ARKADOS GROUP, INC. (Form: 10-Q, Received: 10/11/2013 06:01:07)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

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

FOR THE QUARTERLY PERIOD ENDED: August 31, 2013

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

FOR THE TRANSITION PERIOD FROM _________ TO _________

Commission file number: 0-27587

ARKADOS GROUP, INC.

(Exact name of registrant as specified in its charter)

Delaware		22-3586087
(State or other jurisdiction of incorporation or		(I.R.S. Employer Identification No.)
organization)

211 Warren Street, Suite 320, Newark, New Jersey		07103
(Address of principal executive offices)		Zip code

Issuer's telephone number: (862) 373-1988

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer ¨

Accelerated filer ¨

Non-accelerated filer ¨

(Do not check if a smaller reporting
company)

Smaller reporting company x

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

The number of the registrant’s shares of common stock outstanding was 48,898,474 as of August 31, 2013.

ARKADOS GROUP, INC.

Quarterly Report on Form 10-Q

Quarter Ended August 31, 2013

(FY 2014)

TABLE OF CONTENTS

	Page
PART I. FINANCIAL INFORMATION	F-1

Item 1. Financial Statements	F-1

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	2

Item 3. Quantitative And Qualitative Disclosures About Market Risk.	5

Item 4. Controls and Procedures.	5

PART II - OTHER INFORMATION	6

Item 1. Legal Proceedings.	6

Item 1A. Risk Factors	6

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.	6

Item 4. Mine Safety Disclosures.	6

Item 5. Other Information.	6

Item 6. Exhibits.	7

F- i

INTRODUCTORY NOTES

This Report on Form 10-Q for Arkados Group, Inc. (“Arkados” or the “Company”) may contain forward-looking statements. You can identify these statements by forward-looking words such as “may,” “will,” “expect,” “intend,” “anticipate,” “believe,” “estimate” and “continue” or similar words. Forward-looking statements include information concerning possible or assumed future business success or financial results. You should read statements that contain these words carefully because they discuss future expectations and plans, which contain projections of future results of operations or financial condition or state other forward-looking information. We believe that it is important to communicate future expectations to investors. However, there may be events in the future that we are not able to accurately predict or control. Accordingly, we do not undertake any obligation to update any forward-looking statements for any reason, even if new information becomes available or other events occur in the future.

The forward-looking statements included herein are based on current expectations that involve a number of risks and uncertainties set forth under “Risk Factors” in our Annual Report on Form 10-K for the years ended May 31, 2013 and May 31, 2012 (part of 2011-2012 comprehensive 10-K) and other periodic reports filed with the SEC. Accordingly, to the extent that this Report contains forward-looking statements regarding the financial condition, operating results, business prospects or any other aspect of the Company, please be advised that Arkados’ actual financial condition, operating results and business performance may differ materially from that projected or estimated in such forward-looking statements.

The information contained in this report, except as specifically dated, is as of August 31, 2013.

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

ARKADOS GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(A Development Stage Enterprise)

	August 31, 2013			May 31, 2013
	(Unaudited)
ASSETS

Current assets:
Cash and cash equivalents	$	126,373		$	345,126
Accounts receivable		30,000			-
Prepaid expenses		4,583			-

Total current assets		160,956			345,126


Total assets	$	160,956		$	345,126

LIABILITIES AND STOCKHOLDERS' DEFICIENCY

Current liabilities:
Accounts payable and accrued expenses	$	1,505,379		$	1,441,163
Payroll taxes and related penalties and interest payable		936,906			936,906
Accrued income tax		100,000			100,000
Due to related party		130,000			130,000
Debt subject to equity being issued		6,204,926			6,204,926
Notes payable		678,768			678,768
Total current liabilities		9,555,979			9,491,763

Long term liabilities:
Notes payable, net of discount of $460,319 and $537,323 at August 31 and May 31, 2013, respectively		139,681			62,677

Total liabilities		9,695,660			9,554,440

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 and 48,898,474 issued and outstanding at August 31, 2013 and May 31, 2013, respectively		4,889			4,889
Additional paid-in capital		24,552,807			24,552,807
Accumulated deficit during development stage		(34,092,400	)		(33,767,010	)
Total stockholders' deficiency		(9,534,704	)		(9,209,314	)

Total liabilities and stockholders' deficiency	$	160,956		$	345,126

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

F- 1

ARKADOS GROUP, INC AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(A Development Stage Enterprise)

(Unaudited)

	For the three months ended August 31,						Cumulative during the Development Stage (March 24, 2004 through August 31,
	2012			2013			2013)

Net sales	$	-		$	-		$	3,127,478

Cost of sales		-			-			2,145,042

Gross Profit		-			-			982,436

Operating expenses:
Selling, general and administrative		39,574			222,155			23,655,407
Research and development		-			3,781			11,363,142
Total operating expenses		39,574			225,936			35,018,549

Loss from operations		(39,574	)		(225,936	)		(34,036,113	)

Other income (expenses):
Interest expense		(13,886	)		(99,454	)		(15,340,086	)
Settlement of debt		2,025			-			11,819,506
Sale of license and IP agreements		-			-			11,000,000

Net loss before provision for income taxes		(51,435	)		(325,390	)		(26,556,693	)
Provision for income taxes		-			-			(741,562	)

Net loss	$	(51,435	)	$	(325,390	)	$	(25,815,131	)

Loss per common share - basic:	$	(0.00	)	$	(0.01	)

Weighted average of common shares outstanding - basic		48,898,474			48,898,474

Loss per common share - fully diluted	$	(0.00	)	$	(0.01	)

Weighted average shares of common stock outstanding - fully diluted		48,898,474			48,898,474

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

F- 2

ARKADOS GROUP, INC. and Subsidiaries

Condensed Consolidated Statements of Stockholders’ Deficiency

(A Development Stage Enterprise)

Inception March 24, 2004 to May 31, 2004 through August 31, 2013

												Accumulated
												Deficit
										Additional		During						Total
	Preferred Stock				Common Stock					Paid in		Development			Treasury			Stockholders's
	Shares		Amount		Shares		Amount			Capital		Stage			Stock			Deficiency
Balance as of March 24, 2004 (Unaudited)
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
Amortization of stock compensation		-		-		-		-			359,537		-			-			359,537
Net loss (March 24,2004 to May 31, 2004)		-		-		-		-			-		(693,833	)		-			(693,833	)
Balance as of May 31, 2004 (Unaudited)		-		-		22,501,667		2,250			7,571,202		(8,971,100	)		(16,000	)		(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		-		-		-		-			198,169		-			-			198,169
Valuation of equity rights and beneficial conversion features of debt raise		-		-		-		-			234,353		-			-			234,353
Amortization of stock compensation		-		-		-		-			3,617,681		-			-			3,617,681
Net Loss		-		-		-		-			-		(7,001,365	)		-			(7,001,365	)
Balance as of May 31, 2005 (Unaudited)		-		-		23,201,667		2,321			12,421,641		(15,972,465	)		(16,000	)		(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 accommodations and penalties		-		-		466,600		47			267,253		-			-			267,300
Options issued for services		-		-		-		-			69,170		-			-			69,170
Valuation of equity rights and beneficial conversion features of debt raise		-		-		-		-			404,555		-			-			404,555
Amortization of stock compensation		-		-		-		-			497,347		-			-			497,347
Net Loss		-		-		-		-			-		(4,025,016	)		-			(4,025,016	)
Balance as of May 31, 2006 (Unaudited)		-		-		24,353,053		2,437			14,088,141		(19,997,481	)		(16,000	)		(5,922,903	)
Shares issued for services		-		-		475,000		47			341,953		-			-			342,000
Options issued for services		-		-		-		-			197,923		-			-			197,923
Valuation of equity rights		-		-		-		-			424,247		-			-			424,247
Amortization of stock compensation		-		-		-		-			418,997		-			-			418,997
Exercise of options		-		-		175,604		17			1,739		-			-			1,756
Issuance of common stock for Aster Acquisition		-		-		1,078,564		107			461,712		-			-			461,819
Net loss		-		-		-		-			-		(6,033,075	)		-			(6,033,075	)
Balance as of May 31, 2007 (Unaudited)		-		-		26,082,221		2,608			15,934,712		(26,030,556	)		(16,000	)		(10,109,236	)
Shares issued for services		-		-		196,667		20			63,480		-			-			63,500
Options issued for services		-		-		-		-			105,448		-			-			105,448
Valuation of equity rights		-		-		-		-			1,064,495		-			-			1,064,495
Amortization of stock compensation		-		-		-		-			697,687		-			-			697,687
Net Loss		-		-		-		-			-		(6,478,999	)		-			(6,478,999	)
Balance as of May 31, 2008 (Unaudited)		-	$	-		26,278,888	$	2,628		$	17,865,822	$	(32,509,555	)	$	(16,000	)	$	(14,657,104	)

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

F- 3

ARKADOS GROUP, INC. and Subsidiaries

Condensed Consolidated Statements of Stockholders’ Deficiency

(A Development Stage Enterprise)

Inception March 24, 2004 to May 31, 2004 through August 31, 2013

												Accumulated
												Deficit
									Additional			During						Total
	Preferred Stock				Common Stock				Paid in			Development			Treasury			Stockholders's
	Shares		Amount		Shares		Amount		Capital			Stage			Stock			Deficiency
Balance as of May 31, 2008 (Unaudited)		-	$	-		26,278,888	$	2,628	$	17,865,822		$	(32,509,556	)	$	(16,000	)	$	(14,657,104	)
Shares issued for services		-		-		2,134,469		213		422,542			-			-			422,755
Private Placement		-		-		3,380,159		338		809,700			-			-			810,038
Conversion of Debt		-		-		944,881		95		409,018			-			-			409,113
Options issued for services		-		-		-		-		90,246			-			-			90,246
Valuation of equity rights		-		-		-		-		264,111			-			-			264,111
Amortization of stock compensation		-		-		-		-		1,776,683			-			-			1,776,683
Net Loss		-		-		-		-		-			(6,762,218	)		-			(6,762,218	)
Balance as of May 31, 2009 (Unaudited)		-		-		32,738,397		3,274		21,638,124			(39,271,774	)		(16,000	)		(17,646,375	)
Valuation of equity rights		-		-		-		-		54,000			-			-			54,000
Amortization of stock compensation		-		-		-		-		1,176,762			-			-			1,176,762
Exercise of options		-		-		2,187,864		219		21,660			-			-			21,879
Net Loss		-		-		-		-		-			(11,478,230	)		-			(11,478,230	)
Balance as of May 31, 2010 (Unaudited)		-		-		34,926,261		3,493		22,890,547			(50,750,004	)		(16,000	)		(27,871,964	)
Amortization of stock compensation		-		-		-		-		603,974			-			-			603,974
Conversion of Debt		-		-		10,025,000		1,002		399,998			-			-			401,000
Retire treasury stock		-		-		-		-		(16,000	)		-			16,000			-
Net Income		-		-		-		-		-			13,364,862			-			13,365,862
Balance as of May 31, 2011		-		-		44,951,261		4,495		23,878,519			(37,385,142	)		-			(13,502,128	)
Conversion of Debt		-		-		3,947,213		394		51,188			-			-			51,582
Warrants issued to Trident		-		-		-		-		23,100			-			-			23,100
Net Income		-		-		-		-		-			4,135,062			-			4,135,062
Balance as of May 31, 2012		-		-		48,898,474		4,889		23,952,807			(33,250,080	)		-			(9,292,384	)
Valuation of equity rights and beneficial conversion features of debt raise		-		-		-		-		600,000			-			-			600,000
Net Loss		-		-		-		-		-			(516,930	)		-			(516,930	)
Balance as of May 31, 2013		-		-		48,898,474		4,889		24,552,807			(33,767,010	)		-			(9,209,314	)
Net Loss		-		-		-		-		-			(325,390	)		-			(325,390	)
Balance as of August 31, 2013 (Unaudited)		-	$	-		48,898,474	$	4,889	$	24,552,807		$	(34,092,400	)	$	-		$	(9,534,704	)

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

F- 4

ARKADOS GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(A Development Stage Enterprise)

(Unaudited)

	For the three months ended August 31, 2012			For the three months ended August 31, 2013			Cumulative During the Development Stage (March 24, 2004 to August 31, 2013)
Cash flows from operating activities:
Net loss	$	(51,435	)	$	(325,390	)	$	(25,815,131	)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
Depreciation and amortization		-			-			1,621,848
Amortization of debt discount		-			77,004			139,681
Stock based compensation		-			-			11,706,492
Warrants and beneficial conversion rights with debt		-			-			650,816
Debt and interest penalty		-			-			4,683,122
Amortization of deferred expenses		-			-			130,625
Gain on settlement of debt		(2,025	)		-			(11,819,506	)
Changes in operating assets and liabilities:
Accounts receiveable		-			(30,000	)		(30,000	)
Inventory		-			-			630
Deferred expenses		-			-			674,246
Prepaid expenses		-			(4,583	)		(51,796	)
Payroll taxes and related penalties and interest payable		-			-			(22,916	)
Accounts payable and accrued expenses		59,158			64,216			12,069,696
Net cash (used in) provided by operating activities		5,698			(218,753	)		(6,062,193	)

Cash flows from investing activities:
Purchase of fixed assets		-			-			(140,671	)
Sale of assets		-			-			124,066
Net cash used in investing activities		-			-			(16,605	)

Cash flows from financing activities:
Related party payables		-			-			1,716,726
Proceeds from debt		-			-			1,746,745
Contribution of capital		-			-			1,232,646
Exercise of stock options		-			-			23,635
Repayment of debt		(10,000	)		-			(6,155,670	)
Private placement		-			-			810,038
Proceeds from convertible debt		-			-			1,666,500
Issuance of debentures		-			-			9,533,461
Repayment of related party payables		-			-			(4,369,195	)
Net cash (used in) provided by financing activities		(10,000	)		-			6,204,886

Net increase (decrease) in cash		(4,302	)		(218,753	)		126,088

Cash and cash equivalents beginning of period		4,913			345,126			285

Cash and cash equivalents at end of period	$	611		$	126,373		$	126,373

Supplemental disclosure of cash flow information:
Interest paid	$	-		$	-
Income taxes paid	$	-		$	-

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

F- 5

Arkados Group, Inc. & Subsidiaries (A Development Stage Enterprise)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE MONTHS ENDED AUGUST 31, 2013 and AUGUST 31, 2012

( UNAUDITED )

1.	DESCRIPTION OF BUSINESS

Arkados Group, Inc. (the “Company”) conducts business activities principally through Arkados, Inc., which is a wholly owned subsidiary.

P ursuant 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 CDKNET.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.

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 Company underwent a significant restructuring between December 23, 2010 and continuing beyond May 31, 2013 (the period ending for this report) during which substantially all of its assets were acquired by STMicroelectronics (sometimes referred to hereinafter as the “Asset Sale”), as disclosed in the 8-K filed December 29, 2010 and further described (as to the closing) in the 8-K filed July 12, 2011.

Following the sale of its assets associated with the manufacture of microchips, the Company, still a development stage company, shifted its focus towards software and hardware design and developing solutions that enable machine to machine communications for the Internet of Things (IoT). The Company’s solutions support smart grid and smart home applications primarily in the areas of home and building automation and energy management and are uniquely designed to drive a wide variety of wireless and powerline communication (PLC)-based products, such as sensors, gateways, video cameras, appliances and other devices.

The accompanying financials have been presented on a development stage basis using March 24, 2004 as the date of inception.

