10-Q 1 s104331_10q.htm 10-Q

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q 

 

(Mark One)

  

xQUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

FOR THE QUARTERLY PERIOD ENDED:   August 31, 2016

 

¨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 registrant as specified in its charter)

 

Delaware   22-3586087
(State or other jurisdiction of incorporation or
organization)
  (I.R.S. Employer Identification No.)
     
211 Warren Street, Suite 320, Newark, New Jersey   07103
(Address of principal executive offices)   Zip code
     
Issuer's telephone number: (862) 373-1988    

 

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 x No ¨

 

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 ¨
Accelerated
filer ¨
Non-accelerated filer ¨
(Do not check if a smaller reporting
company)
Smaller reporting
company x

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

 

The number of the registrant’s shares of common stock outstanding as of October 14, 2016 was 13,373,167.

 

 

 

 

ARKADOS GROUP, INC.

Quarterly Report on Form 10-Q

Quarter Ended August 31, 2016

 

TABLE OF CONTENTS

  

  Page
PART I. UNAUDITED CONDENSED FINANCIAL INFORMATION F-1
   
Item 1.  Financial Statements F-1 to F-16
   
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 4
   
Item 3. Quantitative and Qualitative Disclosures About Market Risk 7
   
Item 4. Controls and Procedures 7
   
PART II - OTHER INFORMATION 8
   
Item 1. Legal Proceedings 8
   
Item 1A.  Risk Factors 8
   
Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds 8
   
Item 4.  Mine Safety Disclosures 8
   
Item 5. Other Information 8
   
Item 6. Exhibits 9
   
SIGNATURES 10

  

 2 

 

 

INTRODUCTORY NOTES

 

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 Reports on Form 10-K for the years ended May 31, 2016 and May 31, 2015 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.

 

The information contained in this report, except as specifically dated, is as of August 31, 2016.

 

 3 

 

 

PART I. FINANCIAL INFORMATION

 

  Page
   
Item 1. Financial Statements  
   
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  
   
Condensed Consolidated Balance Sheets F – 2
   
Condensed Consolidated Statements of Operations F – 3
   
Condensed Consolidated Statements of Cash Flows F – 4
   
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS F – 5 to F – 16

  

 F-1 

 

 

ARKADOS GROUP, INC AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

 

   August 31, 2016   May 31, 2016 
   (Unaudited)     
ASSETS          
           
Current Assets:          
Cash  $5,656   $56,172 
Accounts receivable   222,534    192,100 
Inventory   141,197    120,410 
Prepaid expenses and other current assets   125,492    187,935 
Total Current Assets   494,879    556,617 
           
Property and equipment, net   7,378    7,642 
Security deposit   20,384    20,384 
           
Total Assets  $522,641   $584,643 
           
LIABILITIES AND STOCKHOLDERS' DEFICIENCY          
           
Current Liabilities:          
Accounts payable and accrued expenses  $1,147,154   $1,022,382 
Deferred revenue   210,837    260,637 
Accrued income tax   63,082    63,082 
Debt subject to equity being issued   456,930    456,930 
Notes payable   485,832    335,832 
Total Current Liabilities   2,363,835    2,138,863 
           
Total Liabilities   2,363,835    2,138,863 
           
Stockholders' Deficiency:          
Convertible preferred stock, $.0001 par value; 5,000,000 shares authorized, zero shares outstanding   -    - 
Common stock, $.0001 par value; 600,000,000 shares authorized; 13,373,167 shares issued and outstanding   1,337    1,337 
Additional paid-in capital   41,645,382    41,645,382 
Accumulated deficit   (43,487,913)   (43,200,939)
Total Stockholders' Deficiency   (1,841,194)   (1,554,220)
           
Total Liabilities and Stockholders' Deficiency  $522,641   $584,643 

 

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.

 

 F-2 

 

 

ARKADOS GROUP, INC AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

   For the three months ended 
   August 31, 2016   August 31, 2015 
         
Sales  $424,487   $106,836 
           
Cost of sales   380,009    - 
           
Gross Profit   44,478    106,836 
           
Operating Expenses:          
Selling and general and administrative   312,941    529,192 
Research and development   8,860    98,429 
Total Operating Expenses   321,801    627,621 
           
Loss From Operations   (277,323)   (520,785)
           
Other Income (Expenses):          
Interest expense   (9,651)   (7,414)
Loss on translation adjustments   -    (562)
Total Other Expense   (9,651)   (7,976)
           
Loss Before Provision for Income Taxes   (286,974)   (528,761)
           
Provision for income taxes   -    - 
           
Net Loss  $(286,974)  $(528,761)
           
Loss per Common Share - Basic and Diluted  $(0.02)  $(0.04)
           
Weighted Average Shares Outstanding - Basic and Diluted   13,373,167    11,804,761 

 

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.

 

 F-3 

 

 

ARKADOS GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

   For the Years Ended 
   August 31, 2016   August 31, 2015 
Cash Flows from Operating Activities:          
Net loss  $(286,974)  $(528,761)
Adjustments to reconcile net loss to net cash used in operating activities:          
Depreciation   264    - 
Changes in operating assets and liabilities:          
Accounts receivable   (30,434)   71,027 
Inventory   (20,787)   (186,799)
Prepaid expenses and other current assets   62,443    568 
Security deposits   -    (18,510)
Accounts payable and accrued expenses   124,772    150,203 
Deferred revenue   (49,800)   64,900 
Accrued income tax benefits   -    - 
Net Cash Used in Operating Activities   (200,516)   (447,372)
           
Cash Flows from Financing Activities:          
Proceeds from sales of common stock   -    503,000 
Proceeds from short-term note   150,000    - 
Net Cash Provided by Financing Activities   150,000    503,000 
           
Net Increase (Decrease) in Cash   (50,516)   55,628 
           
Cash - Beginning of Year   56,172    234,994 
           
Cash - End of Year  $5,656   $290,622 
           
Supplemental Cash Flow Information:          
Non Cash Investing and Financing Activities          
Common stock issued for accrued stock based compensation  $-   $250,833 
Stock options issued for accrued stock based compensation  $-   $1,622,778 
           
Cash paid for:          
Interest paid  $-   $- 
Income taxes paid  $-   $- 

 

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.

