ARKADOS GROUP, INC. - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations
(Edgar Glimpses Via Acquire Media NewsEdge) Overview
The following Management's Discussion and Analysis of Financial Condition and
Results of Operations ("MD&A") is intended to help the reader understand the
Company's financial condition and results of operations. The MD&A is provided as
a supplement to, and should be read in conjunction with, our financial
statements and the accompanying notes thereto.
We remain engaged in the process of seeking settlements with certain of our
We have executed several agreements that will enable us to provide the services
contemplated in the home automation industry. While we have begun to generate
revenue from operations during quarter ending November 30, 2013, such revenue is
not sufficient to meet our monthly operating expenses and we remain dependent on
outside sources of financing to fund our operations.
We conduct our business activities principally through Arkados, Inc., which is a
wholly-owned subsidiary. In September 2006, we changed our corporate name from
CDKnet.com, Inc. to its current form to align our corporate identity with the
"Arkados" brand developed by our subsidiary.
We were an early adopter in the powerline communication space, and experienced
in home automation. Our Arkados, Inc. subsidiary was a member of the HomePlug
Powerline Alliance, an independent trade organization which has developed global
specifications for high-speed powerline communications, the world's leading
professional association for the advancement of technology.
The Company underwent a significant restructuring between December 23, 2010 and
continuing beyond November 30, 2013 during which substantially all of its assets
were acquired by STMicroelectronics N.V. (sometimes referred to hereinafter as
the "Asset Sale"), as disclosed in the 8-K filed December 29, 2010 and further
described (as to the closing) in the 8-K filed July 12, 2011.
Following the sale of its assets associated with the manufacture of microchips,
the Company, still a development stage company, shifted its focus towards
development of software and hardware solutions that enable machine to machine
communication for the Internet of Things (IoT), primarily in the areas of energy
management and home automation. During the period, the Company has been in
continuous negotiations with partners and industry contacts to establish joint
ventures and other commercial relationships that would enable us to sell such
solutions to service providers that would include these applications in product
or service offerings to their customers.
We expect to develop our sales force to include a network of direct sales
regions. As we develop our international relationships with Tatung Corporation
and STMicroelectronics, we expect to establish international sales offices and
develop relationships with organizations related to our business that will be
located worldwide. We anticipate supplementing our direct sales force with sales
representative organizations and distributors. The scope and development of our
sales and marketing organization will depend, among other things, on the amount
of capital available to us and when products are ready for testing.
While endeavoring to restructure the Company following the Asset Sale and settle
obligations as a result of the Asset Sale, we retained the ability to pursue key
elements of our software and platform solutions.
The smart grid and smart home markets can be characterized by the paradigm shift
created by the advances in information technology and telecommunications meeting
the energy industry. At the grid level, electric meters with enhanced
communication capabilities-an essential component of the smart grid-are becoming
more prevalent. In 2011, more than 23% of all U.S. electrical customers had
smart meters. These meters use two-way communication to connect utilities and
their customers. They support demand response and distributed generation, can
improve reliability, and also provide information that consumers can use to save
money by managing their use of electricity.
Within the home, advanced mobile and wireless technologies have contributed to a
smarter, more connected home that can deliver much in the way of energy savings,
convenience, comfort and security. Networked sensors, devices and appliances
create an internet of things that can be managed within the home and from afar.
Electric meters with enhanced communication capabilities-an essential component
of the smart grid-are becoming more prevalent. In 2011, more than 23% of all
U.S. electrical customers had smart meters. These meters use two-way
communication to connect utilities and their customers. They support demand
response and distributed generation, can improve reliability, and also provide
information that consumers can use to save money by managing their use of
According to research firm Zpryme, the smart grid core and enabled technology
market will reach $220 billion in size by 2020. The explosive growth in this
market is driven primarily by the first wave of smart grid implementation:
advanced metering infrastructure (the "AMI"). Utilities throughout the world
have aggressively implemented smart meters to residential and industrial
customers mainly because it is the required first step to achieve a true smart
grid and, secondarily, in response to significant government incentives to do
so. AMI lays the foundation as a hub for networking and communication and it
the gateway to the HAN. From the perspective of the end user (residential or
industrial), in-home (or in-building) devices are not only capable to
communicating with the other devices within the local network, but are also
capable of communicating outward to the WAN and implementing demand response
We continue to foster our relationships with STMicroelectronics and Tatung Each
of these relationships will allow Arkados to engage in our devised strategy of
developing software and platform solutions for home automation services.
