UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
DC 20549
FORM
10-KSB
x
ANNUAL REPORT UNDER
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For
the
year ended May 31, 2006
o
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.
(Name
of
small business issuer in its charter)
|
Delaware
(State
or other jurisdiction
|
22-3586087
(I.R.S.
Employer Identification No.)
|
|
of
incorporation or organization)
|
|
|
220
Old New Brunswick Road, Piscataway, NJ
(Address
of principal executive offices)
|
08854
(Zip
Code)
|
Issuer’s
telephone number:
(732)
465-9300
Securities
registered under Section 12(b) of the Exchange Act:
|
Title
of each class
|
Name
of each exchange on which registered
|
|
___________________________________________
|
___________________________________________
|
|
___________________________________________
|
___________________________________________
|
Securities
registered under Section 12(g) of the Exchange Act:
Common
Stock, $.0001 par value
(Title
of
class)
(Title
of
class)
Check
whether the issuer (1) filed all reports required to be filed by Section 13
or
15(d) of the Exchange Act during the past 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.
x
Yes
o
No
Check
if
there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant’s knowledge in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB
or any amendment to this Form 10-KSB.
o
Indicate
by check mark whether the registrant is a shell company (as defined by Rule
12b-2 of the Exchange Act:
o
Yes
x
No
State
issuer’s revenues for its most recent fiscal year.
$112,094
The
aggregate market value of the voting common equity held by non-affiliates
(1)
computed
by reference to the last price at which the common equity was sold on September
30, 2006 was $8,170,610.
As of September 30, 2006, there were 24,862,850 shares of common stock, $.0001 par value, outstanding.
Transitional
Small Business Disclosure Format (check one):
o
Yes
x
No
(1)
The
information provided shall in no way be construed as an admission that any
person whose holdings are excluded from the figure is not an affiliate or
that
any person whose holdings are included is an affiliate and any such admission
is
hereby disclaimed. The information provided is included solely for record
keeping purposes of the Securities and Exchange Commission.
NOTE
RE:
FORWARD LOOKING INFORMATION
All
statements in this annual report on Form 10-KSB that are not historical are
forward-looking statements, including statements regarding our “expectations,”
“beliefs,” “hopes,” “intentions,” “strategies,” or the like. Such statements are
based on management’s current expectations and are subject to a number of risks
and uncertainties that could cause actual results to differ materially from
those set forth or implied by any forward looking statements. Some of these
risks are detailed in Part I, Item 1 “Risk Factors” and elsewhere in this
report. We caution investors that there can be no assurance that actual results
or business conditions will not differ materially from those projected or
suggested in such forward-looking statements as a result of various factors,
including, but not limited to, the risk factors discussed in this Annual Report
on Form 10-KSB. We expressly disclaim any obligation or undertaking to release
publicly any updates or revisions to any forward-looking statements contained
herein to reflect any change in our expectations with regard thereto or any
change in events, conditions, or circumstances on which any such statements
are
based.
PART
I
| ITEM 1. |
DESCRIPTION
OF BUSINESS.
|
The
registrant, Arkados Group, Inc., was incorporated in the State of Delaware
in
1998. We are principally engaged in developing and marketing technology and
solutions enabling broadband communication and networking over standard
electrical lines. We conduct these activities through Arkados, Inc., our wholly
owned subsidiary and we recently 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. Arkados is a member of the HomePlug Power
Alliance, an independent trade organization which has developed global
specifications for high speed powerline communications.
Since
we
do not own any semiconductor fabrication facilities we are known as a “fabless”
semiconductor company. Our powerline communications solutions enable high-speed
digital transmission of voice, video, and data over the existing powerline
infrastructure. Our highly integrated semiconductors are designed for the home
networking and broadband communications markets, within which we plan to address
the needs of specific industries with customizable software.
We
are
principally engaged in developing and marketing semiconductors for home
networking and broadband powerline communication (“BPL”) markets, such as the
Multi-dwelling/Multi-tenant (MDU/MTU) and the so-called “last-mile” or “access”
markets. Arkados is a member of the HomePlug Alliance and IEEE P1901. HomePlug
networking is the only globally recognized technology for high-speed powerline
communication having multiple silicon manufacturers support and established
interoperability certification. During the fiscal year ended May 31, 2006
(“Fiscal 2006”) we introduced our first commercially available system-on chip,
the ArkTIC™ AI-1100. The ArkTIC™ AI-1100 is designed to be embedded into various
consumer electronics devices and deliver high-speed Internet connectivity and
multimedia over the power lines in a home. The AI-1100 is the first in our
ArkTIC™ family of turnkey hardware and software solutions. Our system-on-a-chip
designs aim to create easy-to-use digital connectivity between entertainment
and
networking devices used by consumers. In addition, our solutions are designed
to
permit ODM and OEM customers to produce sophisticated, full featured products
with lower overall production cost, faster time to market, and a high degree
of
programmability.
We
design, develop and market comprehensive platform solutions, including a
system-on-chip, firmware and software, for manufacturers of networked multimedia
appliances and feature-rich networking devices. Networked multimedia appliances
play digital media such as audio, photos, and video. Networking devices allow
consumers to share broadband connections and connect computers, laptops, gaming
consoles, TiVO, and other devices together. Our platform solutions support
a
system based approach to networking and will allow our customers to build
products that are simple and intuitive to install and operate with intuitive
and
customizable user interfaces.
Our
executive offices are located at 220 Old New Brunswick Road, Piscataway, NJ
08854. We can be reached at our principal offices by telephone at (732)
465-9300. Arkados maintains a website at
www.arkados.com
.
Except
for the documents on our websites that are expressly incorporated by reference
into this report, the information contained on our websites is not incorporated
by reference into this report and should not be considered to be a part of
this
report. This includes the websites referred to in the paragraph above, as
well
as
other websites that we refer to elsewhere in this report. All of these website
addresses are included in this document as inactive textual references
only.
Corporate
Background
On
May
24, 2004, a wholly owned subsidiary we formed, filed a merger certificate
completing the acquisition of Miletos, Inc., a previously unaffiliated Delaware
corporation (the “Merger”). The consideration for the 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 a Agreement and Plan of Merger dated as
of
May 7, 2004. Miletos merged into our wholly owned subsidiary and changed its
name to “Arkados, Inc.”
Simultaneously
with the Merger, we completed a private placement of 883,334 shares of our
common stock for aggregate proceeds of $1,060,000, of which approximately
$950,000 were subscriptions for cash, $50,000 (41,667 shares) was for
outstanding debt of Arkados, and $59,800 (49,834) was in lieu of consulting
fees. The sale was made to 10 accredited investors (“Investors”) directly by us
without any general solicitation or broker. The offering is claimed to be exempt
from registration pursuant to Section 4(2) under the Securities Act of 1933,
as
amended. In addition, we settled liabilities relating to outstanding convertible
notes and payables for 700,000 common shares.
Prior
to
the Merger, on March 23, 2004, Miletos acquired the assets and business of
Enikia, LLC, a Delaware limited liability company at a public foreclosure sale,
including the intellectual property upon which Arkados’ development efforts are
based. Miletos was formed in February 2004, by control affiliates of Enikia.
These control affiliates were both secured creditors of Enikia and holders
of
the controlling equity interest in Enikia. They contributed a secured promissory
note to Miletos in the initial principal amount of $9,221,000, dated June 1,
2002. The promissory note also represents obligations to the lender for
additional advances to Enikia by the control group which brought the aggregate
principal due at the time of foreclosure to approximately $11,100,000. At the
foreclosure sale, Miletos forgave $4,000,000 of the secured obligation in
exchange for substantially all of the assets of Enikia. The Merger has been
treated as a reorganization of Arkados, Inc. via a reverse merger with Arkados
Group, Inc. (formerly CDKNet.com, Inc.). The assets acquired at the foreclosure
sale and certain liabilities assumed by Arkados Group, Inc. have been recorded
as historical cost.
Dependence
on Financing Activities
Since
we
are not generating significant revenue, we are dependent on outside sources
of
financing. During Fiscal 2006 we completed a series of debt financings in the
aggregate principal amount of $4,442,384. From June, 2006 to September 6, 2006
we completed an additional $2,273,470.00 of debt financing, of which $1,500,000
was for cash proceeds and $773,470 was for the cancellation of obligations
to
our Chairman, Andreas Typaldos, and related family limited partnerships for
consulting fees due under a May 2004 consulting agreement and borrowed
money.
We
have
sought and will continue to seek various sources of financing but there are
no
binding commitments from anyone to provide us with financing. In addition,
under
the terms of $5,649,354.38 principal amount of 6% Secured Convertible Debentures
due December 28, 2008 issued during the period from December 2004 to September
7, 2006, we are prohibited from issuing shares of our common stock, securities
convertible into or giving right to purchase our common stock or debt securities
without the consent of the holders of 60% of the outstanding principal amount
of
the secured debentures. Since December 2005 when we initially issued $2,000,000
principal amount of secured debt, such holders have
consented
to the issuance of additional 6% secured debentures and related warrants and
have purchased $2,375,884.38 of the additional $5,649,354.38 principal amount
sold. A substantial portion of the net proceeds of these sales have been used
to
repay pre-existing debt. There is no assurance that the holders will continue
to
provide additional funds to us or that they will consent to any future
financing. 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.
Industry
Background
Multimedia
distribution is experiencing the shift from old-fashioned analog signals into
a
digital distribution. InStat, in a report titled “Media Networking 2005: The
Networked Living Room Becomes a Reality,” InStat predicted growth trends in home
media networking, including the prediction that total media networking
connections in homes will grow from over 50 million in 2005 to over 200 million
in 2009, a 29% compound annual growth rate. We believe that this shift creates
demand for new products, and new products will require new types of
semiconductors that incorporate digital technologies supporting such functions
as communication and media rendering. Our ArkTIC™ family of turnkey hardware and
software solutions is designed to address these requirements.
Powerline
Communication Enables Several Markets
We
view
the market for powerline communication semiconductors comprising four major
segments: In-Home Networking, Consumer Audio Visual Applications or Multimedia
Networking, Broadband Powerline (BPL), and MDU/MTU Networking.
In-Home
Networking
Technology
and solutions used to connect devices in a home through powerline or wireless
means, for the purpose of sharing entertainment content or connectivity using
HomePlug standard technology. This is a proven marketplace with consumer
products available today.
Consumer
Audio Visual Applications
or
Multimedia Networking
These
applications permit Internet streaming audio, whole house audio distribution
and
control, whole house distribution of video either streamed over IP (IPTV) or
stored locally (PVR/DVR type of applications). In addition, technologies based
on HomePlug specifications can be used to connect portable devices such as
portable audio players and satellite receivers to remote speaker systems,
distribute multimedia and HDTV throughout the home by simple use of already
installed electrical wires.
MDU/MTU
Networking
Technology
and solutions for the purpose of connecting individual rooms or units of a
building (such as a hotel, apartment, or office complex) to an Internet
connection or other services. It is a mature market with an ever-increasing
need
for products that offer non-invasive and cost-effective installation. Powerline
communication technology has the potential to become a significant player in
this market segment. Arkados has acquired significant experience in this market
and conducted
feasibility
studies that helped Arkados team to develop both the expertise and identify
potential solutions suitable for this market.
Broadband
Powerline
Technology
and solutions used to deliver Internet access and broadband services to homes
via power lines. This is an early stage market segment. Utilities and service
operators are testing proprietary technologies and services. Standards
development has begun, which will spur the market. Broadband Powerline has
the
potential to become a significant player along with DSL, Cable, and other access
technologies. Overseas and rural markets offer substantial growth potential.
Arkados
and the HomePlug Powerline Alliance
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 2005
the Alliance ratified HomePlug AV specification that is going to enable 200Mbps
class communication over power lines. In-Stat believes that HomePlug AV will
be
a potentially important technology for multimedia networking, as the technology
could provide a home network backbone. Presently the alliance is working on
the
new HomePlug BPL and HomePlug Command and Control specifications.
Arkados
is a Contributing Member of the 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 the immediate past president of
the
Alliance, having been succeeded by Matthew Theall of Intel. Jim Reeber, our
Director of Marketing has served as Chair of Marketing Working
Group.
Arkados
is also a member of the IEEE P1901 group that is focused on the development
of
powerline communication Physical Layer (PHY) and Media Access Control (MAC)
specifications.
Our
Solution
We
are a
fabless semiconductor company that develops comprehensive platform solutions,
including a system-on-chip, or SoC, firmware and software, for manufacturers
of
networked multimedia appliances and feature-rich networking devices. Our
platform solutions are designed to enable a systems-based approach to networking
and will allow our customers to build products that are simple and intuitive
to
install and operate with intuitive and customizable user
interfaces.
Key
elements of our solution are as follows:
| · |
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
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 development kit will
include 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, I
2
S,
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.
In
contrast, competitors that do not provide comprehensive platform solutions
such
as ours may be able to produce a greater variety of customized SoCs to more
specifically address a particular OEM’s requirements. In addition, solutions
which do not include customizable firmware and software like ours may allow
OEMs
to take advantage of a wider range of third-party developers. Furthermore,
these
alternative solutions may be lower in cost in comparison to our platform
solutions due to lower performance levels or fewer interface options.
Our
Strategy
Our
objective is to be the leading supplier of comprehensive platform solutions
for
high-performance and feature-rich networked multimedia appliances and networking
devices. Key elements of our strategy are:
| · |
Maintain
a full platform solution approach with industry-leading SoCs, firmware
and
software. We plan to continue committing resources of each of our
hardware, firmware and software teams to drive innovation so that
our
integrated, comprehensive platform solutions are at the forefront
of the
networked multimedia appliances and networking devices industries
and
capture a leading market share. We intend to continue to devote resources
to increase the performance and functionality of our SoCs and expand
the
features and capabilities of our firmware and software.
|
| · |
Maintain
our focus on feature-rich networked multimedia appliances and networking
devices. We intend to build on our experience as a platform provider
by
continuing to focus primarily on customers that produce feature-rich
networked multimedia appliances and networking devices.
In
|
|
addition,
we intend to continue to work closely with manufacturers of other
media
rendering components to ensure that our platform solutions interface
with
their current and future technology components for optimal performance
their end products.
|
| · |
Building
on our leadership in the integration of powerline and audio rendering
functions secure the leadership position in networked multimedia
appliances and networking devices. We believe that the networked
audio
markets will continue to represent the largest volume opportunity
for
networked multimedia appliance and networking device manufacturers
in the
near term. We intend to continue to focus on advancing functionality
to
win designs in this large and growing market.
|
| · |
Enable
new growth markets, such as photo- and video-enabled networked multimedia
appliances. We intend to build on our existing expertise to be the
leading
provider of comprehensive platform solutions in new markets. We intend
to
continue to invest our research and development efforts and engineering
resources to develop new platforms and products and to strengthen
our
technological expertise. For example, our recently announced reference
design that employs both AI-1100 as well as BlackFin Processor from
Analog
Devices to provide a cost-effective platform for a variety of video
applications based on powerline
distribution.
|
| · |
Expand
our customer base while securing additional design wins with existing
customers. We plan to be the leading supplier of new designs to our
existing customers, and to secure high market share with new customers
entering this market. We intend to continue the expansion of our
customer
base by marketing our platform solutions to additional manufacturers
of
consumer devices. Further, we intent to broaden our reach within
our
existing customer base into their adjacent product lines that can
utilize
technologies that we intend to implement in the near
future.
|
Our
Products
We
design
and develop and are marketing highly integrated SoC semiconductors that are
designed to cater to the markets for powerline communications. Our chip designs
offer flexible solutions through programmability and remote firmware
upgrades.
Arkados
Total Integration Concept
TM
,
or
ArkTIC
TM
,
family
of converged multimedia and networking solutions targets data-, audio-, photo-,
and video-enabled networked multimedia appliances and networking devices. The
ArkTIC family is a portfolio of turnkey hardware and software solutions that
enable OEMs and ODMs to quickly develop digitally networked consumer electronic
products with a competitive cost structure to address this rapidly developing
market. Among other networking interfaces the first member of the ArkTIC family
will support a powerline communication interface based on the HomePlug Powerline
Specification 1.0.1.
We
started marketing our AI-1100 system-on-chip in Fiscal 2006. It is designed
to
be embedded into various consumer electronics and multimedia networking devices
and deliver high-speed Internet/Networking connectivity and multimedia over
the
power lines in a home. The AI-1100 chip offers a single chip integration of
HomePlug 1.0.1 powerline technology, ARM 926-JES CPU operating at 160 MHz,
dual
Ethernet interface, I
2
S
Audio
Interface, and a wide variety of other interfaces designed to support connected
home applications. Furthermore, the programmable nature of our implementation
allows ODMs/OEMs to extend the functionality of the these products and HomePlug
technology.
ArkTIC
AI-1100 system-on-chip features:
|
·
Based
on HomePlug
1.0 Specification
-
PHY/MAC
sub-system
is designed to allow for compliance with the HomePlug
specification
-
Arkados
extensions
for increased performance and future-proofing
-
Programmable
MAC
functions for full flexibility
·
ARM926
Processor
-
16k
instruction
cache & 4k data cache
-
Memory
Management
Unit
-
Embedded
Trace
Macrocell (ETM9)
·
SDRAM
Controller
-
Supports
external
parts up to 256Mb
·
SRAM
Controller/Expansion Bus Interface
-
Supports
external
boot Flash or external SRAM and acts as a general-purpose
interface bus
for external logic
·
Ethernet
controllers
-
Standard
MII port
(802.3u) - or - PHY Emulation Port (PEP) MII (emulates
Ethernet
PHY)
·
Video/Audio
DSP
Interface
·
USB
1.1 Device
·
Serial
I/O
Controllers
·
I2S
for direct
connection to audio DAC
·
IrDA
-
6550d
compatible
UART
·
GPIO
Controller
·
JTAG
/ Debug
Interface
·
0.18μ
CMOS,
1.8V
core, 3.3v I/O
|
|
Our
AI-1100 is the first in a series of devices built around existing and emerging
HomePlug Powerline Alliance networking specifications. This device supports
the
HomePlug 1.0.1 specification along with a variety of multimedia applications.
Our Direct to Speaker™ Internet Radio Reference Design (AI-1100 DTS-INTR)
received HomePlug 1.0 certification in August 2006. Furthermore, the
programmable nature of the Arkados implementation allows OEMs to extend the
functionality of the HomePlug technology. Future devices will include among
other enhancements the implementation of new HomePlug standards, such as
HomePlug AV and BPL, as they become available.
We
have
modularized a core Orthogonal Frequency Division Multiplexing (OFDM) and
communication platform to rapidly develop customized solutions for each
powerline market. This enables efficient reuse and repurposing of technology
blocks, which can be used to create many specific solutions.
We
also
provide consulting, software, and applications support, thereby facilitating
system integration and reducing our customers’ time-to-market and our customers’
development costs.
In
the
in-home networking segment of the market we expect to deliver highly integrated
circuits that combine both networking blocks and blocks that are capable of
supporting end-use applications. Our chips
are
designed to offer a high degree of programmability and may become an attractive
solution for a diverse range of home-networking products.