 

 F-4 

 

 

ARKADOS GROUP, INC. & SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE MONTHS ENDED AUGUST 31, 2016 and 2015

(UNAUDITED)

 

1.DESCRIPTION OF BUSINESS

 

Arkados Group, Inc. (the “Parent”) conducts business activities principally through its two wholly-owned subsidiaries, Arkados, Inc. (“Arkados”) and Arkados Energy Solutions, LLC (“AES”) (collectively, the “Company”).

 

The Company underwent a significant restructuring following December 23, 2010, during which substantially all of its assets were acquired by STMicroelectronics (sometimes referred to hereinafter as the “Asset Sale”). Settlements reached in connection with the Asset Sale and the fulfillment of obligations in connection therewith, have been substantially completed.

 

Following the Asset Sale, the Company shifted its focus towards the following businesses:

 

Arkados - Software and hardware design and development of solutions that enable machine to machine communications for the Internet of Things (“IoT”). Arkados’ solutions are primarily focused on industrial and commercial applications such as building automation, energy management and predictive maintenance and are uniquely designed to drive a wide variety of full-featured, cutting edge solutions.

 

AES - Energy conservation services for commercial and industrial facilities owners and managers. AES’ services include implementing energy conservation measures such as LED lighting retrofits, oil to natural gas boiler conversions, co-generation system installation and solar PV system installations. In addition, AES sells technology solutions designed by Arkados, Inc. and others that serve to improve the effectiveness of the measures and increases return on investment for the customer.

 

Effective March 18, 2015, the Company implemented a reverse stock split of its outstanding common stock at a ratio of 1-for-30 shares. All share figures and results are reflected on a post-split basis.

 

The accompanying condensed consolidated financial statements as of August 31, 2016 (unaudited) and May 31, 2016 and for the three months ended August 31, 2016 and 2015 (unaudited) have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission including Form 10-Q and Regulation S-X. The information furnished herein reflects all adjustments (consisting of normal recurring accruals and adjustments) which are, in the opinion of management, necessary to fairly present the operating results for the respective periods. Certain information and footnote disclosures normally present in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted pursuant to such rules and regulations. These financial statements and the information included under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations” should be read in conjunction with the audited financial statements and explanatory notes for the year ended May 31, 2016 as disclosed in our annual report on Form 10-K for that year. The results of the three months ended August 31, 2016 (unaudited) are not necessarily indicative of the results to be expected for the pending full year ending May 31, 2017.

   

2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

a.Basis of Presentation - The accompanying condensed consolidated financial statements have been prepared assuming that the Company will continue as a going concern. The Company has incurred net losses of approximately $43.5 million since inception, including a net loss of approximately $286,974 for the three months ended August 31, 2016. Additionally, the Company still had both working capital and stockholders’ deficiencies at August 31, 2016 and May 31, 2016 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.

 

 F-5 

 

 

b.Principles of consolidation - The consolidated financial statements include the accounts of the Parent, and its wholly-owned subsidiaries, which include AES and Arkados. Intercompany accounts and transactions have been eliminated in consolidation.

   

  c. Revenue Recognition
     
    Arkados
     
   

The Company enters into arrangements with end users for items which may include software license fees, services, maintenance and royalties or various combinations thereof. For each arrangement, revenues will be recognized when evidence of an agreement has been documented, the fees are fixed or determinable, collection of fees is probable, delivery of the product has occurred and no other significant obligations remain.

 

Revenues from software licensing are recognized in accordance with Accounting Standards Codification (“ASC”) 985-605, “Software Revenue Recognition.” Accordingly, revenue from software licensing is recognized when all of the following criteria are met: persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, and collectability is probable.

 

License revenues are recognized at the time of delivery of the software and all other revenue recognition criteria discussed above have been met. Deferred revenue represents license revenues billed but not yet earned. Sales of products are recognized when the products are shipped and the customer takes risk of ownership and assumes the risk of loss. Royalty income is recognized as it is earned and recorded when reported by the customer.

 

AES

 

Sales of products are recognized when the products are shipped and the customer takes risk of ownership and assumes the risk of loss. Service revenue is recognized when the service is completed. Deferred revenue represents revenues billed but not yet earned.

  

  d. Cash and cash equivalents - The Company considers investments in highly liquid instruments with a maturity of three months or less to be cash equivalents. The Company did not have any cash equivalents at both August 31, 2016 and May 31, 2016.

 

  e. Accounts receivable - Accounts receivable are reported at their outstanding unpaid principal balances net of allowances for uncollectible accounts. The Company provides for allowances for uncollectible receivables based on management’s estimate of uncollectible amounts considering age, collection history, and any other factors considered appropriate. The Company writes off accounts receivable against the allowance for doubtful accounts when a balance is determined to be uncollectible.  At August 31, 2016 and May 31, 2016, the Company determined that an allowance for doubtful accounts was not needed.

 

  f. 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 carrying amounts of debt were also estimated to approximate fair value. As defined in ASC 820, "Fair Value Measurements and Disclosures," fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). The Company utilizes market data or assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated, or generally unobservable. ASC 820 establishes a fair value hierarchy that prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurement) and the lowest priority to unobservable inputs (level 3 measurement). This fair value measurement framework applies at both initial and subsequent measurement.