The accompanying condensed consolidated financial statements as of August 31, 2013 (unaudited) and May 31, 2013 and for the three month periods ended August 31, 2013 and 2012 (unaudited) have been prepared by Arkados Group, Inc. pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) including Form 10-Q and Regulation S-X. The information furnished herein reflects all adjustments (consisting of normal recurring accruals and adjustments) which are, in the opinion of management, necessary to fairly present the operating results for the respective periods. Certain information and footnote disclosures normally present in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted pursuant to such rules and regulations. These financial statements and the information included under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations" should be read in conjunction with the audited financial statements and explanatory notes for the year ended May 31, 2013 as disclosed in our annual report on Form 10-K for that year. The results of the three months ended August 31, 2013 (unaudited) are not necessarily indicative of the results to be expected for the pending full year ending May 31, 2014.

2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation - The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. The Company has incurred net losses of approximately $26 million since inception, including a net loss of $325,390 for the three months ended August 31, 2013. Additionally, though the Company had a net working capital increase recently, the Company still had both working capital and shareholders’ deficiencies at August 31, 2013 and May 31, 2013 and negative cash flow from operations since inception. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. Management expects to incur additional losses in the foreseeable future and recognizes the need to raise capital to remain viable. The accompanying consolidated financial statements do not include any adjustments that might be necessary should the Company be unable to continue as a going concern.

F- 6

Principles of consolidation - The consolidated financial statements include the accounts of Arkados Group, Inc. (the “Parent”), and its wholly owned subsidiaries, which include: CDKnet, LLC, Creative Technology, LLC, CDK Financial Corp. Diversified Capital Holdings, LLC, Arkados, Inc. and Arkados Wireless Technologies, Inc. Currently, Arkados, Inc., however, is the only active entity with operations. Intercompany accounts and transactions have been eliminated in consolidation.

Cash and cash equivalents - The Company considers investments in highly liquid instruments with a maturity of three months or less to be cash equivalents.

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 cannot estimate the fair value of the remaining outstanding payroll tax penalties and interest recorded in connection with the 2004 merger and legacy payables. As defined in Accounting Standards Codification (“ASC”) Topic No. 820, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). The Company utilizes market data or assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated, or generally unobservable. ASC 820 establishes a fair value hierarchy that prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurement) and the lowest priority to unobservable inputs (level 3 measurement). This fair value measurement framework applies at both initial and subsequent measurement.

The three levels of the fair value hierarchy defined by ASC Topic No. 820 are as follows:

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

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

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

	e.	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 three months ended August 31, 2013 and 2012, there was a net loss, as a result, there are no dilutive securities presented since it would have an anti-dilutive effect. Potentially dilutive securities as of August 31, 2013 were comprised of 660,000 of warrants, 2,960,000 of options, and 40,000,000 shares of common stock issuable as a result of convertible debt instruments. As of August 31, 2012 potentially dilutive securities were comprised of 5,895,545 warrants and 3,610,000 options issuable as a result of debt instruments.

	f.	Equity Based Compensation - In computing the impact, the fair value of each option is estimated on the date of grant based on the Black-Scholes options-pricing model utilizing certain assumptions for a risk free interest rate; volatility; and expected remaining lives of the awards. The assumptions used in calculating the fair value of share-based payment awards represent management’s best estimates, but these estimates involve inherent uncertainties and the application of management judgment. As a result, if factors change and the Company uses different assumptions, the Company’s stock-based compensation expense could be materially different in the future. In addition, the Company is required to estimate the expected forfeiture rate and only recognize expense for those shares expected to vest. In estimating the Company’s forfeiture rate, the Company analyzed its historical forfeiture rate, the remaining lives of unvested options, and the amount of vested options as a percentage of total options outstanding. If the Company’s actual forfeiture rate is materially different from its estimate, or if the Company reevaluates the forfeiture rate in the future, the stock-based compensation expense could be significantly different from what we have recorded in the current period.

The Company has recorded compensation expense for the periods ending August 31, 2013 and 2012, in the amounts of $95,118 and $-0-, respectively.

F- 7

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

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

	i.	New Accounting Pronouncements –

In July 2013, the FASB issued Accounting Standards Update “ASU” 2013-11 on “Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carry-forward, a Similar Tax Loss, or a Tax Credit Carry-forward Exists”. The amendments in this ASU are to improve the current U.S. GAAP because they are expected to reduce diversity in practice by providing guidance on the presentation of unrecognized tax benefits and will better reflect the manner in which an entity would settle at the reporting date any additional income taxes that would result from the disallowance of a tax position when net operating loss carry-forwards, similar tax losses, or tax credit carry-forwards exist. Current U.S. GAAP does not include explicit guidance on the financial statement presentation of an unrecognized tax benefit when a net operating loss carry-forward, a similar tax loss, or a tax credit carry-forward exists. This Update applies to all entities that have unrecognized tax benefits when a net operating loss carry-forward, a similar tax loss, or a tax credit carry-forward exists at the reporting date. The amendments in this Update are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. Early adoption is permitted. The amendments should be applied prospectively to all unrecognized tax benefits that exist at the effective date. Retrospective application is permitted.

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

3.	SALE OF LICENSE AND IP AGREEMENTS

In December 2010, the Company entered into an agreement to sell substantially all of the assets used in the Company’s business of designing, developing and selling semiconductor products that incorporate power line communications and networking services and offering services related thereto (the “Asset Sale”) to STMicroelectronics, Inc. (“ST US”), a subsidiary of STMicroelectronics N.V. (“ST”), pursuant to an Asset Purchase Agreement, by and among the Company, the Companies Arkados, Inc., and Arkados Wireless Technologies, Inc. subsidiaries (collectively, “Arkados”) and ST US, dated as of December 23, 2010 (the “Purchase Agreement”). At the same time, the Company granted a license (the “License”) to ST US to use the Company’s intellectual property assets included in the Asset Sale pending the closing of such sale. In exchange for granting the License, the Company received gross proceeds of $7 million. The Asset Sale was predicated on the Company settling its secured debt and a significant part of its unsecured debt and closed in June, 2011, whereupon the Company received $4 million. At the time the Asset Sale was completed, ST US agreed to license back certain intellectual property on a non-exclusive basis to Arkados to facilitate the continuation and expansion of the Company’s home automation business, support the Company’s customers and, with adequate financing (of which there is no assurance), permit the Company to continue the development and marketing of smart grid products. ST US hired substantially all of the Company’s engineering and semiconductor employees (including Oleg Logvinov, the Company’s former CEO and director, who was engaged in and directed the semiconductor business).

Substantially all of the proceeds received pursuant to the License and the Asset Sale, after payment of expenses related to the transactions, were used to settle approximately $20 million of the Company’s outstanding secured debt issued during the period from December 2004 to August 31, 2008 (which was in default) and pay employees $1.4 million of $5.2 million due them. The remainder of the proceeds received by the Company was used to pay other creditors and expenses incurred in connection with the Asset Sale to the extent funds were available to do so.

As a condition to entering into the Purchase Agreement and the License, ST US required that the Company have written settlement agreements and releases with all of our secured creditors as well as all of our employees. Under the settlement agreements with creditors, the creditors agreed to settle the amounts owed (approximately $30,000,000), for an aggregate amount of $10,862,241 in cash, notes payable of $818,768 and another $5,259,926 in common stock of the Company which has yet to be issued. Of the cash settlements, $7,000,000 was paid in December 2010 out of proceeds from the $7,000,000 license fee received pursuant to the License (received in December, 2010), and $3,862,241 was paid at the closing out of proceeds from the Asset Sale (received in June, 2011). In exchange for the settlement amount, the secured creditors agreed to release their security interest in Arkados’ assets and most secured creditors released Arkados from any and all additional claims, if any, that the secured creditors may have had against Arkados. The secured creditors also agreed that ST and its affiliates were third party beneficiaries to the settlement agreements. Under the settlement agreements with the Company’s employees, the employees agreed to accept an aggregate of $1,429,949 and an amount of the Company’s equity rights to be negotiated after the closing as payment for back wages and unreimbursed expenses. The cash payment was paid to employees in December 2010 out of the license fee paid to the Company by ST US. Also, as a condition to entering into the Purchase Agreement and the License, the Company entered into standstill agreements with holders of approximately $2,100,000 of unsecured debt pursuant to which those unsecured creditors agreed, among other things, not to exercise remedies that they may have as creditors of Arkados, not to sell or transfer their debt, to release ST and its affiliates from any and all claims that they may have against ST, if any, and not to sue ST for any dealings that the creditors had with Arkados.

F- 8

The Company is negotiating with its outstanding unsecured debt holders to compromise, extend the due date or convert outstanding debt into equity and thereby facilitate raising additional investor capital for the portion of the Company’s business that may continue. The amounts that the debt holders have agreed to settle through the receipt of the Company’s equity are labeled as “Debt Subject to Equity Being Issued” on the balance sheet. Except as set forth above, there is no binding commitment on anyone’s part to complete the transactions.

4.	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 Company 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. During the year ended May 31, 2008, an additional $64,106 payment was made to the State of NJ for payment of payroll taxes. Currently, there is $936,906 still recorded on the Company’s books as reserved against amounts possibly due and outstanding to both the federal and state tax authorities for penalties and interest incurred by Enikia related to its payroll liabilities. 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.

5.	ACCRUED EXPENSES AND OTHER LIABILITIES

As of August 31, 2013 and May 31, 2013, accrued expenses and other liabilities consist of the following approximate amounts:

	August 31, 2013		May 31, 2013
Accounts payable	$	618,865	$	642,612
Accrued interest and penalties payable		204,160		181,710
Accrued income taxes		100,000		100,000
Accrued other		682,354		616,841
	$	1,605,379	$	1,541,163

6.	NOTES PAYABLE, RELATED PARTY PAYABLES, DEBT SUBJECT TO EQUITY BEING ISSUED AND SETTLEMENT OF DEBT

As a result of the sale of the Company’s Asset Sale to STUS the notes payable and convertible debentures of $17,269,689 and the related accrued interest of $3,671,137 as of May 31, 2010, have been settled in part with the December 2010 closing in the amount of $5,570,059 and the balance in June 2011 closing with cash of $3,526,523, an undetermined amount of equity yet to be issued and $688,768 of remaining notes payable as of May 31, 2012. As of May 31, 2013 there was $741,455 of notes payable, net of debt discount of $537,323, largely the result of additional debt investments during this year. As of August 31, 2013 there was $818,449 of notes payable, net of debt discount of $460,319.

In November 2012, the Company received a loan in the form of a Convertible Note in the principal amount of $180,000. The note bears interest at 6% per year and matures on November 15, 2014. At any time during the length of the loan, the holder of the note has the right to convert any unpaid portion of the note into shares of common stock. The conversion price shall equal $0.01 per share. The beneficial conversion feature has been fair valued at $180,000 and will be amortized over the life the debt instrument.

In December 2012, the Company received a loan in the form of a Convertible Note in the principal amount of $20,000. The note bears interest at 6% per year and matures on November 15, 2014. If not paid upon maturity, the interest rate will increase to 12% per year. At any time during the length of the loan, the holder of the note has the right to convert any unpaid portion of the note into shares of common stock. The conversion price shall equal $0.01 per share. The beneficial conversion feature has been fair valued at $20,000 and will be amortized over the life the debt instrument.

On January 6, 2013, the Company and Andreas Typaldos, former officer and director, entered into a Separation and Release Agreement. Under the Separation Agreement all prior Typaldos Agreements will be terminated and certain debts and obligations to Typaldos will be released in exchange for (1) $15,920 and (2) 14,073,966 shares of common stock. In addition, $19,000 will be paid to Typaldos’ son for an existing loan with the Company. The Company has yet to issue such shares under this Separation Agreement. As of August 31, 2013 and May 31, 2013, there was $945,000 of payables due to Andreas Typaldos, included in the balance sheet category “Debt subject to equity being issued.”

F- 9

On April 22, 2013, the Company executed two Convertible Notes for loans in principal amount of $40,000 each. Each note bears interest at 6% per year and matures on April 30, 2015. At any time during the length of the loan, the holder of the note has the right to convert any unpaid portion of the note into shares of common stock. The conversion price shall equal $.02 per share for both notes. The beneficial conversion feature has been fair valued at $40,000 each and will be amortized over the life the debt instrument.

On April 22, 2013, the Company executed a Convertible Note for a loan in the principal amount of $120,000. The note bears interest at 6% per year and matures on April 30, 2015. At any time during the length of the loan, the holder of the note has the right to convert any unpaid portion of the note into shares of common stock. The conversion price shall equal $0.02 per share. The beneficial conversion feature has been fair valued at $120.000 and will be amortized over the life the debt instrument.

On May 2, 2013, the Company executed a Convertible Note for a loan in the principal amount of $200,000. The note bears interest at 6% per year and matures on April 30, 2015. At any time during the length of the loan, the holder of the note has the right to convert any unpaid portion of the note into shares of common stock. The conversion price shall equal $0.02 per share. The beneficial conversion feature has been fair valued at $200,000 and will be amortized over the life the debt instrument.

Related Party Activities – The Company received an aggregate of $130,000 from several of its then directors during the 1 ^st quarter of 2012. This obligation remains outstanding therefore the Company has reported a related party payable in the amount of $130,000 as of each of August 31, 2013 and May 31, 2013, respectively.

Effective June 1, 2009, the Company adopted the provisions of EITF 07-05 “Determining Whether an Instrument (or Embedded Feature) is Indexed to a Company's Own Stock,” which was codified into ASC Topic 815 – Derivatives and Hedging. ASC 815 applies to any freestanding financial instruments or embedded features that have characteristics of a derivative and to any freestanding financial instruments that are potentially settled in an entity’s own common stock. The Company has 11,735,004 of warrants with exercise reset provisions, with its debt issuances over the years, which are considered freestanding derivative instruments. ASC 815 requires these warrants to be recorded as liabilities as they are no longer afforded equity treatment assumptions: risk free rates from 1.32% to 1.39%, expected life terms ranging from 0.5 years to 2.0 years, an expected volatility range of 206% to 251% depending on the term of such equity contracts and a dividend rate of 0.0%. The fair value of the warrants issued and outstanding at May 31, 2010, attributed to this derivative liability has been determined to be immaterial due to the low stock price in comparison to the exercise price, hence there was no adjustment to make upon adoption of this accounting standard. As of August 31, 2013, 11,075,004 of these warrants expired. The stock price remains low and the fair value of the derivative liability remains immaterial.

SETTLEMENT OF DEBT

As a direct result of the Sale of the License and IP Agreements to STUS and the mandate to obtain debt releases, the Company has been able to reach settlements with its secured creditors and employees, with cash payments to the secured creditors made as of the December 2010 and June 2011 closings. Nothing further is owed the Company’s secured creditors. There remains, however, approximately $3.7 million of payments due the former employees.

The continuing settlements with unsecured and related parties have resulted in gain being recorded in the amount of $482,784 in fiscal 2012. As of May 31, 2012, there remained $5,259,926 of debts to be settled via the issuance of equity on as yet to be determined or negotiated terms. The majority of debt holders who have settled have agreed to accept equity for their remaining debt. As of August 31, 2013 and May 31, 2013, and as a result of additional financing of operations throughout the fiscal year, the balance is $6,204,926.

During the quarter ended August 31, 2012 the Company negotiated the settlement of additional debts resulting in $10,000 being paid for the settlement of $12,025 of recorded liabilities, resulting in a gain on the settlement of such debts being recorded in the amount of $2,025.

7.	STOCKHOLDERS’ DEFICIENCY

2004 transactions-(Unaudited)

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.

F- 10

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 interest of $51,539 for 549,866 shares of common stock.

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.

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.

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.

2005 transactions- (Unaudited)

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.

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.

The Company recorded $234,353 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.

In August 2004, a vendor converted $75,496 of payables for 125,000 shares of common stock.

2006 transactions – (Unaudited)

During the year ended May 31, 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 125,000 fully vested stock options with an exercise price of $.45 were issued to consultants, an expense of $69,170 was recorded for these stock options.

On March 20, 2006, 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. These 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.

F- 11

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 609,786 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.

During the year May 31, 2006, the Company issued 75,000 shares for services valued at $22,500.

