UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
(Mark One)
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ANNUAL
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended May 31, 2016
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TRANSITION
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________
to ______________
Commission file number: 0-27587
ARKADOS GROUP, INC.
(Exact name of registrant as specified in
its charter)
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Delaware
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22-3586087
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(State or other jurisdiction of incorporation or organization)
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(I.R.S. Employer Identification No.)
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211 Warren Street, Suite 320, Newark, New Jersey
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07103
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(Address of principal executive offices)
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Zip code
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Issuer’s telephone number: (862) 373-1988
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Securities registered under Section 12(b) of the Exchange Act:
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Title of each class
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Name of each exchange on which registered
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Securities registered under Section 12(g) of the Exchange Act:
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Common Stock, $.0001 par value
Indicate by check mark if the registrant
is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
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Yes
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No
Indicate by check mark if the registrant
is not required to file reports pursuant to Section 13 or 15(d) of the Act.
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Yes
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No
Indicate by a 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
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No
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Indicate by check mark whether the Registrant
has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted
and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such
shorter period that the Registrant was required to submit and post such files).
Yes
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No
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Indicate by check mark if disclosure of
delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s
knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment
to this Form 10-K.
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Indicate by check mark whether the registrant
is a large accelerated filer, an accelerated filer or a non-accelerated filer. (See definition of “accelerated filer and
large accelerated filer” in Rule 12b-2 of the Exchange Act). (Check one):
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Large accelerated filer
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Accelerated filer
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Non-Accelerated filer
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Smaller reporting company
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Indicate by check mark wither the registrant
is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes
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No
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The aggregate market value of the voting and non-voting common
equity held by non-affiliates computed by reference to the price ($1.00) at which the common equity was last sold
on the last day of our most recently completed second fiscal quarter was $6,959,777.
The number of shares outstanding of the registrant’s common
stock, as of the last practicable date, September 21, 2016, was 13,373,167.
DOCUMENTS INCORPORATED BY REFERENCE
None.
(1) The stock price used for this calculation was for the last
day of the Company’s most recently completed second fiscal quarter on which trading occurred for the Company’s stock. For purposes of calculating the aggregate market value of shares of our common stock issued and outstanding
held by non-affiliates as set forth on the cover page of this Annual Report on Form 10-K, we have assumed that all outstanding
shares are held by non-affiliates, except for shares held by each of our executive officers, directors and 5% or greater stockholders.
In the case of 5% or greater stockholders, we have not deemed such stockholders to be affiliates unless there are facts and circumstances
which would indicate that such stockholders exercise any control over our company, or unless they hold 10% or more of our outstanding
common stock. These assumptions should not be deemed to constitute an admission that all executive officers, directors and 5% or
greater stockholders are, in fact, affiliates of our company, or that there are not other persons who may be deemed to be affiliates
of our company.
ARKADOS GROUP, INC.
FORM 10-K
INDEX
As used in this Annual Report on Form 10-K, the terms “we”,
“our” or “us” mean Arkados Group, Inc., a Delaware corporation and its consolidated subsidiaries, unless
the context indicates otherwise.
PART I
ITEM 1. BUSINESS
Overview
Arkados Group, Inc., a Delaware corporation, was incorporated
in 1998 and carries out its activities through its wholly-owned subsidiaries, Arkados, Inc., or Arkados, a Delaware corporation,
and Arkados Energy Solutions, LLC, or AES, a Delaware limited liability company (collectively the “Company”). Our two
active subsidiaries combine to deliver technology solutions and services for building and machine automation and energy conservation.
Our principal offices are located in Newark, New Jersey at the Economic Development Corporation at the New Jersey Institute of
Technology.
We underwent a significant restructuring after
December 23, 2010 when substantially all of our then-existing assets were acquired by STMicroelectronics, Inc., a Delaware
corporation (“ST Micro”), as disclosed in the interim report on Form 8-K filed with the Securities Exchange
Commission (“SEC”) on December 29, 2010 and further described (as to the closing) in the Form 8-K filed July 12,
2011(sometimes referred to hereinafter as the “Asset Sale”). This restructuring, focusing on settlements with
unsecured creditors of the Company, continued through May 31, 2016 and as of the date of this report.
Following the Asset Sale, we have shifted our focus towards
development of a universal platform that provides software solutions for the Internet of Things market as well as smart grid and
smart applications primarily in the areas of energy management, health care, smart industrial machines and building security and
smart building.
Arkados
Arkados, our software development subsidiary, was organized
in 2004. It develops proprietary, cloud-based device and system management software solutions, which we refer to as the Arktic
software platform, and delivers software services and support. Arktic is an open, scalable and interoperable software platform
that supports industrial applications, including applications for smart manufacturing, measurement and verification as well as
predictive analysis, or data gathering for baselining machine performance data and reporting of anomalies. Arkados has licensed
its software directly to Tatung Co., a Taiwan corporation (“Tatung”) for use in their manufacturing facility as well
as through AES to end customers as part of an integrated solution with Tatung hardware products.
AES
AES, our energy conservation services subsidiary, was organized
in 2013 but did not commence operations until early 2015. AES provides energy conservation services and solutions to commercial
and buildings throughout the northeastern United States. These services include energy consumption assessments and recommendations
as well as acting as the general contractor for light-emitting diode (“LED”) lighting retrofits, oil-to-natural gas
boiler conversions and solar photovoltaic (“PV”) system installation. AES also markets and sells Arkados technology
solutions to help building owners save money. AES sells its services directly to building owners and managers.
Dependence on Financing Activities
We generated revenue during fiscal year 2016, however, such
revenue was not sufficient to cover our operating expenses and therefore, we remained dependent on outside sources of financing
by investors and related parties for our operations. Any such financing of operating expenses occurred through convertible debt
and equity (common stock). Recent offerings of stock and convertible debt are set forth under the heading “
Recent Sales
Of Unregistered Securities
” in Part II of this report as well as the quarterly reports on Form 10-Q and the interim reports
on Form 8-K filed during the last fiscal year.
Following the December 23, 2010 Asset Sale, we engaged in the
process of finalizing settlement and release agreements with our secured creditors, other noteholders, former employees and its
other unsecured creditors. As a result of the Asset Sale and our restructuring, we reached settlement on approximately $16.8 million
of our pre-existing debt, which has been either released or converted to a right to receive common stock of the Company. Since
May 31, 2014 and as of the date of this report, we fully and finally settled $2.9 million of unsecured debt existing at the time
of the Asset Sale to ST Micro. We intend to offer settlements for any remaining unsecured debt outstanding in exchange for the
Company’s agreement to issue shares of its common stock at the rate of one share for each $1.20 of principal and interest
exchanged. The issuance of shares of the Company’s common stock is claimed to be exempt from registration under the Securities
Act of 1933, as amended (the “Securities Act”) pursuant to Section 3(a)(9) for exchanges of securities of the same
issuer without payment of solicitation fees and Section 4(a)(2) for sales not involving a public offering. The issuance of the
warrants is claimed to be exempt from registration pursuant to Section 4(a)(2) of the Securities Act.
Our Markets
In order to effectively
compete in today’s markets, we believe businesses need to continually focus on increasing productivity, i.e. getting
more from less. One of the main areas where businesses can increases their efficiency is in the management of their long term
assets, particularly machinery and real estate. New technology advancements are able to help owners not only decrease the
cost of ownership of these assets, but can also extend the life of them, both driving a much higher return on assets through
increased output and reducing operational costs, thus increasing productivity and creating a high return on investment.
The Internet of Things is the network of physical objects connected
to the internet that have the ability to process information and communicate with the external world. We believe the Internet of
Things is profoundly changing the way we live our lives and how businesses conduct business. According to Gartner Group, there
will be over 21 billion “things” connected to the internet by 2020, or in other words, 3 things per each human being
on earth. The Gartner Group reported that the market size for services is expected to be $235 billion in 2016, with the majority
coming from business services.
Arkados’ solutions and software seeks to leverage
the Internet of Things principals to help commercial customers increase their return on investment in facilities by reducing
energy and maintenance costs, extending asset life and enhancing sustainability. This area is typically referred to as the
Industrial Internet of Things (“IIoT”).
We believe, in terms of energy efficiency, that applying an
IIoT approach by using Internet connected gateways and sensors to gather data, extract intelligence and enable more efficient usage
of energy-consuming machines and devices can reduce energy expenditures by up to 25% and potentially much more when combined with
implementing other energy conservation measures, such as conversion to LED lighting.
In addition to energy efficiency, IIoT can reduce operating
expenses, particularly operating and maintenance of long term assets. These hard expenses can equate to up to 10% of the overall
operating budget and any reduction in this cost falls directly to the bottom line for most businesses.
Lastly, IIoT can also enhance conditions within the workplace
and increase productivity and sustainability. Many businesses are increasingly under pressure to continue to squeeze more productivity
from operations in order to remain competitive, and social pressures are forcing businesses to do so while caring for our environment.
According to a McKinsey & Company survey, 33% of companies stated that the top reasons for addressing sustainability include
improving operational efficiency and lowering costs. By employing IIoT solutions to optimize conditions and increase productivity,
businesses may be able to balance their goals to increase productivity with maintaining a cleaner, safer environment for workers
and the community in which they operate.
Our corporate strategy is to leverage the capabilities of our
technology platform to enhance the offerings of our service business and deliver a unique value proposition to our commercial customers
defined in terms of return on investment, operational cost savings and unmatched service. Since beginning these undertakings in
2013, we have developed our Arktic software platform, which is unique in its open, scalable and interoperable design and we have
integrated this software with hardware products of our partner Tatung. Our services business has completed a number of large scale
LED lighting projects and is expanding its services to include oil-to-natural gas boiler conversions and solar PV system installations.
We believe our combination of technology products and energy
services has positioned Arkados as a source for turnkey, cutting-edge solutions that immediately bring value to our customers by
reducing costs, conserving energy and seamlessly integrating into their existing systems and has set the stage for additional improvements
in the future.
Sales Force Development and Marketing
Arkados
We have developed a sales force to conduct direct sales activities
with select customers. We expect to develop our sales force to include a network of direct sales regions. As we develop our international
relationships with Tatung, 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.
We anticipate conducting the majority of our future sales in
conjunction with the sales activities of AES. The scope of our sales activities for Arkados will include acting as technical sales
representative and providing technology support and implementation services and other services in support of the activities of
AES.
AES
We developed a direct sales force to focus mainly on opportunities
in the northeastern region of the United States. These sales activities target commercial facilities owners and managers of virtually
all kinds, including commercial office buildings, hospitals, schools, warehouses, hotels, etc. We expect to regularly work with
partners in the construction and property management industries to reach the end customers. For the foreseeable future, we expect
to maintain our focus on the current region and penetrate the large number of opportunities that exist there. We anticipate supplementing
our direct sales force with other representatives and channel partners. The scope and development of our sales and marketing organization
will depend, among other things, on the amount of capital available to us.
Strategic Relationships
We continue to foster our relationship with Tatung and believe
that this strategic relationship is a key competitive advantage for Arkados as we develop IIoT solutions.
Research and Development
Arkados
Research and development in a
rapidly changing technology environment is one of the keys to our success. We allocate resources as much as possible within
our current operational limits to explore and exploit advancements in mobile and cloud computing, data processing
technologies, wireless and broadband technologies and energy storage technologies that will lead to new products and services
within our core competencies. These include the development of new software with a focus on M2M bridges, building networks
and the Internet of Things within the smart building/smart machine areas via our strategic partnerships. We may engage in
certain activities in pursuit of further commercial development as opportunities arise from these
relationships.
In 2015, we rolled our Process and Event Management System
for smart factory, or PEMS-SF. This system is intended to improve efficiency of a factory by use of Arkados’
software solutions residing in the factory’s computer systems and in the Arkados’ cloud computing platform. We
have also developed a service platform being used by Tatung in the manufacturing of electronic devices. We are currently
developing with Tatung a predictive maintenance module designed to be used to predict the failure of free-standing coolers.
We anticipate this product will be rolled out by the third quarter 2016.
In May 2016, we rolled out a new product for smart buildings
called Energy Management Panel, or EMP. EMP is a measurement and verification process for quantifying the savings achieved by energy
conservation measures.
AES
AES has no research and development activities at this time.
Patents, Licenses and Trademarks
We continue to maintain our license with ST Micro for patents
relating to building automation services.
In addition, we maintain the federal registration
of our “Arkados” mark.
Other than as stated above, the Company did not acquire any
patents, licenses or trademarks during the period of this report.
Competition
Arkados
Arkados faces competition in the IIoT market for smart building/smart
grid industries segments from multiple companies.
Firstly, there are several large players within the smart building
market, including but not limited to Johnson Controls, Siemens, Honeywell, and General Electric. These companies provide sophisticated
building management systems for large commercial facilities and essentially dominate the playing field and have done so for years.
We believe the landscape, however, is changing as technology advances and legacy systems become outdated and expensive to maintain.
As the paradigm shifts to open and scalable solutions for building management, we believe that Arkados can gain a competitive advantage
over time. Initially, we seek to integrate our systems as a value-added upgrade or enhancement to existing management systems.
In the future, depending on conditions, we may seek to expand our offerings to compete head on with the larger players.
Additionally, there are early stage technology companies that
represent direct competition to Arkados, including Optimum Energy and Enertiv. These companies are focused on data gathering and
analytics to improve building efficiency and ultimately save money. We believe that we are unique initially in our approach. Our
turnkey solutions are very flexible and highly customizable. Secondly, we believe that our business model and strategic relationships
allow us to be price competitive, which drives higher return on investment for our customers. Lastly, we believe that the best
competitive advantage is high customer satisfaction and believe that our dedication to delivering the best, most innovative solutions
to our customers ultimately allows is to compete.
AES
The competition for LED lighting and building automation solutions
is highly competitive. Large LED lighting companies such as General Electric, Phillips and Cree, as well as a large number of China-based
manufacturers, represent significant competition to AES for LED lighting and companies such as Johnson Controls, Rockwell Automation
and Schneider Electric represent significant competition to AES for building automation solutions. While these companies potentially
represent sources of product for AES as a system integrator, there are situations where these companies are competing directly
with AES, particularly for large commercial customer opportunities. We also face competition from a large number of Energy Savings
Companies (“ESCOs”) in the northeast region of the United States.
Regulatory Environment
As they are developed, we intend to market our services internationally,
as well as throughout the United States.
While we do not anticipate being subject to regulation of our
services, we will endeavor to make those determinations as part of our strategic plans.
Backlog
We do not engage in manufacturing and had no backlog of orders.
Employees
We had six (6) full time employees as of May 31, 2016. As
of May 31, 2016, we had not reached settlements with respect to approximately $179,000 in compensation to one former
employee. None of these employees are covered by a collective bargaining agreement, and we believe our relationship with
our employees is good to excellent.