 

 F-6 

 

 

The three levels of the fair value hierarchy defined by ASC 820 are as follows:

 

Level 1 – Quoted prices are available in active markets for identical assets or liabilities as of the reporting date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis. Level 1 primarily consists of financial instruments such as exchange-traded derivatives, marketable securities and listed equities.

 

Level 2 – Pricing inputs are other than quoted prices in active markets included in level 1, which are either directly or indirectly observable as of the reported date. Level 2 includes those financial instruments that are valued using models or other valuation methodologies. These models are primarily industry-standard models that consider various assumptions, including quoted forward prices for commodities, time value, volatility factors and current market and contractual prices for the underlying instruments, as well as other relevant economic measures. Substantially all of these assumptions are observable in the marketplace throughout the full term of the instrument, can be derived from observable data or are supported by observable levels at which transactions are executed in the marketplace. Instruments in this category generally include non-exchange-traded derivatives such as commodity swaps, interest rate swaps, options and collars.

 

Level 3 – Pricing inputs include significant inputs that are generally less observable from objective sources. These inputs may be used with internally developed methodologies that result in management’s best estimate of fair value.

 

g.Earnings (Loss) Per Share (“EPS”) - Basic EPS is computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding. Diluted EPS includes the effect from potential issuance of common stock, such as stock issuable pursuant to the exercise of stock options and warrants and the assumed conversion of convertible notes.

 

The following table summarizes the securities that were excluded from the diluted per share calculation because the effect of including these potential shares was antidilutive even though the exercise price could be less than the average market price of the common shares. 

 

   Three Months ended 
   August 31, 
   2016   2015 
         
Convertible notes   86,580    114,795 
Stock options   5,112,500    2,312,500 
Warrants   5,225,987    4,776,320 
           
Potentially dilutive securities   10,425,067    7,203,615 

 

  h. Stock Based Compensation - In computing the impact, the fair value of each option and/or warrant 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. There are no issuances of the Company’s common stock, warrants, and options during the three months ended August 31, 2016 and as a result there was no stock based compensation incurred during the period.

 

 F-7 

 

 

    Stock based compensation expense was $0 for the three months ended August 31, 2016 and August 31, 2015.

 

  i. Use of Estimates - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, equity based transactions and disclosure of contingent liabilities at the date of the financial statements and revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

  j. Inventory - Inventory, which consists of finished goods and work-in-process (“WIP”) of AES, is valued at the lower of cost on a first-in, first-out basis or market.   Inventory consists of the following at August 31, 2016 and May 31, 2016.

 

   August 31,   May 31, 
   2016   2016 
   (unaudited)     
           
Finished goods  $60,012   $60,012 
Work-in-process (unbilled labor and consulting)   81,185    60,398 
   $141,197   $120,410 

 

  k. Property and equipment – Property and equipment is recorded at cost.  Depreciation is computed using straight-line and accelerated methods over the estimated useful lives of the related assets.  Expenditures that enhance the useful lives of the assets are capitalized and depreciated.  Maintenance and repairs are expensed as incurred.  When properties are retired or otherwise disposed of, related costs and related accumulated depreciation are removed from the accounts.

 

  l. Research and Development –All research and development costs are expensed as incurred.

  

  m. Foreign Currency Transactions – The Company accounts for foreign currency translation pursuant to ASC 830. The functional currency of the Company is the United States dollar. Under ASC 830, all assets and liabilities denominated in foreign currencies are translated into United States dollars using the current exchange rate at the end of each fiscal period. Revenues and expenses are translated using the average exchange rates prevailing throughout the respective periods. All transaction gains and losses from the measurement of monetary balance sheet items denominated in foreign currencies are reflected in the statement of operations as gain (loss) on foreign currency transactions.

  

  n. New Accounting Pronouncements – In March 2016, the Financial Accounting Standards Board (“FASB”) issued authoritative guidance regarding the accounting for share-based payment transactions, including income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The guidance is to be applied for annual periods beginning after December 15, 2016 and interim periods within those annual periods, and early adoption is permitted. The guidance requires companies to apply the requirements retrospectively, modified retrospectively, or prospectively depending on the amendment(s) applied. The Company is currently evaluating the impact of adopting this guidance.

 

 F-8 

 

 

In February 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-02, “Leases” (Topic 842). This guidance will be effective for public entities for fiscal years beginning after December 15, 2018 including the interim periods within those fiscal years. Early application is permitted. Under the new provisions, all lessees will report a right-of-use asset and a liability for the obligation to make payments for all leases with the exception of those leases with a term of 12 months or less. All other leases will fall into one of two categories: (i) Financing leases, similar to capital leases, which will require the recognition of an asset and liability, measured at the present value of the lease payments and (ii) Operating leases which will require the recognition of an asset and liability measured at the present value of the lease payments. Lessor accounting remains substantially unchanged with the exception that no leases entered into after the effective date will be classified as leveraged leases. For sale leaseback transactions, the sale will only be recognized if the criteria in the new revenue recognition standard are met. The Company is currently evaluating the impact of adopting this guidance.

 

In January 2016, the FASB issued ASU 2016-01, which amends the guidance relating to the classification and measurement of financial instruments. Changes to the current guidance primarily affect the accounting for equity investments, financial liabilities under the fair value option, and the presentation and disclosure requirements for financial instruments. In addition, the ASU clarifies guidance related to the valuation allowance assessment when recognizing deferred tax assets resulting from unrealized losses on available-for-sale debt securities. The new standard is effective for fiscal years and interim periods beginning after December 15, 2017, and upon adoption, an entity should apply the amendments by means of a cumulative-effect adjustment to the balance sheet at the beginning of the first reporting period in which the guidance is effective. Early adoption is not permitted except for the provision to record fair value changes for financial liabilities under the fair value option resulting from instrument-specific credit risk in other comprehensive income. The Company is currently evaluating the impact of adopting this guidance.