There was $404,555 recorded during the year for the valuation of equity rights and beneficial conversion features attributed to debt issuances during the year.

During the year May 31, 2006, the Company issued 466,600 shares of stock for debt penalties and extensions for consideration valued at $267,300.

2007 transactions – (Unaudited)

In June 2006, the Company approved the issuance of 475,000 shares of Arkados stock, or $342,000, to Mr. Andreas Typaldos in recognition of his efforts to obtain financing for Arkados.

During the first quarter of 2007, the Company issued to management and its employees: 1,785,000 stock options with exercise prices ranging from $.43 to $.85; all of which vest over four years.

During the third quarter of 2007, the Company issued 100,000 shares with an exercise price of $.40 per share to the incoming CFO as a component of her employment contract. Another 240,000 stock options with an exercise price of $.50, vesting over 6 months, were issued to a consultant; an expense of $80,919 was recorded for these stock options.

On March 3, 2007, Arkados Wireless Technologies, Inc., our wholly owned subsidiary, filed a merger certificate completing the acquisition of Aster Wireless, Inc., a previously unaffiliated Delaware corporation. The consideration for the Merger was 1,000,000 restricted shares of our common stock. In addition, the Company issued an aggregate of 259,000 seven-year options to four employees through the acquisition exercisable at $0.405 per share which vest over 4 years aggregate of 78,564 shares of restricted stock to such employees. We also issued 300,000 seven-year options to a consultant, which options vested on March 1, 2008 and are exercisable at $0.405 per share; an expense of $100,146 was recognized.

During the fourth quarter of 2007, the Company issued 3,010,000 stock options with exercise prices ranging from $.33 to $.40 per share to management and its employees, which vest over four years. Another 50,000 fully vested stock options with an exercise price of $.50 were issued to a consultant; an expense of $16,858 was recorded for these stock options.

The Company issued 175,604 shares of its common stock with gross proceeds of $1,756 from the exercise of options by employees.

There was $424,247 recorded during the year for the valuation of equity rights and beneficial conversion features attributed to debt issuances during the year.

For the year ended May 31, 2007, the Company incurred a non-cash charge of $418,997 for the amortization of stock options.

2008 transactions – (Unaudited )

During the first quarter of 2008, the Company issued 30,000 shares to a vendor at a cost of $13,500 for the settlement of an outstanding balance. During the fourth quarter of 2008, the Company issued 166,667 shares to a consultant at a cost of $50,000.

During the first quarter of 2008, the Company issued 190,000 options to three service providers; an expense in the amount of $50,274 was recognized for these options. During the fourth quarter, the Company extended the expiration period of 263,333 options for an employee whose contract was not renewed; an expense in the amount of $30,244 was recognized for this extension. In addition, in the same period, the Company issued 150,000 fully vested options with an exercise price of $.32 to a consultant; an expense in the amount of $24,930 was recognized for these options.

During the third quarter of 2008, the Company issued 2,494,000 stock options with exercise prices of $.30 per share to management and its employees, which vest over four years.

aa.

During the fourth quarter of 2008, the Company extended the expiration for two years of 2,227,864 $.01 options due to expire on May 24, 2008 issued to employees at the time of the reorganization. The value determined by Black Scholes of $714,076 will be amortized over the next two years for this extension.

F- 12

bb.

The Company issued 402,353 short-term and 402,353 long-term warrants to the purchasers of the 6% Secured Debentures. Based on the issuance date of the debentures, debt discounts were recorded in the third quarter of 2008 in the amount of $118,723.

cc.

The Company as part of a debt restructuring, agreed to amend the 10,065,210 warrants outstanding and issued with the then outstanding 6% Secured Debentures to be consistent with the 804,706 new warrants issued December 15, 2007 by extending the expiration date from an outside date of December 28, 2010 to December 28, 2012 and removing any restriction on exercising the warrants on a cashless basis or any provision which accelerates the expiration date if the shares issuable on exercise of the warrants are registered for resale under the Securities Act. The change in the terms of these warrants required a charge of $945,772 to be recorded.

dd.

For the year ended May 31, 2008, the Company incurred a non-cash charge of $697,687 for the amortization of stock options.

2009 transactions – (Unaudited)

ee.

500,000 options were awarded to two service providers; an expense in the amount of $90,246 was recognized in the year ended May 31, 2009 for these options. These stock options and warrants are exercisable for three to ten years from the grant date.

ff.

2,134,469 shares of stock were granted to service providers and a former employee during the year ended May 31, 2009; $422,755 of consulting, compensation expense or reduction of accrued compensation.

gg.

A refinancing and the closing on new monies received occurred in July 2008, whereby certain debts were extended in conjunction with conversion of some indebtedness in the amount of $409,113 for 944,881 shares of common stock, 2,332,131 warrants were issued to certain debt holders exercisable at $.25 per share expiring on December 1, 2008 were valued at $264,111 and expensed, accordingly, and $810,038 of monies received net of $35,000 in legal fees from May 2008 to July 2008 resulting in 3,380,159 shares of common stock being issued.

hh.

In February 2009 the Company’s Compensation Committee and Board of Director’s elected to cancel certain underwater options that had been granted to employees. A total of 8,438,184 options with exercise prices ranging from $0.25 to $1.20 were cancelled and new options totaling 75% of the total of the cancelled options (6,328,638 options) were issued to employees with an exercise price of $0.15 , the closing price on February 6, 2009, the date of grant. As a result of this measurement, no additional stock compensation expense was required to be recorded on the new options. The unamortized value of the cancelled options, $888,384, will be amortized over the two year vesting period of the newly issued options. As 50 % of the options were vested on the date of grant, a compensation expense was recorded in the amount of $444,192 on the grant date.

ii.

As a result of the past option awards and the awards made in fiscal 2009, the Company has recorded equity based amortization expense in the amount of $1,776,683.

2010 transactions – (Unaudited )

jj.

There was $54,000 recorded during the year for the valuation of equity rights and beneficial conversion features attributed to debt issuances during the year.

kk.

2,187,864 shares of stock were issued for the exercise of stock options resulting in $21,879 of gross proceeds to the Company.

ll.

As a result of the past option awards and the awards made in the prior years, the Company has recorded equity based amortization expense in the amount of $1,176,762.

2011 transactions

mm.

As a result of the past option awards and the awards made in the prior years, the Company has recorded equity based amortization expense in the amount of $603,974.

nn.

In December 2010, certain creditors converted $401,000 of their indebtedness for the issuance of 10,025,000 shares of common stock.

F- 13

2012 transactions

oo.

Certain creditors received 660,000 warrants as a condition of their debt settlement with the Company. The warrants expire in May 2014 and have an exercise price of $.035 a share. There was a debt inducement settlement expense recorded for these warrants in the amount of $23,100.

pp.

In September 2011, certain creditors converted $51,582 of their indebtedness for the issuance of 3,947,213 shares of common stock, inclusive of past outstanding matters.

2013 transactions

qq.

The Company raised $600,000 of debt with conversion features, converting such debt into equity at the option of the holders at exercise prices ranging from $.01 to $.02 a share. The beneficial conversion rights have been valued at $600,000 and will be amortized over the life of the related debt.

STOCK-BASED COMPENSATION

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

A. Options

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

				Weighted
				Average
	Shares			Exercise Price
Outstanding at May 31, 2006		6,886,652		$	0.64
Granted		5,824,000			0.49
Exercised		(175,604	)		0.01
Expired or cancelled		—			—
Outstanding at May 31, 2007		12,535,048			0.58
Granted		5,365,197			0.21
Exercised		—
Expired or cancelled		(2,927,864	)		0.22
Outstanding at May 31, 2008		14,972,381			0.51
Granted		14,427,600			0.15 - 0.25
Exercised		—
Expired or cancelled		(9,438,184	)		0.25 -1.20
Outstanding at May 31, 2009		19,961,797			0.27
Granted		—
Exercised		(2,228,364	)		0.01
Expired or cancelled		(583,197	)		0.25
Outstanding at May 31, 2010		17,150,236			0.3
Granted		—
Exercised		(2,227,864	)		0.01
Expired or cancelled		(11,072,372	)		0.30
Outstanding at May 31, 2011		3,850,000			0.65
Granted		—
Exercised		—
Expired or cancelled		(240,000	)		0.83
Outstanding at May 31, 2012		3,610,000			0.55
Granted		—
Exercised		—
Expired or cancelled		(650,000	)		0.75
Outstanding at May 31, 2013		2,960,000		$	0.29
Granted		—
Exercised		—
Expired or cancelled		—
Outstanding at August 31, 2013		2,960,000		$	0.29

F- 14

The following table summarizes information about options outstanding and exercisable at August 31, 2013:

	Options Outstanding and exercisable
	Number Outstanding		Weighted- Average Remaining Life In Years		Weighted- Average Exercise Price		Number Exercisable
Range of exercise prices:
$0.00 - $0.25		1,800,000		2.09		0.24		1,800,000
$0.26 - $1.00		1,160,000		1.07	$	0.36		1,160,000
		2,960,000		1.69	$	0.29		2,960,000

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.

B. Warrants

The issuance of warrants attributed to debt issuances are summarized as follows:

			Weighted
			Average
	Shares		Exercise Price
Outstanding at May 31, 2006		4,392,874	$	0.84
Granted		4,655,366		0.93
Exercised		0		—
Expired or cancelled		0		—
Outstanding at May 31, 2007		9,048,240		0.88
Granted		1,821,676		0.85
Exercised		0		—
Expired or cancelled		-825,000		0.67
Outstanding at May 31, 2008		10,044,916		0.84
Granted		4,022,225		0.25
Exercised		0		—
Expired or cancelled		-2,332,137		0.85
Outstanding at May 31, 2009		11,735,004		0.63
Granted		0		—
Exercised		0		—
Expired or cancelled		0		—
Outstanding at May 31, 2010		11,735,004		0.63
Granted		0		—
Exercised		0		—
Expired or cancelled		-6,499,057		0.70
Outstanding at May 31, 2011		5,235,945		0.50
Granted		660,000		0.035
Exercised		0		—
Expired or cancelled		0		—
Outstanding at May 31, 2012		5,895,945		0.50
Granted		0		—
Exercised		0		—
Expired or cancelled		-3,545,865		0.70
Outstanding at May 31, 2013		2,350,080	$	0.19
Granted		0		—
Exercised		0		—
Expired or cancelled		-1,690,080		0.25
Outstanding at August 31, 2013		660,000	$	0.035

F- 15

The following table summarizes information about warrants outstanding and exercisable at August 31, 2013:

	Outstanding and exercisable
	Number Outstanding		Weighted- average remaining life in years		Weighted- Average Exercise Price		Number Exercisable
Range of exercise prices:
$.01 to $.25		660,000		0.75	$	0.035		660,000

9.	COMMITMENTS AND CONTINGENCIES

The Company utilized premises on a month to month basis of one its shareholders during fiscal 2012 and from June, 2012 through December, 2012. Beginning January 1, 2013 through the current date, the Company has been subletting office space on a month-to-month basis from a company owned by its chief executive officer at the rate of $1,668 per month.

Rent expense for the three months ended August 31, 2013 and 2012 was $5,004 and $0, respectively.

On July 1, 2013, the Company entered into a consulting agreement whereby the consultant would be paid in shares of the Company’s common stock in lieu of cash after achieving certain milestones with respect to revenue generation for the Company. Upon consummation of an agreement with a customer that produces non-contingent material revenue for the Company, the Consultant is to receive 20 million shares of common stock (restricted) and another 30 million shares of common stock each time the Company achieves gross revenue receipts thresholds of $500,000, $2,000,000 and $4,000,000 respectively.

10.	SUBSEQUENT EVENTS

On September 6, 2013, the Company entered into a Settlement Agreement and Release with a prior director who was also an unsecured creditor, whereby he released all existing debt, including interest, in exchange for the issuance of 1,204,630 shares of stock within 90 days of the signing of the Agreement, which issuance would be exempt from registration.

On September 9, 2013, the Company entered into a Settlement Agreement and Release with an unsecured creditor whereby the Company was released from all existing debt, including interest, in exchange for the issuance of 2,478,417 shares of stock and the issuance of a warrant to exercise 1,435,000 shares of stock at $0.04 per share within 90 days of the signing of the Agreement, which issuance would be exempt from registration.

On September 10, 2013, the Company entered into a Settlement Agreement and Release with an unsecured creditor whereby the Company was released from all existing debt, including interest, in exchange for the issuance of 23,776,513 shares of stock within 90 days of the signing of the Agreement, which issuance would be exempt from registration.

On September 11, 2013, the Company entered into a Settlement Agreement and Release with a vendor in respect of all past due amounts prior to November 1, 2012 in exchange for a payment by the Company of $15,000 in cash and the issuance of 3,500,000 shares of the Company’s stock within 90 days of the signing of the Agreement, which issuance would be exempt from registration.

On September 19, 2013, the Company entered into a Settlement Agreement and Release with an unsecured creditor whereby the Company was released from all existing debt, including interest, in exchange for the issuance of 1,000,000 shares of stock, which issuance would be exempt from registration.

On October 1, 2013, the Company entered into an Investor Relations Agreement with an initial term of 90 days whereby the Company will issue to the Investor Relations Firm 100,000 shares of restricted stock as of the effective date, deliverable within 30 days of the effective date and, in addition, a cash fee of $1,250 payable in each month of the initial term.

F- 16

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help the reader understand the Company’s financial condition and results of operations. The MD&A is provided as a supplement to, and should be read in conjunction with, our financial statements and the accompanying notes thereto.

We remain engaged in the process of seeking settlements with certain of our unsecured creditors.

We have executed several agreements that will enable us to provide the services contemplated in the home automation industry.

While we have begun to generate revenue from operations during quarter ending August 31, 2013, such revenue is not sufficient to meet our monthly operating expenses and we remain dependent on outside sources of financing to fund our operations.

Corporate Background

We conduct our business activities principally through Arkados, Inc., which is a wholly owned subsidiary. In September 2006, we changed our corporate name from CDKnet.com, Inc., to its current form to align our corporate identity with the “Arkados” brand developed by our subsidiary.

We were an early adopter in the powerline communication space, and experienced in home automation. Our Arkados, Inc. subsidiary was a member of the HomePlug Powerline Alliance, an independent trade organization which has developed global specifications for high-speed powerline communications, the world's leading professional association for the advancement of technology.

Following the sale of its assets associated with the manufacture of microchips, the Company, still a development stage company, shifted its focus towards development of software and hardware solutions that enable machine to machine communication for the Internet of Things (IoT), primarily in the areas of energy management and home automation. During the period, the Company has been in continuous negotiations with partners and industry contacts to establish joint ventures and other commercial relationships that would enable us to sell such solutions to service providers that would include these applications in product or service offerings to their customers.

Market Opportunities

We expect to develop our sales force to include a network of direct sales regions. As we develop our international relationships with Tatung and STMicroelectronics, we expect to establish international sales offices and develop relationships with organizations related to our business that will be located worldwide. We anticipate supplementing our direct sales force with sales representative organizations and distributors. The scope and development of our sales and marketing organization will depend, among other things, on the amount of capital available to us and when products are ready for testing.

Industry Background

While endeavoring to restructure the Company following the Asset Sale and settle obligations as a result of the Asset Sale, we retained the ability to pursue key elements of our software and platform solutions.

The smart grid and smart home markets can be characterized by the paradigm shift created by the advances in information technology and telecommunications meeting the energy industry. At the grid level, electric meters with enhanced communication capabilities—an essential component of the smart grid—are becoming more prevalent. In 2011, more than 23% of all U.S. electrical customers had smart meters. These meters use two-way communication to connect utilities and their customers. They support demand response and distributed generation, can improve reliability, and also provide information that consumers can use to save money by managing their use of electricity.

Within the home, advanced mobile and wireless technologies have contributed to a smarter, more connected home that can deliver much in the way of energy savings, convenience, comfort and security. Networked sensors, devices and appliances create an internet of things that can be managed within the home and from afar.

