2009. As a result, the principal obligation increased to
130% of the principal balance, which the Company recognized as a default penalty
of $3,622,083 in the quarter ended August 31, 2009, and interest increased from
the rate of 6% to the penalty rate of at 18% per annum for the
quarter ended February 28, 2010 and the nine month period February
28, 2010. Aggregate interest fot the three and month periods on Secured
Debentures was of $733,133 and $1,990,890, respectively.
For The
Nine Months Ended February 28, 2010
During
the nine month period ended February 28, 2010, we had total revenue of $173,246,
compared to $583,325 for the same period in fiscal 2009. $173,246 of revenue in
the nine months ended February 28, 2010 was related to development agreement s
with two customers as compared with $583,325 of development revenue in the same
period ended February 29, 2009 from six customers. Total operating expenses for
the nine month period ended February 28, 2010 were $3,480,806 compared to total
operating expenses for the same period in fiscal 2009 totaling $4,115,057. The
Company failed to pay the interest and principal due on the Secured Debentures
on the extended due date of June 30, 2009. As a result, the principal obligation
increased to 130% of the principal balance resulting in a default penalty of
$3,622,083 booked in the quarter ended August 31, 2009 and additional penalty
interest at 18% per annum for the quarter ended August 31, 2009 and the
nine month period February 28th, 2010 in the amounts of $359,399 and
$1,990,890, respectively.
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. If we are not able to raise capital in
the near term we will have to curtail our operations and our business and
potential value could be substantially impaired.
There can
be no assurance that our efforts to raise additional capital will be successful,
or even if successful will fund our planned operations or capital
commitments.
At
February 28, 2010, we had $533 in cash and negative working capital of $26.5
million, compared to $10,000 in cash and negative working capital of $18 million
at May 31, 2009. Working capital reflects the short-term maturities of all
of the secured 18% convertible debentures.
We began
the transition from development stage company in fiscal year ended May 31, 2008
by generating revenue of $855,676 and generated $763,040 of revenue in the
fiscal year ended May 31, 2009. During Fiscal 2009, we obtained a second
extension of convertible subordinated notes which expired June 30, 2009,
obtained a limited waiver of anti-dilution rights held the holders of secured
convertible notes to facilitate equity financing, and added Harris Cohen to our
board of directors. As of February 28, 2010, $17,568,857 of secured
debt, of which $ 4,963,359 is held by related parties is in default,
as is $1,201,555 principal and interest on unsecured notes. In
addition, as of February 28, 2010, $3,362,528 of salary remains due to our
employees and of our accounts payable balance of approximately $1, 737,245,
$1,684,210 was over 90 days.
We are
attempting to reach an agreement with the holders of our secured debt as
to the terms and conditions upon which they would agree to accept partial
payment of principal and convert the balance (or all) of secured debt to equity,
however, there is no binding agreement on anyone’s part to do so and no
assurance can be given that the terms will be acceptable to the holders of all
of the secured debt. If the holders of a material amount of debt do not accept
terms of settlement or conversion into equity acceptable to new investors we
will not be able to obtain financing and will have to suspend operations or seek
protection under the Bankruptcy Code.
26
We have
also received indications of interest from potential private and strategic
investors concerning the terms and conditions upon which they would make an
investment in Arkados, including the terms upon which the secured debt and other
debt would have to be compromised and converted for them to make such
investments, but there is no binding commitment on anyone’s part to complete the
transactions. Finally, without commitment on anyone’s part, we have
discussed converting a substantial portion of past due compensation with our
employees if the financing and restructuring of our debt can be
completed. In the absence of financing and debt restructuring, our
operations are severely constrained and we may have to suspend operations
altogether. In addition, unless the terms of financing and restructuring is
acceptable to our general trade creditors, we remain at the risk of creditors
filing an involuntary petition pursuant to the U.S. Bankruptcy Code. 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 and for making our chip ready
for mass production and 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 will 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. Pending the
completion of these transactions, we are financing operations by issuing bridge
notes to investors that would participate in an equity financing if the debt can
be restructured. If the financing proceeds, these investors would be
able to make the equity investment in Arkados at a discount of 33% from the
price other investors are offered. Most of the bridge
notes were due with interest at the annual rate of 8% on March 31, 2010 and a
small portion was due January 31, 2010. We are seeking extension
agreements from the holders of all of the bridge notes to extend the due date to
April 30, 2010..