In
the
MDU/MTU segment of the market we expect to deliver highly integrated circuits
that combine both networking blocks and blocks that are capable of supporting
communications applications in demand from service providers and utility
companies. Downloadable firmware management capabilities make this an attractive
solution for remote management and service applications.
In
the
broadband powerline segment of the market we expect to deliver highly integrated
circuits that combine both networking blocks and blocks that are capable of
supporting communications applications in demand from service providers and
utility companies. Downloadable firmware management capabilities would make
this
an attractive solution for remote management and service applications.
Some
of
the examples of the products that could be built based on the above-described
semiconductors by original equipment manufacturers (OEM) are:
| · |
CONSUMER
ELECTRONICS - A growing market that includes audio & video devices
with embedded powerline technology. We expect this market to grow
over the
next few years as more video and audio products are released with
networking technologies built-in. Televisions, stereos, powered speakers,
receivers, DVD and CD players, are targeted applications for powerline
networking technology. Internet streaming content and home content
servers
should greatly increase the demand for HomePlug 1.0 and AV
products.
|
| · |
SOHO
NETWORK GEAR - New types of routers, switches, gateways, network
attached
storage, and other devices that offer various types of services to
the
SOHO (Small Office Home Office) network.
|
| · |
INTERNET
TELEPHONY - As companies like Vonage, Comcast, Verizon and other
service
providers begin to roll-out new voice services to the home, an easy-to-use
and reliable home network is needed. VoIP (Voice-over-IP) phones
are
currently produced by several vendors and we expect to see such products
with HomePlug technology embedded into them.
|
| · |
HOME
SECURITY - Many companies have created home security cameras that
are
networked through various means. Early market entrants GigaFast,
ST&T,
and Asoka have already created powerline networked security cameras
with
embedded web servers that allow direct access to the camera’s
feed.
|
Customers
Most
of
our revenue has come from design and development agreements. We expect that
such
agreements will lead to volume 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. We have
not yet derived significant product revenue from these ODMs/OEMs. We have
received initial orders for limited quantities of our AI-1100 SoC. We are
working closely with many of the leading communications, digital entertainment
and consumer electronics companies some of which may result in design wins
and
orders for our integrated circuits. Several OEM’s are sampling and testing our
AI-1100 SoC chips, and one has announced a product incorporating our chip,
but
factors such as design flaws, compatibility issues and manufacturing errors
could delay the functioning of the products and prevent us from making sales.
As
it is evidenced by the recent compliance certification of one of our
reference
designs we are focused on delivering a wide array of reference designs that
can
help out customers through the productization cycle.
Strategic
Relationships
In
July
2004, Arkados entered into a five-year Silicon Product Development and Product
Collaboration Agreement with GDA Technologies, Inc., under which GDA will assist
Arkados in translating Arkados chip designs into a mask that can be used by
a
semiconductor foundry to manufacture Arkados designed integrated circuits in
a
cost effective manner. We paid GDA $175,000 under the agreement in Fiscal 2006
and will pay GDA 20% of production costs as compensation for production
management services. In addition, we issued 150,000 shares of our restricted
common stock to GDA for nominal consideration.,
Manufacturing
We
contract with third parties for all of our wafer fabrication and assembly,
as
well as for a portion of our design and testing. Our 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. Our manufacturing process is designed
to follow the following steps. After wafer fabrication by the foundry,
third-party assembly vendors package the wafer die. The finished products are
then sent for testing, either to third-party testers or to our internal test
facility, before shipment to our customers. We expect to qualify each product,
participate in process and package development, define and control the
manufacturing process at our suppliers were 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. At present,
we
are using foundries in Japan owned by Fujitsu and we also use third parties
to
aid in our test and qualification process.
Patents,
Licenses and Trademarks
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. As of August 31, 2006, Arkados has 4 issued U.S.
patents, 20 pending U.S. patent applications, and various corresponding
international patents and applications.
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.
Research
and Development
We
concentrate our research and development efforts on the design and development
of new products for each of our principal markets. 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. 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.
We
believe that our focus on application related features and software may
contribute to our success.
Competition
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 variety of applications.
We
face
significant competition in our present and future product lines. 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 already have products in the market place that are compliant
with HomePlug Alliance 1.0.1 specification while other competitors’ products are
based on proprietary technologies. Immediate key competitors in the powerline
networking segment include Conexant (CNXT), Maxim Integrated Products (MXIM),
Intellon, DS2, Gigle Semiconductor, Panasonic, Spidcom, and Yitran, many of
whom
have substantially greater resources than we do. Some of them have already
announced HomePlug AV based products. 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.
In
addition, there are other organizations worldwide that seek to foster the
development of powerline connectivity technology solutions and may attempt
to
create technology standards that compete with the industry specifications
established by the HomePlug Powerline Alliance. These include the R7.3
subcommittee of the Consumer Electronics Alliance (CEA), PLCForum, industry
groups such as CEPCA and Universal Powerline Association (UPA), and the IEEE
P1901. The R7.3 subcommittee of the CEA, a consumer electronics trade
association, had pursued a specification for powerline connectivity in the
past,
but later abandoned it. The PLCForum is a European organization primarily
focused on addressing regulatory issues, market factors, and business cases
for
the technology. The two recent entrants, CEPCA and UPA, are focused on
generating industry acceptance of certain technologies from individual
companies, and both have announced intentions to build co-existence methods
that
would allow standards-based and proprietary technologies to divide bandwidth
on
the powerline, allowing co-existence. The IEEE P1901 has announced the focus
on
both co-existence and PHY/MAC development. We believe the HomePlug alliance
is
the only organization solely focused on using open standardization processed
to
build interoperable solutions for both in-home and to-the-home applications
that
allow for the co-existence of services. We also participate in IEEE efforts.
The
HomePlug 1.0 and AV specifications consist of the electrical characteristics
and
protocols related to the transmission of data over conventional power lines.
As
a member of the HomePlug Alliance
we
are
obligated to license Necessary Patent Claim (intellectual property rights
without the use of which products cannot conform to the HomePlug specifications)
to any member of the alliance as defined in the Sponsor Agreement and
Contributor Agreement on a non-discriminatory basis. 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.
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 the strongest competition to powerline solutions.
Many
HomePlug members are also promoting these competing connectivity technologies.
Although several of these competing technologies have already been introduced
in
the market, none has achieved 100% penetration, particularly in the transmission
of entertainment content. We believe the principal factors driving competition
between home connectivity technologies include pervasiveness, performance,
reliability, ease-of-use and cost effectiveness. We believe powerline based
home
connectivity solutions will compete favorably with respect to each of these
competitive factors. 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.
The
principal competitive factors in our markets include time-to-market; total
cost
of the finished product; quality of hardware/ software design and end-market
systems expertise; price; product benefits that are characterized by
performance, features, quality and compatibility with standards; access to
advanced process and packaging technologies at competitive prices; and sales
and
technical support, including 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.
Sales
and Marketing
We
expect
to sell our products worldwide using the following channels:
| · |
Sales
and Marketing Partnerships with established companies. These relationships
generally help to establish the presence in the specific regions
and
access customers through already developed relationships. The benefits
of
using this channel are numerous, among them are added credibility,
reduction of upfront sales and marketing expenses, acceleration of
volume
sales through incumbency of the customer base, and local customer
support
and account management.
|
| · |
Advanced
Development Partnerships with strategic customers. The benefits of using
this channel are numerous. Among them are creation of product focus,
reduction of upfront sales and marketing expenses, acceleration of
sales
volumes through early commitments, and creation of incremental development
revenues.
|
| · |
We
are also developing a network of distributors that can support our
customers worldwide. Recently we announced an agreement with Jedcom,
a
distributor in Taiwan. Under the terms of this agreement Jedcom is
going
to provide us with distribution, sales and marketing, and field
application engineering support in Taiwan and certain regions of
China.
|
13
We
expect
to develop our domestic sales force to include a network of regional direct
sales offices. We expect to establish international sales offices and develop
relationships with appropriate organizations located worldwide. We expect
to
supplement 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.
Government
Regulation
Fabrication
suppliers we plan to contract with are subject to a variety of U.S. and foreign
government regulations, including regulations related to the discharge or
disposal of toxic, volatile or otherwise hazardous chemicals used in their
manufacturing processes. Our failure or the failure of our suppliers to comply
with present or future governmental regulations could result in fines,
suspension of production or cessation of operations. Environmental regulations
could also require the acquisition of equipment or the incurrence of other
substantial expenses to comply with environmental regulations. If substantial
unanticipated expenses were incurred by the us or our suppliers (and such costs
were passed on to us), our manufacturing costs could significantly increase,
thus materially and adversely affecting our business, financial condition and
operating results. We are also subject to a variety of government regulations
relating to our operations, including environmental, labor and export control
regulations. Our failure to maintain compliance with present or future
regulations could result in fines being imposed on us or suspension or cessation
of our operations.
When
communicating over powerline, our technology operates on frequencies that are
not currently restricted by FCC regulations. Products incorporating our
semiconductors are regulated by the Federal Communications Commission (“FCC”) in
US market and respective regulatory bodies in the rest of the world. In certain
countries, there may be regulations restricting the transmission of high
frequency over power lines. We cannot assure you that this will continue to
be
the case. Should government regulations change in the future, making operation
of our customers’ products at their current radio frequency bands subject to
restrictive regulation, or subjecting the frequencies on which our products
operate to restrictions, OEMs’ desire to purchase our products could diminish
and our business may suffer.
On
August
3, 2006, the FCC generally affirmed its rules for Access Broadband over Power
Line (Access BPL) systems while maintaining safeguards against harmful
interference to existing radio services. The decision was adopted in response
to
a number of petitions for reconsideration of the BPL rules established in
October of 2004. In the Memorandum Opinion and Order (MO&O), the FCC again
acknowledged the significant benefits of Access BPL, reaffirmed its commitment
to address interference issues, and reemphasized that the Part 15 rule changes
were made to ensure that Access BPL operations do not become a source of
interference to licensed radio services. The full text of the rules can be
found
on FCC website at www.fcc.gov.
Backlog
We
expect
sales outside of the strategic partnership agreements to be made primarily
pursuant to standard short-term purchase orders for delivery of standard
products. We expect the quantity actually ordered by the customer, as well
as
the shipment schedules, to be frequently revised, without significant penalty,
to reflect changes in the customer’s needs. As a result, we believe that in the
future, our backlog at any given time should not be used as a meaningful
indicator of future revenues.
Employees
As
of May
31, 2006, we had 12 full-time equivalent employees, including our CEO, Oleg
Logvinov. All of our full time employees are engaged in research, development,
engineering or marketing. Andreas Typaldos, our Chairman of the Board provides
us with product marketing services, strategic planning and leadership in our
capital raising efforts on a part-time basis and Kirk Warshaw, our Chief
Financial Officer serves on a part-time basis as well. Our future success
depends, in part, on our ability to continue to attract, retain and motivate
highly qualified technical, marketing, engineering, and management personnel.
Due
to
the highly competitive nature of the marketplace that we operate in, we may
from
time to time lose key employees to certain of our competitors. We expect to
be
able to hire qualified personnel to fill open positions created by such
occurrences, although there can be no assurance that we will be able to do
this
in the future. None of our employees are represented by collective bargaining
agreements
Risk
Factors
An
investment in our common stock is speculative in nature, involves a high degree
of risk and should not be made by any investor who cannot afford the loss of
his
entire investment. Each prospective purchaser should carefully consider the
following risks and speculative factors associated with our business and capital
structure, as well as others described elsewhere in this report, before making
any decision to buy, sell or hold our common stock.
This
report contains certain statements relating to future events or the future
financial performance of our company. Readers are cautioned that such statements
are only predictions, involve risks and uncertainties, and that actual events
or
results may differ materially. In evaluating such statements, prospective
investors should specifically consider the various factors identified in this
memorandum, including the matters set forth below, which could cause actual
results to differ materially from those indicated by such forward-looking
statements.
Risks
Related to Our Business and Financial Condition
Dependence
on financing.
Since
we
are not generating significant revenue we are dependent on outside sources
of
financing. We have financed our operations by offering convertible debt (secured
and unsecured) securities in private placements, in some cases with equity
incentives for the investor in the form of warrants to purchase our common
stock
and have borrowed from affiliates of our Chairman of the Board. We have sought
and will continue to seek various sources of financing but there are no
commitments from anyone to provide us with financing. If we are unable to obtain
financing, we may have to suspend operations, sell assets and will not be able
to execute our business plan.
Inability
to obtain additional financing would result in the suspension of our
business
.
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.
We
are dependent on the consent of the holders of 60% of the principal amount
of
our outstanding 6% Secured Convertible Debentures due December 28, 2008 to
obtain future financing.
Under
the
terms of $5,649,354.38 principal amount of 6% Secured Convertible Debentures
due
December 28, 2008 issued during the period from December 2004 to September
7,
2006, we are prohibited from issuing shares of our common stock, securities
convertible into or giving right to purchase our common stock or debt securities
without the consent of the holders of 60% of the outstanding principal amount
of
the secured debentures. Since December 2005 when we initially issued $2,000,000
principal amount of secured debt, such holders have consented to the issuance
of
additional 6% secured debentures and related warrants and have purchased
$2,375,884.38 of the additional $5,649,354.38 principal amount sold. There
is no
assurance that the holders will continue to provide additional funds to us
or
that they will consent to any future financing. 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.
If
we fail to comply with the new rules under the Sarbanes-Oxley Act related to
accounting controls and procedures, or if material weaknesses or other
deficiencies are discovered in our internal accounting procedures, our stock
price could decline significantly and raising capital could be more difficult.
If
we
fail to comply with the new rules under the Sarbanes-Oxley Act related to
accounting controls and procedures, or if material weaknesses or other
deficiencies are discovered in our internal accounting procedures, our stock
price could decline significantly and raising capital could be more difficult.
Section 404 of the Sarbanes-Oxley Act requires annual management assessments
of
the effectiveness of our internal controls over financial reporting and a report
by our independent auditors addressing these assessments. We are in the process
of documenting and testing our internal control procedures, and we may identify
material weaknesses in our internal control over financial reporting and other
deficiencies. If material weaknesses and deficiencies are detected, it could
cause investors to lose confidence in our Company and result in a decline in
our
stock price and consequently affect our financial condition. In addition, if
we
fail to achieve and maintain the adequacy of our internal controls, we may
not
be able to ensure that we can conclude on an ongoing basis that we have
effective internal controls over financial reporting in accordance with Section
404 of the Sarbanes-Oxley Act. Moreover, effective internal controls,
particularly those related to revenue recognition, are necessary for us to
produce reliable financial reports and are important to helping prevent
financial fraud. If we cannot provide reliable financial reports or prevent
fraud, our business and operating results could be harmed, investors could
lose
confidence in our reported financial information, and the trading price of
our
Common Stock could drop significantly. In addition, we cannot be certain that
additional material weaknesses or significant deficiencies in our internal
controls will not be discovered in the future.
We
have identified significant deficiencies in our disclosure controls and if
we
are not able to remediate them the timeliness of our periodic reporting could
be
impacted.
Our
management determined, in connection with their evaluation of the effectiveness
of the design and operation of our disclosure controls and procedures, that
such
procedures were not effective to ensure that information required to be
disclosed by us was recorded, processed and reported within the time periods
specified in the SEC’s rules and forms Although our management has taken actions
to improve the effectiveness of these procedures, its has not been able to
conclude that such controsls are effective. Our
stock
price, ability to obtain financing and the listing of our common stock on the
OTCBB would be adversely impacted if we are not able to improve these
procedures.
We
have not generated significant revenue from our principal intended activities
and we have been dependent on one customer for substantially all of out
revue
As
a
development stage company, we have generated limited revenue principally from
providing development services and generating data in field test scenarios.
We
have not sold mass produced semiconductors, which is the primary part of our
expected revenue stream going forward. In addition, substantially all of our
revenue has been from one customer. It is difficult, in a market that is rapidly
evolving, to evaluate the future sales performance of powerline technology,
and
our implementation of it. We may not successfully address any of these risks
and
may never have significant revenue.
We
expect losses will continue for the foreseeable future. Our stock price may
be
affected by such losses
.
In
our
short history, we have not reported an operating profit and do not expect to
report a profit in the near future, if at all. We have experienced losses from
operations since Enikia, from whom we indirectly acquired our intellectual
property assets, began operations. Losses are likely to continue, and may cause
volatility in our stock price.
Consumer
demand may not develop as we anticipate, and our business will suffer.
The
initial and primary customers of our semiconductors are expected to be OEMs
of
devices with uses for connectivity. OEM acceptance of powerline technology
will
be driven by consumer demand for home connectivity. If consumer demand does
not
develop as we anticipate, our products will sell slowly, or not at all, and
our
business will suffer.
There
are
several factors that may affect the expansion of the home connectivity market:
| · |
the
emergence of competing standards for home
connectivity
|
| · |
new
content or products that attract a large consumer
base
|
| · |
interoperability
between different products in the same
market
|
| · |
the
success of marketing by OEMs
|
| · |
the
cost and availability of connected products using this technology
or
competing technologies
|
We
have
only limited ability to influence in the resolution of the
foregoing.
Powerline
solutions for home connectivity may not gain acceptance.
Ethernet
and Wireless technologies enjoy a large market share of the home connectivity
market. As the market broadens to include audio/video applications, it is
unclear which medium will be predominant. Among the competing physical mediums,
including coaxial cable, Ethernet, phone line, and wireless, many are actively
supported by various trade associations that represent the interests of a
variety of companies. Some have greater market acceptance. If powerline
technology does not achieve market acceptance, there may be less demand or
no
demand at all, and our business will suffer.
Powerline
technologies, other than the technologies implemented by Arkados may
proliferate.
Arkados
is developing products that comply with the specification for in-home powerline
networking developed by members of the HomePlug Powerline Alliance. However,
there may be other competing, independent efforts in this market. To the extent
that a competing effort establishes the predominant industry standard for
powerline technologies that are not based on Arkados’ chosen technologies, or if
no standard predominates in each market, our business will suffer.
Products
that incorporate our chosen technologies may fail in operation, or fail to
be
certified by standards organizations.
Our
ODM/OEM customers may produce products that fail to work properly, either as
a
consequence of the inclusion of our semiconductors and software, or an unrelated
problem, our business may suffer. If products that incorporate our solutions
fail to pass standards test, our business will suffer.
We
may be unable to sell volumes of semiconductors.
While
we
plan to attract customers with plans for large numbers of products, there may
be
cases when significant effort results in few semiconductors sold. When a company
agrees to develop products that use our solutions, and agrees to purchase our
solutions in volume, we consider the agreement a “design win.” Achieving a
design win does not create a binding commitment from that customer. A design
win
is merely an expression of interest by a customer to make volume purchases,
but
at any time a customer can discontinue using our solutions. To the extent that
we are unable to convert design wins into volume sales, our business will
suffer.
We
may not be able to attract and retain engineering and technical talent, our
business may suffer.
The
needs
of the business will dictate our hiring, but we expect to need personnel in
our
technical and engineering disciplines, as well as in operational roles. Since
powerline technologies is a narrow engineering and technical specialty and
we
have limited financial resources, attracting experienced talent is difficult.
If
we are unable to attract and retain qualified personnel our ability to develop
and produce our products will be limited.