Electric meters with enhanced communication capabilities—an essential component of the smart grid—are becoming more prevalent. In 2011, more than 23% of all U.S. electrical customers had smart meters. These meters use two-way communication to connect utilities and their customers. They support demand response and distributed generation, can improve reliability, and also provide information that consumers can use to save money by managing their use of electricity.

According to research firm Zpryme, the smart grid core and enabled technology market will reach $220 billion in size by 2020. The explosive growth in this market is driven primarily by the first wave of smart grid implementation: advanced metering infrastructure (the “AMI”). Utilities throughout the world have aggressively implemented smart meters to residential and industrial customers mainly because it is the required first step to achieve a true smart grid and, secondarily, in response to significant government incentives to do so. AMI lays the foundation as a hub for networking and communication and it the gateway to the HAN. From the perspective of the end user (residential or industrial), in-home (or in-building) devices are not only capable to communicating with the other devices within the local network, but are also capable of communicating outward to the WAN and implementing demand response protocols.

Strategic Relationships

We continue to foster our relationships with STMicroelectronics and Tatung. Each of these relationships will allow Arkados to engage in our devised strategy of developing software and platform solutions for home automation services.

Research and Development

While we may engage in certain activities in pursuit of home automation services plans, no such activity exists through the end of the period covered by this report.

Patents, Licenses and Trademarks

The Company did not acquire any patents, licenses or trademarks during the period of this report. We continue to maintain our license with STMicroelectronics for patents relating to home automation services. In addition, we maintain the federal registration of our “Arkados” mark.

Competition

We face competition both from established players that are beginning to focus on powerline networking technology, as well as recent entrants in the field. Some of these competitors create solutions that are compliant with existing standards and specifications, while other competitors’ products are based on proprietary technologies. Key competitors include companies such as Tendril, Greenbox Technology and Echelon.

Results of Operations

While we remain a development stage company as of the end of the reporting period, we have been diligently undertaking negotiations with partners and industry contacts to establish joint ventures and other commercial relationships that would enable us to sell solutions in the energy management and home automation industries to service providers that would include these applications in product or service offerings to their customers.

During the period, we entered into an agreement with a multinational corporation that designs and manufactures an array of digital consumer products, including personal computers, liquid crystal display televisions, plasma displays, network-connected devices, storage-based media players, videophones and home appliances. This agreement is our sole source of cash flow at this time.

Since inception, we have incurred accumulated operating losses of approximately $34,000,000. We have financed operating losses since September 2004 with the proceeds primarily from related party lending from our major stockholders and affiliated lenders, as well as other stockholders and lenders.

If we are unable to raise funds to finance our working capital needs, we will not have the capital necessary for ongoing operations and for making our chip ready for mass production, we could lose professional staff necessary to develop our products and the value of our technology could be impaired. In addition, the lack of adequate funding could jeopardize our development and delivery schedule of our planned products. Such delays could in turn jeopardize relationships with our current customers, strategic partners and prospective suppliers.

For The Three Months Ended August 31, 2013 and August 31, 2012

During the three month period ended August 31, 2013, we invoiced a customer for software development costs in the amount of $30,000. In accordance with accounting rules for recognition of revenue, however, this did not result in sales being recorded during the period, but was recorded as a reduction of our research and development expense and therefore our revenue was $0 for the three months ended August 31, 2013 and August 31, 2012. Total operating expenses for the three month period ended August 31, 2013 was $225,936, consisting mainly of salaries of our management, as well as consulting expenses and professional fees. During this period we also incurred net research and development expenses (after the offset described above) of $3,781 relating to development of new technology. This is compared to total operating expenses for the three month period ended August 31, 2012 of $39,574, consisting mainly of consulting expenses and professional fees.

Interest expense on our existing debt for the three month periods ended August 31, 2013 and August 31, 2012 was $99,454 and $13,886, respectively.

Liquidity and Capital Resources

Our principal source of operating capital has been provided in the form of the private placement of convertible debt securities. We do not have any significant sources of revenue from our operations. No assurance can be given that we can engage in any public or private sales of our equity or debt securities to raise working capital. We have depended, in part, upon loans from investors and there can be no assurances that investors will make any additional loans to us.

Our present material commitments are the compensation of our employees, including our executive officers, and professional and administrative fees and expenses associated with the preparation of our filings with the Securities and Exchange Commission and other regulatory requirements.

As of August 31, 2013, we had cash of $126,373 and negative working capital of ($9,395,023) compared to cash of $345,126 and negative working capital of ($9,146,637) at May 31, 2013. The decrease in working capital since May 31, 2013 has resulted from additional accrued expenses and decreased cash used to pay such expenses. There has not been any new financing during the quarter, however, the decreasing cash from prior financing is offset by $30,000 received in connection with development of a software product for a customer.

Commitments

We do not have any commitments which are required to be disclosed in tabular form as of August 31, 2013.

Critical Accounting Policies

The discussion and analysis of the Company’s financial condition and results of operations are based upon the Company’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amount of assets and liabilities, revenues and expenses, and related disclosure on contingent assets and liabilities at the date of the financial statements. Actual results may differ from these estimates under different assumptions and conditions.

Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties, and may potentially result in materially different results under different assumptions and conditions. As of August 31, 2013, management believes the critical accounting policies applicable to the Company that are reflective of significant judgments and or uncertainties are limited to equity based transactions or convertible debt instruments.

Accounting for Stock Based Compensation

The computation of the expense associated with stock-based compensation requires the use of a valuation model. ASC 718 is a complex accounting standard, the application of which requires significant judgment and the use of estimates, particularly surrounding Black-Scholes assumptions such as stock price volatility, expected option lives, and expected option forfeiture rates, to value equity-based compensation. We currently use a Black-Scholes option pricing model to calculate the fair value of stock options. We primarily use historical data to determine the assumptions to be used in the Black-Scholes model and have no reason to believe that future data is likely to differ materially from historical data. However, changes in the assumptions to reflect future stock price volatility and future stock award exercise experience could result in a change in the assumptions used to value awards in the future and may result in a material change to the fair value calculation of stock-based awards. ASC 718 requires the recognition of the fair value of stock compensation in net income. Although every effort is made to ensure the accuracy of our estimates and assumptions, significant unanticipated changes in those estimates, interpretations and assumptions may result in recording stock option expense that may materially impact our financial statements for each respective reporting period.

Impact of Debt with Conversion Features

The Company at times enters into financing transactions whereby such debt instruments contain conversion features into common stock and or may contain detachable equity rights. These debt inducement features may be considered freestanding and or beneficial conversion features in our financial statements pursuant to the accounting guidance under ASC 470-20. These features would be fair valued and recorded as a discount to the debt instrument and amortized over the life of the instrument. Additional valuation features of warrants, conversion features in debt, and similar terms that include “full-ratchet” or reset provisions, which mean that the exercise or conversion price adjusts to pricing in subsequent sales or issuances, no longer meet the definition of indexed to a company's own stock and are not exempt from equity classification provided in ASC Topic 815-15. This means that instruments that were previously classified in equity are reclassified to liabilities and ongoing measurement under ASC Topic 815. The amount of quarterly non-cash gains or losses we will record in future periods will be based upon the fair market value of our common stock on the measurement date.

Off Balance Sheet Arrangements

We do not have any off balance sheet arrangements.

Item 3. Quantitative And Qualitative Disclosures About Market Risk.

We did not have any market risk sensitive instruments outstanding during this period.

Item 4. Controls and Procedures.

We maintain a set of disclosure controls and procedures designed to ensure that information required to be disclosed by us in the reports filed under the Securities Exchange Act, is recorded, processed, summarized and reported within the time periods specified by the SEC’s rules and forms. Disclosure controls are also designed with the objective of ensuring that this information is accumulated and communicated to our management, including our chief executive officer, as appropriate, to allow timely decisions regarding required disclosure. We evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this report. As a result of this evaluation, we concluded that our disclosure controls and procedures were not effective for the period ended August 31, 2013.

Due to its small size and limited financial resources, the Company has only one employee involved in accounting and financial reporting. As a result, there is no segregation of duties within the accounting function, leaving all aspects of financial control and physical control of cash in the hands of the same employee. In addition, our deficiencies include a lack of timely financial statement preparation and account reconciliations, as well as , and as a result of limited funding, the ability to retain personnel with sufficient technical expertise regarding accounting for certain equity-based transactions. We do not currently have a Chief Financial Officer and our CEO also acts in the capacity of Principal Accounting Officer. The CEO is currently working to retain a full-time Chief Financial Officer and to put it in place compensating levels of controls to provide for greater segregation of duties.

Other than those described above, there have been no significant changes in our internal control over financial reporting that occurred during the first fiscal quarter of 2014, ended August 31, 2013 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Changes In Internal Control Over Financial Reporting

None.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings.

There has been no material change in any of the matters set forth in Item 3. of our Form 10-K report for the fiscal year ended May 31, 2013 and no new litigation commenced since the filing of our Form 10-K that would be required to be disclosed in response to this Item.

Item 1A. Risk Factors

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended May 31, 2013 which could materially affect our business, financial condition or future results. There have been no other material changes during the quarter ended August 31, 2013 to the risk factors discussed in the periodic reports noted above that have not already been disclosed in the Company’s most recently filed 10-K.

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

None.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

Entry into a Material Definitive Agreement.

Software Development Agreement with Tatung Company

We entered into an agreement with Tatung, Company, a multinational corporation that designs and manufactures an array of digital consumer products, including personal computers, liquid crystal display televisions, plasma displays, network-connected devices, storage-based media players, videophones and home appliances. The agreement requires us to design software to enable bridging of products using powerline communications and wireless technologies. There are several phases of work that will be encompassed by the relationship. Our fee payable is based on estimates for time and materials included at each phase and billed to Tatung on a monthly basis.

The agreement with Tatung was effective July 1, 2013 and continues for a period of one (1) year and from year to year thereafter (i.e., each being an annual term), unless one of the parties give the other party sixty (60) days advance notice of cancellation.

Technology License with Exegin Technologies Limited

On June 14, 2013, we entered into a license agreement with Exegin Technologies Limited, a Canadian company, of its wireless technology software libraries designed to address the unique needs of low-cost, low-power wireless sensor and control networks. This license is a worldwide, perpetual, non-exclusive, irrevocable, quantity limited, royalty-free license to make, use, sell, copy, modify, create derivative works of, and distribute object code copies of the licensed technology, and the right to sublicense the foregoing as object code to our customers. There is a one-time license fee for each 25,000 units purchased.

Business Development Agreement with MAT Research, LLC

On July 1, 2013, we entered into an agreement with MAT Research, LLC, an Oregon company (“MAT”), to provide us with strategic advisory and business development services. The Agreement is for a term of two (2) years from the effective date but may be terminated at any time upon sixty (60) days advance notice by either party. As compensation for services, MAT is to receive shares of our common stock, on a restricted basis, in connection with the consummation of the first agreement that produces non-contingent material revenue to the Company, and then further based on certain cumulative revenue-based milestones thereafter.

Item 6. Exhibits.

(a) Exhibits.

	10.65	Software Development Agreement with Tatung Co., a Taiwan corporation dated June 28, 2013.

	10.66	License Agreement with Exegin Technologies, Limited, dated June 14, 2013.

	10.67	Consulting Agreement with MAT Research, LLC, an Oregon company, dated July 1, 2013.

	31.1	Certification of Chief Executive Officer of Periodic Report pursuant to Rule 13a-14a and Rule 15d-14(a).

	31.2	Certification of Chief Financial Officer of Periodic Report pursuant to Rule 13a-14a and Rule 15d-14(a).

	32.1	Certificate of Chief Executive Officer pursuant to 18 U.S.C. Section 1350

	32.2	Certificate of Chief Financial Officer pursuant to 18 U.S.C. Section 1350

	101*	The following material from Arkados Group, Inc.’s Form 10-K Report for the year ended May 31, 2013, formatted in XBRL: (i) Balance Sheets, (ii) Statements of Comprehensive Income, (iii) Statement of Changes in Shareholders’ Equity, (iv) Statements of Cash Flows, and (v) the Notes to Financial Statements.

* Furnished, not filed.

SIGNATURES

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

	ARKADOS GROUP, INC.
Dated: October 11, 2013

	By:	/s/ Terrence DeFranco
		Terrence DeFranco
		President and Chief Executive Officer, Principal Accounting Officer

EXECUTION COPY

ARKADOS, INC.

SOFTWARE DEVELOPMENT

AGREEMENT

THIS SOFTWARE DEVELOPMENT AGREEMENT (this “ Agreement ”) is made as of June 28th, 2013 (the “ Effective Date ”) between Arkados, Inc., having an office at 211 Warren Street, Suite 320, Newark, New Jersey 07103 ( “Developer” ) and Tatung Co., a Taiwan corporation having an office at 22, Chungshan North Road, 3 ^rd Section, Taipei, Taiwan 104(“ Client ”).

Definitions . Whenever used in this Agreement, the terms set forth in this Section 1 will have the meanings set forth below. Other terms are defined throughout this Agreement as they first appear. Where the context so indicates, a word in the singular form will include the plural and vice versa.

“Confidential Information” means any and all technical and non-technical information, including trade secrets, know-how and proprietary information, firmware, designs, schematics, techniques, plans or any other information relating to any research project, work in process, future development, scientific, engineering, manufacturing, marketing or business plans or financial or personnel matters relating to either party or its present or future products, sales, suppliers, Clients, employees, investors or affiliates and disclosed or otherwise supplied in confidence by either party to the other party. Confidential Information disclosed (i) in a written or other tangible form pursuant to the parties performing their obligations under this Agreement will be clearly marked with a “confidential” legend or other comparable legend, or (ii) orally or visually will be identified as confidential at the time of disclosure. Confidential Information will not include information to the extent that: (a) such information is or becomes publicly available other than through any act or omission of either party in breach of this Agreement; (b) such information was received by the receiving party, other than under an obligation of confidentiality, from a third party who had no obligation of confidentiality to the other party; (c) such information was in the possession of the receiving party at the time of the disclosure or was independently developed by the receiving party as proven by documentary evidence; or (d) any applicable regulation, court order or other legal process requires the disclosure of such information, provided that prior to such disclosure the disclosing party will give notice to and will cooperate with the other party so that the other party may take reasonable steps to oppose or limit such disclosure, and that the disclosing party does not disclose any more information than strictly necessary to comply with such legal process. The burden of proof that Confidential Information falls into any one of the above exemptions will be borne by the party claiming such exemptions.

“Client Dictated Work” means any and all Developed Work that Client instructs Developer to develop in a specific way or to achieve a specific end result.

Development Agreement

Page 1

EXECUTION COPY

“Client Provided Third Party Technology” means any and all Technology owned by a third party and licensed or sublicensed by Client and which Client provides to Developer for inclusion into or for development of the Deliverables.

“Client Work” means any and all pre-existing Technology owned by Client and provided by Client to Developer for inclusion into or for development of the Deliverables.

“Deliverables” means the tangible materials that Developer will deliver to Client as set forth in the applicable Statements of Work.

“Derivative” means: (i) for copyrightable or copyrighted material, any translation (including translation into other computer languages), modification, correction, addition, extension, upgrade, improvement, compilation, abridgment or other form in which an existing work may be recast, transformed or adapted; (ii) for patentable or patented material, any improvements thereon; and (iii) for material which is protected by trade secret, any new material derived from such existing trade secret material, including new material which may be protected by copyright, patent or trade secret.

“Developed Work” means any and all Technology that Developer may solely, or with Client, develop or reduce to practice in the process of developing and delivering the Deliverables, not including any and all Client Provided Third Party Technology, Client Work, Developer Provided Third Party Technology and Retained Works.

“Effective Date” means the date indicated as the Effective Date on the first page of this Agreement.