While a
substantial portion of the net proceeds of these financing activities was
initially used to repay pre-existing debt, all of the proceeds during the fiscal
year 2008 were used to support Arkados’ operations. There is no assurance that
the holders of the Secured Debentures will continue to provide additional funds
to us, that future equity financing will be available or that future
financing will not be impeded by the anti-dilution provisions of the documents.
Our ability to continue our operations depends on our ability to obtain
financing. If adequate funds are not available on acceptable terms, we may not
be able to retain existing and/or attract new employees, support product
development and fabrication, take advantage of market opportunities, develop or
enhance new products, pursue acquisitions that would complement our existing
product offerings or enhance our technical capabilities to develop new products
or execute our business strategy.
On July
2, 2009 we received notice from a law firm representing approximately 45% of our
outstanding 6% secured convertible debentures due June 28, 2009 (the
“Debentures”) were in default by reason of non-payment. This event triggers an
“Event of Default” under the terms of the Debentures on July 8, 2009, absent
payment in full. The Event of Default entitles the holders of the Debentures to
redemption at the rate of 130% of the principal and accrued interest
outstanding, interest on unpaid interest and principal at the rate of 18% per
annum commencing on July 8, 2009 and reimbursement for expenses incurred
enforcing the obligations.
We have
been negotiating for an infusion of equity capital, restructuring of our secured
and unsecured debt and the holders of the Debentures have indicated that they
are inclined to work with the company in this regard. Although there
can be no assurance that the forbearance, financing or restructuring of our debt
can be achieved, we continue to work closely with representatives of the holders
of the Debentures to maintain the company as an ongoing business, which includes
preserving our current operations and relationships with existing customers,
partners and suppliers.
As of
July 6, 2009 the $1,066,500 principal amount of 6% Convertible Subordinated
Notes (the “Notes”) due June 30, 2009 were also in default by reason on
non-payment. Under the terms of the Notes, the interest rate increases to 12%
during the period the Notes are in default and the holders are entitled to the
costs of collection. We plan to discuss forbearance or extension of the due
dates of the Notes, as well as conversion of the Notes into equity with the
holders and their representatives, but there can be no assurance that any such
agreement can be reached.
Our lack
of working capital has constrained and can be expected to continue to constrain
all aspects of our operations. As design solutions are completed for
existing customers, our need to finance the purchase of chip inventory will
increase. If we are unable to finance the purchase of chip inventory,
we will not be able to fulfill sale commitments and will not be able to
recognize revenue on firm orders; such failures will have an adverse impact on
our important technical relationships and future marketing
efforts. In additional to general efforts to raise capital to support
our operations, we will explore arrangements specifically relating to inventory
that may be costly (in the case of a factoring arrangement), require the consent
of holders of secured debt and may involve the licensing of technology in
exchange for manufacturing services.
We
continue to seek financing to meet the commitments either in the form of the
sale of equity, additional secured or unsecured debt and any combination of the
foregoing. There is no assurance sufficient financing to meet these
commitments will be available, and, if they are not met, our business could be
suspended or, upon a material default in our obligations to the holders of our
convertible secured debt, face the acceleration of our obligations and the
seizure of our assets to satisfy the debt.
27
Commitments
We do not
have any commitments which are required to be disclosed in tabular form as of
February 28, 2010
Critical
Accounting Policies
Financial
Reporting Release No. 60 requires all companies to include a discussion of
critical accounting policies or methods used in the preparation of financial
statements. Our accounting policies are described in Note 2 of the
notes to our consolidated financial statements included in this
report. Our consolidated financial statements are prepared in
accordance with accounting principles generally accepted in the United States of
America, which requires management to make estimates and assumptions 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 following is a brief discussion of the more
significant accounting policies and methods used by us. In addition, Financial
Reporting Release No. 67 was recently released by the SEC to require all
companies to include a discussion to address, among other things, liquidity,
off-balance sheet arrangements, contractual obligations and commercial
commitments.