Our future success depends, in part, on our ability to continue
to attract, retain and motivate highly qualified technical, marketing, and management personnel and, as of the end of the period
covered by this report and as of the date of filing, we continue to rely on the services of independent contractors for much of
our sales/marketing. We believe technical, accounting and other functions are also critical to our continued and future success.
Available Information
Our website address is
www.arkadosgroup.com
. The inclusion of our Internet address in this report does not include or incorporate by reference into this report any information
on our website. We make
available free of charge through a link provided at such website our Forms 10-K, 10-Q, 8-K, and amendments to these reports. Such
reports are available as soon as reasonably practicable after they are filed with the SEC.
ITEM 1A. RISK FACTORS
All statements in this annual report on Form 10-K that are not
historical are forward-looking statements, including statements regarding our “expectations,” “beliefs,”
“hopes,” “intentions,” “strategies,” or the like. Such statements are based on management’s
current expectations and are subject to a number of risks and uncertainties that could cause actual results to differ materially
from those set forth or implied by any forward looking statements. Some of these risks are detailed in Part I, Item 1A “Risk
Factors” and elsewhere in this report. We caution investors that there can be no assurance that actual results or business
conditions will not differ materially from those projected or suggested in such forward-looking statements as a result of various
factors, including, but not limited to, the risk factors discussed in this Annual Report on Form 10-K. We expressly disclaim any
obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein to reflect
any change in our expectations with regard thereto or any change in events, conditions, or circumstances on which any such statements
are based.
An investment in our common stock is speculative in nature,
involves a high degree of risk and should not be made by any investor who cannot afford the loss of their entire investment. Each
prospective purchaser should carefully consider the following risks and speculative factors associated with our business and capital
structure, as well as others described elsewhere in this report, before making any decision to buy, sell or hold our common stock.
Please note that the risk factors stated below are those that,
at the time of the filing of this report we believe are related to our ongoing operations and not necessarily to those operations
reflected in the financial statements included in this report.
Risks Related to Operating in Our Industry
The market for our products and Arktic software platform
is new and unproven, may decline or may experience limited growth and is dependent in part on companies continuing to adopt our
platform and use our products.
Since our Asset Sale, our Arkados subsidiary has been developing
and providing a software platform that enables organizations to integrate measurement and verification of data usage as well as
predictive analytics for baseline machine performance in their hardware products and systems. This market is relatively new and
unproven and is subject to a number of risks and uncertainties. The utilization of software platforms by organizations to build
measurement, verification, reporting and predictive analytics functionality into their industrial applications is still relatively
new, and organizations may not recognize the need for, or benefits of, our products and platform. Moreover, if they do not recognize
the need for and benefits of our products and platform, they may decide to adopt alternative products and services to satisfy some
portion of their business needs. In order to grow our business and extend our market position, we intend to focus on educating
potential customers about the benefits of our products and platform, expanding the functionality of our products and bringing new
technologies to market to increase acceptance and use of our platform. The market for our products and platform could fail to grow
significantly or there could be a reduction in demand for our products as a result of lack of customer acceptance, technological
challenges, competing products and services, decreases in spending by current and prospective customers, weakening economic conditions
and other causes. If our market does not experience significant growth or demand for our products decreases, then our business,
results of operations and financial condition could be adversely affected.
Our AES subsidiary engages in Oil to Natural Gas boiler
conversion services which are susceptible to fluctuations in energy costs.
The price of natural gas versus oil are commodities and each
varies a great deal based on supply and demand, economic conditions, political conditions, regulation and other supply-related
factors (i.e. new discoveries or technologies for extraction). As a result of these factors, the comparative rates may become disadvantageous
to a conversion to natural gas at any time, causing demand for conversion services to drop dramatically for indeterminate periods
of time.
The services of our AES subsidiary require General Contractor
services and other supervision which may increase our Liability Exposure.
Natural gas installation includes the attendant risks of carbon
monoxide poisoning, combustibility, and other hazards, particularly those that may arise as a result of improper installation.
Our services require that we evaluate and recommend subcontractors, unrelated to us, and outside of our control and to further
act in a supervisory capacity on conversion projects. This involves potential additional liability to us that may be mitigated
by insurance and additional stringent controls. There is no guarantee however, that we will be able to fully mitigate such liability.
At present, our Sales are concentrated in a few customers.
Both of our operating subsidiaries, AES and Arkados Inc. have
sales that are presently concentrated within a few customers. If any of these customers, in particular, the customers that provide
the most significant percentage of revenue no longer are customers, for any reason, and these customers are not replaced, we will
sustain additional losses as our fixed cost base will be left uncovered and consume working capital leading to a significant cash
flow problems. See also the risk described as “Dependence on Financing” below.
Risks Related to Our Financial Condition
Dependence on financing and losses for the foreseeable
future.
Although we have started to generate revenue, such
revenue is not sufficient to cover our operating expenses, and we expect that operating losses will continue into the near
term. As of May 31, 2016, we had liabilities of $2.11 million and assets of only $0.58 million. We had a working capital
deficiency of $1.5 million. Our ability to continue as a going concern is dependent upon raising capital from financing
transactions. To stay in business, we will need to raise additional capital through public or private sales of our
securities, debt financing or short-term bank loans, or a combination of the foregoing. In the past, we have financed our
operations by issuing secured and unsecured convertible debt and equity securities in private placements, in some cases with
equity incentives for the investor in the form of warrants to purchase our common stock and have borrowed from related
parties. We have sought and will continue to seek various sources of financing but there are no commitments from anyone to
provide us with financing. We can provide no assurance as to whether our capital raising efforts will be successful or as to
when, or if, we will be profitable in the future. Even if the Company achieves profitability, it may not be able to sustain
such profitability. If we are unable to obtain financing or achieve and sustain profitability, we may have to suspend
operations, sell assets and will not be able to execute our business plan. Failure to become and remain profitable may
adversely affect the market price of our common stock and our ability to raise capital and continue
operations.
If we lose key employees and consultants, including our
Chairman and CEO, or are unable to attract or retain qualified personnel, our business could suffer.
Our future success depends, in part, on our ability to continue
to attract, retain and motivate highly qualified technical, marketing, engineering, and management personnel. Currently we have
retained the services of a full-time Chief Executive Officer, Vice President of Technology, Chief Intelligence Officer and Chief
Strategy Officer but have not retained other management or other full-time staff and rely almost exclusively on outside independent
contractors to meet our operational and development needs. Any inability or postponement in retaining full-time staff could result
in delays in development or fulfillment of any current strategic and operational plans. As a small company, we depend upon the
issuance of equity securities to continue to attract and maintain such key personnel. These additional issuances dilute existing
shareholders and may also adversely affect our ability to obtain financing for the Company.
Our independent registered public accounting firm has
expressed doubt about our ability to continue as a going concern, which may hinder our ability to obtain future financing.
Our consolidated financial statements as of May 31, 2016 have
been prepared under the assumption that we will continue as a going concern for the year ending May 31, 2017. Our independent registered
public accounting firm has issued a report that included an explanatory paragraph referring to our recurring losses from operations
and net capital deficiency and expressing substantial doubt in our ability to continue as a going concern without additional capital
becoming available. Our ability to continue as a going concern is dependent upon our ability to obtain additional equity or debt
financing, attain further operating efficiencies, reduce expenditures, and, ultimately, to generate revenue. The financial statements
do not include any adjustments that might result from the outcome of this uncertainty.
If we fail to comply with the rules under the Sarbanes-Oxley
Act related to accounting controls and procedures or if material weaknesses or other deficiencies are discovered in our internal
accounting procedures, our stock price could decline significantly and raising capital could be more difficult.
If we fail to comply with the rules under the
Sarbanes-Oxley Act related to accounting controls and procedures, or, if material weaknesses or other deficiencies are
discovered in our internal accounting procedures, our stock price could decline significantly and raising capital could be
more difficult. Section 404 of the Sarbanes-Oxley Act requires annual management assessments of the effectiveness of our
internal controls over financial reporting. We may identify material weaknesses in our internal control over financial
reporting and other deficiencies, including the lack of sufficient staff. If material weaknesses and deficiencies are
detected or continue to remain unresolved, it could cause investors to lose confidence in our financial statements and result
in a decline in our stock price and consequently affect our financial condition. In addition, if we fail to achieve and
maintain the adequacy of our internal controls, we may not be able to ensure that we can conclude on an ongoing basis that we
have effective internal controls over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act. Moreover,
effective internal controls, particularly those related to revenue recognition, are necessary for us to produce reliable
financial reports and are important to helping prevent financial fraud. If we cannot provide reliable financial reports or
prevent fraud, our business and operating results could be harmed, investors could lose confidence in our reported financial
information, and the trading price of our Common Stock could drop significantly. In addition, we cannot be certain that
additional material weaknesses or significant deficiencies in our internal controls will not be discovered in the
future. Our stock price, ability to obtain financing and the quotation of our common stock on the OTCQB would be
adversely impacted if we fail to maintain effective disclosure controls and procedures.
If we or our licensors are unable to protect our/their
intellectual property, then our financial condition, results of operations and the value of our technology and products could be
adversely affected.
Proprietary rights are essential to our business and our ability
to compete effectively with other companies is dependent upon the proprietary nature of our technologies. We also rely upon trade
secrets, know-how, continuing technological innovations and licensing opportunities to develop, maintain and strengthen our competitive
position. We seek to protect these, in part, through confidentiality agreements with certain employees, consultants and other parties.
Without adequate protection for the intellectual property that we own or license, other companies might be able to offer substantially
identical products for sale, which could unfavorably affect our competitive business position and harm our business prospects.
Risks Related to Our Common Stock and Its Market Value
If we fail to remain current on our reporting requirements,
we could be removed from the OTCQB Market Tier which would limit the ability of broker-dealers to sell our securities and the ability
of stockholders to sell their securities in the secondary market.
Companies trading on the OTCQB Market Tier, such as
us, must be reporting issuers under Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended (the
“Exchange Act”), and must be current in their reports under Section 13, in order to maintain price quotation privileges on
the OTCQB Market Tier, and to be timely in such filings. If we fail to remain current on our reporting requirements or
file late three times in 12 calendar months, our stock could be removed from the OTCQB Market Tier. As a result, the
market liquidity for our securities could be severely adversely affected by limiting the ability of broker-dealers to sell
our securities and the ability of stockholders to sell their securities in the secondary market. There can be no
assurance that in the future we will always be current in our reporting requirements.
Our common stock is subject to the “penny stock”
rules of the SEC and the trading market in our securities is limited, which makes transactions in our stock cumbersome and may
reduce the value of an investment in our stock.
SEC Rule 15g-9 establishes the definition of a “penny
stock,” for the purposes relevant to us, as any equity security that has a market price of less than $5.00 per share or with
an exercise price of less than $5.00 per share, subject to certain exceptions. For any transaction involving a penny stock,
unless exempt, the rules require:
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the broker or dealer receives from the investor a written agreement to the transaction, setting forth the identity and quantity
of the penny stock to be purchased.
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in penny stocks, the broker or dealer must:
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make a reasonable determination that the transactions in penny stocks are suitable for that person and the person has sufficient
knowledge and experience in financial matters to be capable of evaluating the risks of transactions in penny stocks.
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The broker or dealer must also deliver, prior to any transaction
in a penny stock, a disclosure schedule prescribed by the SEC relating to the penny stock market, which, in highlight form:
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sets forth the basis on which the broker or dealer made the suitability determination; and
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·
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that the broker or dealer received a signed, written agreement from the investor prior to the transaction.
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Generally, brokers may be less willing to execute transactions
in securities subject to the “penny stock” rules. This may make it more difficult for investors to dispose of
our common stock and cause a decline in the market value of our stock.
Disclosure also has to be made about the risks of investing
in penny stocks in both public offerings and in secondary trading and about the commissions payable to both the broker-dealer and
the registered representative, current quotations for the securities and the rights and remedies available to an investor in cases
of fraud in penny stock transactions. Finally, monthly statements have to be sent disclosing recent price information for
the penny stock held in the account and information on the limited market in penny stocks.
The market price of our common stock may be adversely
affected by several factors.
The market price of our common stock could fluctuate significantly
in response to various factors and events, including:
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·
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our ability to execute our business plan;
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·
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operating results below expectations;
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·
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announcements of technological innovations or new products by us or our competitors;
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·
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loss of any strategic relationship;
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·
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industry developments;
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·
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economic and other external factors; and
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·
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period-to-period fluctuations in our financial results.
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In addition, the securities markets have from time to time experienced
significant price and volume fluctuations that are unrelated to the operating performance of particular companies. These market
fluctuations may also materially and adversely affect the market price of our common stock.
We have not paid dividends in the past and do not expect
to pay dividends in the future. Any return on investment may be limited to the value of our common stock
.
We have never paid cash dividends on our capital stock and do
not anticipate paying cash dividends on our capital stock in the foreseeable future. The payment of dividends on our capital
stock will depend on our earnings, financial condition and other business and economic factors affecting us at such time as the
board of directors may consider relevant. If we do not pay dividends, our common stock may be less valuable because a return
on your investment will only occur if our common stock price appreciates.
A sale of a substantial number of shares of our common
stock may cause the price of our common stock to decline.
If our stockholders sell substantial amounts of our common stock
in the public market, including shares issued upon the exercise of outstanding options or warrants, the market price of our common
stock could fall. These sales also may make it more difficult for us to sell equity or equity-related securities in the future
at a time and price that we deem reasonable or appropriate. Amendments to Rule 144 effective in February 2008 also substantially
reduce holding periods and eliminate burdens such as filing notices sale for non-affiliated holders. The amendments
to Rule 144 are applicable to the purchasers of securities prior to and following the effective date of the amendments.
ITEM 1B. UNRESOLVED SEC STAFF COMMENTS
None.
ITEM 2. DESCRIPTION OF PROPERTY
Effective October 1, 2014 as amended on
January 15, 2015 and January 15, 2016, the Company entered into a lease agreement for its 960 square feet office space located
at 211 Warren Street, Suite 320, Newark, New Jersey 07103 at a total monthly rental of $2,034. The lease expires on January 15,
2017, but can be renewed for two additional one-year terms.
Our AES subsidiary leases offices located at 500 North
Broadway, Suites 155 Jericho, New York 11753. The facility is approximately 1,850 square feet, occupied pursuant to a lease
that commenced on August 1, 2015 and expires on September 30, 2018. The average annual rent over the term of the lease is
approximately $57,300. This amount does not include taxes and other occupancy costs for the premises.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. MINE SAFETY DISCLOSURES.
Not applicable.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Our common stock is currently quoted on the OTCQB under the
symbol “AKDS.” Effective March 18, 2015, the Company implemented a reverse stock split of its outstanding common stock
at a ratio of 1-for-30 shares. All share amounts and quotations are reflected on a post-split basis.