“Intellectual Property Rights” means any and all patents, copyrights, trademarks, trade secrets and other intellectual property rights in any country of the world or contract rights having the equivalent effect.

“Developer-Provided Third Party Technology” means any and all Technology owned by a third party and licensed by Developer which Developer includes into any of the Deliverables. Developer Provided Third Party Technology will be identified to Client prior to acceptance of the Deliverables.

“Retained Works” means any and all Technology owned by Developer and incorporated into the Deliverables and created by or for Developer (i) prior to the Effective Date, or (ii) not pursuant to this Agreement, including all of Developer’s software development tools, methodologies and techniques.

“Technology” means algorithms, concepts, data, designs, developments, documentation, discoveries, HTML, XML and other codes, inventions, methods, multimedia files (including audio, graphic, photographic, and video files), object code, procedures, programs, source code, text, documentation, web pages and any other item generally recognized as technology in Developer’s or Client’s industry.

Development Agreement

Page 2

EXECUTION COPY

Term/Termination .

This Agreement will become effective beginning on the date hereof and continue for a period of one (1) year and from year to year thereafter (i.e., each being an annual term), unless one of the parties give the other party sixty (60) days advance notice of cancellation.

Deliverables .

Developer will use commercially reasonable efforts, as such is defined in the software development industry, to develop and deliver the Deliverables in accordance with the provisions of this Agreement and one or more Statements of Work ("SOWs"), as determined by the parties, from time to time, that shall be executed by the parties and incorporated herein by reference . All specifications for the Deliverables and modifications thereto shall be in writing and agreed upon by both parties.

Change Orders; Administration . Any modifications to the specifications for the Deliverables shall require execution of a written change order by both parties to this Agreement (a "Change Order") which shall substantially conform with the draft form attached as Exhibit A to this Agreement. Each Change Order complying with this section shall be deemed to be an amendment to and will become part of this Agreement.

Fees and Payment .

5.1.

Fees . Fees shall be paid in monthly installments. Such amount may be subject to adjustment based upon changes to the specifications agreed upon by Client.

5.2.

Payments . Developer will invoice Client on a monthly basis. Client’s payment will become due and payable in United States currency within thirty (30) days of receipt of Developer’s invoice.

5.3.

Late Payment Fees. Client agrees that there will be 1.5% late payment fees that start accruing ninety (90) days after invoice date and continue until full payment of invoice.

5.4.

Sales and Use Taxes . Client agrees that Developer’s fees and charges do not include any sales, use, excise or similar taxes, if any, which may be assessed by authorities on the Deliverables or Services at any time (excepting taxes on Developer’s net income). Furthermore, Client agrees to reimburse Developer for these taxes or in lieu thereof, Client will provide Developer with a certificate acceptable to the taxing authorities exempting Developer from any obligation to pay these taxes.

Development Agreement

Page 3

EXECUTION COPY

Confidentiality Obligations . Each party will at all times, both during the Term and for a period of five (5) years thereafter, keep in confidence all of the other party’s Confidential Information, and will not use such Confidential Information, directly or indirectly, without the other party’s prior written consent. Neither party will disclose the other party’s Confidential Information to any person except its employees and independent contractors to whom it is necessary to disclose the Confidential Information for purposes permitted under this Agreement and who have agreed to receive it under terms at least as restrictive as those specified in this Agreement. For the avoidance of doubt, the foregoing includes the making of any public statements by Developer, unless specifically authorized by the Client. Each party will take commercially reasonable measures to maintain the confidentiality of the other party’s Confidential Information, but never less than the standard of care that an ordinarily prudent business would exercise to maintain the secrecy of its own confidential information. Each party will immediately give notice to the other party of any unauthorized use or disclosure of the other party’s Confidential Information of which it becomes aware. Either party may disclose this Agreement to its auditors or federal and regulatory agencies, or upon the order of any court of competent jurisdiction; provided that prior to disclosure the receiving party shall inform the other party of such disclosure and shall cooperate with the disclosing party in seeking any protective order.

Ownership.

7.1.

Work for Hire . Developer agrees and confirms that all Developed Work and Deliverables, or any part thereof, shall be a “work for hire” as such term is defined in 17 U.S.C. § 101, and the Client shall be deemed the author and sole and exclusive owner of any copyrights and other rights and interests therein. If any of the Developed Work or Deliverables, or any part thereof, is considered to be work not included in the categories of work covered by the “work for hire” definition contained in 17 U.S.C. § 101, such Developed Work or Deliverable (and any part thereof) shall be owned by the Client or assigned or transferred completely and exclusively to the Client. To the extent that title to any such works may not, by operation of law, vest in Client or such works may not be considered works made for hire, all rights, title and interest therein are hereby irrevocably assigned to Client. Unless otherwise specified to Client in writing, and upon payment in full, title to all materials, products and/or deliverables, including, but not limited to, reports, designs, programs, specifications, documentation, manuals, visual aids, and any other materials developed and/or prepared for Client by Developer pursuant to this Agreement, and all interest therein shall, to the extent that Developer holds such rights title and interest, vest in Client. All such materials shall belong exclusively to Client, except as set forth herein, with Client having the right to obtain and to hold in its own name, copyrights, registrations or such other protection as may be appropriate to the subject matter, and any extensions and renewals thereof. Developer agrees to give Client and any person designated by Client, reasonable assistance, at Client's expense, required to perfect the rights defined in this Section. Unless otherwise requested by Client, upon the completion of the Deliverables, Developer shall immediately turn over to Client all materials and deliverables developed pursuant to this Agreement, including, but not limited to, working papers, narrative descriptions, reports and data.

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7.2.

Notwithstanding the foregoing, the following shall not constitute the property of Client under this Agreement: (i) software, including but not limited to any proprietary code (source and object), which is subject to third-party license agreements; (ii) those portions of the deliverables which include information in the public domain or which are generic ideas, concepts, know-how and techniques within the computer design, support and consulting business generally; and (iii) those portions of the deliverables which contain the computer consulting knowledge, techniques, tools, routines and sub-routines, utilities, know-how, methodologies and information which Developer had prior to or acquired during the performance of its Services for Client and which do not contain any Confidential Information (as hereinafter defined) of Client conveyed to Developer by Client. To the extent that any portion of the deliverables includes information or material that falls within the exceptions to property of Client described in Subsection (iii) above, Developer shall be deemed to have granted Client a paid up, world-wide, non-exclusive license to use any such information or material imbedded in the deliverables for its internal business needs and a non-exclusive license to make copies thereof for use only in its and its affiliates’ facilities, subject to third party license agreements, if any. Should Developer, in performing any services hereunder, use any computer program, code or other materials developed by it independently of the services provided hereunder (“Pre-existing Work”), Developer shall retain any and all rights in such Pre-existing Work. Developer hereby grants Client a paid up, world-wide, non-exclusive license to use and reproduce the Pre-existing Work for its internal business needs.

7.3.

Client understands and agrees that Developer may perform similar services for third parties using the same personnel that Developer may use for rendering services for Client hereunder, subject to Developer’s obligations respecting Client’s Confidential Information pursuant to Section 6 of this Agreement and the provisions of this Section 7..

Warranties . Developer represents and warrants as follows:

that it has full corporate power and authority to execute and deliver this Agreement and to consummate the transactions contemplated hereby;

this Agreement has been duly and validly executed and delivered by Developer and constitutes the valid and binding Agreement of Developer, enforceable against Developer in accordance with its terms;

it and its subcontractors will perform the services in material conformity to the specifications in a professional and workmanlike manner;

Developer computer code will avoid producing erroneous output or otherwise malfunctioning, with respect to date data or otherwise, and will interact or interface with Client or any third parties as set forth in the technical specifications pertaining thereto; and

it will maintain the necessary insurance coverage as mandated by law or as reasonably required to provide the Deliverables.

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NO THIRD PARTY PROPERTY. DEVELOPER AGREES THAT NO DEVELOPER PROVIDED THIRD PARTY TECHNOLOGY SHALL BE INCLUDED IN DELIVERABLES TO CLIENT WITHOUT CLIENT’S ADVANCE WRITTEN CONSENT.DEVELOPER SHALL ENSURE THE AUTHORIZED ASSIGNMENT OR TRANSFER OF ANY LICENSES, COPYRIGHTS, OR OTHER RIGHTS ASSOCIATED WITH ANY DEVELOPER PROVIDED THIRD PARTY TECHNOLOGY APPROPRIATELY INCLUDED IN THE DELIVERABLES TO CLIENT.

10.

Limited Warranty on Deliverables . Developer warrants to Client that it will provide the Deliverables hereunder utilizing reasonable care and professional skill in accordance with customary applicable industry standards. In the event that Developer breaches this warranty, Client shall promptly notify Developer in writing and shall specifically describe the deficiency and a determination as to whether re-performance is practicable under the circumstances. If applicable, Developer agrees to promptly remedy that part of the Deliverables that failed to meet this standard of care. Client must make any claim for breach of this warranty by written notice to Developer within ninety (90) business days of delivery of the Deliverables. Provide, however, that if the situation stated above is not obvious and clear for Client to judge, the claim period may extent to one year.

11.

DISCLAIMER REGARDING DELIVERABLES. EXCEPT AS EXPRESSLY SET FORTH IN THIS AGREEMENT OR ANY APPLICABLE AMENDMENTS HERETO, Developer expressly disclaims any and all warranties and representations of any kind or nature with respect to the Deliverables delivered under this Agreement, whether express or implied, including implied WARRANTIES of fitness for a particular purpose, merchantability, non-infringement, title or otherwise. Developer does not warrant (i) that the Deliverables will run properly on all hardware or systems or operate in ALL combinations which may be selected for use by a user, or (ii) that the operation of the Deliverables will be uninterrupted or error free.

12.

DISCLAIMER REGARDING products. WITH THE EXCEPTION OF WARRANTIES PROVIDED BY ANY THIRD PARTIEs for software or products INCLUDED IN DELIVERABLES TO CLIENT, All Hardware and third party technology delivered to Client under this agreement is without warranty of any kind from Developer. This disclaimer includes any implied warranties of merchantability and fitness for a particular purpose and any warranties of non-infringement or otherwise.

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13.

Limitation of LIABILITY .

13.1.

Direct Damages. EXCEPT FOR THE UNAUTHORIZED USE OF THIRD PARTY SOFTWARE OR PRODUCTS IN DELIVERABLES TO CLIENT, Developer’s LIABILITY for damages or indemnity under this Agreement, regardless of the form of action, will not exceed per claim and in the aggregate the total amount ACTUALLY paid by Client to Developer under thIS Agreement DURING THE TWELVE (12) MONTHS PRECEDING THE EVENTS giving rise to the liability.

13.2.

EXCEPT FOR THE UNAUTHORIZED USE OF THIRD PARTY SOFTWARE OR PRODUCTS IN DELIVERABLES TO CLIENT, No Consequential Damages. In no event will Developer OR CLIENT be liable TO THE OTHER for any indirect, incidental, special or CONSEQUENTIAL damages, including loss of profits, revenues, data, use, any other economic advantage, incurred by Developer OR Client ARising out of OR RELATING TO this Agreement, under any theory of liability, whether in an action in contract, strict liability, tort (including negligence) or other legal or equitable theory.

14.

Dispute Resolution Process.

14.1.

Dispute Resolution. The parties agree to meet and confer in good faith on all matters of common interest or all controversies, claims, or disputes (“ Dispute ”) which materially affect the performance of either party under this Agreement. As soon as a Dispute is recognized by either party, it will communicate the substance of such Dispute to each party’s Primary Contact. Once a Dispute has been raised, the Primary Contacts will make all reasonable efforts to reach a resolution within two (2) weeks after the Dispute has been identified. If the Dispute cannot be resolved between the parties’ respective Primary Contacts, then the parties will submit such matters to their respective executive management, who will make all reasonable efforts to reach a resolution within thirty (30) days after the Dispute has been referred to them. For purposes hereof, the “Primary Contact” for each party shall be the person designated for Notice in Section 15.3 of this Agreement.

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14.2.

Arbitration. All Disputes arising out of or relating to this Agreement, which cannot first be resolved in accordance with Section 14.1 , will be submitted to binding arbitration in San Francisco, California under the Commercial Arbitration Rules (the “ Rules ”) of the American Arbitration Association (“ AAA ”). The arbitration will be conducted by one impartial arbitrator selected by mutual agreement or by three arbitrators (one chosen by each party and the third chosen by agreement of the designated arbitrators) if the parties are unable to agree on a single arbitrator within thirty (30) days after the first demand by one party to the other for arbitration. Any arbitrator(s) selected will have appropriate experience in the field of information technology services. The proceedings will be held in a geographically neutral and reasonably convenient location to both parties. A court reporter will record the arbitration hearing, and the reporter’s transcript will be the official transcript of the proceeding. The arbitrator(s) will have no power to add or detract from the agreements of the parties and may not make any ruling or award that does not conform to the terms and conditions of this Agreement. The award of the arbitrator will include a written explanation of the decision and specify the basis for any damage award and the types of damages awarded. The decision of the arbitrator(s) will be final and binding on the parties and may be entered and enforced in any court of competent jurisdiction by either party. The prevailing party in the arbitration proceedings will be awarded reasonable attorneys’ fees, if any, and all other costs and expenses of the proceedings, unless the arbitrator(s), for good cause, determine otherwise. The foregoing, however, will not prevent or limit in any way either party’s right to apply to a court of competent jurisdiction for a temporary restraining order, preliminary or permanent injunction, or other similar equitable relief.

15.

Miscellaneous .

15.1.

Residual Knowledge . Subject to Section 6, nothing herein shall be construed to prevent or in any way limit Developer from using general knowledge, skill, and expertise acquired in the performance of this Agreement in any current or subsequent endeavors. Client shall have no interest in such endeavors.

15.2.

Survival. The provisions of Sections 6, 7, 8, 9, 10, 11, 12, 13, 14 and 15 of this Agreement shall survive the early termination (for any reason) or expiration of this Agreement.

15.3.

Notices . All notices and other communications required or permitted under this Agreement will be in writing and will be deemed effectively delivered upon receipt by personal delivery, overnight courier service, or facsimile as confirmed by transmission receipt. Any party may change its address for such communications by giving an appropriate written notice to the other party conforming to this Section.

If to Client:	If to Developer:

Attn: Connie Lin	Attn: Terrence DeFranco
22, Chungshan North Road, 3 ^rd Section Taipei, Taiwan 104	211 Warren Street, Suite 320 Newark, New Jersey 07103
Fax: +886 2 25863580	Fax: 862-203-2983
Phone: +886 2 25925252 ext. 2865 Email: conniel@tatung.com	Phone: (862) 373-1988 Email: tmdefranco@arkadosgroup.com

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15.4.

No Assignment . This Agreement will be binding upon, and inure to the benefit of, the permitted successors-in-interest of a party hereto who agree in writing, for the express benefit of the other party, to assume all of the obligations of such party under this Agreement; provided, however, that this Agreement and the rights and obligations under this Agreement may not be assigned in whole or in part by either party without the prior written consent of the other party, which consent will not unreasonably be withheld or delayed. Notwithstanding the foregoing, a party may assign this Agreement to any corporate parent, affiliate or subsidiary or purchaser of the majority of its stock or assets without the prior written consent of the other party. Notwithstanding the foregoing, any assignment shall not materially adversely affect the performance of this Agreement. Any assignment or attempted assignment of this Agreement not permitted by this Section will be void.

15.5.

Governing Law and Forum Selection . This Agreement will be governed by and construed in accordance with the internal laws of the State of California without regard to the conflicts of laws provisions thereof. Each party waives its right to a jury trial in any matter arising out of or relating to this Agreement.

15.6.