Our
solutions have a long development and sales cycle. We may continue to incur
significant expenses before revenues are realized.
Significant
company resources must be dedicated to research and development, production
and
sales and marketing in order to properly sell solutions into our target markets.
Products are developed based on a forecasts from analysts, and we will incur
substantial product development expenses before generating associated revenues.
Customers typically spend two to nine months in testing before volume production
of its own products, which incorporate our solution. Sales cycles are lengthy
and produce delays between the time we incur expenses for research, development,
sales and marketing efforts, and the time that we generate revenue, if any
revenue is generated. If we do not generate revenue after we have incurred
substantial expenses to develop and market any of our products, our business
will suffer.
We
will depend on our OEM and ODM customers to produce successful products that
incorporate our solutions
.
Our
customers are OEMs and ODMs in our target markets. They integrate our IC’s into
their products. If their products are not successful, we may not sell volume
quantities of our semiconductors. OEM and ODM products may be unsuccessful
for
many reasons which are beyond our control. Any of these reasons may harm our
business.
We
will rely on third parties to fabricate, assemble and test our solutions, which
may increase costs or create delays
.
As
a
“fabless” semiconductor manufacturer, we do not own or operate a semiconductor
fabrication, assembly or testing facility. For our first semiconductor product
we have entered into an agreement with GDA Technologies, Inc. to manage this
process for us. In the future GDA or contract foundries, and assembly, and
test
houses selected by us may also be adversely affected for reasons beyond our
control. This may result in our inability to obtain products within the time
frames, volumes or costs we require, or at all. Any disruption in the
availability of products, or problems associated with the delivery, quality
or
cost of fabrication, assembly and testing of our products may cause our business
to suffer.
Our
specifications may result in unacceptable manufacturing yields from our
suppliers, which may increase our product costs or reduce supplies.
We
write
specifications and create designs and our third-party suppliers manufacture
chips based on those specifications and designs. We have not yet entered into
volume production of our products, and our specifications may fall short of
producing volumes of semiconductors effectively and efficiently. This may cause
dies on our wafers to function poorly, if at all. The term “yield” is used to
express the proportion of functional die expressed as a percentage of total
die
on a wafer. If expected yields are not reached, our product costs will increase.
We may also experience problems when our products are scaled to smaller
geometries. Problems with yield may not be identified until late in the product
development cycle, or even once an end-product is built and sold. Yield problems
are difficult to detect, time consuming and expensive to correct. These issues
could affect our intention to delver products to customers in a timely manner.
Defects
in our products could hurt the business by harming our reputation, decreasing
our market acceptance, losing customer accounts, and creating liabilities for
our company.
Integrated
circuits are highly complex products, and may contain defects or bugs which
may
not be detected until other products that incorporate ours are shipped and
being
used by end-users. Defects may harm our reputation and make customers reluctant
to buy our products. Correcting these defects is an expensive process. If
defects are not discovered until after we have commenced commercial production
of a new product, we might incur substantial additional development costs.
If we
fail to solve problems in time, we may incur product recall, repair or
replacement costs. These problems may also result in claims against us by our
customers or consumers. Any such problems could divert our company resources
from other development efforts. Moreover, we would likely lose, or experience
a
delay in, the market acceptance of our products. We could also lose credibility
with our current and prospective customers.
Regulation
in certain regions of the world (Japan as an example), which limits our
international market.
Our
powerline communication products are designed to operate on frequencies that
are
currently restricted by government regulations in certain areas of the world,
Japan as an example, As a result, our
semiconductors
cannot be used in products used in such areas at this time. The international
market will remain limited unless the existing regulations are changed or until
we develop products that can operate within the constrains imposed by the
existing regulations.
Future
Federal Communications Commission, or FCC, regulation may restrict sales of
our
products adversely affecting our business.
Our
powerline communication products are designed to operate on frequencies that
are
not currently restricted by FCC regulations. OEM products incorporating our
ICs
are regulated by the FCC. Operation of these products currently is not
restricted by the FCC as long as the products do not interfere with other radio
frequency, or RF, bands licensed by the FCC. We cannot assure you that this
will
continue to be the case. Should government regulations change in the future,
making operation of our customers’ products at their current radio frequency
bands subject to restrictive regulation, or subjecting the frequencies on which
our products operate to restrictions, our customers’ desire to purchase our
products could diminish and our business may suffer.
Our
business is highly dependent on the expansion of the consumer digital
entertainment electronics market.
We
expect
that the main growth in our product demand will be driven by the consumer
digital entertainment electronics market. We are focusing on audio/video
transmission and distribution products for the in-home use. We expect the
consumer digital market to expand; however, our strategy may not be successful.
Given current economic conditions in the United States and internationally,
as
well as the large installed base of consumer electronics products, consumer
spending on home electronic products may not increase as expected. In addition,
the potential decline in consumer confidence and consumer spending relating
to
future terrorist attacks could have a material adverse effect on our business.
Our
success depends on our ability to introduce new products on a timely
basis.
Our
success depends upon our ability to develop new products for new and existing
markets, to introduce these products in a timely manner, and to have these
products gain market acceptance. The development of new products is highly
complex and we may experience delays in developing and introducing them.
Successful product development and introduction depend on a number of factors,
including:
| · |
proper
new product definition,
|
| · |
timely
completion of design and testing of new products,
|
| · |
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,
|
| · |
successfully
developing and implementing the software necessary to integrate our
products into our customers’ products,
|
| · |
achievement
of acceptable manufacturing yields,
|
| · |
availability
of wafer, assembly, and test capacity,
|
| · |
market
acceptance of our products and the products of our customers
|
| · |
obtaining
and retaining industry certification requirements.
|
Although
we seek to design products that have the potential to become industry standard
products, we cannot assure you that the market leaders will adopt any products
introduced by us, or that any products that may be initially accepted by our
customers that are market leaders will become industry standard
products.
Both revenues and margins may be materially affected if new product
introductions are delayed, or if our products are not designed into successive
generations of our customers’ products. We cannot assure you that we will be
able to meet these challenges, or adjust to changing market conditions as
quickly and cost-effectively as necessary to compete successfully. Our failure
to develop and introduce new products successfully could harm our business
and
operating results.
Successful
product design and development is dependent on our ability to attract, retain,
and motivate qualified design engineers, of which there is a limited number.
Due
to the complexity and variety of CMOS, precision linear, and mixed-signal
circuits, the limited number of qualified circuit designers and software
engineers, and the limited effectiveness of computer-aided design systems in
the
design of such circuits, we cannot assure you that we will be able to
successfully develop and introduce new products on a timely basis.
Strong
competition in the high-performance integrated circuit market may harm our
business.
The
integrated circuit industry is intensely competitive and is characterized by
rapid technological change, price erosion, and design and other technological
obsolescence. Because of shortened product life cycles and even shorter
design-in cycles in a number of the markets that we serve, particularly consumer
entertainment, our competitors have increasingly frequent opportunities to
achieve design wins in next-generation systems. In the event that competitors
succeed in supplanting our products, our desired market share may not be
attainable and/or sustainable and net sales, gross margins, and results of
operations would be adversely affected.
In
powerline communication segment our principal competitors include Intellon,
Conexant, Maxim, DS2, Panasonic Gigle Semiconductor, and Spidcom. In Network
and
Media Processors Conexant, Cirrus Logic, Micrel, Texas Instruments, Atmel,
and
Sharp. 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. We also expect intensified
competition from emerging companies and from customers who develop their own
integrated circuit products. In addition, some of our current and future
competitors maintain their own fabrication facilities, which could benefit
them
in connection with cost, capacity and technical issues.
Increased
competition could adversely affect our business. We cannot assure you that
we
will be able to compete successfully in the future or that competitive pressures
will not adversely affect our financial condition and results of operations.
Competitive pressures could reduce market acceptance of our products and result
in price reductions and increases in expenses that could adversely affect our
business and our financial condition.
Our
products may be characterized by average selling prices that decline over short
time periods; if we are unable to introduce new products with higher selling
prices or reduce our costs, our business and operating results could be harmed.
Historically
in the integrated circuit industry, average selling prices of products have
decreased over time, while manufacturing costs may remain fixed. If we are
unable to introduce new products with higher margins or to reduce manufacturing
costs to offset anticipated decreases in the prices of our products, our
operating results may be adversely affected. In addition, because of high fixed
costs in our industry, we are limited in our ability to reduce total costs
quickly in response to any revenue shortfalls. Because of these factors, we
may
experience material adverse fluctuations in our future operating results on
a
quarterly or annual basis.
Our
products are complex and could contain defects, which could reduce sales of
those products or result in claims against us.
Product
development in the markets we serve is becoming more focused on the integration
of multiple functions on individual devices. In addition to that powerline
communication is a relatively new technology. There is a general trend towards
increasingly complex products. The greater integration of functions and
complexity of operations of our products increase the risk that our customers
or
end users could discover latent defects or subtle faults after volumes of
product have been shipped. This could result in:
| · |
material
recall and replacement costs for product warranty and support,
|
| · |
adverse
impact to our customer relationships by the occurrence of significant
defects,
|
| · |
delay
in recognition or loss of revenues, loss of market share, or failure
to
achieve market acceptance, and
|
| · |
diversion
of the attention of our engineering personnel from our product development
efforts.
|
The
occurrence of any of these problems could result in the delay or loss of market
acceptance of our products and would likely harm our business, and may result
into our inability to secure a reasonable share of the market, In addition,
any
defects or other problems with our products could result in financial or other
damages to our customers who could seek damages from us for their losses. A
product liability claim brought against us, even if unsuccessful, would likely
be time consuming and costly to defend.
We
rely on independent foundries to manufacture our products, which will subject
us
to increased risks.
We
rely
on independent foundries to manufacture all of our wafers. In order to produce
our silicon we need to secure appropriate manufacturing services and capacities.
Our reliance on outside foundries involves several risks and uncertainties,
including the:
| · |
inability
to secure appropriate manufacturing services and capacities
|
| · |
possibility
of an interruption or loss of manufacturing
capacity
|
| · |
lack
of control over delivery schedules, quality assurance, manufacturing
yields and costs
|
| · |
possible
misappropriation of our intellectual
property
|
| · |
inability
to reduce our costs as quickly as competitors who manufacture their
own
products and are not bound by set prices.
|
Market
conditions could result in wafers being in short supply and prevent us from
having adequate supply to meet our customer requirements. In addition, any
prolonged inability to utilize third-party foundries because of fire, natural
disaster, or otherwise would have a material adverse effect on our financial
condition and results of operations. If we are not able to obtain additional
foundry capacity as required, our relationships with our customers would be
harmed and, consequently, our sales would likely be reduced, and we may be
forced to purchase wafers from higher-cost suppliers or to pay expediting
charges to obtain additional supply, if we are able to acquire wafers at all.
In
order
to secure additional foundry capacity, we may enter into contracts that commit
us to purchase specified quantities of silicon wafers over extended periods.
In
the future, we may not be able to secure sufficient capacity with foundries
in a
timely fashion or at all, and such arrangements, if any, may not be on terms
favorable to us. Moreover, if we are able to secure foundry capacity, we may
be
obligated to
utilize
all of that capacity or incur penalties. These penalties may be expensive and
could harm our financial results.
We
will be dependent on our subcontractors to perform some of the design and key
manufacturing functions for us.
We
will
depend on third-party subcontractors for the elements of the design, assembly,
packaging, and testing of our products. International operations and sales
may
be subject to political and economic risks, including political instability,
currency controls, exchange rate fluctuations, and changes in import/export
regulations, tariff, and freight rates, as well as the risks of natural
disaster. Although we will seek to reduce our dependence on a limited number
of
subcontractors, as demand for our products merits, the concentration of
subcontractors and manufacturing operations in certain areas of the World could
subject us to the risks of conducting business internationally, including
political and economic conditions in such regions as Asia, India, etc.
Disruption or termination of the assembly, packaging or testing of our products
could occur, and such disruptions could harm our business and operating results.
In addition, we are unable to predict whether events such as the epidemic of
SARS will have a negative effect on the design, supply, testing, and packaging
of our products.
We
may be unable to protect our intellectual property rights from third-party
claims and litigation.
Our
success depends on our ability to obtain patents and licenses and to preserve
our other intellectual property rights covering our technology, applications,
products, and development and testing tools. We seek patent protection for
those
inventions and technologies for which we believe such protection is suitable
and
is likely to provide a competitive advantage to us. We also rely substantially
on trade secrets, proprietary technology, non-disclosure and other contractual
agreements, and technical measures to protect our technology, application,
design, and manufacturing know-how, and work actively to foster continuing
technological innovation to maintain and protect our competitive position.
We
cannot assure you that steps taken by us to protect our intellectual property
will be adequate, that our competitors will not independently develop or patent
substantially equivalent or superior technologies or be able to design around
patents that we may receive, or that our intellectual property will not be
misappropriated. Also, the laws of some foreign countries may not protect our
intellectual property as much as the laws of the United States.
Potential
intellectual property claims and litigation could subject us to significant
liability for damages and could invalidate our proprietary
rights.
The
semiconductor industry is characterized by frequent litigation regarding patent
and other intellectual property rights. Even if we receive a patent grant we
would not be able to offer any assurance that it will not be invalidated,
circumvented, or challenged, that rights granted under the patent will provide
competitive advantages to us, or that any of our pending or future patent
applications will be issued with the scope of the claims sought by us, if at
all. As is typical in the semiconductor industry, we expect that we and our
customers may have received and may receive in the future, communications from
third parties asserting patents, mask work rights, or copyrights on certain
of
our products and technologies. In the event third parties were to make a valid
intellectual property claim and a license was not available on commercially
reasonable terms, our operating results could be harmed. Litigation, which
could
result in substantial cost to us and diversion of our resources, may also be
necessary to defend us against claimed infringement of the rights of others.
An
unfavorable outcome in any such suit could have an adverse effect on our future
operations and/or liquidity.
If
we are unable to make continued substantial investments in research and
development, we may not be able to sell our products.
We
plan
significant expenditures in research and development activities to develop
products and solutions. If we fail to make sufficient expenditures in research
and development programs, new technologies and process improvements implemented
by our competitors could render our current and planned products obsolete,
and
our business could be harmed. Substantially all of our operating expenses are
related to research and development.
Pending
litigation.
We
have
reported that former officers of Enikia, LLC, the company from which we
indirectly acquired patents and other assets relating to our planned products,
have filed a lawsuit against Andreas Typaldos, our Chairman, Oleg Logvinov,
our
CEO, Enikia, Enikia’s counsel, Arkados and us. The action is captioned
Robert
Dillon, et al. v. Andreas Typaldos et al.
,
and was
commenced in the Superior Court of New Jersey, Chancery Division, Somerset
County (Docket No. C-12102-04).
Obligation
to license certain intellectual property rights.
As
a
member of the HomePlug Alliance, TIA TR30.1 and IEEE P1901, we are
obligated to license certain intellectual property rights to our competitors,
on
a non-discriminatory basis, which may adversely affect our ability to
compete.
Available
Information
We
file
annual, quarterly and current reports, proxy statements and other information
with the Securities and Exchange Commission (“SEC”). You may read and copy any
document the Company files at the SEC’s public facilities located at 100 F
Street N.E., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330
for
information on the public reference room. The SEC maintains a web site
(
www.sec.gov
)
that
contains annual, quarterly and current reports, proxy statements and other
information that we and other issuers file electronically with the SEC.
Executive
Officers of the Registrant
Our
current executive officers are:
|
Name
|
Position
|
|
|
Andreas
Typaldos
|
Chairman
of the Board
|
|
|
Oleg
Logvinov
|
President,
CEO and a Director
|
|
|
Kirk
Warshaw
|
CFO,
Treasurer and Secretary
|
Andreas
Typaldos is a principal stockholder and was appointed Chairman of our Board
in
February, 2005. Although our by-laws provide that the Chairman of the Board’s
primary responsibilities relate to the conduct of board and stockholder
meetings, Mr. Typaldos also serves as a consultant to us on a part-time basis
and has a significant impact on our strategic planning, marketing and capital
raising activities. He has thirty years of software experience as an
entrepreneur and founder/investor of a number of technology companies. In 1997,
Mr. Typaldos founded Enikia, LLC, whose technology and assets were subsequently
acquired by an entity controlled by Mr. Typaldos and merged into our Arkados,
Inc. subsidiary in May 2004. Mr. Typaldos serves as CEO of Xandros, Inc., a
privately held company engaged in the sale of Linux
desktop
applications. From September 1998 until June 2003, as founder and principal
investor, Mr. Typaldos also built a multi-million dollar software consulting
business, e-Vantage Solutions, Inc., until that company’s consulting activities
ended shortly after September 11, 2001. In addition, from September 1999 until
December 2001,
Mr.
Typaldos was active as Interim Chairman and CEO at NetGain Development, Inc.,
which was an internet incubator/investment firm that funded internet and
enabling technology companies, including Enikia, Linux Global Partners, and
other internet and technology companies. Prior to that, Mr. Typaldos founded
his
first consulting and software company in 1973 and in 1978, founded a successor
company, AxsOne (formerly known as Compuiron), which he took public in 1995
and
of which he as President until 1994 and Chairman/CEO until 1996. AxsOne is
an
international client/server and internet-based enterprise applications software
company that supplies Fortune 5000 companies with records and content management
and compliance software (i.e., email and Instant Messaging-IM management),
as
well as financial applications and workflow solutions .
Mr.
Typaldos has a Bachelors of Science Degree from Columbia University in
Mathematical Methods for Engineering and Operations Research. He also holds
a
Masters of Science Degree in Computer Science from Pratt Institute. Mr. Typaldos
serves on the Board of Directors and Advisory Boards of a number of companies
and non-profit organizations.
Oleg
Logvinov was appointed President, CEO and a director on August 12, 2004 and
has
served as President of Arkados since we merged Miletos into Arkados. Prior
to
the merger, from February, 2000 to March, 2004, Mr. Logvinov served as Vice
President of Engineering and later as President of Enikia LLC. From March,
1998
to February, 2000, he served as Senior Director of Product Development and
System Engineering at OpenCon Systems Inc., a telecommunications software
service provider, and later CyberPath Inc., a venture-funded VoDSL Gateway
company spun off by OpenCon Systems Inc. Prior to that, he held senior
management positions at NITECH, INC from1996 to 1998, and CEM, Inc from 1991
to
1996. Mr. Logvinov holds a masters degree in electrical engineering from the
Technical University of Ukraine (KPI). He has also worked as a senior research
scientist and later research team leader at an R&D laboratory at the
Technical University of Ukraine and the Ukraine Department of Energy. Oleg
Logvinov is the Chief Strategy Officer and immediate past President of the
HomePlug Powerline Alliance. Mr. Logvinov is a frequent industry speaker,
representing both the HomePlug alliance and Arkados at conferences around the
world.
Kirk
Warshaw, CPA was appointed CFO of Arkados in June 2004 and was appointed our
CFO, Treasurer and Secretary August 12, 2004. Mr. Warshaw started his career
at
Deloitte Haskins & Sells (Deloitte & Touch) as a Senior Accountant.