Market Information
Our shares of common stock were first quoted on the Over-The-Counter
Bulletin Board in 1999. The following table presents the high and low bid prices per share of our common stock as quoted for each
quarter in the years ended May 31, 2016 and May 31, 2015 which information was provided by NASDAQ Trading and Market Services.
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Quarter Ended
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High Bid
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Low Bid
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Fiscal 2016
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May 31, 2016
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$
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1.00
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$
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0.26
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February 29, 2016
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$
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1.05
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|
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$
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0.25
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November 30, 2015
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$
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1.75
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|
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$
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0.75
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August 31, 2015
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$
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1.90
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$
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1.01
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Fiscal 2015
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May 31, 2015
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$
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5.00
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$
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1.00
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February 28, 2015
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$
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2.10
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$
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0.30
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November 30, 2014
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$
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1.11
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|
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$
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0.36
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August 31, 2014
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$
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1.87
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$
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0.60
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The above prices represent inter-dealer quotations, without
markup, markdown or commissions, and may not represent actual transactions. The trading volume of our common stock fluctuates and
may be limited or nonexistent from time to time. As a result, the above prices should not be considered to represent a liquid trading
market.
Holders
As of September 21, 2016, we had approximately 204 stockholders
of record.
Dividend Policy
We have paid no dividends on our common stock and we do not
expect to pay cash dividends in the foreseeable future. As of the date of this report, we do not have surplus from which we could
pay dividends and intend to retain any future earnings to finance the growth and development of our business.
Equity Compensation Plan Information
The following table sets forth certain information about our
equity compensation plans and agreements as of May 31, 2016:
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Number of
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securities
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remaining
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available
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for future
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Number of
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issuance
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securities
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under equity
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to be issued
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compensation
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upon
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|
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plans
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|
|
|
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exercise of
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|
|
|
|
(excluding
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|
|
|
|
outstanding
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|
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Weighted-average
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|
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securities
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|
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options,
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|
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exercise price of
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|
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reflected in
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|
|
|
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warrants and
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|
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outstanding options,
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column
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|
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rights
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|
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warrants and rights
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(a)
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Plan Category
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(a)
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(b)
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(c)
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|
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|
|
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|
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Equity compensation plans approved by security holders
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|
|
|
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Equity compensation plans not approved by security holders
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320,833
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$
|
1.20
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|
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3,012,500
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|
|
|
|
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|
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|
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Total
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320,833
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$
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1.20
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3,012,500
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In 2004, our board approved our 2004 Stock Option and Restricted
Stock Plan (the “2004 Plan”) and set aside 200,000 shares for grant pursuant to incentive and non-qualified stock options,
and restricted stock awards. The 2004 Plan was amended by the board in June 2006, to increase the number of shares subject to options
that can be granted to our officers, directors, employees and consultants to 333,333. The Plan was later amended in March 2007
and November 2008 to increase this amount to 500,000 and 750,000, respectively. The term was most recently extended by our Board
for an additional 10 years, in April 2014, as well as amending the Plan to increase the amount of shares for which option grants
could be exercised to 3,333,333. The 2004 Plan has not been approved by our stockholders and accordingly, no “incentive stock
options” as defined in the Internal Revenue Code can be granted until such approval is obtained. The 2004 Plan had been administered
by the Compensation Committee of our board of directors. Due to the current vacancy of the Compensation Committee, the board of
directors is currently administering the 2004 Plan.
We believe all of the options granted pursuant to the 2004
Plan issued prior to the Asset Sale have been terminated in accordance with the terms of the 2004 Plan as a result of the
termination of employees and consultants in conjunction with the Asset Sale and settlement and releases obtained
therewith.
As of May 31, 2016, there were options to purchase 3,012,500
shares outstanding under the 2004 Plan, as amended, all of which were vested.
Recent Sales of Unregistered Securities; Use of Proceeds
from Registered Securities
Information concerning our sales of unregistered securities
during the period covered by this report has been reported by us on previously filed reports on Form 10-Q and Form 8-K. In addition,
subsequent to the period covered by this report, the following transactions took place:
For the period from June 1, 2015 to May 31, 2016, 838,334 units
have been subscribed for under the Company’s March 2015 private placement offering and the Company received proceeds of $503,000.
Each unit contains one share of common stock and a warrant to purchase shares of common stock at $2.00 per share. The warrants
are immediately exercisable and have a term of three years. We believe that the issuance of the options was exempt from the registration
requirements of the Securities Act under the exemption provided by Section 4(a)(2) of the Securities Act.
On June 25, 2015, the Company issued 108,333 shares of common
stock to its chairman/chief executive officer and 35,000 shares of common stock to an officer/former director for services rendered
to the Company’s board of directors in fiscal 2015. In addition, the Company issued options to these individuals to purchase
a total of 1,300,000 shares of common stock reserved under its 2004 Plan at $0.60 per share. The options vested immediately and
are exercisable for three years. We believe that the issuance of the options was exempt from the registration requirements
of the Securities Act under the exemption provided by Section 4(a)(2) of the Securities Act.
On October 16, 2015 the Company granted options to three of
its employees to purchase an aggregate of 700,000 shares of its common stock reserved under its 2004 Plan at an exercise price
of $1.00 per share. Under the terms of the option grants, the options are vested immediately and are exercisable for a period of
three years. Each of the option certificates memorializing the option grants bears a legend restricting its transferability and
contains representations from the option holder that he is an “accredited investor” and acquired the options for his
own account for investment and not with a view toward resale or distribution of any part thereof. Accordingly, we believe that
the issuance of the options was exempt from the registration requirements of the Securities Act under the exemption provided by
Section 4(a)(2) of the Securities Act.
On November 18, 2015 the Company issued warrants to purchase
a total of 283,000 shares of its common stock at an exercise price of $1.00 per share exercisable for a period of three years to
two service providers. One warrant to purchase 250,000 shares was issued to Dynamo Development, Inc. as a bonus payment for services
rendered in connection with a software development agreement. The other warrant was issued to CD Capital Advisers, LLC as payment
for services under a consulting agreement. Each of the warrant certificates bears a legend restricting its transferability and
contains representations from the warrant holder that it is an “accredited investor” and acquired the warrants for
its own account for investment and not with a view toward resale or distribution of any part thereof. Accordingly, we believe that
the issuance of the warrants was exempt from the registration requirements of the Securities Act under the exemption provided by
Section 4(a)(2) of the Securities Act.
On January 8, 2016 we entered into an exchange agreement with
two persons who held $130,000 aggregate principal amount of our promissory notes which had matured. Pursuant to that agreement
on January 8, 2016, we issued 50,000 shares of our Common Stock to the two noteholders as part of a transaction in which the noteholders
reduced the aggregate principal amount of notes held by them to $40,000 and extended the maturity date of the notes in exchange
for a cash payment of $60,000 and the issuance of these shares. The issuances of shares of our Common Stock to the noteholders
were exempt from the registration requirements of the Securities Act under Section 4(a)(2) thereof as a transaction not involving
a public offering. The certificate that evidences the shares of our Common Stock that we have issued to the noteholders bears a
legend restricting its transferability.
On February 23, 2016, we entered into a consulting agreement
with LPF Communications under which LPF Communications is to provide certain investor relations services for a period of up to
six months. We have agreed to pay for the services by issuing two tranches of 150,000 shares of our Common Stock each, with the
second tranche becoming issuable only if we do not terminate the consulting agreement on or prior to June 8, 2016. Pursuant to
the agreement, we issued the first tranche of 150,000 shares to the consultant on April 8, 2016. The issuance of shares of our
Common Stock to the consultant was exempt from the registration requirements of the Securities Act under Section 4(a)(2) thereof
as a transaction not involving a public offering. The certificate that evidences the shares of our Common Stock that we have issued
to the consultant bears a legend restricting its transferability.
On April 22, 2016, the Company approved the issuance of
675,000 shares of common stock to its key employees, including 500,000 shares of the Company’s Common Stock to its
chairman/chief executive officer in exchange for services rendered to the Company. The Company also granted 2,100,000 options
outside of its 2004 Plan to its key employees, including 1,100,000 shares of Common Stock to its chairman/chief executive
officer, at an exercise price ranging from $0.60 to $2.00 per share. Under the terms of the option grants, the options are
vested immediately and are exercisable for a period of ten years. Each of the option certificates memorializing the option
grants bears a legend restricting its transferability and contains representations from the option holder that he is an
“accredited investor” and acquired the options for his own account for investment and not with a view toward
resale or distribution of any part thereof. Accordingly, we believe that the issuance of the options was exempt from the
registration requirements of the Securities Act under the exemption provided by Section 4(a)(2) of the Securities Act.
On April 28, 2016, the Company entered into an asset
purchase agreement pursuant to which the Company purchased intangible assets valued at $249,113 in exchange for 166,667
shares of the Company's common stock, and a warrant to purchase 166,667 shares of Common Stock at an exericse price of $2.00
per share. The issuance of these
securities were exempt from the registration requirements of the Securities Act under Section 4(a)(2) thereof as a
transaction not involving a public offering. The certificate that evidences the shares of our Common Stock that we have
issued to the consultant bears a legend restricting its transferability.
On May 15, 2016, the Company entered into a two year consulting agreement whereby consultant is to perform certain consulting
and advisory services. The Company issued 100,000 shares of common stock valued at $69,000 as compensation which was recorded
as prepaid expenses and amortized over the life of the contract. The issuance of shares of our Common Stock to the consultant
was exempt from the registration requirements of the Securities Act under Section 4(a)(2) thereof as a transaction not involving
a public offering. The certificate that evidences the shares of our Common Stock that we have issued to the consultant bears
a legend restricting its transferability.
ITEM 6. SELECTED FINANCIAL DATA.
Not applicable.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION.
This Annual Report on Form 10-K contains forward-looking statements
within the meaning of the "safe harbor" provisions under Section 21E of the Securities and Exchange Act of 1934 and the
Private Securities Litigation Act of 1995. We use forward-looking statements in our description of our plans and objectives for
future operations and assumptions underlying these plans and objectives. Forward-looking terminology includes the words "may",
"expects", "believes", "anticipates", "intends", "forecasts", "projects",
or similar terms, variations of such terms or the negative of such terms. These forward-looking statements are based on management's
current expectations and are subject to factors and uncertainties which could cause actual results to differ materially from those
described in such forward-looking statements. We expressly disclaim any obligation or undertaking to release publicly any updates
or revisions to any forward-looking statements contained in this Form 10-K to reflect any change in our expectations or any changes
in events, conditions or circumstances on which any forward-looking statement is based. Factors which could cause such results
to differ materially from those described in the forward-looking statements include those set forth under "Item. 1A –
Risk Factors" and elsewhere in, or incorporated by reference into this Annual Report on Form 10-K.
Our discussion and analysis of our financial condition and results
of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting
principles generally accepted in the United States of America. The preparation of these consolidated financial statements requires
us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related
disclosures of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to reserves,
deferred tax assets and valuation allowance, impairment of long-lived assets, fair value of equity instruments issued to consultants
for services and fair value of equity instruments issued to others. We base our estimates on historical experience and on various
other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments
about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ
from these estimates under different assumptions or conditions; however, we believe that our estimates, including those for the
above described items, are reasonable.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
See Note 2 of our accompanying consolidated financial statements
for a full description of recent accounting pronouncements and our expectation of their impact, if any, on our results of operations
and financial condition.
Business Overview
Arkados Group, Inc., through its two active subsidiaries
Arkados and AES, is a global provider of scalable and interoperable Internet of Things solutions focused on
industrial automation and energy management. We execute our business as a software and solution designer and developer and
system integrator as well as a service company focused on developing unique, cutting-edge solutions that enable machine to
machine communications with specific applications for smart machines, smart factory and smart building (collectively
“Smart Facility”). We have a strong partnership with Tatung, a major developer of advanced technologies and
global network of operation. This relationship enhances our ability to capitalize globally on the emerging opportunities for
Internet of Things and Smart Facility applications.
As a software developer, we design licensable middleware and
application software that is integrated into circuit boards and modules for incorporation into various types of Internet of Things products, such
as smart lighting, smart cameras, sensors and EV charging stations. As a system integrator, we incorporate the software and modules
into products that we design with our partners and sell directly to property and facilities owners.
We have executed several agreements that have enabled us to
provide the services contemplated in the industrial automation industry. While we have begun to generate revenue from operations
of Arkados during the fiscal year ended May 31, 2016, such revenue is not sufficient to meet our monthly operating expenses and
we remain dependent on outside sources of financing to fund our operations.
We have commenced operations for our wholly-owned subsidiary,
AES. AES started generating revenue in the fourth quarter of fiscal 2015.
We effected a reverse 1-for-30 split of our common stock on
March 18, 2015 and also amended our bylaws, both of which were approved by our shareholders. More information on these actions
may be reviewed in our Information Statement filed with the SEC on February 24, 2015.
Since inception, we have incurred losses of approximately $43.2
million.
We have financed operating losses since January 2013 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, 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.
Arkados
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 building automation industries to service providers that would include these applications in product
or service offerings to their customers. In May 2016, we delivered our first product for smart buildings.
Building upon our rollout to Tatung of our Process and Event
Management System for smart factory, or PEMS-SF, in 2015, which system is intended to improve efficiency of a factory by use of
Arkados’ software solutions residing in the factory’s computer systems and in the Arkados’ cloud computing platform,
we have developed a service platform being used by Tatung in the manufacturing of electronic devices. Additionally, we are currently
developing with Tatung a predictive maintenance module designed to be used to predict the failure of free-standing coolers. We
anticipate this product will be rolled out by the third quarter 2016. In May 2016, we rolled out a new product for smart buildings
called Energy Management Panel, or EMP. EMP is a measurement and verification process for quantifying the savings achieved by energy
conservation measures.
AES
AES began marketing its services and solutions beginning
in February 2015 and to date, has been engaged by two major customers for the provision of energy savings services, including the
provision of LED lighting retrofit services. AES’ direct sales force is in the process of building a sales pipeline that
is expected to generate additional revenue in subsequent periods.
Ongoing Negotiations with Certain Creditors
With respect to the classes of remaining creditors at the time
of the Asset Sale to ST Micro, the total debt that remained to be settled as of May 31, 2016 included approximately $179,000 due
to former employees, and approximately $278,000 to various former vendors. The current CEO of the Company is working diligently
to obtain the remaining releases. We anticipate that substantially all of these claims will be settled in exchange for the issuance
of common stock of the Company at a price of $1.20 (of the debt settled) per one (1) share of common stock, which is consistent
with the offers made to all creditors who have already completed settlements as negotiated in December 2010.
Product Development Plans
Despite selling our patents and other intellectual property
to ST Micro, we retained, through a license back from ST Micro, the ability to pursue key elements of our anticipated software
and platform solutions.