Force Majeure . Neither party will be held liable or responsible to the other party nor be deemed to have defaulted under or breached this Agreement for failure or delay in fulfilling or performing any term of this Agreement, except for Client’s obligations to pay Developer under this Agreement, to the extent, and for so long as, such failure or delay is caused by or results from causes beyond the reasonable control of the affected party, including any act of God, fire, natural disaster, accident, war, acts of war (whether war be declared or not), insurrections, riots, civil commotion, strikes, lockouts or other labor disturbances, shortages in the marketplace, or any acts, omissions or delays in acting by any governmental authority or the other party.

15.7.

No Joint Venture or Agency . Nothing contained in this Agreement will be deemed or construed as creating a joint venture or partnership between the parties. Except as expressly set forth in this Agreement, no party is by virtue of this Agreement authorized as an agent, employee or legal representative of the other party, and the relationship of the parties is, and at all times will continue to be, that of independent contractors. A party's employees, agents or representatives are not employees or agents of the other party and are not entitled to any of the other party's benefits. Neither party shall be responsible for payment of the other party's workers' compensation, disability benefits or unemployment insurance, nor shall it be responsible for withholding or paying employment related taxes for the other party or its employees.

15.8.

No Third Party Beneficiary . This Agreement is made and entered into for the sole protection and benefit of the parties to this Agreement and is not intended to convey any rights or benefits to any third party, nor will this Agreement be interpreted to convey any rights or benefits to any person except the parties to this Agreement.

15.9.

Further Assurances . Each of the parties will from time to time, at the request of the other party and without further consideration, execute and deliver other documents and take other actions as the other party may reasonably request to consummate more effectively the transactions contemplated by this Agreement.

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15.10.

No Other Representations and Warranties . Each party acknowledges that it has entered into this Agreement based solely upon the express representations and warranties set forth in this Agreement.

15.11.

Compliance With Laws . This Agreement and the performance of this Agreement is subject to all present and future applicable laws, rules, orders, statutes and regulations of governmental authorities having jurisdiction over the parties, the Deliverables or the Services. Both parties will comply with all applicable laws, rules, orders, statutes, and regulations.

15.12.

No Implied Waiver. No term, provision or clause of this Agreement shall be deemed waived and no breach excused unless such waiver or consent shall be in writing and executed by a duly authorized representative of each party. Any consent by any party to, or waiver of, a breach by the other, whether express or implied, shall not constitute a consent to, waiver of, or excuse for any different or subsequent breach.

15.13.

Counterparts . This Agreement may be executed in one or more counterparts, each of which shall be deemed an original and when taken together shall constitute one and the same Agreement.

IN WITNESS WHEREOF, the parties to this Agreement, each acting under due and proper authority, have executed this Agreement as of the Effective Date.

ARKADOS, INC.	TATUNG CO.

By: /Terrence DeFranco/	By: /Connie Lin/

Name: Terrence DeFranco	Name: Connie Lin

Title: Chief Executive Officer	Title: General Manager, AEBU, Tatung Co.

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Exhibit A

CHANGE ORDER

Change Order No.____ to Statement of Work No._____

Client or Developer shall complete Question 1. Developer shall complete the remainder of the Change Order, except for the approval/rejection portion, which shall be completed by Client in its sole discretion. Each section may be as long or short as the circumstances require. Attach additional pages, if necessary, referencing the Change Order No, Statement of Work No and Section No.

1. Describe changes, modifications, or additions to the services.

These modifications were requested by:

____ Client

_____ Developer


Signature of Client Project Manager		Date


Signature of Developer Project Manager		Date

2. Modifications, clarifications or supplements by Developer or Client to description of desired changes or additions requested in Section1 above, if any. State any modifications, clarifications, or supplements to the deliverables, time table, and/or responsibilities of the parties.

3. Necessity, availability and assignment of requisite Developer and/or Client personnel and/or resources to make requested modification or additions.

4. Impact on Costs, delivery schedule, and other requirements.

a. Changes in Costs:

b. Changes in delivery schedule:

c. Changes to any other requirements:

Change Order Is:

_____Approved and Accepted

_____Rejected


Signature of Client Project Manager		Date


Signature of Developer Project Manager		Date

EXECUTION COPY

LICENSE AGREEMENT

This License Agreement (the “ Agreement ”), dated June 14, 2013 (the “ Effective Date ”), is by and between:

Exegin Technologies Limited (“ Exegin ”) of 401 - 2071 Kingsway Avenue, Port Coquitlam, British Columbia, Canada, V3C 6N2

AND

Arkados, Inc. (“ Arkados ”) of 211 Warren Street, Suite 320, Newark, New Jersey 07103, USA.

BACKGROUND

Arkados wishes to license Exegin’s ZigBee PRO stack technology with ECMQV libraries and Exegin wishes to license same to Arkados pursuant to the terms of this Agreement.

AGREEMENT

In consideration of the foregoing and the mutual promises, covenants and agreements set forth below, and for other good and valuable consideration, the receipt and sufficiency of which each party acknowledges, the parties, intending to be legally bound, agree as follows:

Part 1 - DEFINITIONS

1.1

Definitions. In this Agreement, the following terms have the following meanings:

(a)

“ Arkados Derivatives ” means derivative works Arkados creates based in whole or in part on any Licensed Technology.

(b)

“ Arkados Products ” means any product offered, sold, distributed, licensed or otherwise exploited by or for Arkados or any of their licensees, distributors or other representatives which incorporates any of the Licensed Technology.

(c)

“ Certicom ” means Certicom Corp. of 5520 Explorer Drive, 4th Floor
Mississauga, ON, Canada, L4W 5L1.

(d)

“ Confidential Information ” of a party means all information, data and financial information relating to the business, commercial strategies, pricing, personnel, customers, products or services of the party, but excludes any information that the other party (the “ Recipient ”) proves:

(i)

was lawfully in the Recipient’s possession before receiving it from the other party as can be proven by documentary evidence,

(ii)

is provided in good faith to the Recipient by a third party without breaching any rights of the other party, or

(iii)

is or becomes generally available to, or accessible by, the public through no fault of the Recipient nor through any malfeasance by any other person.

Without limiting the foregoing, the terms and existence of this Agreement (including all prices) are to be maintained as Confidential Information by each of the parties and shall not be disclosed except as required by regulations to which a party may be subject or otherwise by the express written consent of the other party. In addition, the source code to the Licensed Technology is Confidential Information of Exegin.

(e)

“ ECMQV ” means the Elliptic Curve Menezes-Qu-Vanstone (ECMQV) key agreement algorithm allows two parties to agree upon a common secret value with user authentication.

(f)

“ End-User ” means any person or entity acquiring any Licensed Technology from or through Arkados, for the End-User's internal use and not for resale.

(g)

“ EULA ” means an end user license agreement, either in a form provided by Exegin from time-to-time or in a form provided by Arkados and approved in writing by Exegin.

(h)

“ Feedback ” is defined in section 6.5.

(i)

“ Licensed Technology ” means Exegin’s ZigBee PRO stack with support for the CBKE authentication using ECMQV as more fully described on Exhibit “A” hereto, any third party software included therewith (as set forth on Exhibit “B”) and all improvements thereto made by or for Exegin under this Agreement.

(j)

“ Maintenance Services ” means providing bug, error, security or other fixes, Updates, Upgrades and New Versions for the Licensed Technology as described more fully under PART 8 of this Agreement (Maintenance and Other Services).

(k)

“ New Version ” means a new version of the Licensed Technology that Exegin makes available to other customers who have subscribed to and paid for ongoing maintenance, other than custom modifications for such customers.

(l)

“ NTS ” means National Technical Systems, Inc. of 200 - 24007 Ventura Blvd Calabasas, CA, USA, 91302.

(m)

“ Sale ” means a sale, license or transfer, regardless of whether any revenue was received by Arkados in connection with that sale, license or transfer, excluding a reasonable number of units that are provided free of charge to prospective purchasers only, and for demonstration purposes.

(n)

“ Update” means an enhancement, improvement or update to the Licensed Technology that Exegin makes generally available to other customers who have subscribed to and paid for ongoing maintenance.

(o)

“ Upgrade” means a modification that allows the Licensed Technology to function on a new hardware platform, that Exegin makes generally available to other customers who have subscribed to and paid for ongoing maintenance. .

Part 2 - OTHER LICENSES AND CERTIFICATIONS

2.1

Certicom. Exegin has all rights necessary from Certicom to provide the license to Arkados as set forth in this Agreement. Arkados is solely responsible for obtaining all security certifications it may need from Certicom to fully exploit the license.

2.2

NTS. In the event Arkados desires to obtain NTS, ZigBee PRO and SEP version 1.x (the subversion chosen at Arkados’ sole discretion) certification for the Arkados Products, Exegin will cooperate and provide necessary assistance to Arkados to successfully achieve such certifications in the most expedient manner. All fees and costs payable to the respective certifying organizations or entities shall be the sole responsibility of Arkados.

Part 3 - LICENSES

3.1

Delivery. Exegin has delivered, and Arkados has received the Licensed Technology, including the source code for the Licensed Technology.

3.2

License to Arkados. Subject to the terms and conditions of this Agreement and Certicom’s rights in the Licensed Technology, Exegin hereby grants to Arkados and Arkados accepts, during the Term:

(a)

a worldwide, perpetual, non-exclusive, irrevocable (subject to section 8.7), quantity limited, royalty-free license (the “ License ”) to make, use, sell, copy, modify, create derivative works of, and distribute object code copies of the Licensed Technology, and the right to sublicense the foregoing as object code to Arkados’ customers, provided that the total number of copies of either the original Licenced Technology or its derivatives created, sold or distributed, either directly or through sublicensing, does not exceed the total number of licences purchased; and

(b)

permission to place the source code for the Licensed Technology into a software escrow on terms acceptable to Exegin, for the benefit of Arkados’ customers. Arkados may, under the condition of Exegin’s bankruptcy, provide copies of the source code for the Licenced technology to Arkados’ customers for the purposes of maintaining their current, at time of Exegin bankruptcy, products and no other.

Arkados will not allow any third party (including its customers) to access any of the source code to the Licensed Technology, and Arkados will not carry on any activity in connection with the Licensed Technology except as specifically permitted by this section.

3.3

Sublicenses. Arkados will not permit any third party to use any Licensed Technology until such party has agreed to be bound by the EULA for that Licensed Technology.

3.4

Notices. Arkados will ensure that the Arkados Products are distributed with documentation that prominently states that the products contain or are powered by software developed by Exegin Technologies Limited. Exegin may also advertise and publicly disclose that its technology is used in the Arkados Products, subject to Arkados’ prior written approval of the disclosures, which will not be withheld or delayed unreasonably .

3.5

License to Exegin. Subject to the terms and conditions of this Agreement, Arkados hereby grants to Exegin during the Term a worldwide, perpetual, non-exclusive, irrevocable (subject to section 8.7), royalty-free licence to make, use, sell, copy, modify, create derivative works of any Arkados Derivatives that Arkados may give to Exegin, and the right to sublicense the foregoing to Exegin’s customers .

Part 4 - OWNERSHIP

4.1

Exegin. As between the parties, Exegin owns: (a) its Confidential Information, (b) the Licensed Technology, and (c) all intellectual property and other proprietary rights in and to the foregoing.

4.2

Arkados. As between the parties, and subject to Exegin’s ownership of the underlying Licensed Technology, Arkados owns: (a) its Confidential Information, (b) all Arkados Derivatives, and (c) the Arkados Products, and (d) all intellectual property and other proprietary rights in and to the foregoing.

Part 5 - FEES

5.1

License Fee. Arkados will pay Exegin a one-time license fee of US$25,000 (the “License Fee”) in immediately available funds for each 25,000 units to be licensed, including ZigBee PRO with bridging along with SE1.x Authentication and ECMQV library for Linux operating environment. The License Fee shall be payable in five (5) equal instalments on the 1 ^st of each month following the Effective Date.

5.2

Records. Arkados will keep true and accurate records and books of account in relation to the Sales, and will preserve those records and books of account pertaining to a particular financial year for at least 36 months after the end of that financial year. Upon Exegin’s reasonable request, and solely for purposes of determining whether Arkados is in compliance with the number of units licensed stated in Section 5.1 above, Arkados will supply copies to Exegin of the sales records, with only such information as is necessary to confirm such compliance and all other information redacted, which Exegin shall treat as Confidential Information of Arkados. If reasonably necessary to confirm such compliance, Exegin, at its own expense, may cause its auditor to conduct an audit of so much of Arkados’ records as is necessary to confirm such compliance for any year or other period, provided however, that notice of any such audit must be given at least thirty (30) days in advance in writing to Arkados and shall not materially interrupt the conduct of Arkados’ business.

5.3

Taxes. The parties shall cooperate to segregate the payment of fees into the following: (i) those for nontaxable services and deliverables; and (ii) those for which a VAT, GST, sales, use or other similar tax is to be paid or has already been paid. In addition, each party shall reasonably cooperate with the other to more accurately determine a party's tax liability and to minimize such liability, to the extent legally permissible. Each party shall provide and make available to the other any resale certificates, information regarding out-of-state sales or use of equipment, materials or services, treaty certification and any other exemption certificates or information requested by a party. If obligated by the law of the jurisdiction in which Arkados is headquartered, it may withhold taxes in connection with any payment made to Exegin in connection with the good or services to be provided pursuant to this Agreement.

5.4

Interest. Arkados will pay simple interest on all overdue amounts at a rate of 18% per year or the maximum rate permitted by law, whichever is less, calculated from the date payment was due until the date payment of all overdue amounts is made in full.

5.5

Fees Payable Without Set-off or Deduction. Arkados will pay all amounts due under this Agreement without any set-off, deduction or withholding whatsoever, unless there is a requirement under law for tax purposes.

Part 6 - OBLIGATIONS

6.1

Cooperation. Arkados will cooperate with Exegin in a timely manner, as required for Exegin to provide all services under this Agreement, and will give Exegin all required information and access to the Arkados Products as and when required by Exegin in connection with this Agreement.

6.2

Exegin Marks. Arkados must not use any Exegin trademark, Exegin’s legal name and reasonable contractions thereof, its logos and the specific names of its products, without Exegin’s prior written permission.

6.3

Confidentiality. Each party will (and will cause its employees and agents to) keep the other party’s Confidential Information strictly confidential and not disclose it to anyone unless the other party consents or unless the recipient required by law or court order to do so. Each party will not use the other party’s Confidential Information for any purpose other than to perform its obligations or exercise its rights under this Agreement.

6.4

Requests and Suggestions. Each party may make requests and suggestions regarding changes or improvements to the Licensed Technology, or regarding ways to brand, market or distribute the Licensed Technology ( “Feedback”). Giving Feedback is optional. In the event that a party provides Feedback to the other party without any prior notification of restriction or limitation on its use, it will be deemed that such Feedback is without charge or claim of any kind whatsoever to the party receiving and that the receiving party has full and unlimited license to use or commercially exploit such Feedback in its sole discretion.

Part 7 - REPRESENTATIONS AND WARRANTIES

7.1

Power and Capacity. Each party represents and warrants to the other, in respect of itself, that:

(a)

it has full power and capacity to enter into and be bound by this Agreement, and to perform its obligations under this Agreement;

(b)

this Agreement constitutes valid and binding obligations upon it, enforceable in accordance with its terms; and

(c)

the execution and performance by it of this Agreement and the activities contemplated by it do not and will not, to its knowledge, contravene any contractual restrictions or any existing applicable law or regulations binding on it.

7.2

Exegin’s Representations and Warranties. Exegin represents and warrants to Arkados that:

(a)

to its knowledge, Exegin has good, valid, legal title to the Licensed Technology, free of encumbrances of any kind, and has not unlawfully copied, misappropriated or infringed any patents, copyrights, trade secret rights or other intellectual property rights of a third party in those jurisdictions covered by the Bern Convention for the Protection of Literary and Artistic Works in respect of the Licensed Technology;

(b)

to its knowledge, the Licensed Technology does not contain any virus or any other contaminant, including, but not limited to, codes, commands or instructions that may be used to access, alter, delete, damage or disable the Licensed Technology, other software, firmware, or hardware;

(c)

the Licensed Technology does not contain any open source software, or any third party software, except as set forth on the “Third Party and Open Source Materials” as set forth on Exhibit “B” to this Agreement; and

(d)

to its knowledge, it has all rights necessary to provide the Licensed Technology to Arkados for the purposes of this Agreement.