Subsequently, Mr. Warshaw was employed in the banking industry, including a
position as the CFO of Amerifederal Savings Bank from 1987 to 1990 where he
supervised the accounting, retail branches, corporate services, consumer
lending, and data processing departments. He was directly responsible for asset
/ liability, and interest rate risk management; tax, budget, and insurance
functions; capital planning, regulatory compliance and financing activities.
From 1990 to 1991 he was the bank President and CEO where he resolved numerous
non-performing assets and operating problems, prepared business plans,
negotiated loan workout plans, and participated in the resolution and sale
of
the bank. For the last 14 years, he has invested in and served in managerial
capacity in a variety of private businesses, including radio stations, an
executive recruitment entity, and a firm which provides personal financial
planning services. In addition, he acts as a financial and business consultant
to several small businesses. Mr. Warshaw is currently the Chief Financial
Officer of Entrust Financial Services, Inc. (OTCBB:ENFN), the Chief Financial
Officer and Director of 24 Holdings, Inc. (OTCBB:TFHD), a Director of Empire
Financial Holding Company (AMEX:EFH), Chief Financial Officer of Twin Lakes
Delaware, Inc. (a publicly reporting, non-trading company), Chief Financial
Officer and Secretary of R&R Acquisition II, Inc., R&R Acquisition III,
Inc., R&R Acquisition IV, Inc., R&R Acquisition V, Inc., R&R
Acquisition
VI,
Inc.,
R&R Acquisition VII, Inc., R&R Acquisition VII, Inc., R&R
Acquisition IX, Inc., and R&R Acquisition X, Inc. (each a publicly
reporting, non-trading company), and a Director of two privately owned entities.
Mr. Warshaw, a Certified Public Accountant since 1982, holds a BS in accounting
and marketing from Lehigh University.
| ITEM 2. |
DESCRIPTION
OF PROPERTY.
|
Our
executive offices are located at 220 Old New Brunswick Road, Piscataway, NJ
08854. The facility is approximately 6,500 sq. feet, occupied pursuant to a
lease which expires on June 30, 2009 and is adequate for our current activities.
We may add to the space or seek larger facilities as our operations
expand.
| ITEM 3. |
LEGAL
PROCEEDINGS.
|
In
December 2004, Robert Dillon, William Simons and Stephen Schuster (the
“Plaintiffs”) named us, our Arkados, Inc. subsidiary, Enikia, LLC, Oleg
Logvinov, our CEO, Andreas Typaldos, our Chairman, and others in a lawsuit.
The
action is captioned
Robert
Dillon, et al. v. Andreas Typaldos et al.
,
and was
commenced in the Superior Court of New Jersey, Chancery Division, Somerset
County (Docket No. C-12102-04). The plaintiffs claim damages and allege, among
other things entitlement to a portion of the Common Shares issued as
consideration for Miletos, Inc. (an affiliate of Mr. Typaldos’) merging into our
Arkados subsidiary. We do not believe there is any merit to these claims, but
discussions about settlement with plaintiffs’ counsel occurred several months
ago but did not result in a settlement. Whether or not any future discussions
lead to a settlement, the resolution of this litigated matter could require
a
significant amount of our management’s time and is detrimental to our business.
Plaintiff Dillon, a holder of membership interests in Enikia and the other
plaintiffs that hold options to acquire Enikia interests allege, among other
things, that they are entitled to various forms of equitable relief and
unspecified damages. Litigation is currently pending regarding what parties
and
what issues should be decided in an arbitration rather than in Superior Court
of
New Jersey. We believe claims against the Company are wholly without merit
and
intend to vigorously defend against the claims against us unless the claims
can
be settled for nuisance value.
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 4. |
SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS.
|
Not
applicable.
PART
II
| ITEM 5. |
MARKET
FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
|
Our
common stock is currently quoted on the Over-The-Counter Bulletin Board under
the symbol “AKDSE.OB” and we anticipate that the symbol will change to AKDS.OB”
shortly after this report is filed..
Market
Information
Our
shares of common stock were first quoted on the Over-The-Counter Bulletin Board
in 1999. The following table presents the high and low bid prices per share
of
our common stock as quoted for the quarter ended August 31, 2006 and each
quarter in the years ended May 31, 2006 and May 31, 2005 which information
was
provided by NASDAQ Trading and Market Services.
|
High
Bid
|
Low
Bid
|
||
|
Quarter
ended:
|
|||
|
August
31, 2006
|
$0.95
|
$0.51
|
|
|
Fiscal
Year ended May 31, 2006
|
|||
|
High
Bid
|
Low
Bid
|
||
|
Quarter
ended:
|
|||
|
May
31, 2006
|
$0.88
|
$0.47
|
|
|
February
28, 2006
|
$0.85
|
$0.51
|
|
|
November
30, 2005
|
$1.05
|
$0.56
|
|
|
August
31, 2005
|
$0.90
|
$0.41
|
|
|
Fiscal
Year ended May 31, 2005
|
|||
|
High
Bid
|
Low
Bid
|
||
|
Quarter
ended:
|
|||
|
May
31, 2005
|
$0.21
|
$0.42
|
|
|
February
29, 2005
|
$0.80
|
$0.50
|
|
|
November
30, 2004
|
$1.20
|
$0.53
|
|
|
August
31, 2004
|
$3.00
|
$0.56
|
The
above
prices represent inter-dealer quotations, without markup, markdown or
commissions, and may not represent actual transactions. The trading volume
of
our common stock fluctuates and may be limited or nonexistent from time to
time.
As a result, the above prices should not be considered to represent a liquid
trading market.
Holders
As
of
August 31, 2006 we had 195 stockholders of record of our common
stock.
Dividend
Policy
We
have
paid no dividends on our common stock and we do not expect to pay cash dividends
in the foreseeable future. The terms of $5,649,354.38 principal amount
outstanding of 6% Secured Convertible Debentures due December 28, 2008 prohibit
our payment of any cash dividends or distributions without the consent of the
holders of 60% of the principal amount outstanding at the time of such dividend
or distribution. We currently do not have surplus from which we could pay
dividends and intend to retain any future earnings to finance the growth and
development of our business.
Recent
Sales Of Unregistered Securities; Use Of Proceeds From Registered
Securities
Information
concerning our sales of unregistered securities during the period covered by
this report has been reported by us on previously filed reports on Form 10-QSB
and Form 8-K.
Equity
Compensation Plan Information
The
following table sets forth certain information about our equity compensation
plans and agreements as of May 31, 2006:
|
Plan
Category
|
Number
of securities
to
be issued upon
exercise
of
outstanding
options,
warrants
and rights
(a)
|
Weighted-average
exercise
price of
outstanding
options,
warrants
and rights
(b)
|
Number
of securities
remaining
available
for
future issuance
under
equity
compensation
plans
(excluding
securities
reflected
in column
(a))
(c)
|
|
Equity
compensation plans
approved
by security holders
|
5,000
|
$30.00
|
55,000
|
|
Equity
compensation plans not
approved
by security holders
|
7,622,642
|
$
0.64
|
2,557,358
|
|
Total
|
Our
board
adopted a stock option plan in 1998 which was approved by stockholders. The
plan
reserved 3,000,000 shares of old common stock for issuance upon the granting
of
incentive and non-qualified stock option until 2008 with terms up to 10 years
from the dated of grant. As a result of a reverse stock split the number of
shares available for grant was reduced to 60,000.
In
2004,
our board approved our 2004 Stock Option and Restricted Stock Plan (the “2004
Plan”) and set aside 6,000,000 shares for grant pursuant to incentive and
non-qualified stock options, and restricted stock awards. The 2004 Plan was
amended by the board in June 2006, to increase the number of shares subject
to
options that can be granted to our officers, directors, employees and
consultants to 10,000,000. The 2004 Plan has not been approved by our
stockholders and accordingly, no “incentive stock options” as defined in the
Internal Revenue Code can be granted until such approval is obtained. The 2004
plan is currently administered by our board of directors. There are options
to
purchase 744,642 shares outstanding under the 2004 Plan, as
amended.
In
March
2006, our board approved the issuance of 180,000 warrants to purchase shares
of
our common stock for $0.85 per share to a investor relations consultant. The
issuance of the warrants has not been approved by our stockholders.
| ITEM 6. |
MANAGEMENT’S
DISCUSSION AND ANALYSIS OR PLAN OF
OPERATIONS
|
Readers
are urged to carefully review and consider the various disclosures made by
us in
this Form 10-KSB for the period ended May 31, 2006, and our other filings with
the U.S. Securities and Exchange Commission. These reports and filings attempt
to advise interested parties of the risks and factors that may affect our
business, financial condition and results of operations and prospects. The
forward-looking statements made in this Form 10-KSB speak only as of the date
hereof and we disclaim any obligation to provide updates, revisions or
amendments to any forward-looking statements to reflect changes in our
expectations or future events.
Plan
of Operation
We
are a
semiconductor company engaged in research and development activities focused
on
the segment of the industry that provides the technology and solutions enabling
broadband communications over standard electricity lines. Arkados is member
of
an alliance of several companies referred to as the HomePlug Powerline Alliance,
“HomePlug.” HomePlug’s mission is to enable and promote rapid availability,
adoption and implementation of cost effective, interoperable and standards-based
home powerline networks and products. Arkados is also a member of newly created
IEEE P1901 group that is focused on the standardization of the powerline
communication technology.
We
have
not had significant revenue from operations since inception and as of May 31,
2006 were 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 May 31, 2006, we sold
an
aggregate $3,375,884.30 of 6% secured convertible debentures due December 28,
2008 of which $2,375,884.30 was purchased by institutional investors and the
balance of $500,000 by a limited liability company owned equally by our
Chairman’s wife and another director. In addition, we paid down a substantial
portion of outstanding short term debt and other liability 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,
2006 to September 2006, we raised and additional $1,500,000 of cash and settled
$773,400 of related party debt by issuing addition 6% secured debentures.
Despite these milestones in improving our financial position, our business
plan
to aggressively market our chips remains constrained by our limited capital
resources. Operating under these constraints, during the year ended May 31,
2006:
| · |
our
focus began to shift to sales and marketing and customer acquisition
mode,
after developing and demonstrating reference designs and prototypes
of
end-user products that utilized our A-1000 chip, the first in our
family
of ArkTIC
Ô
solutions and demonstrated its capabilities and competitive advantages.
|
| · |
We
demonstrated such prototypes and reference designs including at the
Consumer
Electronic
Show (CES) held in Las Vegas on January 5 - 8,
2006.
|
We
are
currently demonstrating our chip and reference design products to individual
potential customers, including both OEM’s (Original Equipment Manufacturers)and
ODM’s (Original Design Manufacturers. Such potential customers, if they
ultimately agree to design our chips into their end user products (as is
the
case with OEM’s) or in the products of their own OEM customers (as is the case
with ODM’s), could be responsible for the introduction of multiple end user
products into the market, based on the timetables required for such product
introductions. Such an event could in turn produce multiple revenue streams,
including revenues streams from each potential OEM customer that uses our
chips
in their end user products. In the case of each potential ODM customer that
uses
our chips in the designs of the multiple OEM customers served by each ODM,
there
could be multiple revenue streams attributable to each ODM that chooses to
work
with our chips. In both case, however, such revenue streams will affect future
quarters, based on the timetable associated with the deployment of end user
products by such OEM and ODM customers. Thus far, one such ODM has publicly
announced their offering of a product incorporating our AI-1100
SoC.
As
an
example of such initial marketing and sales activity, we have been working
with
potential ODM and OEM customers during the current quarter, and were able to
have our own and potential ODM product concept prototypes of possible product
implementations demonstrated in a number of venues, including at our Hospitality
Suite, the HomePlug Booth, and at the booth of one of its potential ODM
customers, during the 2006 Consumer Electronic Show (CES) held in Las Vegas
on
January 5 - 8, 2006. We met with a number of potential ODM/OEM customers for
the
purpose of generating interest in the use of the AI-1100 SoCs and exploring
new
product opportunities that can be enabled by the ArkTIC family of products.
This
specific activity at CES was undertaken without contractual agreements or firm
revenue commitments in the form of orders received by us, and there is no
guarantee that such revenues or orders will be generated as the results of
these
initial engagements.
We
require additional funding for the expansion of our research and development
efforts, expansion of our management team and sales and marketing organization,
and to fund consulting and manufacturing work needed in order for our chip
to be
ready and available for mass production. We also plan to develop various
end-user product prototypes and reference designs to support our marketing
efforts.
We
will
contract with third parties for all of our wafer fabrication and assembly,
as
well as 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.
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 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.
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.
Revenue
Recognition
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, revenue 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. SFAS 123(R) 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.
SFAS 123(R) 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.
The
Year ended May 31, 2005
Because
we currently do not have nor have we ever had since inception any business
operations as a development stage company, we did not have any recurring
revenues for the 2005 Fiscal Year.
During
the year ended May 31, 2005, we had revenues of $832,910 which were realized
as
the result of achieving certain benchmarks in a long term arrangement for
product development and supply with one client. We recorded $599,620 of labor,
material and supplies, and outside fabrication cost as Cost of
Goods
Sold relying on estimates determined by management. Total operating expenses
for
the twelve month period were $6,878,000. The most significant expenses were
personnel, professional fees and related expenses. Of the total, $4.85 million
was related to the issuance of stock and stock options for services rendered
by
both our employees and outside consultants.
The
Year ended May 31, 2006
Because
we currently do not have nor have we ever had since inception any business
operations as a development stage company, we did not have any recurring
revenues for the 2005 Fiscal Year.
During
the year ended May 31, 2006, we had revenues of $112,000 which were realized
as
the result of achieving certain benchmarks in a long term arrangement for
services and products with one client compared to $832,910 realized from
activities with the same client during the prior year We estimated gross margin
from the receivable based upon cost estimates we prepared for the provision
of
all of the services and products in the arrangement. We recorded $78,000 of
labor, material and supplies, and outside fabrication cost as Cost of Goods
Sold
relying on these estimates, compared to $599,620 during the prior year. Total
operating expenses for the year ended May 31, 2006 were $3.592 million compared
to $6.878 million in the same period of fiscal year 2005. In both periods,
the
most significant expenses were personnel, professional fees and related
expenses.
Research
and development expenses during the year were $377,979 however, a substantial
portion of our administrative expenses relate to product development.
Of
the total in fiscal year 2006, approximately $856,000 was related to the
issuance of stock and stock options for services rendered by both our employees
and outside consultants. In the prior year period, this amount was $4.85
million. Given our reliance on outside sources of capital, we expect significant
additional charges relating to stock compensation.
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.
During
the years ended May 31, 2006, we were able to raise gross proceeds of $1,066,500
from the sale of convertible notes and warrants to accredited investors,
$3,375,884.30 from the sale of secured convertible debentures and warrants
to
institutional investors and a limited partnership that is a related party,
and
an additional $412,700 from borrowing from related parties. During the same
period, we repaid $750,000 of outstanding convertible debt, an aggregate of
$225,000 of related party debt, and $874,000 of liabilities we agreed to pay
at
the time we completed the acquisition Arkados by merger in May 2004. The net
cash provided from these financing activities exceeded the amount of cash
consumed by operations during the period by approximately $530,000. During
the
last quarter we were able to negotiate with the various holders of long and
short term debt the conversion of a portion of our debt into shares our common
stock. The total debt converted was $405,000 in exchange for the issuance of
609,786 shares of our stock. There can be no assurance that our efforts to
convert our outstanding debt or to raise additional capital will be successful,
or even if successful will fund our planned operations or capital
commitments.
May
31,
2006, we had cash of approximately $10,000 and negative working capital of
$2,725,783 compared to cash of $10,000 and negative working capital of
$3,807,000 at May 31, 2005. The improvement resulted from the sale of the 6%
two
year convertible notes and the 6% three year secured debentures during the
year
as well as the payment of approximately $874,000 of federal and state tax
liabilities
assumed in a merger in fiscal 2004. Subsequent to May 31, 2006, we sold an
additional $2,273,470 of 6% secured convertible debentures due December 28,
2006. The cash proceeds of such sale were $1.5 million and $773,470 of the
notes
were issued in satisfaction of related party debt.
Our
present material commitments are the compensation of its 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.
Commitments
We
do not
have any commitments which are required to be disclosed in tabular form as
of
May 31, 2006.
Off
Balance Sheet Arrangements
We
do not
have any off balance sheet arrangements.
| ITEM 7. |
FINANCIAL
STATEMENTS.
|
Our
financial statements are filed under this Item 7, beginning on page F-1 of
this
report.
Arkados
Group, Inc. and Subsidiaries
(formerly
known as CDKNET.COM, Inc.)
Development
Stage Enterprise
CONTENTS
|
Page
|
|
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC
|
|
|
ACCOUNTING
FIRM
|
F
-
1
|
|
CONSOLIDATED
FINANCIAL STATEMENTS
|
|
|
Consolidated
Balance Sheet
|
F
-
2
|
|
Consolidated
Statement of Operations
|
F
-
3
|
|
Consolidated
Statement of Changes in Stockholders’ Deficiency
|
F
-
4
|
|
Consolidated
Statement of Cash Flows
|
F
-
5
|
|
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
|
F
-
6 to F - 24
|
Report
of Independent Registered Public Accounting Firm
Board
of
Directors and Stockholders
Arkados
Group, Inc. and Subsidiaries
(formerly
known as CDKNET.COM, Inc.)
We
have
audited the accompanying consolidated balance sheet of Arkados Group, Inc.
and
subsidiaries (formerly known as CDKNET.COM, Inc.) (A Development Stage
Enterprise) as of May 31, 2006, and the related consolidated statements of
operations, stockholders’ deficit, and cash flows for each of the years ended
May 31, 2006 and 2005 and for the period March 24, 2004 (inception) to May
31,
2006. These financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these financial
statements based on our audit. The financial statements for the period March
24,
2004 (inception) to May 31, 2004 reflect total revenues and a net loss of $0
and
$693,833, respectively of the cumulative totals. The other auditors’ report has
been furnished to us in our opinion, insofar as it relates to amounts included
for such period, is based solely on the report of such other
auditors.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining,
on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and
significant estimates made by management, as well as evaluating principles
used
and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In
our
opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of the Company as of
May
31, 2006, and the results of its operations and cash flows for each of the
years
ended May 31, 2006 and 2005 and for the period March 24, 2004 (inception) to
May
31, 2006 in conformity with generally accepted accounting principles in the
United States.
The
accompanying financial statements have been prepared assuming that Arkados
Group, Inc. will continue as a going concern. As more fully described in Note
2,
the Company has incurred recurring operating losses and will have to obtain
additional capital to sustain operations. These conditions raise substantial
doubt about the Company’s ability to continue as a going concern. Management’s
plans in regard to these matters are also described in Note 2. The financial
statements do not include any adjustments to reflect the possible effects on
the
recoverability and classification of assets or the amounts and classification
of
liabilities that may result from the outcome of this uncertainty.
|
|
|
|
| By: |
/s/
Sherb
& Co., LLP
|
|
|
SHERB & CO, LLP |
||
| Certified Public Accountants | ||
New
York,
New York
October
6, 2006
ARKADOS
GROUP, INC. and Subsidiaries
(
formerly known as CDKNET.COM, INC.)