Research and Development
We have incurred research and development expense in conjunction with efforts to
further develop our provisioning of electronic devices onto networks, in
conjunction with our strategic relationships with STMicroelectronics and
Tatung. We may engage in certain activities in pursuit of home automation
services plans and other further commercial development as opportunities arise
from these relationships.
Patents, Licenses and Trademarks
We continue to maintain our provisional application (Application No. 61/873,249)
for a patent covering systems and methods for provisioning of electronic devises
onto a network and the subsequent monitoring and operation of the devices, as
filed with the U.S. Patent and Trademark Office on September 3, 2013.
We continue to maintain our license with STMicroelectronics for patents relating
to home automation services. In addition, we maintain the federal registration
of our "Arkados" mark.
Other than as stated above, the Company did not acquire any patents, licenses or
trademarks during the period of this report.
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 existing standards
and specifications, while other competitors' products are based on proprietary
technologies. Key competitors include companies such as Tendril, Greenbox
Technology and Echelon.
Results of Operations
While we remain a development stage company as of the end of the reporting
period, we have been diligently undertaking negotiations with partners and
industry contacts to establish joint ventures and other commercial relationships
that would enable us to sell solutions in the energy management and home
automation industries to service providers that would include these applications
in product or service offerings to their customers.
Since inception, we have incurred accumulated operating losses of approximately
$34,600,000. We have financed operating losses since September 2004 with the
proceeds primarily from related party lending from our major stockholders and
affiliated lenders, as well as other stockholders and lenders.
If we are unable to raise funds to finance our working capital needs, we will
not have the capital necessary for ongoing operations and 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.
For The Three Months Ended November 30, 2013 and November 30, 2012
During the three months period ended November 30, 2013 and likewise, for the
three months ended November 30. 2012, we recorded no revenue. We continue to
provide software development services, however, funds received in respect of
these services did not result in sales being recorded during the period, but was
recorded as a reduction of our research and development expense, in accordance
with U.S. generally accepted accounting principles. Total operating expenses for
the three month period ended November 30, 2013 was $452,848, consisting mainly
of salaries of our management, as well as consulting expenses and professional
fees. During this period, we also incurred net research and development
expenses of $16,188 relating to development of new technology. This is compared
to total operating expenses for the three month period ended November 30, 2012
of $15,682, consisting mainly of consulting expenses and professional fees.
Interest expense on our existing debt for the three month periods ended November
30, 2013 and November 30, 2012 was $95,819 and $14,231, respectively. Interest
expense includes the amortization of beneficial conversion features on certain
convertible debt securities.
For The Six Months Ended November 30, 2013 and November 30, 2012
During the six months ended November 30, 2013 and 2012, we provided software
development services for a customer. In accordance with accounting rules for
recognition of revenue, however, this did not result in sales being recorded
during the period, but was recorded as a reduction of our research and
development expense and therefore our revenue was $0 for each of the six months
ended November 30, 2013 and November 30, 2012. Total operating expenses for the
six month period ended November 30, 2013 was $678,784, consisting mainly of
salaries of our management, as well as consulting expenses and professional
fees. During this period we also incurred net research and development expenses
of $19,969 relating to development of new technology. This is compared to total
operating expenses for the six month period ended November 30, 2012 of $55,256,
consisting mainly of consulting expenses and professional fees.
Interest expense on our existing debt for the six month periods ended November
30, 2013 and November 30, 2012 was $195,273 and $28,117, respectively. Interest
expense includes the amortization of beneficial conversion features on certain
convertible debt securities.
Liquidity and Capital Resources
Our principal source of operating capital has been provided in the form of the
private placement of convertible debt securities. We 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 investors and there
can be no assurances that investors will make any additional loans to us.