 

In November 2015, the FASB issued ASU 2015-17, “Balance Sheet Classification of Deferred Taxes”. Currently deferred taxes for each tax jurisdiction are presented as a net current asset or liability and net noncurrent asset or liability on the balance sheet. To simplify the presentation, the new guidance requires that deferred tax liabilities and assets for all jurisdictions along with any related valuation allowances be classified as noncurrent in a classified statement of financial position. This guidance is effective for interim and annual reporting periods beginning after December 15, 2016, and early adoption is permitted. The Company is currently evaluating the impact of adopting this guidance.

 

In September 2015, the FASB issued ASU 2015-16, “Simplifying the Accounting for Measurement–Period Adjustments”. Changes to the accounting for measurement-period adjustments relate to business combinations. Currently, an acquiring entity is required to retrospectively adjust the balance sheet amounts of the acquiree recognized at the acquisition date with a corresponding adjustment to goodwill as a result of changes made to the balance sheet amounts of the acquiree. The measurement period is the period after the acquisition date during which the acquirer may adjust the balance sheet amounts recognized for a business combination (generally up to one year from the date of acquisition). The changes eliminate the requirement to make such retrospective adjustments, and, instead require the acquiring entity to record these adjustments in the reporting period they are determined. The new standard is effective for both public and private companies for annual reporting periods beginning after December 15, 2015. The Company is currently evaluating the impact of adopting this guidance.

 

In August 2015, the FASB issued ASU No. 2015-14, “Revenue from Contracts with Customers (Topic 606)”. The amendments in this ASU defer the effective date of ASU 2014-09 “Revenue from Contracts with Customers (Topic 606)”. Public business entities should apply the guidance in ASU 2014-09 to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. The Company is still evaluating the impact of adopting this guidance.

 

In April 2015, the FASB issued ASU 2 015-03, “Imputation of Interest – Simplifying the Presentation of Debt Issuance Costs.” This guidance requires that the debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the debt liability, consistent with the presentation of a debt discount. This amendment is effective for fiscal years and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted. The Company is currently evaluating the impact on its consolidated financial statements of adopting this new guidance but at this time does not expect it to have a material impact on the Company’s consolidated financial statements.

 

 F-9 

 

 

All newly issued but not yet effective accounting pronouncements have been deemed to be not applicable or immaterial to the Company.

 

3.ASSET SALE AND DEBT SUBJECT TO EQUITY BEING ISSUED

 

In December 2010, the Company entered into an agreement to sell substantially all of the assets (the “Asset Sale”) to STMicroelectronics, Inc. (“ST US”), a subsidiary of STMicroelectronics N.V. (“ST”). The Asset Sale was predicated on the Company settling its secured debt and a significant part of its unsecured debt and closed in June, 2011. The Company is negotiating with its remaining unsecured debt holders to compromise, extend the due date or convert outstanding debt into equity. Debt holders who have agreed to settle through receipt of the Company’s equity are labeled as “Debt Subject to Equity Being Issued” on the balance sheet. Except as set forth above, there is no binding commitment on anyone’s part to complete the transactions.

 

Debt Subject to Equity Being Issued

 

As a direct result of the Sale of the License and IP Agreements to ST US and the mandate to obtain debt releases, the Company has been able to reach settlements with its secured creditors and employees, with cash payments to the secured creditors made as of the December 2010 and June 2011 closings. Nothing further is owed to the Company’s secured creditors. There remains, however, approximately $179,000 of payments due the former employees as of August 31, 2016 and May 31, 2016.

 

As of August 31, 2016 and May 31, 2016, there remained $456,930 of debts that have been settled with debt holders who have agreed to accept equity for their remaining debt.

  

4.ACCOUNTS PAYABLE AND ACCRUED EXPENSES

 

As of August 31, 2016 and May 31, 2016, accounts payable and accrued expenses consist of the following amounts:

 

   August 31,   May 31, 
   2016   2016 
   (Unaudited)     
           
Accounts payable  $920,887   $782,654 
Accrued interest payable   125,686    116,035 
Accrued payroll   4,966    28,320 
Accrued other   95,615    95,373 
   $1,147,154   $1,022,382 

 

 F-10 

 

 

5.NOTES PAYABLE, RELATED PARTY PAYABLES AND DEBT SUBJECT TO EQUITY BEING ISSUED

 

Notes Payable 

 

Notes payable transactions include the following: 

 

FY 2016 (Year Ended May 31, 2016) Transactions:

 

In January 2016, the Company executed a Promissory Note for a loan in the principal amount of $60,000. The Promissory Note bears interest at 6% per year, compounded quarterly, and matures on January 15, 2017. The proceeds from the Promissory Note were used to partially repay two Convertible Notes as discussed below.

 

On January 8, 2016, the Company entered into an Exchange Agreement with the noteholders of the Convertible Notes that were in default. On January 15, 2016, the Company applied the proceeds of the new Promissory Note together with the issuance of 50,000 shares of the Company’s common stock, to the payment of two outstanding 6% Convertible Notes that were in default having the aggregate outstanding principal amount of $130,000.  In exchange for the payment and the shares, the holders of the outstanding 6% Convertible Notes surrendered their notes, and the Company issued a new 6% Convertible Note December 31, 2016 to them in the original principal amount of $40,000.  The new Convertible Note bears interest at the rate of 6% per year, compounded quarterly, and matures on December 31, 2016. At any time during the term of the Convertible Note, the holders have the right to convert any unpaid portion of the Convertible Note and accrued interest into shares of common stock at an original conversion price of $1.20 per share. There is no beneficial conversion feature. The holders further agreed that their extension of the maturity of the outstanding Convertible Notes had been effective from October 31, 2015 until January 15, 2016.