Basis
of Presentation
Our
consolidated financial statements have been prepared assuming we will continue
as a going concern despite substantial doubt as to our ability to do
so. Management anticipates losses in the foreseeable future and plans
to finance losses by raising additional capital. If we are unable to
continue as a going concern, adjustments would have to be made to the carrying
value of assets.
We
recognize revenue in accordance with SEC Staff Accounting Bulletin No. 101,
Revenue Recognition in Financial Statements, as amended (“SAB 101”). SAB 101
requires that four basic criteria must be met before revenue can be recognized:
(1) persuasive evidence of an arrangement exists; (2) delivery has occurred or
services rendered; (3) the fee is fixed or determinable; and (4) collectibility
is reasonably assured. Under the provisions of SAB 101, we recognize revenue
when products are shipped, and the collection of the resulting receivable is
probable. If revenues are from a long term arrangement, revenues are recognized
when pre-determined milestones, which generally are related to substantial
scientific or technical achievement, are accomplished.
Accounting
for Stock Based Compensation
The
computation of the expense associated with stock-based compensation requires the
use of a valuation model. The accounting guidance for stock based compensation
is a new and very 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 its 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. The guidance 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.
Off
Balance Sheet Arrangements
We do not
have any off balance sheet arrangements.
28
Item
3. Quantitative And Qualitative Disclosures About Market
Risk
Item
4T. Controls and Procedures.
The
Company’s management evaluated, with the participation of the Company’s
principal executive and principal financial officer, the effectiveness of the
Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange
Act”)), as ofFebruary 28, 2010. Based on this evaluation, the Company’s
principal executive and principal financial officer concluded that the Company’s
disclosure controls and procedures were not effective as of February 28,
2010.
There has
been no change in the Company’s internal control over financial reporting (as
defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred
during the Company’s fiscal quarter ended February 28, 2010 that has materially
affected, or is reasonably likely to materially affect, the Company’s internal
control over financial reporting.
In
connection with the preparation of our annual financial statements, our
management performed an assessment of the effectiveness of internal control over
financial reporting as of May 31, 2009. Management’s assessment included an
evaluation of the design of our internal control over financial reporting and
testing of the operational effectiveness of those controls. Based on this
evaluation, management determined that, as of May 31, 2009, there were material
weaknesses in our internal control over financial reporting. The material
weaknesses identified during management’s assessment were (i) a lack of
sufficient internal accounting expertise to provide reasonable assurance that
our financial statements and notes thereto, are prepared in accordance with
generally accepted accounting principles (GAAP) and (ii) a lack of
segregation of duties to ensure adequate review of financial statement
preparation. In light of these material weaknesses, management concluded that,
as of May 31, 2009, we did not maintain effective internal control over
financial reporting. As defined by the Public Company Accounting Oversight Board
Auditing Standard No. 5, a material weakness is a deficiency or a
combination of deficiencies, such that there is a reasonable possibility that a
material misstatement of the annual or interim financial statements will not be
prevented or detected.
In
designing and evaluating our disclosure controls and procedures, management
recognizes that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the desired control
objectives, and management necessarily is required to apply its judgment in
evaluating the relationship between the benefit of desired controls and
procedures and the cost of implementing new controls and
procedures.
The
consolidated financial statements as of and for the period ended February 28,
2010 include all adjustments identified as a result of the evaluation
performed.
Changes
In Internal Control Over Financial Reporting
None.
29
PART
II - OTHER INFORMATION
Item
1. Legal Proceedings.
There has
been no material change in any of the matters set forth in Item 3. of our
Form 10-K report for the fiscal year ended May 31, 2009 and no new litigation
commenced since the filing of our Form 10-K that would be required to be
disclosed in response to this Item.