Consolidated
Balance Sheet
(A
Development Stage Enterprise)
|
May
31, 2006
|
||||
|
Assets
|
||||
|
Current
Assets:
|
||||
|
Cash
|
$
|
—
|
||
|
Accounts
receivable, net
|
9,398
|
|||
|
Total
Current Assets
|
9,398
|
|||
|
Deferred
financing costs
|
427,140
|
|||
|
Equipment,
net
|
2,147
|
|||
|
Intangible
assets, net
|
129,077
|
|||
|
Other
assets
|
27,225
|
|||
|
$
|
594,987
|
|||
|
Liabilities
and Stockholders
’
Deficiency
|
||||
|
Current
Liabilities:
|
||||
|
Accrued
expense and other liabilities
|
$
|
495,873
|
||
|
Accrued
expenses - related party
|
360,000
|
|||
|
Payroll
taxes and related penalties and interest payable
|
959,822
|
|||
|
Related
party payables
|
446,406
|
|||
|
Total
Current Liabilties
|
2,262,101
|
|||
|
Convertible
Debentures, including related debt
|
4,255,789
|
|||
|
Commitments
and Contingencies
|
—
|
|||
|
Stockholders’
Deficiency
|
||||
|
Convertible
Preferred Stock - $.0001 par value;
|
||||
|
5,000,000
shares authorized, zero shares outstanding
|
—
|
|||
|
Common
stock, $.0001 par value, 100,000,000 shares
|
||||
|
authorized,
24,353,053 issued and outstanding
|
2,436
|
|||
|
Additional
Paid in capital
|
14,929,333
|
|||
|
Treasury
Stock
|
(16,000
|
)
|
||
|
Unearned
Compensation
|
(841,191
|
)
|
||
|
Accumulated
Deficit
|
(19,997,481
|
)
|
||
|
Total
Stockholders’ deficiency
|
(5,922,903
|
)
|
||
|
$
|
594,987
|
|||
ARKADOS
GROUP, INC. and Subsidiaries
(
formerly known as CDKNET.COM, INC.)
Consolidated
Statement of Operations
(A
Development Stage Enterprise)
|
Cumulative
|
||||||||||
|
During
the
|
||||||||||
|
Development
|
||||||||||
|
Year
Ended
|
Year
Ended
|
Stage
(March
|
||||||||
|
May
31,
|
May
31,
|
24,
2004 to
|
||||||||
|
2005
|
2006
|
May
31, 2006)
|
||||||||
|
Net
Sales
|
$
|
832,910
|
$
|
112,094
|
$
|
945,004
|
||||
|
Cost
of Goods Sold
|
599,620
|
79,980
|
679,600
|
|||||||
|
Gross
Profit
|
233,290
|
32,114
|
265,404
|
|||||||
|
Research
and Development Expenses
|
436,224
|
377,979
|
814,203
|
|||||||
|
General
and Administrative Expenses
|
6,442,164
|
3,213,679
|
10,349,676
|
|||||||
|
Net
Loss From Operations
|
(6,645,098
|
)
|
(3,559,544
|
)
|
(10,898,475
|
)
|
||||
|
Other
Income (Expenses):
|
||||||||||
|
Interest
Income (Expense)
|
(356,267
|
)
|
(465,472
|
)
|
(821,739
|
)
|
||||
|
Net
Loss Before Income Taxes
|
(7,001,365
|
)
|
(4,025,016
|
)
|
(11,720,214
|
)
|
||||
|
Provision
for Income Taxes
|
—
|
|||||||||
|
Net
Loss
|
$
|
(7,001,365
|
)
|
$
|
(4,025,016
|
)
|
$
|
(11,720,214
|
)
|
|
|
Net
loss per share - basic and diluted
|
$
|
(0.30
|
)
|
$
|
(0.17
|
)
|
||||
|
Weighted
Average of Common Shares
|
||||||||||
|
Outstanding
- basic and diluted
|
23,174,359
|
23,777,360
|
||||||||
ARKADOS
GROUP, INC. and Subsidiaries
(
formerly known as CDKNET.COM, INC.)
Consolidated
Statement of Stockholders’ Deficiency
(A
Development Stage Enterprise)
Inception
March 24, 2004 to May 31, 2004 and the Years Ended May 31, 2005 and
2006
|
Additional
|
Total
|
|||||||||||||||||||||||||||
|
Preferred
Stock
|
Common
Stock
|
Paid
in
|
Accumulated
|
Treasury
|
Unearned
|
Stockholders’
|
||||||||||||||||||||||
|
Shares
|
Amount
|
Shares
|
Amount
|
Capital
|
Deficit
|
Stock
|
Compensation
|
Deficiency
|
||||||||||||||||||||
|
Balance
as of March 24, 2004
|
||||||||||||||||||||||||||||
|
post
foreclosure sale
|
$
|
—
|
5,569
|
$
|
5,569
|
$
|
1,988,185
|
$
|
(8,277,267
|
)
|
$
|
—
|
$
|
—
|
$
|
(6,283,513
|
)
|
|||||||||||
|
Effect
of Reorganization and
|
||||||||||||||||||||||||||||
|
Merger
- May 24, 2004
|
21,473,364
|
(3,422
|
)
|
4,105,180
|
(16,000
|
)
|
4,085,758
|
|||||||||||||||||||||
|
Sale
of shares pursuant to PPM
|
841,666
|
84
|
950,116
|
950,200
|
||||||||||||||||||||||||
|
Issuance
of shares for
|
||||||||||||||||||||||||||||
|
settlement
of debts
|
181,068
|
18
|
168,185
|
168,203
|
||||||||||||||||||||||||
|
Issuance
of options for services
|
4,086,164
|
(4,086,164
|
)
|
—
|
||||||||||||||||||||||||
|
Amortization
of unearned
|
||||||||||||||||||||||||||||
|
compensation
|
359,537
|
359,537
|
||||||||||||||||||||||||||
|
Net
loss (March 24, 2004 to
|
||||||||||||||||||||||||||||
|
May
31, 2004)
|
(693,833
|
)
|
(693,833
|
)
|
||||||||||||||||||||||||
|
Balance
as of May 31, 2004
|
—
|
—
|
22,501,667
|
2,250
|
11,297,829
|
(8,971,100
|
)
|
(16,000
|
)
|
(3,726,627
|
)
|
(1,413,648
|
)
|
|||||||||||||||
|
Shares
issued for services
|
575,000
|
58
|
724,753
|
724,811
|
||||||||||||||||||||||||
|
Debt
converted to equity
|
125,000
|
13
|
75,483
|
75,496
|
||||||||||||||||||||||||
|
Issuance
of options for services
|
900,461
|
(702,292
|
)
|
198,169
|
||||||||||||||||||||||||
|
Valuation
of equity rights and
|
||||||||||||||||||||||||||||
|
beneficial
conversion
|
||||||||||||||||||||||||||||
|
features
of debt raise
|
234,353
|
234,353
|
||||||||||||||||||||||||||
|
Amortization
of unearned
|
||||||||||||||||||||||||||||
|
compensation
|
3,617,681
|
3,617,681
|
||||||||||||||||||||||||||
|
Net
Loss
|
(7,001,365
|
)
|
(7,001,365
|
)
|
||||||||||||||||||||||||
|
Balance
as of May 31, 2005
|
—
|
—
|
23,201,667
|
2,321
|
13,232,879
|
(15,972,465
|
)
|
(16,000
|
)
|
(811,238
|
)
|
(3,564,503
|
)
|
|||||||||||||||
|
Shares
issued for services
|
75,000
|
8
|
22,492
|
22,500
|
||||||||||||||||||||||||
|
Debt
converted to equity
|
609,786
|
61
|
405,683
|
405,744
|
||||||||||||||||||||||||
|
Shares
issued for debt
|
||||||||||||||||||||||||||||
|
accomodations
and penalties
|
466,600
|
47
|
267,253
|
267,300
|
||||||||||||||||||||||||
|
Options
issued for services
|
596,471
|
(527,301
|
)
|
69,170
|
||||||||||||||||||||||||
|
Valuation
of equity rights and
|
||||||||||||||||||||||||||||
|
beneficial
conversion
|
||||||||||||||||||||||||||||
|
features
of debt raise
|
404,555
|
404,555
|
||||||||||||||||||||||||||
|
Amortization
of unearned
|
||||||||||||||||||||||||||||
|
compensation
|
497,347
|
497,347
|
||||||||||||||||||||||||||
|
Net
Loss
|
(4,025,016
|
)
|
(4,025,016
|
)
|
||||||||||||||||||||||||
|
Balance
as of May 31, 2006
|
—
|
$
|
—
|
24,353,053
|
$
|
2,437
|
$
|
14,929,333
|
$
|
(19,997,481
|
)
|
$
|
(16,000
|
)
|
$
|
(841,192
|
)
|
$
|
(5,922,903
|
)
|
||||||||
ARKADOS
GROUP, INC. and Subsidiaries
(
formerly known as CDKNET.COM, INC.)
Consolidated
Statement of Operations
(A
Development Stage Enterprise)
|
Cumulative
|
||||||||||
|
During
the
|
||||||||||
|
Development
|
||||||||||
|
Year
Ended
|
Year
Ended
|
Stage
(March
|
||||||||
|
May
31,
|
May
31,
|
24,
2004 to
|
||||||||
|
2005
|
2006
|
May
31, 2006)
|
||||||||
|
Cash
Flows From Operating Activities
|
||||||||||
|
Net
Loss
|
$
|
(7,001,365
|
)
|
$
|
(4,025,016
|
)
|
$
|
(11,720,214
|
)
|
|
|
Adjustments
to reconcile net loss to net cash provided
|
||||||||||
|
by
(used) in operating activities:
|
||||||||||
|
Depreciation
and Amortization
|
110,579
|
103,428
|
235,565
|
|||||||
|
Common
stock and warrants issued for services
|
4,540,661
|
856,317
|
5,756,515
|
|||||||
|
Warrants
and Beneficial Conversion Rights with Debt
|
234,353
|
404,555
|
638,908
|
|||||||
|
Accounts
Receivabe
|
(24,420
|
)
|
15,022
|
(9,398
|
)
|
|||||
|
Prepaid
and Deferred Expenses
|
(8,778
|
)
|
(235,828
|
)
|
(414,580
|
)
|
||||
|
Other
assets
|
(178,306
|
)
|
(27,225
|
)
|
(27,225
|
)
|
||||
|
Accounts
Payable and accrued expenses
|
(42,595
|
)
|
(822,950
|
)
|
(680,676
|
)
|
||||
|
Net
Cash Provided by (Used) in Operating Activities
|
(2,369,871
|
)
|
(3,731,697
|
)
|
(6,221,105
|
)
|
||||
|
Cash
Flows from Investing Activities
|
||||||||||
|
Purchases
of capital expenditures and Patents
|
(101,863
|
)
|
(1,175
|
)
|
(103,038
|
)
|
||||
|
|
||||||||||
|
Net
Cash Used in Investing Activities
|
(101,863
|
)
|
(1,175
|
)
|
(103,038
|
)
|
||||
|
Cash
Provided by Financing Activities
|
||||||||||
|
Related
party payables
|
668,021
|
731,005
|
1,399,026
|
|||||||
|
Debt
discount
|
—
|
(153,322
|
)
|
(153,322
|
)
|
|||||
|
Contribution
of capital
|
—
|
—
|
1,232,646
|
|||||||
|
Repayment
of debt
|
(344,256
|
)
|
(344,256
|
)
|
||||||
|
Issuance
of Debentures
|
750,000
|
3,942,384
|
4,692,384
|
|||||||
|
Repayment
of related party payables
|
—
|
(452,621
|
)
|
(502,621
|
)
|
|||||
|
Net
Cash Provided by Financing Activities
|
1,418,021
|
3,723,190
|
6,323,857
|
|||||||
|
Net
Decrease in Cash
|
(1,053,713
|
)
|
(9,682
|
)
|
(286
|
)
|
||||
|
Cash,
beginning of the period
|
1,063,394
|
9,681
|
285
|
|||||||
|
Cash,
end of the period
|
$
|
9,681
|
$
|
—
|
$
|
—
|
||||
|
Supplemental
disclosures of cash flow information:
|
||||||||||
|
Cash
paid for interest during the year
|
$
|
—
|
$
|
35,352
|
||||||
|
Cash
paid for taxes during the year
|
—
|
—
|
||||||||
|
Non
cash financing activities:
|
||||||||||
|
Common
stock and warrants issued for services
|
$
|
1,625,214
|
$
|
92,210
|
||||||
|
Shares
and warrants issued with debt and
|
||||||||||
|
beneficial
conversion feature rights
|
234,353
|
671,855
|
||||||||
|
Conversion
of debt for equity
|
$
|
75,496
|
$
|
405,744
|
||||||
See
notes
to consolidated financial statements.
Arkados
Group, Inc. & Subsidiaries
(A
Development Stage Enterprise)
NOTES
TO
FINANCIAL STATEMENTS
YEARS
ENDED MAY 31, 2006 AND 2005
| 1. |
DESCRIPTION
OF BUSINESS
|
Arkados
Group, Inc. (the “Company”) (formerly known as CDKNET.COM, Inc.), pursuant to an
“Agreement and Plan of Merger”, (“the Merger Agreement”) dated May 7, 2004 and
consummated on May 24, 2004, merged a wholly owned subsidiary, CDK Merger Corp.,
with Miletos, Inc. (the
“
Merger
”
).
CDK Merger
Corp. was renamed “Arkados, Inc.” On August 30, 2006 the Company changed its
name from CDKNET.COM, Inc.to Arkados Group, Inc. All references to
CDKENT.COM, Inc. have been changed accordingly. Since Arkados Group, Inc. and
subsidiaries prior to May 7, 2004 had no meaningful operations, this merger
has
been recorded as a reorganization of Arkados, Inc. via a reverse merger with
Arkados Group, Inc. Currently the Company is a development stage enterprise,
which is a fabless semiconductor manufacturer that designs, develops, markets,
and sells technology and solutions enabling broadband communications over
standard electricity lines. The Company is a member of an alliance of several
companies referred to as the HomePlug Powerline Alliance, “HomePlug” for
developing the standard of such technologies.
Miletos,
Inc. was a newly established entity, which acquired the assets and business
of
Enikia, LLC in a public foreclosure sale on March 23, 2004 in exchange for
the
forgiveness of $4,000,000 of secured debt and the assumption of certain
outstanding liabilities. The assets and certain liabilities acquired at the
foreclosure sale have been recorded at historical cost basis. The new entity,
Miletos, Inc. was predominately owned by a controlled group, which was the
same
controlled group of Enikia, LLC and the same group became majority holders.
The
accompanying financials have been presented on a development stage basis using
March 24, 2004 as the date of inception.
Pursuant
to the Merger Agreement, the consideration for the merger consisted of
16,340,577 shares of the Company’s restricted common stock (250,000 of such
common shares are contingent shares and will be returned for cancellation unless
called upon as a result of a breach of a warranty or representation) and
3,634,642 stock options at prices ranging from $.01 to $1.20 per share. In
addition $950,200 was raised through the sale of equity for working capital
of
the Company.
| 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 in excess of $11 million since inception
including
a net loss in excess of $4 million for the recent year ended May
31, 2006.
Additionally, the Company had a net working capital deficiency and
shareholders’ deficiencies at May 31, 2005 and 2006, 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. (the “Parent”), and it’s wholly owned subsidiaries.
Intercompany accounts and transactions have been eliminated in
consolidation.
|
| c. |
Cash
and cash equivalents
-
The Company considers investments in highly liquid instruments
with a
maturity of three months or less to be cash
equivalents.
|
| d. |
Allowance
for doubtful accounts
-
The Company records a bad debt expense / allowance based on managements
estimate of uncollectible accounts. The Company has not recorded
any bad
debt expense in each of the years ended May 31, 2005 and
2006.
|
| e. |
Equipment
-
Equipment is recorded at cost. Depreciation is provided on the
straight-line method based upon the estimated useful lives of the
respective assets. Equipment is being depreciated over a period
of five
years. Maintenance, repairs and minor renewals are charged to operations
as incurred, whereas the cost of significant betterments is capitalized.
Upon the sale or retirement of property and equipment, the related
costs
and accumulated depreciation are eliminated from the accounts and
gains or
losses are reflected in
operations.
|
| f. |
Impairment
of Long-Lived Assets
-
The Company reviews long-lived assets, certain identifiable assets
and
goodwill related to those assets on a quarterly basis for impairment
whenever circumstances and situations change such that there is
an
indication that the carrying amounts may not be recovered. To the
extent
there has been any impairment such impairment has been record in
the
statement of operations.
|
| g. |
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. The Company
can not
estimate the fair value of the remaining outstanding payroll taxes,
penalties and interest recorded in connection with the
merger.
|
| h. |
Revenue
Recognition
-
The Company records revenues pursuant to one long term development
contract. The revenues are earned and recorded are based on pre-determined
milestones. When revenues within a pre-determined milestone has
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 been fully completed. The Company
also
monitors their estimated costs to complete such long term contract
to the
revenues to be earned to ensure that if there is an estimated loss
to
record to complete their obligation to fulfill the terms of such
development contract, such loss existed. As of May 31, 2006, there
were no
long term contracts for which revenues were yet to be earned outstanding.
|
| i. |
Advertising
Costs
-
All advertising costs, are expensed as incurred. The Company has
not had
any advertising costs in each of the last two
years.
|
| j. |
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.
For the
years ended May 31, 2006 and 2005, diluted loss per share is the
same as
basic loss per share since the inclusion of approximately 11.1
million
stock options and warrants and as well as
5.4
|
|
million
shares of common stock issuable upon conversion of convertible
indebtedness would be antidilutive.
|
|
k.
|
Stock
Options
-
Previously we accounted for our stock-based compensation plans under
Accounting Principles Board Opinion 25, (APB 25) Accounting for Stock
Issued to Employees and the related interpretation, for which no
compensation cost is recognized as of the grant when the estimated
fair
value of stock options issued with an exercise price equal to or
greater
than the fair value of the common stock on the date of grant up to
May 31,
2005. Statement of Financial Accounting Standards No. 123 (SFAS 123)
Accounting for Stock-Based Compensation, as amended by Statement
of
Financial Accounting Standards No. 148 (SFAS 148) Accounting for
Stock-Based Compensation - Transition and Disclosure, requires that
companies, which do not elect to account for stock-based compensation
as
prescribed by this statement, disclose the pro-forma effects on earnings
and earnings per share as if SFAS 123 has been adopted.
|
SFAS
123-R eliminates the alternative to use the intrinsic value methods of
accounting that was provided in SFAS 123, which generally resulted in no
compensation expense recorded in the financial statements related to the
issuance of stock options. SFAS 123-R requires that the cost resulting from
all
share-based payment transactions be recognized in the financial statements.
SFAS
123-R establishes fair value as the measurement objective in accounting for
share-based payment transactions with employees.
On
June
1, 2005 (the first day of our 2006 fiscal year), the Company adopted SFAS 123-R
using modified prospective application, as permitted under SFAS 123-R.