(e)

it will comply with all applicable laws, rules, and regulations related to Arkados' rights and obligations under this Agreement and Exegin’s activities with relation to this Agreement, and Exegin further covenants not to violate any rights of third parties, be they in the nature of intellectual or other property rights or otherwise, in any manner that would expose Arkados to claims by third parties based upon the conduct of the Exegin.

7.3

No Other Warranties of Exegin. The representations and warranties in Section 7.2 are the exclusive representations of Exegin and are instead of any and all other warranties, representations or conditions (whether express, implied, oral or written) with respect to the subject matter of this Agreement, including any implied warranties or conditions of title, non-infringement, merchantability or fitness or suitability for a particular purpose, PROVIDED HOWEVER, THAT THIS DISCLAIMER SHALL NOT LIMIT IN ANY WAY ARKADOS’ ABILITY TO SEEK REPAIR OF ERRORS THAT PREVENT THE COMMERCIALLY REASONABLE OPERATION OF THE SOFTWARE IN ACCORDANCE WITH ITS FUNCTIONAL SPECIFICATIONS.. Exegin disclaims and Arkados waives all other such warranties, representations and conditions. Certain jurisdictions do not permit such exclusion of warranties, so this disclaimer may not apply to Arkados. To the extent permitted by those jurisdictions, all warranties respecting the Licensed Products, if any, are limited to the Warranty Period.

Part 8 - MAINTENANCE AND OTHER SERVICES

8.1

Maintenance Services.

(a)

HELP DESK

Exegin will provide Arkados with technical assistance for the Licensed Technology by email at any time or by telephone between 9:00 a.m. and 5:00 p.m. Pacific Time on business days observed in the Province of British Columbia, Canada.

(b)

ERROR CORRECTION

(i)

Reporting . Errors or other defects in the Licensed Technology Materials can be reported by email at any time or by telephone between 9:00 a.m. and 5:00 p.m. Pacific Time on business days observed in the Province of British Columbia, Canada.

(ii)

Acknowledgement . Exegin will acknowledge each defect report within one business day of receipt by providing Customer with a defect ticket number and a request for additional information, if needed.

(iii)

Classification . Within two (2) business days of receiving a defect report, Exegin will classify the defect’s severity level (as either urgent, high, medium, low, or comment) and assign resources to correct the defect.

High - Defect results in severely impaired functionality. A work around may exist but its use is unsatisfactory. In general, you would not release the product with such a defect. Examples: with certain steps, we may generate a Windows error/message that you can click Ok on and continue with whatever you were doing with no harmful effects.

Medium - Defect causes failure of non-critical aspects of the system. There is a reasonably satisfactory work around. The product may be released if the defect is documented, but the existence of the defect may cause customer dissatisfaction. Example: a non-Client Financial Report is not recognizing an option correctly, but if a filter is set, the report can be generated with the proper output.

Low - Defect of minor significance. A work around exists or, if not, the impairment is slight. Generally, the product could be released and most customers would be unaware of the defect's existence or only slightly dissatisfied. Example: A button or button set is slightly off center on a data screen, or the problem is purely cosmetic and not easily recognizable.

Comment - Enhancement request or design issue. These should probably be coded as Suggestions or brought to the Design Team by the originating person’s DT representative; These will have to be covered under optional engineering services along with business development.

(iv)

Resolution . Exegin shall use commercially reasonable efforts to correct each reported defect within the following time frames:

High: Within five business days of classification

Medium: Within ten business days of classification

Low: Before the next scheduled release

Comment: At Exegin’s discretion

(c)

MAINTENANCE

Exegin shall:

(i)

deliver to Licensee, within fourteen (14) days after a material change is made to any of the Licensed Technology, a copy of such change; and

(ii)

deliver to Licensee, within fourteen (14) days after the completion of any planned enhancement to Licensed Technology, a copy of such enhancement; and

(iii)

notify Licensee forthwith each time a material enhancement is made to Licensed Technology and provide a list of changed source files.

In addition, Exegin shall deliver to Licensee a maintenance release of the Licensed Technology at least once every six (6) months during the period covered by Section 8.2.

8.2.

Maintenance Fees. Arkados will pay Exegin US$5,000 per year, in advance, for each year of Maintenance Services. The first payment will be made upon execution of this Agreement. The second payment will be made on the one-year anniversary of the Effective Date. The first two payments are mandatory and shall constitute payment in full for the Maintenance Services. All subsequent payments are at the option of Arkados, however, all Maintenance Services will terminate immediately if subsequent payments are not made by the anniversary of the Effective Date.

8.3

Fees for Other Services. For a period of six (6) months from the Effective Date, Exegin will provide professional services as requested from time to time by Arkados in writing. Including but not limited to assistance with ports to other processors, MAC drivers for other radios and similar connectivity or accessibility not listed in Exhibit B hereto, at a rate of US$125.00 per hour on a time and materials basis. After the expiration of the six (6) month period, unless otherwise agreed in writing by the parties, Arkados will pay Exegin at Exegin’s then current hourly rates for such services.

8.4

Expenses. Provided same are preapproved in writing by Arkados, Arkados will reimburse Exegin for all travel costs incurred in connection with the services performed under this Agreement, and all related expenses.

8.5

Payment. Arkados will pay all amounts under sections 8.2, 8.3 and 8.4 within 30 days after being invoiced for them.

8.6

Termination.

(a)

Either party may terminate this Agreement with respect to this Part 8:

(i)

if the other party materially defaults in the performance or observance of any of its obligations and fails to remedy the default within 30 days after receiving a written demand to do so, provided that such demand is sufficiently detailed as to permit the other party to formulate a reasonable remedy; or

(ii)

if the other party becomes insolvent or bankrupt or makes an assignment for the benefit of creditors, or if a receiver or trustee in bankruptcy is appointed for it, or if any proceeding in bankruptcy, receivership, or liquidation is instituted against it and is not dismissed within 30 days following commencement thereof.

(b)

When any party has the option to terminate, it may exercise that option by giving the other party written notice of termination, which will be effective upon receipt.

(c) FOR THE AVOIDANCE OF DOUBT, The termination or expiration of this Agreement for any reason shall not LIMIT, DIMINISH, AMEND OR affect, in any way whatsoever, the license to the Licensed Technology or any sublicense thereof BY ARKADOS.

8.7

Upon Expiration or Termination. Upon expiration or termination of this Agreement for any reason:

(a)

each party will return all Confidential Information of the other party in its possession or control, except that Arkados may retain such information to the extent required for Arkados to meet its support, maintenance and warranty obligations to its existing customers;

(b)

Arkados will pay to Exegin all amounts its owes to Exegin; and

(c)

Notwithstanding anything to the contrary, only such rights and obligations of the parties under Part 3, Part 4, Section 5.2, Section 5.3, Section 5.4 Section 5.5, Section 6.3, Section 6.4, Section 8.6(c), Part 9, and Part 10 will survive and continue after termination or expiration of this Agreement.

Part 9 - LIABILITY

9.1

Indirect Damages. WITH THE EXCEPTION OF LIABILITY FOR INFRINGEMENT UPON THIRD PARTY’S INTELLECTUAL PROPERTY, IN NO EVENT WILL EITHER PARTY BE LIABLE FOR ANY INDIRECT, INCIDENTAL, SPECIAL, PUNITIVE OR CONSEQUENTIAL DAMAGES ARISING OUT OF OR IN CONNECTION WITH THIS AGREEMENT OR THE EXEGIN TECHNOLOGY.

9.2

Total Liability. EXEGIN’S TOTAL LIABIITY FOR ITS INDEMNIFICATION OBLIGATION UNDER THIS AGREEMENT SHALL NOT EXCEED, IN THE AGGREGATE, US$2 MILLION. WITH THE EXCEPTION OF LIABILITY FOR FEES OWED PURSUANT TO SECTION 5.1 OR PART 8 OF THIS AGREEMENT, ARKADOS’ TOTAL LIABILITY UNDER THIS AGREEMENT FOR DAMAGES (INCLUDING DIRECT DAMAGES) WILL NOT EXCEED THE LICENSE FEES PAID BY ARKADOS TO EXEGIN UNDER SECTION 5.1.

9.3

Indemnification by Exegin. Exegin will defend, indemnify and hold Arkados harmless from and against all claims, fines, taxes, damages, expenses and costs (including reasonable lawyers’ fees) incurred by Arkados or its officers, directors, shareholders, employees and representatives in connection with a claim for infringement by Exegin of any third party intellectual property or that any of Exegin’s representations or warranties under this Agreement are untrue, provided that:

(a)

Arkados gives Exegin prompt written notice of the claims and, reasonable assistance and access to information to defend them, provided however, that under no circumstances may Exegin settle any claim that includes an admission of liability on the part of Arkados without the explicit prior written consent of Arkados;

(b)

Arkados does not negotiate, settle or compromise any of the claims without Exegin’s prior written consent; and

(c)

the claims are not related in whole or part to:

(i)

use of an altered version of any of the Licensed Technology, which alteration was by Arkados, unless the claim would have arisen even in the absence of the alterations;

(ii)

use of a non-current version of any of the Licensed Technology, provided that Exegin made a current version available to Arkados which eliminates the claim and Exegin has so notified Arkados;

(iii)

use of any of the Licensed Technology in combination with any other software or materials, unless the claim would have arisen even in the absence of such combination;

(iv)

Exegin’s having complied with Arkados’ written instructions or specifications; or

(v)

Arkados’ breach of any obligation in this Agreement.

9.4

Indemnification by Arkados. Arkados will indemnify and hold Exegin harmless from and against all claims, fines, taxes, damages, expenses, costs (including reasonable lawyers’ fees) incurred by Exegin or its officers, directors, shareholders, employees and representatives for any reason relating directly or indirectly to the Arkados Products, but only to the extent that the claims were not caused by Exegin’s breach of any obligation in this Agreement.

Part 10 - GENERAL

10.1

Communication. All communications required or permitted by this Agreement to be made by either party to the other will be made in writing and be delivered by hand, registered mail at the addresses and numbers set-out above, or to such other addresses of which a party gives the other notice from time to time. Proof of delivery in that manner will constitute proof of receipt.

10.2

Law. This Agreement will be interpreted, construed, and enforced in all respects in accordance with the substantive law of the State of California without reference to its choice of laws principles, and excluding the provisions of the U.N. Convention on Contracts for the International Sale of Goods.

10.3

Dispute Resolution. It is the strict intention of the parties that all disputes be resolved amicably. In the event of a dispute, the parties first shall work cooperatively and in good faith to resolve same through its respective Chief Executive Officer. If the parties cannot resolve the dispute within fifteen (15) business days, the parties shall resort to commercial arbitration before a panel of three (3) arbitrators, with one (1) arbitrator chosen by each party and the third chosen by the parties’ selected arbitrators. Such arbitration shall be conducted pursuant to the rules provided by the American Arbitration Association. Nothing in this Section prohibits a party from applying to court of competent jurisdiction for injunctive or other equitable relief.

10.4

Force Majeure. Neither party will be responsible for any failure to perform its obligations hereunder to the extent caused by events beyond the non-performing party’s reasonable control, including acts of God, war, riot, embargoes, acts of government including civil or military authorities, export controls, catastrophe, fire, floods, accidents, strikes, shortages of transportation, facilities, fuel, energy, labour or material acts of public enemy, but not including the financial status of the non-performing party.

10.5

Relationship. The parties are independent contractors. Neither party will hold itself out as the agent or partner of the other party.

10.6

Currency. Unless otherwise stated, all references in this Agreement to payments and monetary amounts mean lawful currency of the United States of America.

10.7

Assignment. Neither party will assign or transfer, in whole or in part, its interest in this Agreement without the prior written consent of the other party, which will not be unreasonably withheld, conditioned, or delayed, except that either party may assign its rights and obligations hereunder without prior consent in connection with a merger, acquisition or sale of substantially all of its assets.

10.8

Enurement. This Agreement enures to the benefit of and is binding upon the parties and their respective successors and permitted assigns.

10.9

Severability. The invalidity of any provision of this Agreement will not affect the validity of any other provision.

10.10

Entire Agreement. This Agreement is the entire agreement, and supersedes all previous understandings, agreements and representations between the parties, written or oral regarding the subject matter contained herein, and may be amended only by a written document signed by both parties.

10.11

Waiver. The failure of either party to enforce at any time for any period any provision hereof will not be construed to be a waiver of such provision or of the right of such party thereafter to enforce each such provision, nor shall any single or partial exercise of any right or remedy hereunder preclude any other or further exercise thereof or the exercise of any other right or remedy.

10.12

Anti-Corruption. Neither party shall perform any actions that are prohibited by local and other anti-corruption laws (including the U.S. Foreign Corrupt Practices Act, collectively “Anti-Corruption Laws”) that may be applicable to one or both parties to this Agreement. Without limiting the foregoing, neither party shall make any payments, or offer or transfer anything of value, to any government official or government employee, to any political party official or candidate for political office or to any other third party related to the transaction in a manner that would violate Anti-Corruption Laws.

10.13

Further Assurances. Each party shall execute any instruments reasonably believed by the other to be necessary to fully implement the provisions of this Agreement.

10.14

Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original and when taken together shall constitute one and the same document. Facsimile or other electronic reproduction of signatures shall be deemed originals.

[REMAINDER OF PAGE LEFT INTENTIONALLY BLANK
SIGNATURE PAGE TO FOLLOW]

TO EVIDENCE THEIR AGREEMENT each of the parties has executed this Agreement as of the Effective Date.

EXEGIN TECHNOLOGIES LIMITED		ARKADOS, INC.

By:	/Leslie Mulder/	By:	/Terrence DeFranco/
	Authorized Signatory		Authorized Signatory

Name (printed): Leslie Mulder		Name (printed): Terrence DeFranco

Its:	President	Its:	CEO
	Title of Authorized Signatory		Title of Authorized Signatory

Execution Copy

CONSULTING AGREEMENT

THIS CONSULTING AGREEMENT (the “Agreement”) is effective as of the 1st day of July, 2013 (the “Effective Date”) by and between ARKADOS GROUP, INC., a Delaware corporation (hereinafter referred to collectively with its subsidiaries as the “Company”) with its address at 211 Warren Street, Suite 320, Newark, New Jersey 07103, and MAT Research, LLC, an Oregon limited liability company with an address at 15265 NW Perimeter Drive, Beaverton, Oregon 97006(sometimes referred to hereinafter as “MAT” or the “Consultant”).

RECITALS

WHEREAS, Consultant has unique knowledge and expertise in the industry in which the Company does business; and

WHEREAS, the Company desires to retain the services of the Consultant to provide certain strategic advisory services to the Company, and the Consultant desires to perform such services for the Company.

NOW THEREFORE, in consideration of the mutual covenants and promises contained herein and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged by the parties hereto, the parties agree as follows:

1. Engagement of Services

1.1. Services . During the Consultation Period (as defined below), the Consultant agrees to perform such consulting, advisory and related services to and for the Company as may be reasonably requested from time to time by the Company.

1.2. Contract for Personal Services of Alan Pan . It is the intention that any Services to be performed by Consultant pursuant to this Agreement shall be performed by its principal, Alan Pan and shall not be delegated or assigned to any other individual or entity without the express written consent of the Company. In the event that Alan Pan is unable or unwilling to perform the Services, this Agreement may be terminated by Company without penalty or further obligation to Consultant.