Arkados intends to continue to expand its relationship with
Tatung by agreeing to partner on business and product development initiatives for smart building applications. We anticipate that
our relationships will position us to be able to commercially exploit opportunities in the various smart building and energy efficiency
industries. In May 2016, Arkados and Tatung collaborated to deliver the first such product for smart building called EMP.
We believe electric meters with enhanced
communication capabilities—an essential component of the smart grid—are becoming more prevalent in the Smart Facility
industry. 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. The growth in the smart grid core and enabled technology market is driven primarily by the first wave of smart grid
implementation: advanced metering infrastructure, 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
is the gateway to the building area network. From the perspective of the end user (residential or industrial), in-building devices
are not only capable of communicating with the other devices within the local network, but are also capable of communicating outward
to larger interconnected networks and implementing demand response protocols. These trends enhance the value of the our products
and services as we are able to help our customers leverage our data-gathering and analytics features to drive down energy consumption
as well as secure more competitive pricing from electricity providers.
Every aspect of our business remains constrained by our limited
capital resources and the threat of having to cease operations as a result of our lack of capital.
If we are unable to generate sufficient revenue or raise funds
to finance our working capital needs, we will not have the capital necessary for ongoing operations.
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 May 31, 2016, 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.
Revenue Recognition
Arkados
Revenues from software licensing are recognized in accordance
with Accounting Standards Codification (“ASC”) 985-605, “Software Revenue Recognition.” Accordingly, revenue
from software licensing is recognized when all of the following criteria are met: persuasive evidence of an arrangement exists,
delivery has occurred, the fee is fixed or determinable, and collectability is probable.
The Company intends to enter into arrangements with end users
for items which may include software license fees, and services or various combinations thereof. For each arrangement, revenues
will be recognized when evidence of an agreement has been documented, the fees are fixed or determinable, collection of fees is
probable, delivery of the product has occurred and no other significant obligations remain.
License revenues are recognized at the time of delivery of the
software and all other revenue recognition criteria discussed above have been met. Deferred revenue represents license revenues
billed but not yet earned.
AES
Sales of products are recognized when the products are shipped
and the customer takes risk of ownership and assumes the risk of loss. Service revenue is recognized when the service is completed.
Deferred revenue represents revenues billed but not yet earned.
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.
RESULTS OF OPERATIONS FOR THE YEARS ENDED MAY 31, 2016 AND
2015
For the Year Ended May 31, 2016
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|
|
Arkados
|
|
|
AES
|
|
|
Total
|
|
|
Revenue
|
|
$
|
730,249
|
|
|
$
|
1,140,781
|
|
|
$
|
1,871,030
|
|
|
Cost of Sales
|
|
|
3,000
|
|
|
|
906,902
|
|
|
|
909,902
|
|
|
Gross Profit
|
|
|
727,249
|
|
|
|
233,879
|
|
|
|
961,128
|
|
|
Gross Profit Percentage
|
|
|
100
|
%
|
|
|
21
|
%
|
|
|
51
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses
|
|
|
2,898,582
|
|
|
|
1,141,458
|
|
|
|
4,040,040
|
|
|
Operating Loss
|
|
|
(2,171,333
|
)
|
|
|
(907,579
|
)
|
|
|
(3,078,912
|
)
|
|
Other expenses
|
|
|
(30,419
|
)
|
|
|
-
|
|
|
|
(30,419
|
)
|
|
Income (loss) before benefit from income taxes
|
|
$
|
(2,201,752
|
)
|
|
$
|
(907,579
|
)
|
|
$
|
(3,109,331
|
)
|
For the Year Ended May 31, 2015
|
|
|
Arkados
|
|
|
AES
|
|
|
Total
|
|
|
Revenue
|
|
$
|
403,852
|
|
|
$
|
80,410
|
|
|
$
|
484,262
|
|
|
Cost of Sales
|
|
|
-
|
|
|
|
25,645
|
|
|
|
25,645
|
|
|
Gross Profit
|
|
|
403,852
|
|
|
|
54,765
|
|
|
|
458,617
|
|
|
Gross Profit Percentage
|
|
|
100
|
%
|
|
|
68
|
%
|
|
|
95
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses
|
|
|
4,463,471
|
|
|
|
121,432
|
|
|
|
4,584,903
|
|
|
Operating Income (Loss)
|
|
|
(4,059,619
|
)
|
|
|
(66,667
|
)
|
|
|
(4,126,286
|
)
|
|
Other income (expenses)
|
|
|
(316,721
|
)
|
|
|
-
|
|
|
|
(316,721
|
)
|
|
Income (loss) before benefit from income taxes
|
|
$
|
(4,376,340
|
)
|
|
$
|
(66,667
|
)
|
|
$
|
(4,443,007
|
)
|
Variance
|
|
|
Arkados
|
|
|
AES
|
|
|
Total
|
|
|
Revenue
|
|
$
|
326,397
|
|
|
$
|
1,060,371
|
|
|
$
|
1,386,768
|
|
|
Cost of Sales
|
|
|
3,000
|
|
|
|
881,257
|
|
|
|
884,257
|
|
|
Gross Profit
|
|
|
323,397
|
|
|
|
179,114
|
|
|
|
502,511
|
|
|
Gross Profit Percentage
|
|
|
0
|
%
|
|
|
-48
|
%
|
|
|
-43
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses
|
|
|
(1,564,889
|
)
|
|
|
1,020,026
|
|
|
|
(544,863
|
)
|
|
Operating Income (Loss)
|
|
|
1,888,286
|
|
|
|
(840,912
|
)
|
|
|
1,047,374
|
|
|
Other income (expenses)
|
|
|
286,302
|
|
|
|
-
|
|
|
|
286,302
|
|
|
Income (loss) before benefit from income taxes
|
|
$
|
2,174,588
|
|
|
$
|
(840,912
|
)
|
|
$
|
1,333,676
|
|
Revenues and Gross Margins
Revenues increased by $1,386,768 or 286% from the prior year,
which resulted from increases of $326,397 from revenues of the Company’s Arkados segment and $1,060,374 in the AES segment.
The increases resulted from an increased customer base.
Gross profit increased $502,511 mostly due to increased revenue
from new projects for two customers.
Operating Income (Loss)
Loss from operations for the years ended May 31, 2016 and 2015
was $3,078,912 and $4,126,286 respectively, a decrease of $1,047,374 or 25%. The decrease in loss from operations is primarily
due to an increase in revenues as well as a reduction in operating expenses.
Selling, general and administrative expenses decreased by $549,629,
or 13%, from $4,252,294 to $3,702,665, mainly due to decreased consulting of $1,230,095, decreased public relations expenses of
$22,767, decreased board of directors’ fees of $1,873,611 and decreased payroll tax expense of $41,974 offset by increases
in salaries and wages of $327,824, employee stock compensation of $1,212,376, office expense of $231,200 and increased investor
relations expense of $128,416.
Net Loss Per Share
Net loss for the fiscal years ended May 31, 2016 and 2015 was
$3,109,331 or $0.26 per share and $4,407,167 or $0.74 per share, respectively.
Interest expense on our existing debt for
fiscal 2016 and 2015 was $29,288 and $485,469, respectively. Interest expense includes the amortization of beneficial
conversion features on certain convertible debt securities. Amortization amounted to -0- and $380,262 for fiscal 2016 and
2015, respectively. Interest expense and amortization related to debt decreased as a result of the conversion of a substantial portion of the
notes payable.
In fiscal 2015, the Company determined that certain accounts
payable had been settled in prior periods and should be written off. Balances totaling $124,793 were reversed and recognized as
other income.
The provision for income tax benefits of $35,840 for fiscal
2015 represents the reversal of over accruals from prior periods.
Liquidity and Capital Resources
Our consolidated financial statements have been presented on
the basis that it is a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal
course of business. We have experienced recurring operating losses and negative operating cash flows since inception, and have
financed our working capital requirements through the recurring sale of our equity securities in the form of the private placement
of convertible debt securities. As a result, our independent registered public accounting firm, in its current report on our 2016
consolidated financial statements, has raised substantial doubt about our ability to continue as a going concern. The Company’s ability to continue as a going concern is dependent upon its ability to generate consistent cash flows
to meet its obligations on a timely basis, to obtain additional financing as may be required, and its ability to continue
its implementation of operations. Management is continuing its efforts to obtain the necessary financing as may be required
to generate sufficient cash flows for current and future operations. However, 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 SEC and other regulatory requirements.
As of May 31, 2016, we had cash
and cash equivalents of $56,172, and negative working capital of approximately $1.6 million. As of May 31, 2015, we had cash of
$234,994 and negative working capital of approximately $3.25 million. There was an overall reduction in the working capital deficit
of approximately $1.7 million for the fiscal year ending May 31, 2016 and $547,000 for the fiscal year ending May 31, 2015. The
change in working capital since May 31, 2015 has resulted from $503,000 received from the sales of units from our March 2015 private
placement offering (“PPO” – see below), $80,000 received in new financing during the year as described above,
a decrease of $685,789 in cash used in operating activities to pay current expenses, and a decrease of $5,619 in prepaid expenses
and other current assets. In addition, however, we experienced net decreases in our liabilities as follows: $10,000 decrease in
notes payable which was settled in exchange for equity issued and a decrease of $1,651,118 in accounts payable and accrued expenses
.
On March 15, 2015, the Company commenced a PPO for accredited
investors to issue up to 2,500,000 shares of common stock and warrants to purchase 2,500,000 shares of common stock at $2.00 per
share (each share and warrant constitutes a “Unit”) for total gross proceeds of $1,500,000. The warrants are immediately
exercisable and have a term of three years. The Units are being offered by the Company on a “best efforts” “any-or-none”
basis in Units of 166,666 shares although the Company may accept fractional Units. The PPO was scheduled to close on May 15, 2015
but was extended by the Company until September 15, 2015. From the period March 15, 2015 through May 31, 2015, 1,586,664 Units
have been subscribed for under the PPO and the Company received proceeds of $952,000. The proceeds are being used for working capital
purposes.
For the period June 1, 2015 through the date of the filing of
this report, 838,334 shares of common stock have been subscribed for under the PPO and the Company received proceeds of $503,000.
The proceeds are being used for working capital purposes.
Operating Activities
Net cash used by operating activities was $674,879 for the fiscal
year ended May 31, 2016. Cash used during the year ended May 31, 2016 was primarily due to a net loss of $3,109,331, stock based
compensation of $1,968,084, and depreciation and amortization of $791 offset by a decrease in net operating assets of $29,075 and
an increase in operating liabilities of $245,539.
Net cash used by operating activities was $581,637 for the fiscal
year ended May 31, 2015. Cash used during the year ended May 31, 2015 was primarily due to net loss of $4,407,167, and an increase
in operating liabilities of $603,008, amortization of debt discount of $380,262, stock based compensation of $3,283,205, offset
by a decrease in net operating assets of $196,751.
Investing Activities
For the fiscal year ended May 31, 2016, net cash used by investing
activities was $26,943. The primary decrease in cash was from the purchase of property and equipment for $8,433 and the payment
of a security deposit of $18,510.
For the fiscal year ended May 31, 2015, net cash used by investing
activities was $1,874 used for the payment of a security deposit.
Financing Activities
For the fiscal year ended May 31, 2016, net cash provided by
financing activities was $523,000. $503,000 was provided from the sale of 838,334 shares of our common stock
offset by cash used of $60,000 for note repayment and $80,000 received in connection with the issuance of a note payable.
For the fiscal year ended May 31, 2015, net cash provided
by financing activities was $700,000 of which $500,000 was from the sale of our common stock and $200,000 represents proceeds
from the sale of a convertible note.
Inflation
We believe our operations have not been and, in the foreseeable
future, will not be materially and adversely affected by inflation or changing prices.
Commitments
The following table sets forth our future contractual obligations
as of May 31, 2016.
|
|
|
Payment due by period
|
|
|
|
|
|
|
|
Less than
|
|
|
1 to 3
|
|
|
3 to 5
|
|
|
More than
|
|
|
|
|
Total
|
|
|
1 year
|
|
|
years
|
|
|
years
|
|
|
5 years
|
|
|
Notes payable
|
|
$
|
345,832
|
|
|
$
|
345,832
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
Operating leases
|
|
|
192,145
|
|
|
|
81,331
|
|
|
|
83,039
|
|
|
|
27,995
|
|
|
|
-
|
|
|
Total
|
|
$
|
537,977
|
|
|
$
|
427,163
|
|
|
$
|
83,039
|
|
|
$
|
27,995
|
|
|
$
|
-
|
|
Off Balance Sheet Arrangements
We do not have any off balance sheet arrangements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK.
Not applicable.
ITEM 8. FINANCIAL STATEMENTS.
Our financial statements are filed under this Item 8, beginning
on page F-1 of this report.
Arkados Group, Inc. and Subsidiaries
May 31, 2016 and 2015
CONTENTS
Report of Independent
Registered Public Accounting Firm
Board of Directors and Stockholders
Arkados Group, Inc. and Subsidiaries
We have audited the accompanying consolidated
balance sheets of Arkados Group, Inc. and Subsidiaries (the “Company”) as of May 31, 2016, and the related
consolidated statements of operations, stockholders’ deficiency, and cash flows for the year ended May 31, 2016. These financial statements are the responsibility of the Company’s management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with
the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by management, as well as evaluating principles used and
significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the financial statements
referred to above present fairly, in all material respects, the consolidated financial position of the Company as of May 31, 2016, and the results of its operations and cash flows for the year ended May 31, 2016 in conformity with
generally accepted accounting principles in the United States.
The accompanying financial statements have
been prepared assuming that the Company will continue as a going concern. As more fully described in Note 2, the Company has incurred
recurring operating losses and will have to obtain additional capital to sustain operations. These conditions raise substantial
doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are
also described in Note 2. The financial statements do not include any adjustments to reflect the possible effects on the recoverability
and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty.
/s/ RBSM, LLP
Certified Public Accountants
New York, New York
September 21, 2016
Report of Independent
Registered Public Accounting Firm
Board of Directors and Stockholders
Arkados Group, Inc. and Subsidiaries
We have audited the accompanying consolidated
balance sheets of Arkados Group, Inc. and Subsidiaries (the “Company”) as of May 31, 2015 and the related consolidated
statements of operations, stockholders’ deficiency, and cash flows for the year ended May 31, 2015. These financial statements
are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements
based on our audit.
We conducted our audit in accordance with the
standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by management, as well as evaluating principles used and
significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred
to above present fairly, in all material respects, the consolidated financial position of the Company as of May 31, 2015, and the
results of its operations and cash flows for the year ended May 31, 2015 in conformity with generally accepted accounting principles
in the United States.