Accordingly, prior period amounts have not been restated. Under the application,
the Company is required to record compensation expense for all awards granted
after the date of adoption and for the unvested portion of previously granted
awards that remain outstanding at the date of adoption. Per the provisions
of
SFAS 123-R, the Company has adopted the policy to recognize compensation expense
on a straight-line attribution method.
If
we
applied the recognition provisions of SFAS 123R using the Black-Scholes option
pricing model, the resulting pro-forma net income (loss) available to common
shareholders, and pro-forma net income (loss) available to common shareholders
per share would be as follows:
|
For
the year ended
May
31, 2005
|
||||
|
Net
loss available to common
shareholders,
as reported
|
$
|
(7,001,365
|
)
|
|
|
Add:
Stock-based compensation
expense
included in the reported
net
income, net of related tax
effects
|
||||
|
Deduct:
Stock-based
compensation,
net of tax
|
(605,059
|
)
|
||
|
Net
loss available to common
shareholders,
pro-forma
|
$
|
(7,606,424
|
)
|
|
|
Basic
earnings per share:
|
||||
|
As
reported -
|
$
|
(.30
|
)
|
|
|
Pro-forma
-
|
$
|
(.33
|
)
|
|
The
above
stock-based employee compensation expense has been determined utilizing a fair
value method, the Black-Scholes option-pricing model.
In
accordance with SFAS 123R, 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:
The
Company has recorded compensation expense in the amount of $856,317 for the
year
ended May 31, 2006 attributed to the issuance and vesting of stock options
and
warrants for services.
|
For
Years Ended May 31,
|
|||
|
2006
|
2005
|
||
|
Risk
free interest rate
|
5.00%
|
5.125%
|
|
|
Expected
life
|
4
years
|
4
years
|
|
|
Dividend
rate
|
0.00%
|
0.00%
|
|
|
Expected
volatility
|
43%
|
64.74%
|
|
|
l.
|
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 and liabilities
and
disclosure of contingent assets and liabilities at the date of the
financial statements and revenues and expenses during the reporting
period. Actual results could differ from those
estimates.
|
|
m.
|
Comprehensive
Income
-
SFAS No. 130, “Reporting Comprehensive Income”, establishes standards for
reporting and displaying comprehensive income, comprising net income
and
other non-owner changes in equity, in the financial statements. For
all
periods presented, comprehensive income was the same as net
income.
|
| n. |
Recent
Accounting Pronouncements
-
|
FASB
153
- Exchanges of Nonmonetary Assets
In
December 2004, the FASB issued FASB Statement No. 153. This Statement addresses
the measurement of exchanges of nonmonetary asstes. The guidance in APB Opinion
No. 29, Accounting for Nonmonetary Transactions, is based on the principle
that
exchanges of nonmonetary assets should be measured based on the fair value
of
the assets exchanged. The guidance in that Opinion, however, included certain
exceptions to that principle. This Statement amends Opinion 29 to eliminate
the
exception for nonmonetary exchanges of similiar productive assets and replaces
it with a general exception for exchanges of nonmonetary assets that do not
have
commercial substance. A nonmonetary exchange has commercial substance if the
future cash flows of the entity are expected to change significantly as a result
of the exchange. This Statement is effective for financial statements for fiscal
years beginning after June 15, 2005. Earlier application is permitted for
nonmonetary asset exchanges incurred during fiscal years beginning after the
date of this Statement is issued. Management believes this Statement will have
no impact on the financial statements of the Company once adopted.
FASB
123
(revised 2004) - Share-Based Payments
In
December 2004, the FASB issued a revision to FASB Statement No. 123R, Accounting
for Stock Based Compensation. This Statement supercedes APB Opinion No. 25,
Accounting for Stock Issued to Employees, and its related implementation
guidance. This Statement establishes standards for the accounting for
transactions in which an entity exchanges its equity instruments for goods
or
services. It also addresses transactions in which an entity incurs liabilities
in exchange for goods or services that are based on the fair value of the
entity’s equity instruments or that may be settled by the issuance of those
equity instruments. This Statement focuses primarily on accounting for
transactions in which an entity obtains employee services in share-based payment
transactions. This Statement does not change the accounting guidance for
share-based payment transactions with parties other than employees provided
in
Statement 123 as originally issued and EITF Issue No. 96-18, “Accounting for
Equity Instruments That Are Issued to Other Than Employees for Acquiring, or
in
Conjunction with Selling, Goods or Services.” This Statement does not address
the accounting for employee share ownership plans, which are subject to AICPA
Statement of Position 93-6, Employers’ Accounting for Employee Stock Ownership
Plans.
A
nonpublic entity will measure the cost of employee services received in exchange
for an award of equity instruments based on the grant-date fair value of those
instruments, except in certain circumstances.
A
public
entity will initially measure the cost of employee services received in exchange
for an award of liability instruments based on its current fair value; the
fair
value of that award will be re-measured subsequently at each reporting date
through the settlement date. Changes in fair value during the requisite service
period will be recognized as compensation cost over that period. A nonpublic
entity may elect to measure its liability awards at their intrinsic value
through the date of settlement.
The
grant-date fair value of employee share options and similar instruments will
be
estimated using the option-pricing models adjusted for the unique
characteristics of those instruments (unless observable market prices for the
same or similar instruments are available).
Excess
tax benefits, as defined by this Statement, will be recognized as an addition
to
paid-in-capital. Cash retained as a result of those excess tax benefits will
be
presented in the statement of cash flows as financing cash inflows. The
write-off of deferred tax assets relating to unrealized tax benefits associated
with recognized compensation cost will be recognized as income tax expense
unless there are excess tax benefits from previous awards remaining in paid-in
capital to which it can be offset.
The
notes
to the financial statements of both public and nonpublic entities will disclose
information to assist users of financial information to understand the nature
of
share-based payment transactions and the effects of those transactions on the
financial statements.
The
effective date for public entities that do not file as small business issuers
will be as of the beginning of the annual reporting period that begins after
June 15, 2005. For public entities that file as small business issuers and
nonpublic entities the effective date will be as of the beginning of the first
annual reporting period that begins after December 15, 2005. Management intends
to comply with this Statement at the scheduled effective date for the relevant
financial statements of the Company. Management believes the effects of adopting
this revision to FASB 123R, will approximate recording those amounts currently
reported as compensation herein on a pro-forma basis as allowed under FASB
123R.
FASB
154
- Accounting Changes and Error Corrections
In
May
2005, the FASB issued FASB Statement No. 154, which replaces APB Opinion No.20
and FASB No. 3. This Statement provides guidance on the reporting of accounting
changes and error corrections. It established, unless impracticable
retrospective application as the required method for reporting a change in
accounting principle in the absence of explicit transition requirements to
a
newly adopted accounting principle. The Statement also provides guidance when
the retrospective application for reporting of a change in accounting principle
is impracticable. The reporting of a correction of an error by restating
previously issued financial statements is also addressed by this Statement.
This
Statement is effective for financial statements for fiscal years beginning
after
December 15, 2005. Earlier application is permitted for accounting changes
and
corrections of errors made in fiscal years beginning after the date of this
Statement is issued. Management believes this Statement will have no impact
on
the financial statements of the Company once adopted.
FIN
47 -
Accounting for Conditional Asset Retirement Obligations
In
March
2005, the Financial Accounting Standards Board (“FASB”) issued interpretation
No. 47, “Accounting for Conditional Asset Retirement Obligations” (“FIN No.
47”). FIN No. 47 clarifies that the term conditional obligation as used in FASB
Statement No. 143, “Accounting for Assets Retirement Obligations”, refers to a
legal obligation to perform an asset retirement activity in which the timing
and/or method of settlement are conditional on a future event that may or may
not be within the control of the entity. FIN No. 47 requires that the
uncertainty about the timing and/or method of settlement of a conditional asset
retirement obligation be factored into the measurement of the liability when
sufficient
information
exists. FIN No. 47 also clarifies when an entity would have sufficient
information to reasonably estimate the fair value of an asset retirement
obligation. FIN No. 47 is effective for fiscal years ending after December
15,
2005. Management believes this Statement will have no impact on the financial
statements of the Company once adopted .
FASB
155
- Accounting for Certain Hybrid Financial Instruments
In
February 2006, the FASB issued FASB Statement No. 155, which is an amendment
of
FASB Statements No. 133 and 140. This Statement; a) permits fair value
remeasurement for any hybrid financial instrument that contains an embedded
derivative that otherwise would require bifurcation, b) clarifies which
interest-only strip and principal-only strip are not subject to the requirements
of Statement 133, c) establishes a requirement to evaluate interests in
securitized financial assets to identify interests that are freestanding
derivatives or that are hybrid financial instruments that contain an embedded
derivative requiring bifurcation, d) clarifies that concentrations of credit
risk in the form of subordination are not embedded derivatives, e) amends
Statement 140 to eliminate the prohibition on a qualifying special-purpose
entity from holding a derivative financial instrument that pertains to a
beneficial interest other than another derivative financial instrument. This
Statement is effective for financial statements for fiscal years beginning
after
September 15, 2006. Earlier adoption of this Statement is permitted as of the
beginning of an entity’s fiscal year, provided the entity has not yet issued any
financial statements for that fiscal year. Management believes this Statement
will have no impact on the financial statements of the Company once
adopted.
FASB
156
- Accounting for Servicing of Financial Assets
In
March
2006, the FASB issued FASB Statement No. 156, which amends FASB Statement No.
140. This Statement establishes, among other things, the accounting for all
separately recognized servicing assets and servicing liabilities. This Statement
amends Statement 140 to require that all separately recognized servicing assets
and servicing liabilities be initially measured at fair value, if practicable.
This Statement permits, but does not require, the subsequent measurement of
separately recognized servicing assets and servicing liabilities at fair value.
An entity that uses derivative instruments to mitigate the risks inherent in
servicing assets and servicing liabilities is required to account for those
derivative instruments at fair value. Under this Statement, an entity can elect
subsequent fair value measurement to account for its separately recognized
servicing assets and servicing liabilities. By electing that option, an entity
may simplify its accounting because this Statement permits income statement
recognition of the potential offsetting changes in fair value of those servicing
assets and servicing liabilities and derivative instruments in the same
accounting period. This Statement is effective for financial statements for
fiscal years beginning after September 15, 2006. Earlier adoption of this
Statement is permitted as of the beginning of an entity’s fiscal year, provided
the entity has not yet issued any financial statements for that fiscal year.
Management believes this Statement will have no impact on the financial
statements of the Company once adopted.
| 3. |
CONCENTRATION
OF CREDIT RISK
|
The
Company’s accounts receivable were concentrated 100% with one customer.
The
Company, periodically may have cash in excess of $100,000, the Federal Deposit
Insurance Corp. “FDIC” insurable limit. As of May 31, 2006 there were no funds
in any uninsured bank account.
| 4. |
EQUIPMENT
|
At
May
31, 2006 equipment consists of the following:
|
Equipment
|
$
|
6,869
|
||
|
Total
|
6,86
|
|||
|
Less:
Accumulated depreciation
|
(4,723
|
)
|
||
|
Net
|
$
|
2,146
|
|
Depreciation
expense for the years ended May 31, 2006 and 2005 was $4,000 and
$3,000,
respectively.
|
| 5. |
INTANGIBLE
ASSETS - PATENTS
|
|
The
Company owns 45 patents and patents pending, which are currently,
being
used in the development of the Company’s products. As of May 31, 2006, the
Company had recorded $462,102 of gross patents costs and $333,025
of
accumulated amortization. The annual amortization of such intangible
assets approximates $106,000 per year for the next year, until they
are
fully amortized.
|
|
6.
|
PAYROLL
TAX LIABILITIES
|
|
Enikia
was in arrears for several years in its payment of federal and state
payroll taxes. Pursuant to the Merger Agreement, the Parent assumed
up to
$1.2 million of the delinquent payroll taxes due and outstanding
with the
remaining difference an assumed liability of the major shareholder
of the
Company. During the year ended May 31, 2006, the Company made payments
to
both Federal and State of NJ taxing authorities in the amount of
$874,000.
The payments represented payroll taxes withheld by Miletos from its
employees but not remitted to the taxing authorities. Currently,
there is
$960,000 still recorded on the Company’s books as due and outstanding to
both the federal and state tax authorities for delinquent payroll
taxes,
penalties and interest. 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, the Company
has
elected to keep the liability on its
books.
|
|
7.
|
ACCRUED
EXPENSES AND OTHER LIABILITIES
|
|
As
of May 31, 2006, accrued expenses and other liabilities consist of
the
following approximate amounts:
|
|
Accrued
compensation
|
$
|
157,000
|
||
|
Accrued
consulting - Typaldos related party
|
360,000
|
|||
|
Accrued
interest payable
|
140,000
|
|||
|
Accrued
professional fees
|
28,000
|
|||
|
Accrued
technical and engineering fees
|
62,000
|
|||
|
Liabilities
assumed per merger agreement
|
109,000
|
|||
|
$
|
856,000
|
| 8. |
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, them 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 is due October 15, 2006 and is held by an
affiliate of the Company’s Chairman of the Board.
10%
Convertible Notes
- During
the period from March 18, 2005 to May 12, 2005, the Company issued $750,000
of
10% convertible extendable notes initially due June 8, 2005 (the “10% Notes”).
The due date of the 10% Notes was extended at the Company’s option to September
8, 2005 by the Company’s payment of an extension fee aggregating $20,000 for the
entire issue and paying interest due on the 10% Notes to June 8, 2005. The
Company paid $37,500 of principal with related interest on September 18, 2005
in
full payment of two of the outstanding notes and obtained the extension of
the
$712,500 then remaining notes by paying an additional sum of $20,000 and issuing
85,000 shares of common stock to the remaining holders of the 10% Notes. An
expense of $76,500 was recorded related to the issuance of the 85,000 shares
of
common stock, using a share price of $.90. The Company paid $22,167 of principal
pursuant to a mandatory prepayment provision in September, 2005. Principal
and
accrued interest on the 10% Notes are convertible at the holders’ option into
shares of the Company’s common stock only after an event of default, as defined
in the Notes at the lower of $0.67 or the average closing bid price of the
Company’s common stock on the ten trading days preceding conversion. The
conversion right is limited in that it may not be exercised by a holder to
the
extent it would result in such holder becoming the beneficial owner of more
than
4.99% of the Company’s common stock. The 10% Notes were issued with 825,000 of
three year common stock warrant exercisable for $0.67 per share in the basis
of
one warrant for each $1 of principal.
On
December 20, 2005, the Company paid $261,398 in satisfaction of a portion of
the
10% Notes, of which $254,333 was principal and $7,064 was interest. The Company
previously reported that it did not make principal and interest payments
totaling $707,591 due on December
8,
2005
to holders of the Notes and the grace period for such payment expired December
19, 2005. Holders of remaining $436,000 principal of the Notes agreed to extend
the Maturity Date of the Notes to January 15, 2006 and waived all prior
defaults. The remaining principal balance and interest was satisfied pursuant
to
agreements with the remaining holders of the 10% Notes on February 1, 2006
by
the Company’s payment of $268,824 and the issuance of 293,116 shares of common
stock.
$200,000
Short Term Borrowing
-
Beginning on June 10, 2005 and ending June 15, 2005, the Company borrowed an
aggregate of $200,000 from two lenders that are not affiliates of the Company.
During the quarter ended August 31, 2005 $100,000 of these notes were repaid
and
during the quarter ended November 30, 2005 the remaining $100,000 plus accrued
interest on the notes was repaid.
2005
6% Convertible Notes
- During
the quarters ended August 31, 2005 and November 30, 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 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) are 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.
Related
Party Borrowings
-
Through December 19, 2005, the Company borrowed $253,075 from three directors
and one stockholder. These advances were due on demand with interest at the
annual rate of 6% and $225,000 was paid on January 10, 2006. See subsequent
event for conversion of the remaining balance into shares of the Company’s
common stock with the holders.
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
the $2.0 million principal amount of the 6% Secured Debentures and related
warrants. On December 28, 2005,
the
Company issued $2.0 million aggregate principal amount and authorized $3.5
million 6% Secured Debentures to three institutional investors. The 6% Secured
Debentures have a term of three years and 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 Company
may elect to pay interest on the 6% Secured Debentures in cash or in shares
of
common stock, subject to certain conditions related to the market for such
shares stock and the registration of the shares issuable upon conversion of
the
6% Secured Debentures under the Securities Act of 1933, as amended (the
“Securities Act”).
The
6%
Secured Debentures are 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, 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. The terms of the conversion rights also contain
certain dilution provisions.
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.
Upon
the
occurrence of certain events of default defined in the 6% Secured Debentures,
including events of default under the transaction documents related to the
financing, the full principal amount of the 6% Secured Debentures, together
with
interest and other amounts owing, become immediately due and payable, the
principal obligation increases to 130% of the principal balance and the interest
rate increases to 18%.
The
transaction documents relating to the 6% Secured Debentures issued in December
2005 contained a covenant that the Company would obtain the conversion of an
aggregate of $746,600 principal and related interest into shares of the
Company’s Common Stock at or above $0.67 per share on or before January 15,
2006. On February 1, 2006, as part of the sale of an additional $375,884 of
the
6% Secured Debentures described above, the Company and the holders of all
outstanding 6% Debentures agreed to modify the covenant to permit the Company
to
issue 604,956 shares of common stock and pay $405,744 in full satisfaction
of
such outstanding principal and interest concurrently with the additional
investment and waived prior defaults. Two of the parties that agreed to accept
shares of common stock in lieu of repayment were directors of the Company,
of
which one received 75,078 shares in satisfaction of $50,303 of principal and
interest and the other received 76,969 shares in lieu of $51,989 of principal
and interest.
On
February 1, 2006, and February 24, 2006 the Company issued $375,884 and
$500,000, respectively, of additional principal of 6% Secured Debentures on
substantially the same terms as those debentures issued on December 28, 2005.
As
a result, an aggregate of $2,875,884 of these debentures were outstanding as
of
February 28, 2006. On February 1, 2006 and February 24, 2006 the Company issued
176,887 and 235,294 additional short and long term warrants, respectively,
to
the purchasers of the additional 6% Secured Debentures. As a result, there
were
1,353,357 short and 1,353,357 long term warrants outstanding as of May 31,
2006.
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. After giving effect to this additional
issuance, there is $3,375,884 principal amount of the 6% Secured Debentures
outstanding, as well as 1,588,651 of the five year and 1,588,651 of the short
term warrants outstanding.