 

On March 31, 2016 and May 6, 2016, the Company executed Promissory Notes for loans, each in the amount of $10,000. The Promissory Notes bear interest at 6% per year, compounded quarterly. Both notes matured on June 30, 2016 and are now bearing annual interest of 12%. The proceeds from the Promissory Note were used to partially repay two Convertible Notes as discussed below.

 

FY 2017 (Year Ended May 31, 2017):

 

In August 2016 the Company issued a promissory note in the amount of $150,000 with a maturity date in January 2017. The loan bears interest at 10% per annum compounded quarterly.

 

6.STOCKHOLDERS’ DEFICIENCY

 

FY 2016 (Year Ended May 31, 2016):   

 

a.On June 25, 2015, the Company issued 108,333 shares of common stock to its chairman/chief executive officer and 35,000 shares of common stock to an officer/former director for services rendered to the Company’s board of directors in fiscal 2015.  The shares were valued at $1.75 per share.  The value of the shares totaling $250,833 was charged as stock compensation in fiscal 2015.

 

b.For the period June 1, 2015 through May 31, 2016, 838,334 shares of common stock have been subscribed for under the PPO and the Company received proceeds of $503,000. These shares were issued in July and August 2015.

 

c.On January 8, 2016 the Company issued 50,000 shares as part of a debt conversion and refinance whereby $130,000 of note principle and accrued interest of $11,332 were extinguished and a new note of $100,000 was issued.

 

d.On February 23, 2016, we entered into a consulting agreement with. LPF Communications under which LPF Communications is to provide certain investor relations services for a period of up to six months. We have agreed to pay for the services by issuing two tranches of 150,000 shares of our Common Stock each, with the second tranche becoming issuable only if we do not terminate the consulting agreement on or prior to June 8, 2016. Pursuant to the agreement, we issued the first tranche of 150,000 shares to the consultant on April 8, 2016.

 

e.On April 22, 2016, the Company issued 675,000 shares of common stock to its key employees, including 500,000 shares to its chairman/chief executive officer, for services rendered to the Company in fiscal 2016.  The shares were valued at $0.51 per share.  The value of the shares totaling $344,250 was charged as stock compensation in fiscal 2016.

 

 F-11 

 

 

f.On April 28, 2016, the Company entered into an asset purchase agreement pursuant to which the Company purchased intangible assets valued at $249,113 in exchange for 166,667 shares of the Company's common stock and a warrant to purchase 166,667 shares of the Company's common stock at $2.00 per share. As a result of management's evaluation, the intangible asset was deemed impaired and thus fully written off to selling, general and administrative expense of the income statement.

 

FY 2017 (Year Ended May 31, 2017):  

 

There were no issuances of common stock during the period ended August 31, 2016.

 

7.STOCK-BASED COMPENSATION

 

The Company accounted for its stock based compensation in accordance with the fair value recognition provisions of FASB ASC Topic 718, “Compensation – Stock Compensation”.

 

A. Options

 

The Company issued options to purchase an aggregate of 4,100,000 shares of the Company’s common stock in the year ended May 31, 2016, 2,100,000 of which were granted outside of the 2004 Stock Option and Restricted Stock Plan (the “2004 Plan”). There were no options granted during the three months ended August 31, 2016.

 

Compensation based stock option activity for qualified and unqualified stock options are summarized as follows:

 

 

       Weighted 
       Average 
   Shares   Exercise Price 
Outstanding at May 31, 2015   1,012,500   $1.20 
Granted   4,100,000    0.94 
Exercised   -    - 
Expired or cancelled   -    - 
Outstanding at May 31, 2016   5,112,500   $0.99 
Granted   -    - 
Exercised   -    - 
Expired or cancelled   -    - 
Outstanding at August 31, 2016   5,112,500   $0.99 

 

The compensation expense attributed to the issuance of the options will be recognized as they vested/earned. These stock options 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.

 

B. Warrants

 

The issuance of warrants to purchase shares of the Company's common stock including those attributed to debt issuances are summarized as follows:

 

 F-12 

 

 

       Weighted 
       Average 
   Shares   Exercise Price 
Outstanding at May 31, 2015   3,937,986   $1.45 
Granted   1,288,001    1.78 
Exercised   -    - 
Expired or cancelled   -    - 
Outstanding at May 31, 2016   5,225,987   $1.53 
Granted   -    - 
Exercised   -    - 
Expired or cancelled   -    - 
Outstanding at August 31, 2016   5,225,987   $1.53 

 

Issuances of warrants to purchase shares of the Company's common stock were as follows:

 

FY 2016 (Year Ended May 31, 2016):

 

·As discussed in Note 8, in addition to common stock, the Company also issued warrants to purchase 833,334 shares of the Company's common stock under the PPO.

 

·In November 2015, a warrant to purchase 250,000 shares of the Company's common stock at $1.00 per share was issued to a vendor as a bonus payment for services rendered in connection with a software development agreement. The warrant issued was valued using the Black Scholes option pricing model under the following assumptions: stock price $ 1.00; strike price $ 1.00; expected volatility 87.54%; risk free interest rate 1.21%; dividend rate 0%; and expected term 3years. The value of the warrant totaling $139,928 was charged as research and development.