The accompanying financial statements have
been prepared assuming that the Company will continue as a going concern. As more fully described in Note 2, the Company has incurred
recurring operating losses and will have to obtain additional capital to sustain operations. These conditions raise substantial
doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are
also described in Note 2. The financial statements do not include any adjustments to reflect the possible effects on the recoverability
and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty.
|
|
/s/ Liggett & Webb, P.A.
|
|
|
Certified Public Accountants
|
New York, New York
August 27, 2015
ARKADOS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
|
|
|
May 31, 2016
|
|
|
May 31, 2015
|
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
56,172
|
|
|
$
|
234,994
|
|
|
Accounts receivable
|
|
|
192,100
|
|
|
|
132,349
|
|
|
Inventory
|
|
|
120,410
|
|
|
|
156,705
|
|
|
Prepaid expenses and other current assets
|
|
|
187,935
|
|
|
|
12,004
|
|
|
Total current assets
|
|
|
556,617
|
|
|
|
536,052
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net of accumulated depreciation
|
|
|
7,642
|
|
|
|
-
|
|
|
Security deposit
|
|
|
20,384
|
|
|
|
1,874
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
584,643
|
|
|
$
|
537,926
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
$
|
1,022,382
|
|
|
$
|
2,655,132
|
|
|
Deferred revenue
|
|
|
260,637
|
|
|
|
267,291
|
|
|
Accrued income tax
|
|
|
63,082
|
|
|
|
63,082
|
|
|
Debt subject to equity being issued
|
|
|
456,930
|
|
|
|
456,930
|
|
|
Notes payable
|
|
|
335,832
|
|
|
|
345,832
|
|
|
Total current liabilities
|
|
|
2,138,863
|
|
|
|
3,788,267
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
2,138,863
|
|
|
|
3,788,267
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders' deficiency:
|
|
|
|
|
|
|
|
|
|
Convertible preferred stock, $.0001 par value; 5,000,000 shares authorized, zero shares outstanding
|
|
|
-
|
|
|
|
-
|
|
|
Common stock, $.0001 par value; 600,000,000 shares authorized; 13,373,167 and 11,099,833 shares issued and outstanding
|
|
|
1,337
|
|
|
|
1,110
|
|
|
Additional paid-in capital
|
|
|
41,645,382
|
|
|
|
36,840,157
|
|
|
Accumulated deficit
|
|
|
(43,200,939
|
)
|
|
|
(40,091,608
|
)
|
|
Total stockholders' deficiency
|
|
|
(1,554,220
|
)
|
|
|
(3,250,341
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders' deficiency
|
|
$
|
584,643
|
|
|
$
|
537,926
|
|
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
ARKADOS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
|
For the years ended
|
|
|
|
|
May 31, 2016
|
|
|
May 31, 2015
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
1,871,030
|
|
|
$
|
484,262
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
909,902
|
|
|
|
25,645
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
961,128
|
|
|
|
458,617
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
Selling and general and administrative
|
|
|
3,702,665
|
|
|
|
4,252,294
|
|
|
Research and development
|
|
|
337,375
|
|
|
|
332,609
|
|
|
Total operating expenses
|
|
|
4,040,040
|
|
|
|
4,584,903
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(3,078,912
|
)
|
|
|
(4,126,286
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expenses):
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(29,288
|
)
|
|
|
(485,469
|
)
|
|
Loss on translation adjustments
|
|
|
(1,131
|
)
|
|
|
(116
|
)
|
|
Other income
|
|
|
-
|
|
|
|
124,793
|
|
|
Gain on settlement of debt
|
|
|
-
|
|
|
|
44,071
|
|
|
Total other expense
|
|
|
(30,419
|
)
|
|
|
(316,721
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Loss before provision for income taxes
|
|
|
(3,109,331
|
)
|
|
|
(4,443,007
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income tax benefits
|
|
|
-
|
|
|
|
35,840
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(3,109,331
|
)
|
|
$
|
(4,407,167
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Loss per common share - basic and diluted
|
|
$
|
(0.26
|
)
|
|
$
|
(0.74
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average of common shares outstanding - basic and diluted
|
|
|
12,126,367
|
|
|
|
5,948,847
|
|
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
ARKADOS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS'
DEFICIENCY
YEARS ENDED MAY 31, 2016 AND 2015
|
|
|
Preferred Stock
|
|
|
Common Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
Par
Value
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
be Issued
|
|
|
Paid-in
Capital
|
|
|
Retained
Deficit
|
|
|
Shareholders'
Deficiency
|
|
|
Balance as of May 31, 2014
|
|
|
-
|
|
|
$
|
-
|
|
|
|
2,528,797
|
|
|
$
|
253
|
|
|
|
1,835,486
|
|
|
$
|
29,727,373
|
|
|
$
|
(35,684,441
|
)
|
|
$
|
(4,121,329
|
)
|
|
Common stock issued under private placement agreements
|
|
|
-
|
|
|
|
-
|
|
|
|
833,330
|
|
|
|
83
|
|
|
|
-
|
|
|
|
499,917
|
|
|
|
-
|
|
|
|
500,000
|
|
|
Common stock issued for consulting agreements
|
|
|
-
|
|
|
|
-
|
|
|
|
716,667
|
|
|
|
72
|
|
|
|
-
|
|
|
|
1,059,928
|
|
|
|
-
|
|
|
|
1,060,000
|
|
|
Warrants issued for consulting agreements
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
349,594
|
|
|
|
-
|
|
|
|
349,594
|
|
|
Common stock issued for promissory notes and accrued interest
|
|
|
-
|
|
|
|
-
|
|
|
|
4,387,879
|
|
|
|
439
|
|
|
|
-
|
|
|
|
1,315,925
|
|
|
|
-
|
|
|
|
1,316,364
|
|
|
Common stock issued for bridge notes
|
|
|
-
|
|
|
|
-
|
|
|
|
648,381
|
|
|
|
65
|
|
|
|
-
|
|
|
|
465,935
|
|
|
|
-
|
|
|
|
466,000
|
|
|
Common stock issued for debt subject to equity being issued
|
|
|
-
|
|
|
|
-
|
|
|
|
723,072
|
|
|
|
74
|
|
|
|
-
|
|
|
|
767,587
|
|
|
|
-
|
|
|
|
767,661
|
|
|
Common stock issued for transactions previously classified as common stock to be issued
|
|
|
-
|
|
|
|
-
|
|
|
|
1,261,683
|
|
|
|
126
|
|
|
|
(1,835,486
|
)
|
|
|
1,835,360
|
|
|
|
-
|
|
|
|
-
|
|
|
Warrants issued to former employees
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
747,535
|
|
|
|
-
|
|
|
|
747,535
|
|
|
Valuation of beneficial conversion feature of debt raise
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
71,000
|
|
|
|
-
|
|
|
|
71,000
|
|
|
Effects of rounding due to reverse stock split
|
|
|
-
|
|
|
|
-
|
|
|
|
24
|
|
|
|
(2
|
)
|
|
|
-
|
|
|
|
3
|
|
|
|
-
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(4,407,167
|
)
|
|
|
(4,407,167
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of May 31, 2015
|
|
|
-
|
|
|
|
-
|
|
|
|
11,099,833
|
|
|
|
1,110
|
|
|
|
-
|
|
|
|
36,840,157
|
|
|
|
(40,091,608
|
)
|
|
|
(3,250,341
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued for accrued board services
|
|
|
-
|
|
|
|
-
|
|
|
|
143,333
|
|
|
|
14
|
|
|
|
-
|
|
|
|
250,819
|
|
|
|
-
|
|
|
|
250,833
|
|
|
Common stock issued under private placement agreements
|
|
|
-
|
|
|
|
-
|
|
|
|
838,334
|
|
|
|
84
|
|
|
|
-
|
|
|
|
502,916
|
|
|
|
-
|
|
|
|
503,000
|
|
|
Stock options issued for accrued board services
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,622,778
|
|
|
|
-
|
|
|
|
1,622,778
|
|
|
Stock options issued to employees
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
293,122
|
|
|
|
-
|
|
|
|
293,122
|
|
|
Warrants issued for services rendered
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
158,399
|
|
|
|
-
|
|
|
|
158,399
|
|
|
Common stock issued for debt conversion
|
|
|
-
|
|
|
|
-
|
|
|
|
50,000
|
|
|
|
5
|
|
|
|
-
|
|
|
|
41,327
|
|
|
|
-
|
|
|
|
41,332
|
|
|
Common stock issued for services
|
|
|
-
|
|
|
|
-
|
|
|
|
400,000
|
|
|
|
40
|
|
|
|
-
|
|
|
|
274,460
|
|
|
|
-
|
|
|
|
274,500
|
|
|
Common stock issued in connection with purchase of customer list- intangible
|
|
|
-
|
|
|
|
-
|
|
|
|
166,667
|
|
|
|
17
|
|
|
|
-
|
|
|
|
124,983
|
|
|
|
-
|
|
|
|
125,000
|
|
|
Warrants issued in connection with the purchase of intangible
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
124,113
|
|
|
|
-
|
|
|
|
124,113
|
|
|
Options issued to employees
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,068,125
|
|
|
|
-
|
|
|
|
1,068,125
|
|
|
Common stock issued to Management
|
|
|
-
|
|
|
|
-
|
|
|
|
675,000
|
|
|
|
67
|
|
|
|
-
|
|
|
|
344,183
|
|
|
|
-
|
|
|
|
344,250
|
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(3,109,331
|
)
|
|
|
(3,109,331
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of May 31, 2016
|
|
|
-
|
|
|
$
|
-
|
|
|
|
13,373,167
|
|
|
$
|
1,337
|
|
|
|
-
|
|
|
$
|
41,645,382
|
|
|
$
|
(43,200,939
|
)
|
|
$
|
(1,554,220
|
)
|
ARKADOS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
|
May 31, 2016
|
|
|
May 31, 2015
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(3,109,331
|
)
|
|
$
|
(4,407,167
|
)
|
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
|
Stock based compensation
|
|
|
1,705,497
|
|
|
|
-
|
|
|
Accrued stock based compensation
|
|
|
-
|
|
|
|
1,873,611
|
|
|
Issuance of warrants for services
|
|
|
158,399
|
|
|
|
349,594
|
|
|
Depreciation
|
|
|
791
|
|
|
|
-
|
|
|
Amortization of debt discount
|
|
|
-
|
|
|
|
380,262
|
|
|
Impairment of intangible
|
|
|
249,113
|
|
|
|
-
|
|
|
Issuance of common stock for services
|
|
|
104,188
|
|
|
|
1,060,000
|
|
|
Reversal of accounts payable
|
|
|
-
|
|
|
|
(124,793
|
)
|
|
Gain on settlement of debt
|
|
|
-
|
|
|
|
(44,071
|
)
|
|
Interest accrued on debt subject to equity being issued
|
|
|
-
|
|
|
|
17,753
|
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(59,751
|
)
|
|
|
(132,349
|
)
|
|
Inventory
|
|
|
36,295
|
|
|
|
(156,705
|
)
|
|
Prepaid expenses and other current assets
|
|
|
(5,619
|
)
|
|
|
(780
|
)
|
|
Accounts payable and accrued expenses
|
|
|
252,193
|
|
|
|
371,557
|
|
|
Deferred revenue
|
|
|
(6,654
|
)
|
|
|
267,291
|
|
|
Accrued income tax benefits
|
|
|
-
|
|
|
|
(35,840
|
)
|
|
Net cash used in operating activities
|
|
|
(674,879
|
)
|
|
|
(581,637
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(8,433
|
)
|
|
|
-
|
|
|
Security deposit
|
|
|
(18,510
|
)
|
|
|
(1,874
|
)
|
|
Net cash used in investing activities
|
|
|
(26,943
|
)
|
|
|
(1,874
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
Proceeds from sales of common stock
|
|
|
503,000
|
|
|
|
500,000
|
|
|
Proceeds from related party advance
|
|
|
-
|
|
|
|
-
|
|
|
Proceeds from convertible debt
|
|
|
-
|
|
|
|
200,000
|
|
|
Payment of debt
|
|
|
(60,000
|
)
|
|
|
-
|
|
|
Proceeds from debt
|
|
|
80,000
|
|
|
|
-
|
|
|
Net cash provided by financing activities
|
|
|
523,000
|
|
|
|
700,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash
|
|
|
(178,822
|
)
|
|
|
116,489
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash at beginning of year
|
|
|
234,994
|
|
|
|
118,505
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash at end of year
|
|
$
|
56,172
|
|
|
$
|
234,994
|
|
|
|
|
|
|
|
|
|
|
|
|
Schedule of non-cash transactions:
|
|
|
|
|
|
|
|
|
|
Common stock issued for accrued stock based compensation
|
|
$
|
250,833
|
|
|
$
|
-
|
|
|
Stock options issued for accrued stock based compensation
|
|
$
|
1,622,778
|
|
|
$
|
-
|
|
|
Common stock issued for debt conversion
|
|
$
|
41,332
|
|
|
$
|
1,316,364
|
|
|
Warrants issued to former employees to settle debt subject to equity being issued
|
|
$
|
-
|
|
|
$
|
747,536
|
|
|
Value of common stock and warrants issued for purchase of intangible
|
|
$
|
249,113
|
|
|
$
|
-
|
|
|
Common stock issued for prepaid consulting
|
|
$
|
170,312
|
|
|
$
|
-
|
|
|
Common stock issued or to be issued for debt subject to equity being issued
|
|
$
|
-
|
|
|
$
|
1,233,661
|
|
|
Common stock issued for transactions previously classified as common stock to be issued
|
|
$
|
-
|
|
|
$
|
1,835,486
|
|
|
Valuation of beneficial conversion feature of debt raise
|
|
$
|
-
|
|
|
$
|
71,000
|
|
|
Refinance of due to related party
|
|
$
|
-
|
|
|
$
|
130,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
-
|
|
|
$
|
-
|
|
|
Income taxes paid
|
|
$
|
-
|
|
|
$
|
-
|
|
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
ARKADOS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 2016 and 2015
|
|
1.
|
DESCRIPTION OF BUSINESS
|
Arkados Group, Inc. (the “Parent”) conducts business
activities principally through two of its wholly-owned subsidiaries, Arkados, Inc. (“Arkados”) and Arkados Energy Solutions,
LLC (“AES”) (collectively, the “Company”).
The Company underwent a significant restructuring following December
23, 2010, during which substantially all of its assets were acquired by STMicroelectronics, Inc. (sometimes referred to hereinafter
as the “Asset Sale”), as disclosed in the Form 8-K filed December 29, 2010 and further described (as to the closing)
in the Form 8-K filed July 12, 2011. Settlements reached in connection with the Asset Sale and the fulfillment of obligations in
connection therewith, have just recently been (post the period covered by this report) substantially completed.
Following the sale of its assets associated with the manufacture
of microchips, the Company shifted its focus towards the following businesses:
Arkados - Software and hardware design and developing solutions
that enable machine to machine communications for the Internet of Things (“IoT”). Arkados’ solutions support
smart grid and smart building applications primarily in the areas of 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.