As of
February 28, 2010, $3,362,528 of compensation and reimbursements for expenses is
due to our employees and our accounts payable was approximately $1,737,860 of
which $1,679,249 was over 90 days old Accordingly, some of our
general creditors have commenced actions and many may initiate litigation to
collect past due amounts for materials and services. While individual actions
may involve more than 10% of our current assets of $8,325 as of February 28,
2010, the aggregate amount of the claims do not exceed the amounts we have
recorded as current liabilities. We evaluate each case on what
we believe is its merits and respond by either offering to pay less than the
amount owed, offering to settle for the issuance of shares of our common stock,
or raise counterclaims or defenses to the action, as we deem
appropriate.
The
outcome of any litigation is inherently uncertain and we are required under our
certificate of incorporation, bylaws and employment agreements to indemnify our
officers and directors for certain liabilities, including the cost of defending
litigation brought against them in their capacity as such. Nevertheless, a
portion of our indemnification liability is insured and shares of our common
stock were escrowed at the time of the merger in which Arkados is the surviving
corporation, to indemnify us against certain claims being made in the above
actions.
Item
5. Other Information.
We
borrowed the sum of $60,000 from Cooper Barrons, a private investment firm, in
December, 2009. Cooper Barrons is controlled by Harris Cohen, a
director of the Company. The original loan was due on
demand. On March 29, 2010, Cooper Barrons agreed to accept a
promissory note in the principal amount of $60,000 from us to represent the
loan. The note is due with interest at the rate of 8% per annum on
April 30, 2010, or on the earlier occurrence of a default, as defined in the
note. In the event of default, penalty interest will be due on the
note at the rate of $100 per day and the note provides for certain mandatory
pre-payments of principal in the event we receive in financing or cash revenue
from operations in excess of budgeted monthly operating critical
expenses. Payment of principal and interest is subordinated to the
obligation to the holders of our outstanding Debentures. Our Board of
Birectors determined that the terms of the note are no more favorable to Cooper
Barrons that that which could have been obtained from an unaffiliated lender. A
copy of the note is filed as Exhibit 10.1 to this report.
On March
29, 2010, the Board of Directors approved the payment of consulting fees to
Harris Cohen in the amount of $7,000 for the period from December 1, 2009 to
January 31, 2010 and continuing fees of $3,000 per month for his service as the
sole member of a committee of independent directors to make recommendations to
the board concerning matters relating to the outstanding
Debentures. The board granted additional compensation to Mr. Cohen in
the form of a agreement to issue a five- year warrant on the
successful debt restructuring, financing and possible recapitalization of the
Company to purchase 150,000 shares of the Company’s common equity (as
constituted after such transactions) for $0.05 per share. A copy of
the Board consent relating to this transaction is filed as Exhibit 10.2 to this
report.
Item
6. Exhibits.
(a)
Exhibits.
10.1
|
Senior
Subordinated Note due April 30,
2010.
|
10.2
|
Consent
of the Board of Directors dated March 29, 20101
|
|
31.1
|
Certification
of Chief Executive Officer of Periodic Report pursuant to Rule 13a-14a and
Rule 15d-14(a).
|
|
31.2
|
Certification
of Chief Financial Officer of Periodic Report pursuant to Rule 13a-14a and
Rule 15d-14(a).
|
|
32.1
|
Certificate
of Chief Executive Officer pursuant to 18 U.S.C. Section
1350
|
|
32.2
|
Certificate
of Chief Financial Officer pursuant to 18 U.S.C. Section
1350
|
_____________________
1
Relates to compensation of directors.
30
SIGNATURES
In
accordance with the requirements of the Securities Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Dated:
April 2, 2010
|
ARKADOS
GROUP, INC.
|
||
By:
|
/s/ Oleg
Logvinov
|
||
Oleg
Logvinov
|
|||
President
and Chief Executive Officer
|
|||
By:
|
/s/ Larry
L Crawford
|
||
Larry
L Crawford, Chief Financial Officer
|
|||
(Principal
Financial and Accounting Officer)
|
|||
31