Our present material commitments are the compensation of our employees,
including our executive officers, and professional and administrative fees and
expenses associated with the preparation of our filings with the Securities and
Exchange Commission and other regulatory requirements.
As of November 30, 2013, we had cash of $310,761 and negative working capital of
($8,670,010) after changes between short- and long-term debt as described
below, compared to cash of $345,126 and negative working capital of ($9,146,637)
at May 31, 2013, an overall reduction in the working capital deficit of
approximately $477,000. The change in working capital since May 31, 2013 has
resulted from approximately $400,000 received in new financing during the
quarter, a decrease of approximately $34,000 in cash used to pay current
expenses and an increase of approximately $12,000 in prepaid expenses in
connection with an advisory agreement (as described in Item 5 below) and the
amortization of license fee for ZigBee communication protocols. In addition,
however, we experienced net decreases in our liabilities as follows: $103,000 of
notes payable (net of debt discount) that are now classified as short-term
liabilities that were previously long-term liabilities, approximately a net
decrease of $296,000 in accounts payable and accrued expenses (resulting from a
$76,000 increase in accounts payable and accrued expenses from operations and
reduction of $372,000 settled in exchange for equity), $125,000 decrease in our
debt subject to equity being issued, and an approximately $71,000 decrease in
notes payable which was settled in exchange for equity to be issued.
Critical Accounting Policies
The discussion and analysis of the Company's financial condition and results of
operations are based upon the Company's consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States of America. The preparation of these financial statements
requires the Company to make estimates and judgments that affect the reported
amount of assets and liabilities, revenues and expenses, and related disclosure
on contingent assets and liabilities at the date of the financial statements.
Actual results may differ from these estimates under different assumptions and
Critical accounting policies are defined as those that are reflective of
significant judgments and uncertainties, and may potentially result in
materially different results under different assumptions and conditions. As of
November 30, 2013, management believes the critical accounting policies
applicable to the Company that are reflective of significant judgments and or
uncertainties are limited to equity based transactions or convertible debt
Accounting for Stock Based Compensation
The computation of the expense associated with stock-based compensation requires
the use of a valuation model. ASC 718 is a complex accounting standard, the
application of which requires significant judgment and the use of estimates,
particularly surrounding Black-Scholes assumptions such as stock price
volatility, expected option lives, and expected option forfeiture rates, to
value equity-based compensation. We currently use a Black-Scholes option pricing
model to calculate the fair value of stock options. We primarily use historical
data to determine the assumptions to be used in the Black-Scholes model and have
no reason to believe that future data is likely to differ materially from
historical data. However, changes in the assumptions to reflect future stock
price volatility and future stock award exercise experience could result in a
change in the assumptions used to value awards in the future and may result in a
material change to the fair value calculation of stock-based awards. ASC 718
requires the recognition of the fair value of stock compensation in net income.
Although every effort is made to ensure the accuracy of our estimates and
assumptions, significant unanticipated changes in those estimates,
interpretations and assumptions may result in recording stock option expense
that may materially impact our financial statements for each respective
Impact of Debt with Conversion Features
The Company at times enters into financing transactions whereby such debt
instruments contain conversion features into common stock and or may contain
detachable equity rights. These debt inducement features may be considered
freestanding and or beneficial conversion features in our financial statements
pursuant to the accounting guidance under ASC 470-20. These features would be
fair valued and recorded as a discount to the debt instrument and amortized over
the life of the instrument. Additional valuation features of warrants,
conversion features in debt, and similar terms that include "full-ratchet" or
reset provisions, which mean that the exercise or conversion price adjusts to
pricing in subsequent sales or issuances, no longer meet the definition of
indexed to a company's own stock and are not exempt from equity classification
provided in ASC Topic 815-15. This means that instruments that were previously
classified in equity are reclassified to liabilities and ongoing measurement
under ASC Topic 815. The amount of quarterly non-cash gains or losses we will
record in future periods will be based upon the fair market value of our common
stock on the measurement date.
Off Balance Sheet Arrangements
We do not have any off balance sheet arrangements.
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