AES - Energy services provider with focus on the design, installation
and maintenance of innovative, sustainable, and cost-effective energy solutions for both residential and commercial customers.
AES implements smart grid applications primarily in the areas of LED lighting, building automation, and energy management. These
applications are uniquely designed to drive a wide variety of wireless and PLC-based products, such as sensors, gateways, video
cameras, appliances and other devices.
Effective March 18, 2015, the Company implemented a reverse stock
split of its outstanding common stock at a ratio of 1-for-30 shares. All share figures and results are reflected on a post-split
basis. See Note 8.
|
|
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 $43.2 million since inception, including a net loss of approximately $3.1 million for the year ended May
31, 2016. Additionally, the Company still had both working capital and stockholders’ deficiencies at May 31, 2016 and 2015
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.
Principles of consolidation
- The consolidated financial
statements include the accounts of the Parent, and its wholly-owned subsidiaries, which include: AES, Arkados, CDKnet, LLC and
Creative Technology, LLC. Currently, Arkados and AES are the only active entities with operations. Intercompany accounts and transactions
have been eliminated in consolidation.
Revenue recognition
– For Arkados, revenues
from software licensing are recognized in accordance with Accounting Standards Codification (“ASC”) 985-605, “Software
Revenue Recognition.” Accordingly, revenue from software licensing is recognized when all of the following criteria are met:
persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, and collectability is probable.
The Company intends to enter into arrangements with end users for
items which may include software license fees, and services or various combinations thereof. For each arrangement, revenues
will be recognized when evidence of an agreement has been documented, the fees are fixed or determinable, collection of fees is
probable, delivery of the product has occurred and no other significant obligations remain.
License revenues are recognized at the time of delivery of the software
and all other revenue recognition criteria discussed above have been met. Deferred revenue represents license revenues billed but
not yet earned.
For AES, sales of products are recognized when the products are
shipped and the customer takes risk of ownership and assumes the risk of loss. Service revenue is recognized when the service is
completed. Deferred revenue represents revenues billed but not yet earned.
Cash equivalents
- The Company considers investments
in highly liquid instruments with a maturity of three months or less to be cash equivalents. The Company did not have any cash
equivalents at both May 31, 2016 and 2015.
Accounts receivable
- Accounts receivable are reported
at their outstanding unpaid principal balances net of allowances for uncollectible accounts. The Company provides for allowances
for uncollectible receivables based on management’s estimate of uncollectible amounts considering age, collection history,
and any other factors considered appropriate. The Company writes off accounts receivable against the allowance for doubtful accounts
when a balance is determined to be uncollectible. At May 31, 2016, the Company determined that an allowance for doubtful
accounts was not needed.
Fair Value of Financial Instruments
- The carrying
value of cash, accounts receivable inventory, prepaid expenses and other current assets, 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 legacy payables. As defined
in ASC 820, “Fair Value Measurement” (“ASC 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 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.
Earnings (Loss) Per Share (“EPS”)
- Basic
EPS is computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding. Diluted EPS
includes the effect from potential issuance of common stock, such as stock issuable pursuant to the exercise of stock options and
warrants and the assumed conversion of convertible notes.
The following table summarizes the securities that were excluded
from the diluted per share calculation because the effect of including these potential shares was antidilutive even though the
exercise price could be less than the average market price of the common shares.
|
|
|
Years ended May 31,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
Convertible notes
|
|
|
85,320
|
|
|
|
113,085
|
|
|
Stock options
|
|
|
3,012,500
|
|
|
|
1,012,500
|
|
|
Warrants
|
|
|
5,225,987
|
|
|
|
3,937,986
|
|
|
Potentially dilutive securities
|
|
|
8,323,807
|
|
|
|
5,063,571
|
|
Stock Based Compensation
- In computing the amount
of stock based compensation, the fair value of each option and/or warrant is estimated on the date of grant based on the Black-Scholes
options-pricing model utilizing certain assumptions for a risk free interest rate; volatility; and expected remaining lives of
the awards. The assumptions used in calculating the fair value of share-based payment awards represent management’s best
estimates, but these estimates involve inherent uncertainties and the application of management judgment. As a result, if factors
change and the Company uses different assumptions, the Company’s stock-based compensation expense could be materially different
in the future. In addition, the Company is required to estimate the expected forfeiture rate and only recognize expense for those
shares expected to vest. In estimating the Company’s forfeiture rate, the Company analyzed its historical forfeiture rate,
the remaining lives of unvested options, and the amount of vested options as a percentage of total options outstanding. If the
Company’s actual forfeiture rate is materially different from its estimate, or if the Company reevaluates the forfeiture
rate in the future, the stock-based compensation expense could be significantly different from what we have recorded in the current
period.
Stock based compensation expense for the years ended May 31, 2016
and 2015 was $1,968,084 and $3,283,205, respectively, and is included in selling and general and administrative expenses. See Notes
8a, 8f, 8i, 8m, 9A and 9B.
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.
Inventory
- Inventory, which will consist solely of
finished goods of AES, is valued at the lower of cost on a first-in, first-out basis or market. Inventory consists
of the following at May 31, 2016 and 2015.
|
|
|
May 31, 2016
|
|
|
May 31, 2015
|
|
|
|
|
|
|
|
|
|
|
Finished goods
|
|
$
|
60,012
|
|
|
$
|
147,605
|
|
|
Work-in-process (unbilled labor)
|
|
|
60,398
|
|
|
|
9,100
|
|
|
|
|
$
|
120,410
|
|
|
$
|
156,705
|
|
Intangible Asset
In May, 2016, the Company purchased an intangible asset with a value
of $249,113 by issuing common stock and warrants. The Company believes the intangible asset to have a useful life of less than
one year and opted to impair the asset and report it within the selling, general and administrative expense of the income statement.
Research and Development
– All research and
development costs are expensed as incurred.
Income Taxes
– The provision for, or benefit
from, income taxes includes deferred taxes resulting from the temporary differences in income for financial and tax purposes using
the liability method. Such temporary differences result primarily from the differences in the carrying value of assets and liabilities.
Future realization of deferred income tax assets requires sufficient taxable income within the carryback, carryforward period available
under tax law. The Company evaluates, on a quarterly basis whether, based on all available evidence, if it is probable that the
deferred income tax assets are realizable. Valuation allowances are established when it is more likely than not that the tax benefit
of the deferred tax asset will not be realized. The evaluation, as prescribed by ASC 740-10, “Income Taxes,” includes
the consideration of all available evidence, both positive and negative, regarding historical operating results including recent
years with reported losses, the estimated timing of future reversals of existing taxable temporary differences, estimated future
taxable income exclusive of reversing temporary differences and carryforwards, and potential tax planning strategies which may
be employed to prevent an operating loss or tax credit carryforward from expiring unused.
The Company accounts for uncertain tax provisions in accordance
with ASC 740-10-05 “Accounting for Uncertainty in Income Taxes.” The ASC clarifies the accounting for uncertainty in
income taxes recognized in an enterprise’s financial statements. The ASC prescribes a recognition threshold and measurement
attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.
The ASC provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure
and transition.
Foreign Currency Transactions
– The Company
accounts for foreign currency translation pursuant to ASC 830. The functional currency of the Company is the United States dollar.
Under ASC 830, all assets and liabilities denominated in foreign currencies are translated into United States dollars using the
current exchange rate at the end of each fiscal period. Revenues and expenses are translated using the average exchange rates prevailing
throughout the respective periods. All transaction gains and losses from the measurement of monetary balance sheet items denominated
in foreign currencies are reflected in the statement of operations as gain (loss) on foreign currency transactions.
Recent Accounting Pronouncements
In March 2016, the Financial Accounting
Standards Board (“FASB”) issued authoritative guidance regarding the accounting for share-based payment transactions,
including income tax consequences, classification of awards as either equity or liabilities, and classification on the statement
of cash flows. The guidance is to be applied for annual periods beginning after December 15, 2016 and interim periods within those
annual periods, and early adoption is permitted. The guidance requires companies to apply the requirements retrospectively, modified
retrospectively, or prospectively depending on the amendment(s) applied. The Company is currently evaluating the impact of adopting
this guidance.
In February 2016, the FASB issued Accounting
Standards Update (“ASU”) 2016-02, “Leases” (Topic 842). This guidance will be effective for public entities
for fiscal years beginning after December 15, 2018 including the interim periods within those fiscal years. Early application is
permitted. Under the new provisions, all lessees will report a right-of-use asset and a liability for the obligation to make payments
for all leases with the exception of those leases with a term of 12 months or less. All other leases will fall into one of two
categories: (i) Financing leases, similar to capital leases, which will require the recognition of an asset and liability, measured
at the present value of the lease payments and (ii) Operating leases which will require the recognition of an asset and liability
measured at the present value of the lease payments. Lessor accounting remains substantially unchanged with the exception that
no leases entered into after the effective date will be classified as leveraged leases. For sale leaseback transactions, the sale
will only be recognized if the criteria in the new revenue recognition standard are met. The Company is currently evaluating the
impact of adopting this guidance.
In January 2016, the FASB issued ASU 2016-01,
which amends the guidance relating to the classification and measurement of financial instruments. Changes to the current guidance
primarily affect the accounting for equity investments, financial liabilities under the fair value option, and the presentation
and disclosure requirements for financial instruments. In addition, the ASU clarifies guidance related to the valuation allowance
assessment when recognizing deferred tax assets resulting from unrealized losses on available-for-sale debt securities. The new
standard is effective for fiscal years and interim periods beginning after December 15, 2017, and upon adoption, an entity should
apply the amendments by means of a cumulative-effect adjustment to the balance sheet at the beginning of the first reporting period
in which the guidance is effective. Early adoption is not permitted except for the provision to record fair value changes for financial
liabilities under the fair value option resulting from instrument-specific credit risk in other comprehensive income. The Company
is currently evaluating the impact of adopting this guidance.
In November 2015, the FASB issued ASU 2015-17,
“Balance Sheet Classification of Deferred Taxes”. Currently deferred taxes for each tax jurisdiction are presented
as a net current asset or liability and net noncurrent asset or liability on the balance sheet. To simplify the presentation, the
new guidance requires that deferred tax liabilities and assets for all jurisdictions along with any related valuation allowances
be classified as noncurrent in a classified statement of financial position. This guidance is effective for interim and annual
reporting periods beginning after December 15, 2016, and early adoption is permitted. The Company is currently evaluating the impact
of adopting this guidance.
In September 2015, the FASB issued ASU
2015-16, “Simplifying the Accounting for Measurement–Period Adjustments”. Changes to the accounting for measurement-period
adjustments relate to business combinations. Currently, an acquiring entity is required to retrospectively adjust the balance sheet
amounts of the acquiree recognized at the acquisition date with a corresponding adjustment to goodwill as a result of changes made
to the balance sheet amounts of the acquiree. The measurement period is the period after the acquisition date during which the
acquirer may adjust the balance sheet amounts recognized for a business combination (generally up to one year from the date of
acquisition). The changes eliminate the requirement to make such retrospective adjustments, and, instead require the acquiring
entity to record these adjustments in the reporting period they are determined. The new standard is effective for both public and
private companies for annual reporting periods beginning after December 15, 2015. The Company is currently evaluating the impact
of adopting this guidance.
In August 2015, the FASB issued ASU No.
2015-14, “Revenue from Contracts with Customers (Topic 606)”. The amendments in this ASU defer the effective date of
ASU 2014-09 “Revenue from Contracts with Customers (Topic 606)”. Public business entities should apply the guidance
in ASU 2014-09 to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting
period. Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim
reporting periods within that reporting period. The Company is still evaluating the impact of adopting this guidance.
In April 2015, the FASB issued ASU 2 015-03,
“Imputation of Interest – Simplifying the Presentation of Debt Issuance Costs.” This guidance requires that the
debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the debt
liability, consistent with the presentation of a debt discount. This amendment is effective for fiscal years and interim periods
within those fiscal years, beginning after December 15, 2015. Early adoption is permitted. The Company is currently evaluating
the impact on its consolidated financial statements of adopting this new guidance but at this time does not expect it to have a
material impact on the Company’s consolidated financial statements.
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 Parent, its subsidiary Arkados, its former subsidiary Arkados Wireless Technologies, Inc.
(collectively, “Arkados Group”) 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 Group 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 Group’s assets and most secured creditors released Arkados Group from
any and all additional claims, if any, that the secured creditors may have had against Arkados Group. 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 Group, 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 Group.
The Company is negotiating with those few remaining outstanding
unsecured debt holders from the period prior to the ST US Asset Sale for which it has not reached agreement, compromise, or convert
outstanding debt into equity and thereby facilitate raising additional investor capital for the Company’s business. 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. These settlements are binding commitments, however, the Company is awaiting
required information from these debt holders in order to issue the equity and discharge such obligations.
|
|
4.
|
PAYROLL TAX LIABILITIES
|
On May 24, 2004, we filed
a merger certificate completing the acquisition of Miletos, Inc., a previously unaffiliated Delaware corporation which prior to
the merger, acquired the assets and business of Enikia, LLC.
Enikia, LLC was in arrears for several years in its payment
of federal and state payroll taxes. Pursuant to the Agreement and Plan of Merger dated May 7, 2004, the Company assumed up to $1.2
million of the delinquent payroll taxes due and outstanding with the remaining difference being 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 New Jersey
taxing authorities in the amount of $874,000. The payments represented payroll taxes withheld by Miletos, Inc. from its employees
but not remitted to the taxing authorities.
|
|
5.
|
ACCOUNTS PAYABLE AND ACCRUED EXPENSES
|
As of May 31, 2016 and 2015, accounts payable and accrued expenses
consist of the following amounts:
|
|
|
May 31, 2016
|
|
|
May 31, 2015
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
782,654
|
|
|
$
|
463,911
|
|
|
Accrued board of director fees
|
|
|
-
|
|
|
|
1,873,611
|
|
|
Accrued interest and penalties payable
|
|
|
116,035
|
|
|
|
98,078
|
|
|
Accrued payroll
|
|
|
28,320
|
|
|
|
54,882
|
|
|
Accrued other
|
|
|
95,373
|
|
|
|
164,650
|
|
|
|
|
$
|
1,022,382
|
|
|
$
|
2,655,132
|
|
In fiscal 2015 the Company determined that certain accounts payable
had been settled in prior periods and should be written off. Balances totaling $124,793 were reversed and recognized as other income.
|
|
6.
|
NOTES PAYABLE, RELATED PARTY PAYABLES AND DEBT SUBJECT
TO EQUITY BEING ISSUED
|
Notes Payable
As a result of the Company’s Asset Sale to ST US, 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. In fiscal 2014, the
Company received loans of $400,000. As of May 31, 2014, there was $939,894 of notes payable, net of debt discounts of $309,263.