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
maturities of debt, including related party debt and excluding the debt discount
of $186,597, are as follows:
|
|
Year
ended May 31, 2007
|
$
|
446,406
|
||||
|
2008
|
1,066,500
|
||||||
|
2009
|
3,375,884
|
||||||
Other
Obligations
- As a
consequence of the Company raising a 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 and has not yet been
paid.
| 9. |
INCOME
TAXES
|
At
May
31, 2006, the Company has available unused net operating loss carryovers
approximately $16,500,000
that
may
be applied against future taxable income and expire at various dates through
2026. The Company has a deferred tax asset arising from such net operating
loss
deductions and has recorded a valuation allowance for the full amount of such
deferred tax asset since the likelihood of realization of the tax benefits
cannot be determined.
|
2006
|
||||
|
Deferred
tax asset:
|
||||
|
Net
operating loss carryforward
|
$
|
5,800,000
|
||
|
Valuation
allowance
|
(5,800,000
|
)
|
||
|
Net
deferred tax asset
|
$
|
—
|
||
A
reconciliation of the statutory federal income tax benefit to actual tax benefit
is as follows:
|
Year
Ended
May
31, 2005
|
Year
Ended
May
31, 2006
|
|
|
Statutory
federal income tax benefit
|
35%
|
35%
|
|
Permanent
timing differences -
equity
rights
|
(25%)
|
(13%)
|
|
Income
tax benefit not utilized
|
(10%)
|
(22%)
|
|
Actual
tax benefit
|
—
|
—
|
The
Company has had greater than 50% change in ownership of certain stock holdings
by shareholders of the Company pursuant to Section 382 of the Internal Revenue
Code, the net operating losses may be limited as to its utilization on an annual
basis. Currently no such evaluation has been performed.
| 10. |
SHAREHOLDERS’
DEFICIENCY
|
| a. |
On
May 7, 2004, CDKNET.com, Inc and Miletos entered into an “Agreement and
Plan of Merger” (“the Merger Agreement”). On May 24, 2004, the merger was
consummated between a wholly owned subsidiary of CDKNET.com, Inc
(CDK
Merger Corp) and Miletos, Inc. The successor subsidiary was renamed
Arkados, Inc. Because CDKNET.com, Inc and its subsidiaries had
no
meaningful operations prior to May 7, 2004 and equity ownership
in
CDKNET.com, Inc. in an amount greater than 50% was issued to the
shareholders of Miletos, Inc., this transaction has been recorded
as a
reorganization of Arkados, Inc. via a reverse merger with CDKNET.com,
Inc.
|
| b. |
In
May 2004, prior to the consummation of the aforementioned reverse
merger,
the Company; (a) issued 200,000 common shares for services rendered
by
several individuals valued at $1.50 a share and were expensed prior
to the
consummation of the aforementioned reverse merger, (b) converted
$150,834
of indebtedness owed to a law firm affiliated with the former CEO
for
150,000 shares of common stock, (c) converted $165,000 of convertible
debentures and related accrued of $51,539 for 549,866 shares of
common
stock.
|
| c. |
Pursuant
to the Merger Agreement, as amended, the consideration for the
merger
consisted of 16,340,577 shares of the Company’s restricted common stock
(250,000 of such common shares are contingent shares and will be
returned
for cancellation unless called upon as
a
|
|
result
of a breach of warranty), 39,401 shares of common stock to the
former
employees of Enikia, 100,000 shares were issued to the major
shareholder
to assume the satisfaction of certain outstanding 401K liabilities
due to
the employees of the predecessor entity, 2,484,644 stock options
exercisable at $.01 per share, 1,149,998 stock options exercisable
at
$1.20 per share. In addition $950,200 was raised through the
sale of
791,833 shares of common stock of the Company, 41,667 shares
of common
stock were issued to satisfy $50,000 of indebtedness, and 49,833
shares of
common stock for $59,800 of services rendered related to the
equity raise.
The $59,800 of services rendered was recorded as a cost of raising
such
equity.
|
| d. |
The
883,334 shares issued, pursuant to the terms of the Purchase Agreement
relating to the aforementioned equity raise, have certain registration
rights. In addition such shareholders are entitled to liquidated damages,
if a registration statement, registering such shares, is not filed
within
90 days of June 1, 2004 or if the registration statement is not
declared
effective until 120 days after June 1, 2004, or 180 days if such
registration statement is subject to review by the Securities and
Exchange
Commission. Such liquidated damages are calculated monthly based
on the
delayed days of such registration not being effective. Such calculation
is
2% per month of the purchase price paid by such shareholders for
the
883,333 shares purchased limited to an aggregate of 18% of the
aggregate
purchase price paid for the 883,333 shares purchased. The Company
accrued
$190,800 in penalties for the failure to register such shares
issued.
|
| e. |
The
major shareholder of the Company allocated 2,345,410 shares of
his shares
in the Company to satisfy assumed obligations of Enikia for services
previously rendered to the predecessor entities. Pursuant to Topic
5T of
the Staff Accounting Bulletins, such contribution of the common
shares of
the Company have been recorded as a contribution by the shareholder
to the
Company in satisfaction of such liabilities recorded of $1,288,185.
The
major shareholder continues to negotiate for the allocation of
additional
shares to satisfy a separate assumed liability for services previously
rendered to Enikia for capital transaction services. The recorded
estimated value of such services yet to be negotiated is
$700,000.
|
| f. |
During
fiscal 2005, the Company issued 575,000 shares of common stock
net of
another 1,050,000, which was returned for non performance. These
shares
were valued at the fair market value of such stock upon issuance
at prices
ranging from $.50 to $2.15 per share. The aggregate compensation
expense
recorded in this fiscal year for these shares issued was
$724,811
|
| g. |
During
fiscal 2005, the Company issued 610,000 options at an exercise
price of
$1.20 per share which was above fair market value to its employees
and
directors and 1,725,000 options to third parties for services rendered
at
exercise prices ranging from $.01 to $1.20 per share. No compensation
has
been recorded for the options issued to employees and directors.
The
options to third parties have been valued at $900,461, which $582,292
has
yet to be expensed due to the term of such services being
performed.
|
| h. |
The
Company recorded $234,143 of interest expense related to the valuation
of
the detachable warrants and the beneficial conversion feature of
$750,000
in debt raised from March to May 2005. This debt matured on June
8, 2005,
hence predominately all of such interest expense was recorded in
fiscal
2005.
|
| i. |
In
August 2004, a vendor converted $75,496 of payables for 125,000
shares of
common stock.
|
| j. |
During
nine months ended February 28, 2006, the Company issued 750,000
stock
options with an exercise price of $.45 per share to management
and its
employees, which vest over four years. Another 100,000 fully vested
stock
options with a exercise price of $.45 were issued to a consultant,
an
expense of $52,420 was recorded for these stock options.
|
| k. |
On
March 20, 3006, the Company issued warrants to purchase up to 180,000
shares of our common stock for $0.85 per share to Emerging Capital
Markets
LLC as part compensation for investor relations consulting services
for a
three month period. The warrants vest in equal thirds on the first
day of
April, May and June 2006, provided there is no material breach
of the
related consulting agreement. Such investor relations consulting
services
agreement also provides for cash compensation in the amount of
$20,000 per
month for three months. This investor relations consulting agreement
also
provides for the requirement to obtain approval form this individual
for
any potential reverse stock splits greater than 1 for 5 and has
the option
to renew such agreement for another three months on the same
terms
|
| 11. |
STOCK-BASED
COMPENSATION
|
The
Company accounted for its stock option plans under APB No. 25, “Accounting for
Sock Issued to Employees,” (“APB 25”), under which no compensation cost is
recognized through May 31, 2005 and provided pro-forma disclosure only as
provided for under SFAS No. 123 and 148.
Effective
June 1, 2005, the Company adopted SFAS no. 123R “Accounting for Stock-Based
Compensation” (“SFAS 123”).
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, 2004
|
3,894,142
|
$
|
.79
|
||||
|
Granted
|
2,330,000
|
1.39
|
|||||
|
Exercised
|
|
—
|
|||||
|
Expired
or cancelled
|
(131,500
|
)
|
57.19
|
||||
|
Outstanding
at May 31, 2005
|
6,092,642
|
$
|
.75
|
||||
|
Granted
|
1,125,000
|
.52
|
|||||
|
Exercised
|
|||||||
|
Expired
or cancelled
|
(330,990
|
)
|
2.40
|
||||
|
Outstanding
at May 31, 2006
|
6,886,652
|
$
|
.64
|
||||
Information,
at date of issuance, regarding stock option grants during the year ended May
31,
2006.
|
Shares
|
Weighted-
Average
Exercise
Price
|
Weighted-
Average
Fair
Value
|
||||||||
|
Year
ended May 31, 2006
|
||||||||||
|
Exercise
price exceeds market price
|
$
|
—
|
$
|
—
|
||||||
|
Exercise
price equals market price
|
1,100,000
|
.54
|
.44
|
|||||||
|
Exercise
price is less than market price
|
25,000
|
$
|
.01
|
$
|
.67
|
|||||
The
following table summarizes information about warrants and options outstanding
and exercisable at May 31, 2006:
|
Outstanding
and exercisable
|
|||||||||||||
|
Number
Outstanding
|
Weighted-
average
remaining
life
in
years
|
Weighted-
Average
Exercise
Price
|
Number
Exercisable
|
||||||||||
|
Range
of exercise prices:
|
|||||||||||||
|
$.01
to $1.00
|
4,649,868
|
6.04
|
$
|
.34
|
3,584,644
|
||||||||
|
$1.01
- $5.00
|
2,231,784
|
7.17
|
1.20
|
1,540,422
|
|||||||||
|
$5.01
- $40.00
|
5,000
|
1.96
|
30.00
|
5,000
|
|||||||||
|
|
|||||||||||||
|
6,886,652
|
5,130,066
|
||||||||||||
The
compensation expense attributed to the issuance of the options and warrants
will
be recognized as they vest / earned. These 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, 2004
|
—
|
$
|
—
|
||||
|
Granted
|
825,000
|
.67
|
|||||
|
Exercised
|
—
|
—
|
|||||
|
Expired
or cancelled
|
—
|
—
|
|||||
|
Outstanding
at May 31, 2005
|
825,000
|
$
|
.67
|
||||
|
Granted
|
3,567,874
|
.88
|
|||||
|
Exercised
|
—
|
—
|
|||||
|
Expired
or cancelled
|
—
|
—
|
|||||
|
Outstanding
at May 31, 2006
|
4,392,874
|
$
|
.84
|
||||
Information,
at date of issuance, regarding warrant grants during the year ended May 31,
2006.
|
Shares
|
Weighted-
Average
Exercise
Price
|
Weighted-
Average
Fair
Value
|
||||||||
|
Year
ended May 31, 2006
|
||||||||||
|
Exercise
price exceeds market price
|
152,359
|
$
|
.35
|
$
|
.49
|
|||||
|
Exercise
price equals market price
|
1,826,864
|
.82
|
.09
|
|||||||
|
Exercise
price is less than market price
|
1,588,651
|
$
|
1.00
|
$
|
.10
|
|||||
The
following table summarizes information about warrants and exercisable at May
31,
2006:
|
Outstanding
and exercisable
|
|||||||||||||
|
Number
Outstanding
|
Weighted-
average
remaining
life
in
years
|
Weighted-
Average
Exercise
Price
|
Number
Exercisable
|
||||||||||
|
Range
of exercise prices:
|
|||||||||||||
|
$.01
to $.35
|
152,359
|
4.25
|
$
|
.35
|
152,359
|
||||||||
|
$.36
- $.99
|
2,651,864
|
2.00
|
.82
|
2,651,864
|
|||||||||
|
$1.00
|
1,588,651
|
4.75
|
1.00
|
1,588,651
|
|||||||||
|
4,392,874
|
4,392,874
|
||||||||||||
Interest
expense attributed to the aforementioned warrants is being amortized over the
ratable term of each respective debt arrangement. See loans payable
above.
| 12. |
COMMITMENTS
AND CONTINGENCY
|
| a. |
The
Company leases office space pursuant to a lease that began on May
8, 2006
and which expires on June 30, 2009. The annual base rent is approximately
$101,000. There are no other material rental or lease commitment
arrangements as of May 31, 2006.
|
Total
rental expenses for the years ended May 31, 2006 and 2005 was approximately
$41,000 and $40,000, respectively.
| b. |
The
Company and its’ subsidiary, Arkados, have entered into employment
agreements with all of the employees of Arkados and the CEO of the
Company. The general terms of the combined employment agreements
are; (a)
each employment agreement provides for a base salary up to $225,000
depending on the employment position of such employee, (b) the employment
agreements provide for a weekly salary deferral of 10% to 24.5% until
additional capital or financing is obtained, the weekly deferral
will be
paid within seven business days of obtaining funding of at least
$3
million, if such deferral has not been paid by May 24, 2005 then
such
deferral will be paid pro-rata based on the monies raised to May
24, 2005,
with the balance being waived in full, (c) an aggregate of $188,384
has
been paid as signing bonuses, (d) each employee will receive standard
employment benefits comparable to
|
|
those
previously provided, (e) the Company will issue 39,401 shares of
common
stock, as amended, as a partial settlement of the unfunded 401K
account as
of May 24, 2005, which has been recorded as an outstanding liability
of
Miletos prior to the Plan, (f) an aggregate of 184,646 “nonqualified”
options have been issued at an exercise price of $.01 for a term
of ten
years, exercisable immediately, which such recorded value was $275,123
with $241,168 being expensed as a result of such options being
issued, an
aggregate of 2,299,988 “nonqualified” options have been issued at an
exercise price of $.01 for a term of ten years and 1,149,988
“nonqualified” options have been issued at fair market value or $3,794,996
for a term of one to three years and will be expensed as ratably
over the
term after considering the vesting terms, (h) release Enikia, Miletos
and
Andreas Typaldos or any other third parties of any claims or agreements
whether written or oral as a condition of receiving the above.
|
| c. |
On
May 27, 2005, the Company extended its May 21, 2004, one year
employment
agreement “Employment Agreement” with its CFO for another year. Material
terms of the Employment Agreement are as follows; the Company
and the CFO
may terminate the Employment Agreement with 30 days prior written
notice,
the CFO is to receive $5,000 per month as cash compensation,
25,000 shares
as a signing bonus, which was valued at $37,500 and expensed
prior to the
effective date of the reverse merger May 24, 2004 and 100,000
fully vested
stock options exercisable at $1.00 each. Currently the CFO is
paid on a
month to month basis.
|
|
d.
|
The
Company may be subject to future lawsuits relating to unresolved
claims
against Enikia LLC as a result of the contribution of debt owed to
a
control group of Enikia being contributed to Miletos, Inc. and Miletos
purchasing the assets of Enikia at a public foreclosure sale in partial
satisfaction of the $11,116,803 obligation of Enikia to such control
group. Some of these claims have alleged fraud, several claims have
been
settled and others continue to be unresolved. The Company maintains
that
such claims are without basis because of the statutory provision
of New
Jersey law governing creditors rights following a public foreclosure
sale
and in that it had no privatey of contract with the claimants.
|
| 13. |
SUBSEQUENT
EVENTS
|
| a. |
The
Company received an advance of $500,000 from one of the holders
of our 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.
|
| b. |
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, payable semi-annually on January 1 and July 1 of each year
beginning January 1, 2007. 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 wholly-owned operating subsidiary. 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 will be reflected as interest expense for three
month
period ending August 31,
2006.
|
| c. |
On
June 30, 2006, the Company signed a letter amendment to the consulting
agreement with Andreas Typaldos dated May 21, 2004. The amendment
removes
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
$360,00 of accrued and unpaid fees in exchange for the $360,000
principal
amount of 6% Secured Debentures and related
warrants.
|
| d. |
On
August 18, 2006, the Company entered into a amendment agreement
with the
holders of $3,875,884.38 principal amount of 6% Secured Debentures
outstanding as of May 31, 2006, including a New York limited liability
company owned by the wife of our Chairman, and one of our directors.
The
Amendment agreement makes material changes to the securities purchase
agreements, warrants, registration rights agreements, security
agreements
and other ancillary documents we executed in connection 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. 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.
|
| e. |
On
August 30, 2006, the Company amended its certificate of incorporation
to
change its name from “CDKnet.com, Inc.” to “Arkados Group, Inc.,”
effective September 6, 2006.
|
| f. |
On
September 26, 2006, the Company issued $500,000 additional principal
of
the 6% Secured Debentures to two institutional investors on substantially
the same terms as the 6% Secured Debentures previously issued.
After
giving effect to this additional issuance, there is $5,649,354
principal
amount of the 6% Secured Debentures outstanding, as well as 2,608,520
of
the five year and 2,608,520 of the short term warrants outstanding.
|
| ITEM 8. |
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL
DISCLOSURE.
|
On
March
18, 2005, our Board of Directors voted to dismiss, Radin, Glass & Co., LLP
(
“
Radin,
Glass
”
) and
appointed Sherb & Co., LLP (“Sherb
”
) as our
independent public accountant for our year ending May 31, 2005. We notified
Radin, Glass of its dismissal on March 24, 2005.
The
reports issued by Radin, Glass on our consolidated financial statements of
as of
and for the fiscal years ended May 31, 2004 and May 31, 2003 and the period
from
March 24, 2004 (date of inception) to May 31, 2004 did not contain any adverse
opinion or disclaimer of opinion, nor were they qualified or modified as to
uncertainty, audit scope or accounting principles, except that Radin, Glass’
report with respect to these periods contained an explanatory paragraph
indicating that there was substantial doubt as to our ability to continue as
a
going concern.
During
the fiscal years ended May 31, 2004 and May 31, 2003 and the period from March
24, 2004 (date of inception) to May 31, 2004 and through the date of our filing
the Form 8-K reporting the change of auditors, there were no disagreements
between Radin, Glass and our management on any matter
of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedure, which, if not resolved to the satisfaction of Radin, Glass,
would have caused Radin, Glass to make reference to the subject matter of the
disagreements in connection with its reports on our consolidated financial
statements for such periods, nor have there been any reportable events as listed
in Item 304 (a)(1)(iv) of Regulation S-B.
Prior
to
engaging Sherb as its independent accountant, neither we nor anyone acting
on
our behalf consulted with Sherb regarding any of the matters or events set
forth
in Item 304(a)(2)(i) and (ii) of Regulation S-B. We provided Radin, Glass with
a
copy of the foregoing disclosures, and a letter from Radin, Glass confirming
its
agreement with these disclosures was filed as Exhibit 16.1 to our Form 8-K
Report dated March 18, 2005.
.
| ITEM 8A. |
CONTROLS
AND PROCEDURES
|
In
performing its audit of our Consolidated Financial Statements for Fiscal
2006,
our independent auditors, Sherb & Co., LLP “ Sherb”, notified our Board of
Directors of a material weakness in internal controls under standards
established by the American Institute of Certified Public Accountants.
Reportable conditions and material weaknesses involve matters coming to the
attention of our auditors relating to significant deficiencies in the design
or
operation of internal controls that, in their judgment, could adversely affect
our ability to record, process, summarize, and report financial data consistent
with the assertions of management in the consolidated financial statements.
Sherb
designed its audit procedures to address the matter described below in order
to
obtain reasonable assurance that the financial statements are free of material
misstatement and to issue an unqualified audit report.
A
material weakness is a control deficiency or combination of control deficiencies
that results in more than a remote likelihood that a material misstatement
of
the annual or interim financial statements will not be prevented or detected.
As
of May 31, 2006, we did not maintain effective controls related to transactional
accounting and financial reporting. These deficiencies included a lack of
timely
and sufficient financial statement account reconciliation and analysis and
lack
of sufficient support resources within the accounting and finance department.
Management believes that such control deficiencies represents a material
weakness in internal control over financial reporting that result in a
reasonable likelihood that a material misstatement in our financial statements
will not be prevented or detected by our employees in the normal course of
performing their assigned functions.
35
We
continue our efforts to remediate these conditions and has and will continue
to
implement enhanced procedures to accelerate improvement of its internal
controls.