2. Compensation

2.1 Consulting Fees. The Company shall pay the Consultant in shares of common stock of the Company a fee in the amount of 20,000,000 shares in connection with the consummation of an agreement with a customer that produces non-contingent material revenue to the Company, and in addition to such initial bonus, for contributing to the growth of the Company’s gross revenue, the amounts set forth in the table below. Each of the tiers is cumulative with the previous tier and not independent of the others or intended to compound. For the avoidance of doubt, and by way of example, achieving the second tier would entitle Consultant to the amount stated next to that tier and not to the amount for any previous tier.

Arkados Independent Consultant

Execution Copy

Cumulative Milestone (Gross Revenue of Company)		Common Shares to be issued
$	500,000	30 million
$	2,000,000	30 million
$	4,000,000	30 million

2.2 Reimbursement of Expenses. The Company shall reimburse the Consultant for all reasonable and necessary expenses incurred or paid by the Consultant in connection with, or related to, the performance of his services under this Agreement. The Consultant shall submit to the Company itemized monthly statements, in a form satisfactory to the Company, of such expenses incurred in the previous month. The Company shall pay to the Consultant amounts shown on each such statement within 30 days after receipt thereof. Notwithstanding the foregoing, the Consultant shall not incur total expenses in excess of $100 per month without the prior written approval of the Company.

2.3 Benefits. The Consultant shall not be entitled to any benefits, coverages or privileges, including, without limitation, social security, unemployment, medical or pension payments, made available to employees of the Company.

2.4 Consultant shall not be entitled to any compensation other than as specified in this Agreement.

3. Independent Consultant Relationship

3.1 Nature of Relationship . Consultant’s relationship with Arkados will be that of an independent contractor and nothing in this Agreement shall be construed to create a partnership, joint venture, or employer-employee relationship. Since Consultant will not be an employee of Arkados, Consultant will not be entitled to any of the benefits which Arkados may make available to its employees, such as group insurance, profit-sharing or retirement benefits. Consultant is not the agent of Arkados and is not authorized to make any warranty, representation, contract, or commitment on behalf of Arkados unless specifically requested or authorized to do so by Arkados. Consultant will indemnify, defend and hold harmless Arkados for claims of any third party arising out of any unauthorized statements by Consultant. Consultant is responsible for providing all facilities, tools and equipment that Consultant may require to perform services for Arkados hereunder.

3.2 Consultant Responsible for Taxes and Records . Consultant acknowledges and agrees that it will be solely responsible for and will file and remit on a timely basis, all tax returns and payments required to be filed with or made to any Federal, State or local tax authority, on behalf of Consultant and/or Consultant’s employees, with respect to Consultant’s performance of services and receipt of fees under this Agreement, including, without limitation, amounts required to be paid for (i) social security, (ii) Federal, State or any other employee payroll taxes, (iii) Federal unemployment taxes, (iv) workers’ compensation, (v) disability insurance, and (vi) similar items. No payments to Consultant will be subject to withholding by Arkados for the payment of Taxes and Other Payments. Consultant will be solely responsible for and must maintain adequate records of expenses incurred in the course of performing services under this Agreement. Arkados will regularly report amounts paid to Consultant by filing Form 1099 MISC with the Internal Revenue Service as required by law.

Arkados Independent Consultant

Execution Copy

3.3 Risk Borne by Consultant . Consultant shall perform the services hereunder entirely at the Consultant’s risk. Consultant assumes all responsibility for the subject matter of this Agreement. Consultant shall be solely liable for any acts made during Consultant’s performance under this Agreement. Any assignment of Consultant’s duties or obligations hereunder is hereby expressly prohibited. Any such assignment shall be deemed void and without force or effect.

3.4 Compliance with Applicable Law . Consultant agrees that, in performance of the services required under this Agreement, Consultant has full and sole responsibility for compliance with all applicable laws, statutes, ordinances and regulations. Additionally, Consultant has the sole responsibility for compliance with all other matters in conjunction with the services to be performed hereunder.

3.5 Indemnification . Consultant further agrees to indemnify, defend and hold harmless Arkados from any and all claims, loss or liability incurred by reason of any (a) unauthorized statements made while engaged in the service of Arkados; (b) undisclosed conflict or by the alleged breach by Consultant of any confidentiality, restrictive covenants or services agreement with anyone other than Arkados; (c) any intentional act or omission or gross negligence while engaged in services rendered to or on behalf of Arkados; (d) any breach of the provisions of this Agreement.

4. Restrictive Covenants; Company Property.

4.1 Confidential Information

(a) Consultant agrees during the term of this Agreement and at all times thereafter to take all steps necessary to hold in trust and confidence Confidential Information of Arkados and its clients/customers, vendors/suppliers and third parties disclosed to Consultant in the course of providing services to Arkados. Consultant will not directly or indirectly use or disclose any Confidential Information, for any purpose not specifically authorized by Arkados in writing. “Confidential Information” includes, but is not limited to, technical and business information (in any form whatsoever) and material relating to products, trade secrets, research and development, production, processes, policies, procedures, costs, profit or margin information, employee information, finances, budgets, projections, investors, customers and customer lists, addresses, contact information and similar information, marketing and production and future business plans, documents, such as drawings, manuals, letters, notes, notebooks, reports, sketches, memoranda, records, files, data (in any form), vendor lists, addresses, contact information and similar information.

(b) Notwithstanding the other provisions of this Agreement, nothing received by Consultant will be considered to be the Confidential Information if: 1) it has been published or is otherwise readily available to the public other than by a breach of this Agreement; 2) it has been lawfully received by Consultant from a third party without confidential limitations; 3) it has been independently developed by or for Consultant by personnel or agents having no access to the Confidential Information and same may be proven by documentary evidence; or 4) it was known to Consultant prior to its receipt by Consultant in the course of work performed for Arkados and may be proven by documentary evidence.

(c) In addition, nothing set forth herein shall prevent disclosure of this Agreement by the Company as may be required to governmental agencies.

Arkados Independent Consultant

Execution Copy

4.2 Assignment of Works and Inventions .

(a) Consultant acknowledges and agrees that anything produced by Consultant in the course of performance of services pursuant to this Agreement is a work made for hire. As such, Consultant hereby assigns to Arkados all patent, copyright, and other intellectual property rights Consultant may have in any Inventions or other protectable work created in the course of any services performed for Arkados, whether such work was created solely by Consultant or jointly with another. Consultant further agrees to execute, upon Arkados’ request, any documents reasonably necessary to perfect such rights in Arkados. Inventions resulting from Consultant’s work for Arkados under this Agreement are the exclusive property of Arkados.

(b) For purposes of this Agreement, “Inventions” includes any and all inventions, improvements, discoveries, technical developments, computer programs, notes, sketches, drawings, reports or other works that Consultant, solely or jointly with others, conceives or reduces to practice as a result of, or in the course of, any services performed for Arkados. Consultant assigns to Arkados Consultant’s entire right, and shall cause any employee who may be an inventor of an Invention to assign his or her entire right to all such Inventions. Consultant agrees to cooperate with Arkados or its designee(s), both during and after the term of this Agreement, in the procurement and maintenance of Arkados’ rights in the Inventions, and to sign (or its employees to sign) all papers which Arkados may consider necessary and desirable for securing and maintaining such rights on behalf of Arkados or its designee(s).

(c) Arkados shall not have rights to any Invention conceived or reduced to practice by Consultant for which no equipment, supplies, facility, or trade secret information of Arkados was used and which was developed entirely on Consultant’s own time except if 1) the Invention relates (i) to Arkados’ business or (ii) to Arkados’ actual or demonstrably anticipated research or development, or 2) the Invention results from any services performed by Consultant for Arkados.

(d) Consultant agrees to assist Arkados in any reasonable manner to obtain and enforce for Arkados’ benefit patents, copyrights, and other property rights in any and all countries, and Consultant agrees to execute, when requested, patent, copyright or similar applications and assignments to Arkados and any other lawful documents deemed necessary by Arkados for the purposes of this Agreement. Consultant further agrees that the obligations and undertakings stated in this Section will continue beyond the termination of Consultant’s service to Arkados. If called upon to render assistance under this Section, Consultant will be entitled to reimbursement of expenses incurred at or upon written request of Arkados.

4.3 Conflicts of Interest, Non-Competition, Non-Solicitation . Consultant agrees during the term of this Agreement not to accept work or enter into a contract or accept an obligation inconsistent or incompatible with Consultant’s obligations under this Agreement or with the scope of services to be rendered for Arkados. Consultant warrants that to the best of Consultant’s knowledge, there is no other contract or duty on Consultant’s part now in existence inconsistent with this Agreement. During the term of this Agreement and for a period of two (2) years after expiration or termination for any reason of this Agreement, Consultant agrees not to:

(a) compete with the business of Arkados, whether individually or through any entity, or to use (or permit the use of) any Confidential Information, directly or indirectly, for the purpose of competing with the business of Arkados; or

(b) suggest to, induce or persuade any customer, client, vendor, supplier, employee, Consultant or agent of Arkados to terminate or diminish its relationship with Arkados.

Arkados Independent Consultant

Execution Copy

Subject to the limitation regarding use of Confidential Information of Arkados set forth above, the foregoing is not intended to otherwise limit the employment of Consultant in his profession.

4.4 Arkados Property . Consultant acknowledges that Arkados’ sole and exclusive property includes all Arkados trademark, trade names, service marks, copyrights, and Confidential Information (defined above), whether delivered to Consultant by Arkados, made available to Consultant, or made by Consultant in the performance of services under this Agreement, relating to the business activities of Arkados or its customers or suppliers and containing any information or data whatsoever. Upon expiration or termination of this Agreement for any reason or in any manner, with the exception of any samples purchased by Consultant (not on behalf of or at the direction of Arkados), Consultant agrees to return to Arkados all property of Arkados then in Consultant’s possession, except as Arkados may, by proper written permission, allow Consultant to retain. Consultant further agrees that nothing contained herein shall be a deemed a license to use any Arkados property, except as directed by Arkados in the course of performing services hereunder.

4.5 Injunctive Relief for Breach . Consultant acknowledges and agrees that the obligation and promises of Consultant under Sections 4.1, 4.2, 4.3, and 4.4 of this Agreement are of a unique, intellectual character that gives them particular value. Consultant acknowledges and agrees that a breach of any of the promises or agreements contained in this Agreement will result in immediate irreparable and continuing damage to Arkados for which there will be no adequate remedy at law, and, in the event of such breach, Arkados will be entitled to injunctive relief and/or a decree for specific performance, and such other relief as may be proper without the necessity of posting bond and which may be taken cumulatively and not concurrently. Any action taken by Arkados pursuant to this Section shall not be deemed an election of remedies.

5. Term/Termination

5.1 Term . This Agreement shall be for a term of two (2) years from the Effective Date but may be terminated earlier upon sixty (60) days advance notice by either party.

5.2 Termination of this Agreement . If Consultant terminates prior to completion of any project assignment and without having obtained from Arkados advance approval for such termination, Consultant shall be liable to Arkados for damages suffered as a result of said termination including, without limitation, damages suffered by the Arkados client or customer and costs incurred by Arkados in connection with hiring a new Consultant.

5.2 Survival of Provisions. The provisions set forth in Article 4, Section 5.1(b) and Article 6 of this Agreement shall survive any termination or expiration of this Agreement.

6. General Provisions .

6.1 Governing Law . This Agreement shall be governed and construed in accordance with the internal laws of the State of New Jersey without regard to the conflicts of law provisions thereof. The Federal and State courts within the State of New Jersey, County of Essex, shall have exclusive jurisdiction to adjudicate any disputes arising out of or in connection with this Agreement, and for any litigation adjudicating such disputes, venue shall lie in these courts.

Arkados Independent Consultant

Execution Copy

6.2 Entire Agreement . This Agreement sets forth the entire understanding and agreement of the parties as to the subject matter of this Agreement. It may not be amended except in writing, signed by both parties.

6.3 Severability; Waiver . If any provision, or any portion of such provision, of this Agreement is held to be invalid or unenforceable for any reason, the remaining provisions, or portion of such provision, will continue in full force without being impaired in any way. Arkados and Consultant agree to replace any invalid and unenforceable provision with a valid and enforceable provision which most closely approximates the intent and economic effect of the invalid or unenforceable provision. The waiver by Arkados of a breach of any provision of this Agreement of Consultant will not operate or be interpreted as a waiver of any other or subsequent breach by Consultant.

6.4 Successors and Assigns . Neither this Agreement nor any of the rights or obligations of Consultant arising under this Agreement may be assigned or transferred without Arkados’ prior written consent. This Agreement will be for the benefit of Arkados’ successors and assigns, and will be binding on Consultant’s heirs, successors and legal representatives.

6.5 Headings . Titles or headings to the sections and paragraphs of this Agreement are not part of the terms of this Agreement, but are inserted solely for convenience of reference.

6.6 Notices . All notices, requests and other communications under this Agreement must be in writing, and must be mailed by registered or certified mail, postage prepaid and return receipt requested, or delivered by hand to the party to whom such notice is required or permitted to be given. If mailed, any such notice will be considered to have been given three (3) business days after it was mailed, as evidenced by the postmark. If delivered by hand, any such notice will be considered to have been given when received by the party to whom notice is given, as evidenced by written and dated receipt of the receiving party. The mailing address for notice to either party will be the address in the introductory paragraph of this Agreement. Either party may change its mailing address by notice as provided by this Section 6.6.

6.7. Miscellaneous .

6.7.1 No delay or omission by the Company in exercising any right under this Agreement shall operate as a waiver of that or any other right. A waiver or consent given by the Company on any one occasion shall be effective only in that instance and shall not be construed as a bar or waiver of any right on any other occasion.

6.7.2 The captions of the sections of this Agreement are for convenience of reference only and in no way define, limit or affect the scope or substance of any section of this Agreement.

6.7.3 In the event that any provision of this Agreement shall he invalid, illegal or otherwise unenforceable, the validity, legality and enforceability of the remaining provisions shall in no way he affected or impaired thereby.

6.8. Counterparts . This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original, but all of which together shall constitute one and the same instrument.

Arkados Independent Consultant

Execution Copy

IN WITNESS WHEREOF, the parties have executed this Consulting Agreement as of the date first above written.

	ARKADOS GROUP, INC.

	By:	/Terrence DeFranco/
	Name: Terrence DeFranco
	Title: CEO

	CONSULTANT:

	MAT RESEARCH, LLC

	By:	/Tai Jee Pan/
	Name: Tai Jee Pan (aka Alan Pan)
	Title: President

Arkados Independent Consultant

EXHIBIT 31.1

CERTIFICATIONS

I, Terrence DeFranco, certify that:

I have reviewed this Form 10-Q of Arkados Group, Inc.;

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

As sole officer of the registrant, I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under my supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under my supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report my conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

As sole officer, I have disclosed, based on my most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or person(s) performing the equivalent functions):

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting

Date October 11, 2013	/s/ Terrence DeFranco
	Terrence DeFranco, CEO

EXHIBIT 31.2

CERTIFICATIONS

I, Terrence DeFranco, certify that:

I have reviewed this Form 10-Q of Arkados Group, Inc.;

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting

Date October 11, 2013	/s/ Terrence DeFranco
	Terrence DeFranco
	Principal Accounting Officer

EXHIBIT 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the quarterly report on Form 10-Q of Arkados Group, Inc. (the “Company”) for the quarterly period ended August 31, 2013 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Terrence DeFranco, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:

(1)

The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)

The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

	/s/Terrence DeFranco
	Terrence DeFranco
	Chief Executive Officer
	October 11, 2013

A signed original of this certification has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

EXHIBIT 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the quarterly report on Form 10-Q of Arkados Group, Inc.(the “Company”) for the quarterly period ended August 31, 2013 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Terrence DeFranco, Principal Accounting Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:

(1)

The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)

The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

	/s/Terrence DeFranco
	Terrence DeFranco
	Principal Accounting Officer
	October 11, 2013