 

·In November 2015, a warrant to purchase 33,000 shares of the Company's common stock at $1.00 per share was issued to a consultant for services rendered under a consulting contract. The warrant issued was valued using the Black Scholes option pricing model under the following assumptions: stock price $ 1.00; strike price $1.00; expected volatility 87.54%; risk free interest rate 1.21%; dividend rate 0%; and expected term 3years. The value of the warrant totaling $18,471 was charged as consulting. See Note 11.

 

·On April 28, 2016, the Company entered into an asset purchase agreement pursuant to which the Company purchased intangible assets in exchange for 166,667 shares of the Company's common stock and a warrant to purchase 166,667 shares of the Company's common stock at $2.00 per share. The warrant issued was valued using the Black Scholes option pricing model under the following assumptions: stock price $ 0.75; strike price $2.00; expected volatility 293%; risk free interest rate .93%; dividend rate 0%; and expected term 3years. The value of the warrant totaling $124,000 was included in the cost of the intangible which was fully impaired as of May 31, 2016.

 

FY 2017 (Year Ended May 31, 2017):

 

There were no warrants granted during the three months ended August 31, 2016.

 

The expense attributed to the issuances of the warrants was recognized as they vested/earned. These warrants are exercisable for three years from the grant date.

 

 F-13 

 

 

8.LICENSE AGREEMENTS

 

Master Agreement – License of (“PEMS-SF”™)

 

On July 10, 2014, the Company entered into a Master Agreement to license our Process and Event Management System (“PEMS-SF”™) with Tatung Corporation (“Tatung”).

 

The basic fee generation structure of the Agreement allows for (1) a one-time licensing fee for each PEMS-SF-enabled stations or subsystems installed, (2) separate fees of up to 10% of the software fees for software updates, maintenance and technical support, (3) on-going service fees based on units of products manufactured utilizing PEMS-SF; and (4) an annual service fee for cloud-based services and data storage.

 

The Master Agreement has a year-to-year term but can be terminated by either party upon sixty (60) days’ advance written notice. Upon termination or expiration of this agreement, we are not required to provide any continuing or ongoing processing of data or other services that, pursuant to a sub-agreement, are discontinued upon termination, however, the customer shall retain any perpetual rights granted in a sub-agreement or schedule. The term of any sub-agreements is concomitant and co-terminus with the Master Agreement term.

 

Revenue recognized under the Master Agreement amounted to $13,583 and $66,000 for the three months ended August 31, 2016 and 2015, respectively.

 

Agreement – License of Meter Collar and Bridge Programmable Logic

 

In October 2014, the Company entered into a year-to-year term agreement with Tatung to license its meter collar and bridge programmable logic controllers. The license is paid on a per copy (ordered) fee, and is on a perpetual, worldwide, non-exclusive, transferable basis.

 

Revenue recognized under the agreement amounted to $-0- and $42,500 for the three months ended August 31, 2016 and 2015, respectively. 

 

In March, 2015 the Company entered into a one-year agreement, with automatic one year renewals until terminated by either party with sixty (60) days’ notice, with Tatung to provide services in the area of business development and as a representative to sell its products. Tatung will pay a monthly retainer fee for this service. Revenue recognized under this agreement was approximately $60,000 for the three months ended August 31, 2016.  

 

9.COMMITMENTS

 

Leases

 

Effective October 1, 2014 as amended on January 15, 2015, the Company entered a lease for its office space at a total monthly rental of $1,874. The lease expired on January 15, 2016. The Company renewed this lease until January 15, 2017 at a monthly rental of $2,034. It can be renewed for two additional one-year terms upon its expiration.

 

Our AES subsidiary leases offices in Jericho, New York. The facility is approximately 1,850 square feet, occupied pursuant to a lease that commenced on August 1, 2015 and expires September 30, 2018. The average annual rent over the term of the lease is approximately $57,300. This amount does not include taxes for the premises.

  

Rent expense for all locations including occupancy costs for the three months ended August 31, 2016 and 2015 was $22,777 and $10,766, respectively.

 

Consulting Agreements

 

None in the three months ended August 31, 2016.

  

 F-14 

 

 

10.CONCENTRATIONS OF CREDIT RISK

 

Cash

 

The Company maintains principally all cash balances in two financial institutions which, at times, may exceed the amount insured by the Federal Deposit Insurance Corporation. The exposure to the Company is solely dependent upon daily bank balances and the respective strength of the financial institutions. The Company has not incurred any losses on these accounts.

 

Net Sales

 

Two customers accounted for 94% of net sales for the three ended August 31, 2016, as set forth below:

 

   Three months ended August 31,   
   2016   2015   
           
Customer 1   80%   60%  
Customer 2   14%   40%  
             
Accounts Receivable  
             
Two customers accounted for 92% of the accounts receivable as of August 31, 2016, as set forth below:
             
   Three months ended   
   August 31,
2016
   May 31,
2016
   
   (Unaudited)       
Customer 1   83%   83%  
Customer 2   9%   11%  

 

11.RELATED PARTY TRANSACTIONS

 

There were no related party transactions during the period.

 

12.BUSINESS SEGMENT INFORMATION

 

As of August 31, 2016, the Company had two operating segments, Arkados and AES.

 

The Company’s reportable segments are distinguished by types of service, customers and methods used to provide their services. The operating results of these business segments are regularly reviewed by the Company’s chief operating decision maker.