In fiscal 2015, the Company received loans of $200,000 and refinanced related party payables totaling $130,000. In addition, as
discussed below the Company issued common stock for the conversion of various notes payable and accrued interest. As of May 31,
2015, there was notes payable of $345,832, net of debt discounts of $0. All notes payable mature on or before October 31, 2015
and as such, are classified as current liabilities on the consolidated balance sheet. As of May 31, 2016, there was $335,832
of notes payable.
Notes payable transactions include the following:
FY 2015 (Year Ended May 31, 2015) Transactions:
On August 11, 2014, the Company executed a Convertible Note for
a loan in the principal amount of $100,000. The Convertible Note bore interest at 6% per year and was scheduled to mature on October
31, 2015. At any time during the term of the Convertible Note, the holder had the right to convert any unpaid portion of the Convertible
Note and accrued interest into shares of common stock at an original conversion price of $0.60 per share. The beneficial conversion
feature was fair valued at $35,500 and was being amortized over the life of the debt instrument. On March 16, 2015, the conversion
price for the note was amended to $0.30 per share. On April 1, 2015, the Company issued 345,360 shares for the conversion of the
principal and accrued interest of $3,608. As a result of the conversion of the note, the remaining unamortized beneficial conversion
feature was written off in March 2015. See Note 8h.
On August 12, 2014, the Company executed a Convertible Note for
a loan in the principal amount of $100,000. The Convertible Note bore interest at 6% per year and was scheduled to mature on October
31, 2015. At any time during the term of the Convertible Note, the holder had the right to convert any unpaid portion of the Convertible
Note and accrued interest into shares of common stock at an original conversion price of $0.60 per share. The beneficial conversion
feature was fair valued at $35,500 and was being amortized over the life of the debt instrument. On April 1, 2015, the Company
issued 345,303 shares for the conversion of the principal and accrued interest of $3,591. As a result of the conversion of the
notes, the remaining unamortized beneficial conversion features were written off in March 2015. See Note 8h.
On September 10, 2014, the Company executed two Convertible Notes
to refinance due to related party, a previously issued outstanding note payable and accrued interest totaling $174,071. Each of
these Convertible Notes has a principal balance of $65,000, bear interest at 6% per year and mature on October 31, 2015. At any
time during the term of the Convertible Notes, the holders have the right to convert any unpaid portion of the Convertible Notes
and accrued interest into shares of common stock at a conversion price of $1.20 per share. There was no beneficial conversion feature.
The Company recognized a gain on the settlement of debt of $44,071 for the year ended May 31, 2015.
FY 2016 (Year Ended May 31, 2016) Transactions:
In January 2016, the Company executed a Promissory Note for a loan
in the principal amount of $60,000. The Promissory Note bears interest at 6% per year, compounded quarterly, and matures on January
15, 2017. The proceeds from the Promissory Note were used to partially repay two Convertible Notes as discussed below.
On January 8, 2016, the Company entered into an Exchange Agreement
with the noteholders of the Convertible Notes that were in default. On January 15, 2016, the Company applied the proceeds of the
new Promissory Note together with the issuance of 50,000 shares of the Company’s common stock, to the payment of two outstanding
6% Convertible Notes that were in default having the aggregate outstanding principal amount of $130,000. In exchange for
the payment and the shares, the holders of the outstanding 6% Convertible Notes surrendered their notes, and the Company issued
a new 6% Convertible Note December 31, 2016 to them in the original principal amount of $40,000. The new Convertible Note
bears interest at the rate of 6% per year, compounded quarterly, and matures on December 31, 2016. At any time during the term
of the Convertible Note, the holders have the right to convert any unpaid portion of the Convertible Note and accrued interest
into shares of common stock at an original conversion price of $1.20 per share. There is no beneficial conversion feature. The
holders further agreed that their extension of the maturity of the outstanding Convertible Notes had been effective from October
31, 2015 until January 15, 2016.
On March 31, 2016 and May 6, 2016, the Company executed Promissory
Notes for loans, each in the amount of $10,000. The Promissory Notes bear interest at 6% per year, compounded quarterly. Both notes
matured on June 30, 2016 and are now bearing annual interest of 12%. The proceeds from the Promissory Note were used to partially
repay two Convertible Notes as discussed below.
Related Party Payables
There were no related party payables at May 31, 2016 or May 31,
2015.
Debt Subject To Equity Being Issued
As a direct result of the Sale of the License and IP Agreements
to ST US and the mandate to obtain debt releases, the Company has been able to reach settlements with its secured creditors and
employees, with cash payments to the secured creditors made as of the December 2010 and June 2011 closings. Nothing further is
owed to the Company’s secured creditors. There remains, however, approximately $179,000 of payments due the former employees
as of May 31, 2016 and 2015.
As of May 31, 2016 and 2015, there remained $456,930 of debts that have been settled with debt holders who have agreed to
accept equity for their remaining debt.
FY 2015 (Year Ended May 31, 2015):
In fiscal 2015, the Company entered into final supplemental agreements
with former employees to settle all outstanding claims. The Company issued warrants to purchase 622,947 shares of common stock
at $1.20 per share for a five-year period to settle claims totaling $747,535.
During the year ended May 31, 2015, the Company entered into final
supplemental agreements with bridge note holders to settle all outstanding claims. The Company issued 648,381 shares of common
stock to settle claims totaling $466,000 in September 2014 and 256,486 shares of common stock to settle claims totaling $207,753
on April 1, 2015. See Note 8d.
During the year ended May 31, 2015, the Company agreed to issue
418,669 shares of common stock to settle claims totaling $502,408 from previous holders of unsecured debt. The shares were issued
in January 2015. See Note 8e.
FY 2016 (Year Ended May 31, 2016):
None
There was no provision for federal or state taxes for both of the
years ended May 31, 2016 and 2015.
The components of deferred taxes were as follows:
|
|
|
May 31,
|
|
|
May 31,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
|
Net operating loss carry forward
|
|
$
|
7,219,000
|
|
|
$
|
6,970,000
|
|
|
Accrued compensation
|
|
|
|
|
|
|
72,000
|
|
|
Changes in prior year estimates
|
|
|
150,000
|
|
|
|
(83,000
|
)
|
|
Valuation allowance
|
|
|
(7,369,000
|
)
|
|
|
(6,959,000
|
)
|
|
Net deferred tax asset
|
|
$
|
-
|
|
|
$
|
-
|
|
The Company has a valuation allowance against the full amount of
its net deferred taxes due to the uncertainty of realization of the deferred tax assets due to operating loss history of the Company. The Company currently provides a
valuation allowance against deferred taxes when it is more likely than not that some portion, or all of its deferred tax assets
will not be realized. The valuation allowance could be reduced or eliminated based on future earnings and future estimates of taxable
income.
A reconciliation of the statutory federal income tax benefit to
actual tax benefit for the years ended May 31, 2016 and 2015 is as follows:
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
Federal statutory income tax rates
|
|
|
(35
|
)%
|
|
|
(35
|
)%
|
|
State statutory income tax rate, net of federal benefit
|
|
|
(5
|
)
|
|
|
(5
|
)
|
|
Permanent differences – equity rights
|
|
|
24
|
|
|
|
33
|
|
|
Other
|
|
|
3
|
%
|
|
|
-
|
|
|
Change in net operating
loss
|
|
|
13
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective tax rate
|
|
|
—
|
%
|
|
|
—
|
%
|
As of May 31, 2016, the Company has federal net operating loss
carryforwards of approximately $18,000,000 subject to expiration between fiscal years 2027 and 2036. The Company may have had a greater than 50% change in
ownership of certain stock holdings by shareholders of the Company pursuant to Section 382 of the Internal Revenue Code. The
net operating losses may be limited as to its utilization on an annual basis. Currently, no such evaluation has
been performed.
The Company has not been audited by the Internal Revenue Service
(“IRS”) or any states in connection with income taxes. The periods from fiscal 2012 through 2016 remain open to examination
by the IRS and state jurisdictions. The Company believes it is not subject to any tax audit risk beyond those periods. The Company’s
policy is to recognize interest and penalties accrued on any unrecognized tax benefits as a component of interest expense. The
Company does not have any accrued interest or penalties associated with any unrecognized tax benefits, nor was any interest expense
recognized during the years ended May 31, 2016 and 2015.
|
|
8.
|
STOCKHOLDERS’ DEFICIENCY
|
Increase in Authorized Shares
A majority of the Company’s stockholders authorized, at the
recommendation of the Company’s Board of Directors, an increase the number of shares of common stock from 100,000,000 to
600,000,000. The increase became effective on March 17, 2014.
Reverse Stock Split
Effective March 18, 2015, the Company implemented a reverse stock
split of its outstanding common stock at a ratio of 1-for-30 shares. In connection with the reverse stock split, the
Company’s Certificate of Incorporation was amended such that the Company’s issued and outstanding common stock was
proportionally reduced. The number of authorized shares and the par value of the Company’s common stock and preferred stock
were not affected by the reverse stock split. Stockholders will not receive fractional shares but instead will receive cash in
an amount equal to the fraction of a share that stockholder would have been entitled to receive multiplied by the sale price of
the common stock as last reported on February 12, 2015, the last business day prior to the first public disclosure/announcement
of the reverse stock split.
Private Placement Offering (“PPO”)
On March 15, 2015, the Company commenced a PPO for accredited investors
to issue up to 2,500,000 shares of common stock and warrants to purchase 2,500,000 shares of common stock at $2.00 per share (each
share and warrant constitutes a “Unit”) for total gross proceeds of $1,500,000. The warrants are immediately exercisable
and have a term of three years. The Units are being offered by the Company on a “best efforts” “any-or-none”
basis in Units of 166,666 shares although the Company may accept fractional Units. The PPO closed on September 15, 2015. See Notes
8g, 8j, and 9B for the shares and warrants subscribed for through the date of this report.
Issuances of Common Stock
FY 2015 (Year Ended May 31, 2015):
|
|
a.
|
On July 16, 2014, the Company issued 666,667 shares of common stock to a consultant under the terms of a consulting agreement. The
shares were valued at $1.50 per share which was the price of the common stock on the date of the consummation of an agreement with
a customer. See Note 11.
|
|
|
b.
|
As described above, the Company signed a Settlement Agreement and Release with an unsecured creditor and agreed to issue 792,550
shares of common stock for $550,000 of accounts payable and $310,977 of a promissory note and accrued interest. The Company issued
such shares under this Settlement Agreement in September 2014. Prior to the issuance date, such shares were classified as common
stock to be issued.
|
|
|
c.
|
As described above, the Company entered into a Separation Agreement with Typaldos and agreed to issue 469,132 shares of common
stock as part of the Agreement. The Company issued such shares under this Separation Agreement in September 2014. Prior to the
issuance date, such shares were classified as common stock to be issued.
|
|
|
d.
|
As described above, the Company entered into final supplemental agreements with bridge note holder to settle all outstanding
claims. In September 2014, the Company agreed to issue 648,381 shares of common stock to settle claims totaling $466,000. Prior
to the issuance date, such shares were classified as common stock to be issued. On April 1, 2015, the Company issued
256,486 shares of common stock to settle claims totaling $207,754.
|
|
|
e.
|
As described above, the Company settled all outstanding claims with previous holders of unsecured debt. In September 2014,
the Company issued 418,669 shares of common stock to settle claims totaling $502,408.
|
|
|
f.
|
On February 19, 2015, the Company issued 50,000 shares of common stock to a consultant under the terms of an investor relations
agreement. The shares were valued at $1.20 per share which was the price of the common stock on the date the agreement
was signed.
|
|
|
g.
|
For the period March 15, 2015 through May 31, 2015, 833,330 shares of common stock have been subscribed for under the PPO and
the Company received proceeds of $500,000. The shares were issued on April 7, 2015.
|
|
|
h.
|
As described above, on April 1, 2015, the Company issued 4,387,879 shares of common stock for the conversion of notes payable
of $1,200,000 and accrued interest of $116,364.
|
FY 2016 (Year Ended May 31, 2016):
|
|
i.
|
On June 25, 2015, the Company issued 108,333 shares of common stock to its chairman/chief executive officer and 35,000 shares
of common stock to an officer/former director for services rendered to the Company’s board of directors in fiscal 2015. The
shares were valued at $1.75 per share. The value of the shares totaling $250,833 was charged as stock compensation in
fiscal 2015.
|
|
|
j.
|
For the period June 1, 2015 through May 31, 2016, 838,334 shares of common stock have been subscribed for under the PPO and
the Company received proceeds of $503,000. These shares were issued in July and August 2015.
|
|
|
k.
|
On January 8, 2016 the Company issued 50,000 shares as part of a debt conversion and
refinance whereby $130,000 of note
principle and accrued interest of $11,332 were extinguished and a new note of $100,000 was issued;
|
|
|
l.
|
On February 23, 2016, we entered into a consulting
agreement with. LPF Communications under which LPF Communications is to provide certain investor relations services for a period
of up to six months. We have agreed to pay for the services by issuing two tranches of 150,000 shares of our Common Stock each,
with the second tranche becoming issuable only if we do not terminate the consulting agreement on or prior to June 8, 2016. Pursuant
to the agreement, we issued the first tranche of 150,000 shares to the consultant on April 8, 2016.
|
|
|
m.
|
On April 22, 2016, the Company issued 675,000 shares of common stock to its key employees, including 500,000 shares to its
chairman/chief executive officer, for services rendered to the Company in fiscal 2016. The shares were valued at $0.51
per share. The value of the shares totaling $344,250 was charged as stock compensation in fiscal 2016.
|
|
|
n.
|
On April 28, 2016, the Company entered into an asset purchase agreement pursuant to which the Company purchased intangible
assets valued at $249,113 in exchange for 166,667 shares of the Company's common stock and a warrant to purchase 166,667 shares
of the Company's common stock at $2.00 per share. As a result of management's evaluation, the intangible asset was deemed
impaired and thus fully written off to selling, general and administrative expense of the income statement.
|
|
|
9.
|
STOCK-BASED COMPENSATION
|
The Company accounted for its stock based compensation in accordance
with the fair value recognition provisions of ASC 718, “Compensation – Stock Compensation” (“ASC 718”).
A. Options
The Company issued options to purchase an aggregate of 4,100,000
shares of the Company’s common stock in the year ended May 31, 2016, 2,100,000 of which were granted outside of the 2004
Stock Option and Restricted Stock Plan (the “2004 Plan”). No options were granted in the year ended May 31, 2015. On
April 8, 2014, the Company issued options to its chairman/chief executive officer and two of its key employees to purchase 1,181,250
shares of the Company’s common stock at an exercise price of $1.20 per share, the closing price of the Company common stock
as quoted on the OTCQB. The options vested immediately and are exercisable for ten years. Stock based compensation related to these
options amounted to $968,092 for the year ended May 31, 2014.