Our
senior management is responsible for establishing and maintaining a system
of
disclosure controls and procedures (as defined in Rule 13a-15 and 15d-15
under
the Exchange Act) designed to ensure that information required to be disclosed
by us in the reports that we file or submit under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in
the
SEC's rules and forms. Disclosure controls and procedures include, without
limitation, controls and procedures designed to ensure that information
required
to be disclosed by an issuer in the reports that it files or submits under
the
Act is accumulated and communicated to the issuer's management, including
its
principal executive officer or officers and principal financial officers,
to
allow timely decisions regarding required disclosure.
We
have
carried out an evaluation under the supervision and with the participation
of
our management, including our Chief Executive Officer and Chief Accounting
Officer, of our disclosure controls and procedures as defined in Exchange
Act
Rule 13(a)-15(e). In designing and evaluating our disclosure controls and
procedures, we recognize that any disclosure controls and procedures, no
matter
how well designed and operated, can only provide reasonable assurance of
achieving the desired control objective. Due to the material weakness in
internal control over financial reporting previously noted and insufficient
passage of time to test the enacted changes to determine if such changes
are
effective as at and prior to May 31, 2006, management concludes that our
disclosure controls and procedures are ineffective.
| ITEM 8B. |
OTHER
INFORMATION
|
None.
PART
III
| ITEM 9. |
DIRECTORS,
EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE
ACT
|
In
accordance with Instruction E.3. of Form 10-KSB, we plan to incorporate the
information required in response to this Item 9 by reference to our definitive
information statement or proxy or file an amendment to this report to provide
such information before 120 days after May 31, 2006.
Information
concerning executive officers is set forth in Item 1 above.
| ITEM 10. |
EXECUTIVE
COMPENSATION
|
In
accordance with Instruction E.3. of Form 10-KSB, we plan to incorporate the
information required in response to this Item 10 by reference to our definitive
information statement or proxy or file an amendment to this report to provide
such information before 120 days after May 31, 2006.
| ITEM 11. |
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
|
In
accordance with Instruction E.3. of Form 10-KSB, we plan to incorporate the
information required in response to this Item 10 by reference to our definitive
information statement or proxy or file an amendment to this report to provide
such information before 120 days after May 31, 2006.
| ITEM 12. |
CERTAIN
RELATIONSHIPS AND RELATED
TRANSACTIONS
|
In
accordance with Instruction E.3. of Form 10-KSB, we plan to incorporate the
information required in response to this Item 12 by reference to our definitive
information statement or proxy or file an amendment to this report to provide
such information before 120 days after May 31, 2006.
| ITEM 13. |
EXHIBITS
|
EXHIBIT
INDEX
|
Incorporated
by Reference
|
|||||||
|
Exhibit
Number
|
Exhibit
Description
|
Form
|
File
Number
|
Exhibit
|
Filing
Date
|
Filed
Herewith
|
|
|
2.1
|
Agreement
and Plan of Merger dated as of May 7, 2004 between CDKnet.com, Inc.,
CDK
Merger Corp., Miletos, Inc. and Andreas Typaldos, as Representative
of
Certain Stockholders of Miletos, Inc.
|
10-KSB
|
0-27587
|
2.1
|
9/17/04
|
||
|
2.2
|
Amendment
dated May 21, 2004 to the Agreement and Plan of Merger dated as of
May 7,
2004 between CDKnet.com, Inc., CDK merger Corp., Miletos, Inc. and
Andreas
Typaldos, as Representative of Certain Stockholders of Miletos,
Inc.
|
10-KSB
|
0-27587
|
2.2
|
9/17/04
|
||
|
2.3
|
Amendment
Number 2, dated January 19, 2005, amending the Agreement and Plan
of
Merger, dated as of May 7, 2004, by and among CDKNet.Com, Inc., CDK
Merger
Corp., and Miletos, Inc., and Andreas Typaldos, in his individual
capacity
and as representative of the following stockholders of the Company:
Renee
Typaldos, Patra Holdings LLC, Andreas Typaldos Family Limited Partnership
and Renee Typaldos Family Partnership, Ltd.
|
10-QSB
|
0-27587
|
2.1
|
1/23/06
|
||
|
3.1
|
Articles
of Incorporation of the Registrant.
|
10-SB
|
0-27587
|
3.1
|
10/7/99
|
||
|
3.2
|
Amendment
to the Articles of Incorporation.
|
10-SB
|
0-27587
|
3.2
|
10/7/99
|
||
|
3.3
|
By-Laws
of the Registrant.
|
10-SB
|
0-27587
|
3.3
|
10/7/99
|
||
|
3.4
|
Certificate
of Merger of the Registrant.
|
10-SB
|
0-27587
|
3.4
|
10/7/99
|
||
|
3.5
|
Amendment
to the Articles of Incorporation.
|
10-SB
|
0-27587
|
3.5
|
10/7/99
|
||
|
3.6
|
Amended
and Restated Series A Designation
|
10-QSB
|
0-27587
|
3.1
|
2/14/03
|
||
|
3.7
|
Amendment
to Certificate of Incorporation (Reverse Split ) filed November 31,
2003.
|
10-QSB
|
0-27587
|
3.1
|
2/17/04
|
||
|
3.8
|
Certificate
of Amendment to Certificate of Incorporation
|
10-QSB
|
0-27587
|
3.2
|
2/17/04
|
||
|
3.9
|
Certificate
of Ownership and Merger dated August 30, 2006.
|
8-K
|
0-27587
|
3.1
|
9/1/06
|
||
|
4.1
|
Specimen
of Common Stock Certificate.
|
X
|
|||||
|
4.2*
|
Form
of Stock Option Grant Agreement under the CDKnet.com, Inc. 2004 Stock
Option and Restricted Stock Plan.
|
10-KSB
|
0-27587
|
4.7
|
9/17/04
|
||
|
4.3
|
Form
of 6% Secured Convertible Debenture due December 28, 2008
|
8-K
|
0-27587
|
4.1
|
1/4/06
|
||
|
4.4
|
Form
of Common Stock Purchase Warrant (long term and short term warrants
differ
as to price and expiration date as set forth in footnotes to the
form
filed)
|
8-K
|
0-27587
|
4.2
|
1/4/06
|
||
|
4.5
|
Registration
Rights Agreement, dated as of December 28, 2005, by and among the
Registrant, Bushido Capital Master Fund, L.P., Gamma Opportunity
Capital
Partners, L.P. Class A, and Gamma Opportunity Capital Partners, L.P.
Class
C
|
8-K
|
0-27587
|
4.3
|
1/4/06
|
||
|
4.6
|
Form
of 6% Secured Convertible Debenture due December 28, 2008
|
8-K/A
|
0-27587
|
4.1
|
7/11/06
|
||
|
4.7
|
Form
of Common Stock Purchase Warrant (long term and short term warrants
differ
as to price and expiration date as set forth in footnotes to the
form
filed)
|
8-K/A
|
0-27587
|
4.2
|
7/11/06
|
||
|
4.8
|
Registration
Rights Agreement, dated as of December 28, 2005, by and among the
Registrant, Bushido Capital Master Fund, L.P., Gamma Opportunity
Capital
Partners, L.P. Class A, and Gamma Opportunity Capital Partners, L.P.
Class
C
|
8-K/A
|
0-27587
|
4.3
|
7/11/06
|
||
|
10.1*
|
Technology
Horizons Corp. 1998 Equity Incentive Plan.
|
10-SB
|
0-27587
|
10.1
|
10/7/99
|
||
|
10.2
|
Registration
Rights Agreements dated as of May 21, 2004 between CDKnet.Com, Inc.
and
several stockholders.
|
10-KSB
|
0-27587
|
10.17.1
10.17.2
|
9/17/04
|
||
|
10.3*
|
Consulting
Agreement dated as of May 21, 2004 between CDKnet.Com, Inc. and Andreas
Typaldos.
|
10-KSB
|
0-27587
|
10.18
|
9/17/04
|
||
|
10.4*
|
Employment
Agreement dated as of May 23, 2004 between CDKnet.Com, Inc. and Oleg
Logvinov.
|
10-KSB
|
0-27587
|
10.19
|
9/17/04
|
||
|
10.5
|
Silicon
Product Development Production Collaboration Agreement dated August
___,
2004 between GDA Technologies, Inc. and Arkados, Inc.
|
10-KSB
|
0-27587
|
10.23
|
9/17/04
|
||
|
10.6
|
Form
of 10% convertible extendible note due June 8, 2005 in the aggregate
authorized principal amount of $750,000
|
10-QSB
|
0-27587
|
10.1
|
4/19/05
|
||
|
10.7
|
Form
of three year warrant exercisable at $0.67
|
10-QSB
|
0-27587
|
10.2
|
4/19/05
|
||
|
10.8
|
Form
of registration rights agreement relating to the 10% convertible
extendible notes and three year warrants
|
10-QSB
|
0-27587
|
10.3
|
4/19/05
|
||
|
10.9*
|
Stock
Option Grant Agreement dated June 21, 2005
|
8-K
|
0-27587
|
10.1
|
6/24/05
|
||
|
10.10
|
Form
of Securities Purchase Agreement
|
8-K
|
0-27587
|
10.1
|
7/14/05
|
||
|
10.11
|
Form
of 6% Convertible Subordinated Note due July 7, 2007 in the aggregate
authorized principal amount of $2.4 million
|
8-K
|
0-27587
|
10.2
|
7/14/05
|
||
|
10.12
|
Form
of three year warrant exercisable at $0.35
|
8-K
|
0-27587
|
10.3
|
7/14/05
|
||
|
10.13
|
Securities
Purchase Agreement, dated as of December 28, 2005, by and among the
Registrant, Bushido Capital Master Fund, L.P., Gamma Opportunity
Capital
Partners, L.P. Class A, and Gamma Opportunity Capital Partners, L.P.
Class
C
|
8-K
|
0-27587
|
99.1
|
1/4/06
|
||
|
10.14
|
Security
Agreement, dated as of December 28, 2005, by and among the Registrant,
Gamma Opportunity Capital Partners, L.P. Class A, and Gamma Opportunity
Capital Partners, L.P. Class C
|
8-K
|
0-27587
|
99.2
|
1/4/06
|
||
|
10.15
|
Subsidiary
Guarantee dated as of December 28, 2005 executed by Arkados,
Inc.
|
8-K
|
0-27587
|
99.3
|
1/4/06
|
||
|
10.16
|
Waiver
dated as of January 17, 2006 to the Securities Purchase Agreement,
dated
as of December 28, 2005, by and among the Registrant, Bushido Capital
Master Fund, L.P., Gamma Opportunity Capital Partners, L.P. Class
A, and
Gamma Opportunity Capital Partners, L.P. Class C
|
10-QSB
|
0-27587
|
10.1
|
1/23/06
|
||
|
10.17
|
Additional
Issuance Agreement dated February 1, 2006 between the Registrant
and
Bushido Capital Master Fund, L.P.
|
8-K
|
0-27587
|
99.4
|
2/6/06
|
||
|
10.18
|
Amended
and Restated Extension Waiver and Debt Conversion Agreement dated
as of
February 1, 2006 by and among the Registrant and each of the holders
of
the Registrant’s outstanding 10% Convertible Extendable Notes originally
due June 8, 2005, 6% Convertible Notes original due October 15, 2005
and
that Grid Note dated October 15, 2004
|
8-K
|
0-27587
|
99.5
|
2/6/06
|
||
|
10.19
|
Debt
Conversion Agreement (Note) dated as of January 11, 2006 between
the
Registrant and William Carson
|
8-K
|
0-27587
|
99.6
|
2/6/06
|
||
|
10.20
|
Debt
Conversion Agreement (Advances) dated as of January 11, 2006 between
the
Registrant and William Carson
|
8-K
|
0-27587
|
99.7
|
2/6/06
|
||
|
10.21
|
Debt
Conversion Agreement (Advances) dated as of January 11, 2006 between
the
Registrant and Gennaro Vendome
|
8-K
|
0-27587
|
99.8
|
2/6/06
|
||
|
10.22
|
Second
Additional Issuance Agreement dated February 24, 2006 between the
Registrant and Bushido Capital Master Fund, L.P., Gamma Opportunity
Capital Partners, L.P. Class A, and Gamma Opportunity Capital Partners,
L.P. Class C
|
8-K
|
0-27587
|
99.5
|
3/2/06
|
||
|
10.23
|
Third
Additional Issuance Agreement dated March 31, 2006 between the Registrant
and Cargo Holdings LLC
|
8-K
|
0-27587
|
99.6
|
4/6/06
|
||
|
10.24
|
Letter
Agreement dated march 31, 2006 between the Registrant and Bushido
Capital
Master Fund, L.P., Gamma Opportunity Capital Partners, L.P. Class
A, and
Gamma Opportunity Capital Partners, L.P. Class C
|
8-K
|
0-27587
|
99.7
|
4/6/06
|
||
|
10.25
|
Warrant
agreement dated March 20, 2006 issued to Emerging Capital Markets
LLC
|
8-K
|
0-27587
|
99.8
|
4/6/06
|
||
|
10.26
|
Lease
Agreement effective May 8, 2006 between Arkados, Inc. and Bridgeview
Plaza
Associates.
|
8-K
|
0-27587
|
99.1
|
5/9/06
|
||
|
10.27
|
Securities
Purchase Agreement, dated as of December 28, 2005, by and among the
Registrant, Bushido Capital Master Fund, L.P., Gamma Opportunity
Capital
Partners, L.P. Class A, and Gamma Opportunity Capital Partners, L.P.
Class
C
|
8-K/A
|
0-27587
|
99.1
|
7/11/06
|
||
|
10.28
|
Security
Agreement, dated as of December 28, 2005, by and among the Registrant,
Gamma Opportunity Capital Partners, L.P. Class A, and Gamma Opportunity
Capital Partners, L.P. Class C
|
8-K/A
|
0-27587
|
99.2
|
7/11/06
|
||
|
10.29
|
Subsidiary
Guarantee dated as of December 28, 2005 executed by Arkados,
Inc.
|
8-K/A
|
0-27587
|
99.3
|
7/11/06
|
||
|
10.30*
|
Letter
Amendment dated June 30, 2006 to the Consulting Agreement with Andreas
Typaldos dated May 21, 2004
|
8-K/A
|
0-27587
|
99.4
|
7/11/06
|
||
|
10.31
|
Amendment
Agreement dated August 18, 2006 between CDKnet.com, Inc., Bushido
Capital
Master Fund, LP, Gamma Opportunity Capital Partners, LP (Classes
A and C),
and Cargo Holdings LLC
|
8-K
|
0-27587
|
99.1
|
8/24/06
|
||
|
10.32
|
Additional
Issuance Agreement dated September 26, 2006 between Arkados Group,
Inc.,
Bushido Capital Master Fund, LP, Pierce Diversified Strategy Master
Fund,
LLC - Series BUS, Andreas Typaldos and Andreas Typaldos Family Limited
Partnership
|
8-K
|
0-27587
|
99.5
|
10/2/06
|
||
|
10.33
|
Waiver
and Amendment Agreement dated September 26, 2006 between Arkados
Group,
Inc. and Bushido Capital Master Fund, L.P., Gamma Opportunities Capital
Partners, LP Class A, Gamma Opportunities Capital Partners, LP Class
C and
Cargo Holdings LLC
|
8-K
|
0-27587
|
99.6
|
10/2/06
|
||
| 10.34 |
Limited
waiver letter dated October 10, 2006 relating to the Employment Agreement
dated as of May 23, 2006 between Arkados Group, Inc. (formerly CDKnet.com,
Inc.) and Oleg Logvinov
|
X
|
|||||
|
14.1
|
Code
of Business Conduct and Ethics
|
10-KSB
|
0-27587
|
14.1
|
9/17/04
|
||
|
14.2
|
Code
of Ethics for Financial Executives
|
10-KSB
|
0-27587
|
14.2
|
9/17/04
|
||
|
16.1
|
Letter
dated March 24, 2005 from Radin, Glass & Co., LLP
|
8-K
|
0-27587
|
16.1
|
3/24/05
|
||
|
21
|
Subsidiaries
of the Registrant.
|
X
|
|||||
|
31.1
|
Certification
of Chief Executive Officer of Periodic Report pursuant to Rule 13a-14a
and
Rule 15d-14(a).
|
X
|
|||||
|
31.2
|
Certification
of Chief Financial Officer of Periodic Report pursuant to Rule 13a-14a
and
Rule 15d-14(a).
|
X
|
|||||
|
32.1
|
Certification
of Chief Executive Officer of pursuant to 18 U.S.C. - Section
1350.
|
X
|
|||||
|
32.2
|
Certification
of Chief Financial Officer of pursuant to 18 U.S.C. - Section
1350.
|
X
|
|||||
*Compensation
plans or arrangements in which directors or executive officers are eligible
to
participate.
| ITEM 14. |
PRINCIPAL
ACCOUNTANT FEES AND SERVICES
|
Audit
Fees
The
aggregate fees billed and unbilled for the fiscal years ended May 31, 2005
and
2006 for professional services rendered by our principal accountants for the
audits of our annual financial statements, and the review of our financial
statements included in our quarterly reports on Form 10-QSB were approximately
$35,150 and $30,500, respectively.
Audit-Related
Fees
The
aggregate fees billed for the fiscal years ended May 31, 2005 and 2006 for
assurance and related services rendered by our principal accountants related
to
the performance of the audit or review of our financial statements, specifically
accounting research, were $0 and $0, respectively.
Tax
and Other Fees
There
aggregate fees billed for the fiscal years ended May 31, 2005 and 2006 for
tax
related or other services rendered by our principal accountants in connection
with the preparation of our federal and
state
tax
returns was $0 and $0, respectively.
Approval
of Non-audit Services and Fees
We
did
not have an audit committee during fiscal 2005 or 2006 and did not have any
independent directors until fiscal 2005. We plan to form an Audit Committee
consisting solely of independent directors and, consistent with SEC policies
and
guidelines regarding audit independence, the Audit Committee will responsible
for the pre-approval of all audit and permissible non-audit services provided
by
our principal accountants on a case-by-case basis.
SIGNATURES
In
accordance with Section 13 or 15(d) of the Exchange Act, the Registrant caused
this report on to be signed on its behalf by the undersigned, thereunto duly
authorized.
| Arkados Group, Inc. (Registrant) | ||
|
|
|
|
| By: | /s/ Oleg Logvinov | |
|
President and Chief Executive Officer |
||
| By: | /s/ Kirk Warshaw | |
|
Chief
Financial Officer (Principal
Financial
and Accounting Officer)
|
||
| Date: October 10, 2006 | ||
In
accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities and on
the
dates indicated.
| Date: October 10, 2006 |
By:
/s/ Oleg Logvinov
Oleg
Logvinov, President, Chief
Executive
Officer and a Director
|
| Date: October 10, 2006 |
By:
/s/ Gennaro Vendome
Gennaro
Vendome, Director
|
| Date: October 10, 2006 |
By:
/s/
William H. Carson
William
H. Carson, Director
|
| Date: October 10, 2006 |
By:
/s/
Andreas Typaldos
Andreas
Typaldos, Chairman
|