 

The accounting policies of each of the segments are the same as those described in the Summary of Significant Accounting Policies. The Company evaluates performance based primarily on income (loss) from operations

 

 F-15 

 

 

Information about segments is as follows:

 

   Arkados   AES   Consolidated 
             
Three months ended August 31, 2016               
Revenues  $76,883   $347,604   $424,487 
Loss from operations  $(104,448)  $(172,875)  $(277,323)
                
Three months ended August 31, 2015               
Revenues  $106,836   $80,410   $187,246 
Loss from operations  $(257,737)  $(263,048)  $(520,785)
                
Total assets               
August 31, 2016  $142,306   $380,335   $522,641 
                
May 31, 2016  $236,797   $347,846   $584,643 

 

13.SUBSEQUENT EVENTS

 

On September 15, 2016, the Company entered into two consulting agreements with two consultants, pursuant to which the Company agreed to issue 200,000 shares of common stock to each consultant in exchange for certain consulting services.

 

 F-16 

 

 

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 Group, Inc., through its subsidiaries (together, the “Company”), is a global provider of scalable and interoperable Internet of Things solutions focused on industrial automation and energy management. We execute our business as a software developer, system integrator and services business focused on developing unique, cutting-edge solutions that enable machine to machine communications with specific applications for Smart Lighting, Smart Factory and Smart Building. Additionally, we work with commercial property owners and managers to optimize energy efficiency in their facilities through various energy conservation measure, such as LED lighting retrofits, oil-to-natural gas boiler conversions, solar PV system installations and co-generation system installation. Ultimately, we utilize our technology solutions to deliver full featured products that help our customers to maximize their return on investment and reduce their energy consumption.

 

We remain engaged in the process of seeking settlements with certain of our unsecured creditors from the periods prior to the sale of certain of our assets to STMicroelectronics in December 2010 (the "Asset Sale").

 

We have executed several agreements that have enabled us to provide the services contemplated in the industrial automation industry. Although we have begun to generate revenue from operations of our Arkados, Inc. subsidiary, this revenue is not sufficient to meet our monthly operating expenses and we remain dependent on outside sources of financing to fund our operations. There is no assurance that we will be able to secure any amount of investment for this or any other purpose. If we are unable to obtain financing, we may be forced to limit or cease our operations.

 

We effected a reverse 1-for-30 split of our common stock on March 18, 2015 and also amended our bylaws, both of which were approved by our shareholders. More information on these actions may be reviewed in our Information Statement filed with the Securities and Exchange Commission (“SEC”) on February 24, 2015.

 

Corporate Background

 

Arkados Group, Inc. was incorporated in 1998 and carries out its activities through its two wholly-owned subsidiaries, Arkados, Inc., a Delaware corporation and Arkados Energy Solutions, LLC (“AES”), a Delaware limited liability company. Arkados, Inc. and AES combine to create opportunities to exploit the growth in the Internet of Things across multiple verticals with our software solutions, while simultaneously building a focus in smart facility (building, factory, school, hospital, etc.) applications based on our core advantages in industrial types of environments. We are based in Newark, New Jersey at the Economic Development Corporation at the New Jersey Institute of Technology. The Company’s shares trade on the Over-The-Counter QB market under the ticker symbol AKDS.

 

Following the Asset Sale, the Company shifted its focus towards development of a universal platform that provides software solutions for Internet of Things applications primarily in the areas of energy management, health care, smart industrial machines and smart factory.

 

 4 

 

 

RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED AUGUST 31, 2016 AND 2015.

 

For the Three Months Ended August 31, 2016

 

   Arkados   AES   Total 
Revenue  $76,883   $347,604   $424,487 
Cost of Sales   -    380,009    380,009 
Gross Profit   76,883    (32,405)   44,478 
Gross Profit Percentage   100%   -9%   10%
                
Operating Expenses   181,331    140,470    321,801 
Operating Income (Loss)   (104,448)   (172,875)   (277,323)
Other income (expenses)   (9,651)   -    (9,651)
                
Income (loss) before benefit from income taxes  $(114,099)  $(172,875)  $(286,974)

 

For the Three Months Ended August 31, 2015

 

   Arkados   AES   Total 
Revenue  $106,836   $-   $106,836 
Cost of Sales   -    -    - 
Gross Profit   106,836    -    106,836 
Gross Profit Percentage   100%   0%   100%
                
Operating Expenses   364,573    263,048    627,621 
Operating Income (Loss)   (257,737)   (263,048)   (520,785)
Other income (expenses)   (7,976)   -    (7,976)
                
Income (loss) before benefit from income taxes  $(265,713)  $(263,048)  $(528,761)

 

Variance

 

   Arkados   AES   Total 
Revenue  $(29,953)  $347,604   $317,651 
Cost of Sales   -    380,009    380,009 
Gross Profit   (29,953)   (32,405)   (62,358)
Gross Profit Percentage   0%   -9%   -90%
                
Operating Expenses   (183,242)   (122,578)   (305,820)
Operating Income (Loss)   153,289    90,173    243,462 
Other income (expenses)   (1,675)   -    (1,675)
                
Income (loss) before benefit from income taxes  $151,614   $90,173   $241,787 

 

Revenue for the three months ended August 31, 2016 increased by $317,651 mainly due to increased revenue from our AES segment. This revenue is derived mainly from the installation of LED lighting retrofit services.

 

Gross profit for the three months ended August 31, 2016 decreased by $62,358 mainly due to lower margins for a particular job and reduced sales in the Arkados segment offset by increased sales in the AES segment.

 

We are highly dependent on a small number of customers. For the three months ended August 31, 2016, two customers accounted for 94% of our revenue. For the three months ended August 31, 2015, two customers accounted for 100% of our revenue. The complete loss of or significant reduction in business from, or a material adverse change in the financial condition of any of our customers could cause a material and adverse change in our revenues and operating results.

 

 5 

 

 

As of August 31, 2016, two customers held 92% of our accounts receivable. Two customers held 94% of our accounts receivable as of May 31, 2016.

 

Income from operations for the three months ended August 31, 2016 increased by $243,462 over the same period in 2015, mainly due to increased revenue.

 

Interest expense on our existing debt for the three months ended August 31, 2016 and 2015 was $9,651 and $7,414, respectively.

 

Liquidity and Capital Resources

 

Our principal source of operating capital has been provided in by the private placement of convertible debt securities. We do not have any significant sources of revenue or recurring profits from our operations. We may be unable to raise additional working capital through sales of our equity and debt securities. Through August 31, 2016, we have depended, in substantial part, upon loans from investors evidenced by convertible notes, and there are no assurances that investors will make any additional loans to us, in which case we may not be able to continue as a going concern.

 

As of August 31, 2016, we had cash of $5,656 as compared to $56,172 as of May 31, 2016.

 

 6 

 

 

Operating Activities

 

Operating activities used $200,516 in cash for the three months ended August 31, 2016, compared to $447,372 for the three months ended August 31, 2015. The decrease in cash was primarily attributable to funding our operations for the period.

 

Investing Activities

 

For the three months ended August 31, 2016 and August 31, 2015, net cash used in investing activities was $-0-.

 

Financing Activities

 

For the three months ended August 31, 2016, net cash provided by financing activities was $150,000, compared to $503,000 for the three months ended August 31, 2015. The Company received proceeds of $150,000 for a short-term note due January 15, 2017.

 

Critical Accounting Policies

 

Our consolidated financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the United States of America, or U.S. GAAP. Our significant accounting policies are described in Note 2 to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended May 31, 2016. The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses as well as the disclosure of contingent assets and liabilities. Critical accounting policies are those that require application of management’s most subjective or complex judgments, often as a result of matters that are inherently uncertain and may change in subsequent periods. Our critical accounting policies are limited to equity based transactions or convertible debt instruments. Management bases its estimates and judgments on historical experience and other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. For additional discussion of our critical accounting policies, see our Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended May 31, 2016.

 

Off Balance Sheet Arrangements

 

We do not have any off balance sheet arrangements.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

 

Not applicable.

 

Item 4. Controls and Procedures.

 

We strive to maintain a set of disclosure controls and procedures designed to ensure that information required to be disclosed by us in the reports filed under the Securities Exchange Act, is recorded, processed, summarized and reported within the time periods specified by the SEC’s rules and forms. Disclosure controls are also designed with the objective of ensuring that this information is accumulated and communicated to our management, including our chief executive officer, as appropriate, to allow timely decisions regarding required disclosure. As a result of this evaluation, we concluded that our disclosure controls and procedures were not effective for the period ended August 31, 2016

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Section 15d-15(f) of the Exchange Act) for our Company. Our sole officer and director, who is chief executive officer and is also acting in the capacity of principal accounting officer, conducted an evaluation of the design and operation of our internal control over financial reporting as of the end of the period covered by this report, based on the criteria set forth in the Internal Control- Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. As a result of this evaluation, we concluded that our financial reporting controls and procedures were not effective for the period ended August 31, 2016. Due to its small size and limited financial resources, the Company has only one employee involved in accounting and financial reporting and relies on outside contractors for the majority of its accounting. As a result of engaging an outside accounting firm to assist with our books, there is some added segregation of duties within the accounting function and financial control, however, all aspects of physical control of cash remains in the hands of the same employee. Our Chief Executive Officer is currently seeking to retain a full-time chief financial officer and to put in place additional compensating levels of controls to provide for greater segregation of duties. As of the date of this quarterly report, however, we have not employed a separate chief financial officer, and the chief executive officer continues to act as our Principal Accounting Officer.

 

 7 

 

 

There has been no significant change in our internal control over financial reporting that occurred during the last fiscal quarter that has materially affected, or is reasonably likely to materially affect our internal control over financial reporting.

 

Changes in Internal Control Over Financial Reporting

 

None.

 

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 annual report on Form 10-K for the fiscal year ended May 31, 2016 and no new litigation commenced since the filing of our most recent annual report on Form 10-K that would be required to be disclosed in response to this Item.

 

Item 1A.   Risk Factors

 

In addition to the other information set forth in this Quarterly Report on Form 10-Q, 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, 2016 which could materially affect our business, financial condition or future results. There have been no other material changes during the fiscal quarter ended August 31, 2016 to the risk factors discussed in the periodic reports noted above that have not already been disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended May 31, 2016.

 

Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds.

 

None.

 

Item 3.   Defaults Upon Senior Securities.

 

None.

 

Item 4.   Mine Safety Disclosures.

 

Not applicable.

 

Item 5. Other Information.

 

None.

 

 8 

 

 

Item 6. Exhibits.

 

(a) Exhibits.

 

31.1 Certification of Chief Executive Officer/Principal Accounting Officer of Periodic Report pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 - Rule 13a-14a and Rule 15d-14a.

 

32.1 Certificate of Chief Executive Officer/Principal Accounting Officer of Periodic Report pursuant to 18 U.S.C. Section 1350.

 

101.INS XBRL Instance Document
101.SCHXBRL Taxonomy Extension Schema Document
101.CALXBRL Taxonomy Extension Calculation Document
101.DEFXBRL Taxonomy Extension Definition Document
101.LABXBRL Taxonomy Extension Labeled Document
101.PREXBRL Taxonomy Extension Presentation Document

 

 9 

 

 

SIGNATURES

 

In accordance with the requirements of the Securities Exchange Act, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

  ARKADOS GROUP, INC.
Dated: October 14, 2016  
   
  By: /s/ Terrence DeFranco
    Terrence DeFranco
    President and Chief Executive Officer,
    Principal Accounting Officer

 

 10