The options issued were valued using the Black-Scholes option pricing
model under the following assumptions: stock price - $1.20; strike price - $1.20; expected volatility - 93.24%; risk-free interest
rate - 1.5%; dividend rate - 0%; and expected term – 2 - 5 years.
The expected life is the number of years that the Company estimates,
based upon history, that options will be outstanding prior to exercise or forfeiture. Expected life is determined using the “simplified
method” permitted by Staff Accounting Bulletin No. 107. The Company did not use the volatility rate of its common stock
price. Instead, the volatility rate was based on a blended rate of the Company’s common stock price as well as the stock
prices of companies providing similar services.
Compensation based stock option activity for qualified and unqualified
stock options are summarized as follows:
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
Shares
|
|
|
Exercise Price
|
|
|
Outstanding at May 31, 2014
|
|
|
1,247,917
|
|
|
$
|
1.53
|
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
Expired or cancelled
|
|
|
(235,417
|
)
|
|
|
2.95
|
|
|
Outstanding at May 31, 2015
|
|
|
1,012,500
|
|
|
$
|
1.20
|
|
|
Granted
|
|
|
4,100,000
|
|
|
|
0.94
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
Expired or cancelled
|
|
|
-
|
|
|
|
-
|
|
|
Outstanding at May 31, 2016
|
|
|
5,112,500
|
|
|
$
|
0.99
|
|
The following table summarizes information about options outstanding
and exercisable at May 31, 2016:
|
|
|
|
Options Outstanding and Exercisable
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
|
|
|
|
|
|
Shares
|
|
|
Remaining Life
|
|
|
Exercise
|
|
|
Number
|
|
|
|
|
|
Outstanding
|
|
|
In Years
|
|
|
Price
|
|
|
Exercisable
|
|
|
Exercise prices:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.60
|
|
|
|
2,300,000
|
|
|
|
5.47
|
|
|
$
|
0.60
|
|
|
|
2,300,000
|
|
|
|
1.00
|
|
|
|
700,000
|
|
|
|
2.38
|
|
|
|
1.00
|
|
|
|
700,000
|
|
|
|
1.20
|
|
|
|
1,562,500
|
|
|
|
8.58
|
|
|
|
1.20
|
|
|
|
1,562,500
|
|
|
|
2.00
|
|
|
|
550,000
|
|
|
|
6.08
|
|
|
|
2.00
|
|
|
|
550,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,112,500
|
|
|
|
6.06
|
|
|
|
|
|
|
|
5,112,500
|
|
The compensation expense attributed to the issuance of the outstanding
options was recognized as they vest. The outstanding stock options are exercisable for ten years from the grant date.
The employee stock option plan stock options are exercisable for
up to ten years from the grant date and vest over various terms from the grant date to three years.
The aggregate intrinsic value totaled $230,000 and was based on
the Company’s closing stock price of $0.70 as of May 31, 2016, which would have been received by the option holders had all
option holders exercised their options as of that date.
The weighted average fair value of options granted during the years
ended May 31, 2016 and 2015 was $0.74 and $0 per share, respectively. The total fair value of shares vested during the years ended
May 31, 2016 and 2015 was $230,000 and $0, respectively.
As of May 31, 2016, there was no future compensation cost related
to non-vested stock options.
On June 25, 2015, the Company issued options under the 2004 Plan
to its chairman/chief executive officer and a former director for services rendered to the Company’s board of directors in
fiscal 2015 to purchase a total of 1,300,000 shares of common stock as follows:
|
|
1.
|
Chairman/chief executive officer – options to purchase 1,000,000 shares of common stock at $0.60 per share.
|
|
|
2.
|
Former director – options to purchase 300,000 shares of common stock at $0.60 per share.
|
The options vested immediately and are exercisable for three years.
The options issued were valued using the Black-Scholes option pricing model under the assumptions below. The value of the options
totaling $1,622,778 was charged as stock compensation in fiscal 2015.
On October 16, 2015, the Company issued options under its 2004 Plan
to employees to purchase 700,000 shares of its common stock at $1.00 per share.
On April 22, 2016, the Company issued options
outside of its 2004 Plan, which vested immediately and are exercisable for ten years, to certain of its key employees, including
its chairman/chief executive officer for services rendered to the Company during fiscal 2016 for a total of 1,100,000 shares of
its common stock as follows:
|
|
1.
|
Chairman/chief executive officer – options to purchase 500,000 shares of the Company's common stock at $0.60 per share.
|
|
|
2.
|
Chairman/chief executive officer – options to purchase 300,000 shares of the Company's common stock at $1.20 per share.
|
|
|
2.
|
Chairman/chief executive officer – options to purchase 300,000 shares of the Company's common stock at $2.00 per share.
|
The assumptions are as follows - stock price - $1.75; strike price
- $0.60; expected volatility – 91.35%; risk-free interest rate - 0.73%; dividend rate - 0%; and expected term – 1.5
years.
B. Warrants
The issuances of warrants are summarized as follows:
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
Shares
|
|
|
Exercise Price
|
|
|
Outstanding at May 31, 2014
|
|
|
2,401,043
|
|
|
$
|
1.34
|
|
|
Granted
|
|
|
1,536,943
|
|
|
|
1.63
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
Expired or cancelled
|
|
|
-
|
|
|
|
-
|
|
|
Outstanding at May 31, 2015
|
|
|
3,937,986
|
|
|
|
1.45
|
|
|
Granted
|
|
|
1,288,001
|
|
|
|
1.78
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
Expired or cancelled
|
|
|
-
|
|
|
|
-
|
|
|
Outstanding at May 31, 2016
|
|
|
5,225,987
|
|
|
$
|
1.53
|
|
The following table summarizes information about warrants outstanding
and exercisable at May 31, 2016:
|
|
|
|
Outstanding and exercisable
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
|
|
|
average
|
|
|
Average
|
|
|
|
|
|
|
|
|
Shares
|
|
|
remaining life
|
|
|
Exercise
|
|
|
Number
|
|
|
|
|
|
Outstanding
|
|
|
in years
|
|
|
Price
|
|
|
Exercisable
|
|
|
Range of exercise prices:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1.00
|
|
|
|
283,000
|
|
|
|
2.47
|
|
|
$
|
1.00
|
|
|
|
283,000
|
|
|
$
|
1.20
|
|
|
|
3,004,656
|
|
|
|
3.14
|
|
|
|
1.20
|
|
|
|
3,004,656
|
|
|
$
|
2.00
|
|
|
|
1,838,331
|
|
|
|
2.07
|
|
|
|
2.00
|
|
|
|
1,838,331
|
|
|
|
greater than $2.00
|
|
|
|
100,000
|
|
|
|
0.47
|
|
|
|
4.50
|
|
|
|
100,000
|
|
|
|
|
|
|
|
5,225,987
|
|
|
|
2.67
|
|
|
$
|
1.52
|
|
|
|
5,225,987
|
|
The expense attributed to the issuances of the warrants was recognized
as they vested/earned. These warrants are exercisable for three years from the grant date.
Issuances of warrants to purchase shares of the Company's common
stock were as follows:
FY 2015 (Year Ended May 31, 2015):
|
|
·
|
Warrants to purchase 622,947 shares of the Company's common stock
were issued in exchange for certain past due indebtedness outstanding. Such warrants were determined to have been issued at fair
value since such settlements were negotiated by the Company with each debt holder.
|
|
|
·
|
Warrants to purchase 88,000 shares of the Company's common stock were
issued to a consultant for services rendered under a consulting contract. The warrants issued were valued using the Black Scholes
option pricing model under the following assumptions: stock price $ 0.46 $ 1.87; strike price $1.20; expected volatility
100.00%; risk free interest rate 1.5%; dividend rate 0% ; and expected term 3 years. The value of the warrants totaling
$349,721 was charged as consulting.
|
|
|
·
|
As discussed in Note 8, in addition to common stock, the Company also
issued warrants to purchase 833,330 shares of the Company's common stock under the PPO.
|
FY 2016 (Year Ended May 31, 2016):
|
|
·
|
As discussed in Note 8, in addition to common stock, the Company also
issued warrants to purchase 833,334 shares of the Company's common stock under the PPO.
|
|
|
·
|
In November 2015, a warrant to purchase 250,000 shares of the Company's
common stock at $1.00 per share was issued to a vendor as a bonus payment for services rendered in connection with a software development
agreement. The warrant issued was valued using the Black Scholes option pricing model under the following assumptions: stock price
$ 1.00; strike price $ 1.00; expected volatility 87.54%; risk free interest rate 1.21%; dividend rate 0%;
and expected term 3years. The value of the warrant totaling $139,928 was charged as research and development.
|
|
|
·
|
In November 2015, a warrant to purchase 33,000 shares
of the Company's common stock at $1.00 per share was issued to a consultant for services rendered under a consulting contract.
The warrant issued was valued using the Black Scholes option pricing model under the following assumptions: stock price $ 1.00;
strike price $1.00; expected volatility 87.54%; risk free interest rate 1.21%; dividend rate 0%; and expected
term 3years. The value of the warrant totaling $18,471 was charged as consulting. See Note 11.
|
|
|
·
|
As noted in Note 8n,on April 28, 2016, the Company entered into an
asset purchase agreement pursuant to which the Company purchased intangible assets in exchange for 166,667 shares of the Company's
common stock and a warrant to purchase 166,667 shares of the Company's common stock at $2.00 per share. The warrant issued was
valued using the Black Scholes option pricing model under the following assumptions: stock price $ 0.75; strike price $2.00;
expected volatility 293%; risk free interest rate .93%; dividend rate 0%; and expected term 3years. The value of
the warrant totaling $124,000 was included in the cost of the intangible which was fully impaired as of May 31, 2016.
|
The Company earned all of its revenue from one customer
under the following agreements.
Master Agreement – License of (“PEMS-SF”™)
On July 10, 2014, the Company entered into a Master
Agreement to license our Process and Event Management System (“PEMS-SF”™) with Tatung Corporation (“Tatung”).
The basic fee generation structure of the Agreement allows for (1)
a one-time licensing fee for each PEMS-SF-enabled stations or subsystems installed, (2) separate fees of up to 10% of the software
fees for software updates, maintenance and technical support, (3) on-going service fees based on units of products manufactured
utilizing PEMS-SF; and (4) an annual service fee for cloud-based services and data storage.
The Master Agreement has a year-to-year term but
can be terminated by either party upon sixty (60) days’ advance written notice. Upon termination or expiration of this agreement,
we are not required to provide any continuing or ongoing processing of data or other services that, pursuant to a sub-agreement,
are discontinued upon termination, however, the customer shall retain any perpetual rights granted in a sub-agreement or schedule.
The term of any sub-agreements is concomitant and co-terminus with the Master Agreement term.
Revenue recognized under the Master Agreement amounted to $172,600
and $284,788 for the years ended May 31, 2016 and 2015, respectively.
Agreement – License of Meter Collar and
Bridge Programmable Logic Controllers
In October 2014, the Company entered into a year-to-year term agreement
with Tatung to license its meter collar and bridge programmable logic controllers. The license is paid on a per copy (ordered)
fee, and is on a perpetual, worldwide, non-exclusive, transferable basis.
Revenue recognized under the agreement amounted to $87,500 and $115,700
for the years ended May 31, 2016 and 2015, respectively.
In March, 2015 the Company entered into a one year agreement, with automatic one year renewals until terminated by either
party with sixty (60) days’ notice, with Tatung to provide services in the area of business development and as a representative
to sell its products. Tatung will pay a monthly retainer fee for this service. Revenue recognized under this agreement was
approximately $395,0000 for the twelve months ended May 31, 2016.
Leases
Effective October 1, 2014 as amended on January 15, 2015, the Company
entered a lease for its office space at a total monthly rental of $1,874. The lease expired on January 15, 2016. The Company renewed
this lease until January 15, 2017 at a monthly rental of $2,034. It can be renewed for two additional one-year terms upon its expiration.
Rent expense for the years ended May 31, 2016 and 2015 was $80,992
and $17,488, respectively.
Our AES subsidiary leases offices in Jericho, New York. The facility
is approximately 1,850 square feet, occupied pursuant to a lease that commenced on August 1, 2015 and expires September 30, 2018.
The average annual rent over the term of the lease is approximately $57,300. This amount does not include taxes for the premises.
Future minimum rental commitments of non-cancelable operating leases
(including the Jericho lease) are as follows:
The following table sets forth our future contractual obligations:
|
For the twelve month period ended May 31,
|
|
Office Rent
|
|
|
2017
|
|
$
|
81,331
|
|
|
2018
|
|
|
83,039
|
|
|
2019 and thereafter
|
|
|
27,775
|
|
|
|
|
$
|
192,145
|
|
Consulting Agreements
On February 19, 2015, the Company entered into a one-year consulting
agreement whereby the consultant received a payment of $5,000 and 50,000 shares of common stock valued at $1.20 per share. In addition,
the consultant is entitled to payments of $5,000 per month for the duration of the agreement if and when the Company receives $500,000
or more in debt or equity financing.
On May 12, 2015, the Company entered into a three month consulting
agreement for the raising of capital whereby the consultant received a payment of approximately $3,000. In addition, the consultant
is entitled to a success fee of 5% of all monies raised as a direct result of introductions (as defined) made by the consultant.
On November 15, 2015, the Company entered into a one-year consulting
agreement to provide advisory services whereby the consultant received a payment of a warrant to purchase 33,000 shares of the
Company's common stock at $1.00 per share.
On February 23, 2016, we entered into a consulting agreement
with LPF Communications under which LPF Communications is to provide certain investor relations services for a period of up
to six months. We have agreed to pay for the services by issuing two tranches of 150,000 shares of our Common Stock each,
with the second tranche becoming issuable only if we do not terminate the consulting agreement on or prior to June 8, 2016.
Pursuant to the agreement, we have issued 300,000 shares valued at $205,000 which was recorded in prepaid expense and
amortized over the term of the agreement.
On May 15, 2016, the Company entered into a two year consulting agreement whereby consultant is to perform certain consulting
and advisory services. The Company issued 100,000 shares of common stock valued at $69,000 as compensation which was recorded
as prepaid expenses and amortized over the life of the contract.
|
|
12.
|
CONCENTRATIONS OF CREDIT RISK
|
Cash
The Company maintains principally all cash balances in two financial
institutions which, at times, may exceed the amount insured by the Federal Deposit Insurance Corporation. The exposure to the Company
is solely dependent upon daily bank balances and the respective strength of the financial institutions. The Company has not incurred
any losses on these accounts.
Net Sales
Two customers accounted for 60% of net sales for the year ended
May 31, 2016, as set forth below:
|
Customer 1
|
|
|
29
|
%
|
|
Customer 2 (related party, see Note 13)
|
|
|
31
|
%
|
Accounts Receivable
Two customers accounted for 94% of the accounts receivable as of
May 31, 2016, as set forth below:
|
Customer 1
|
|
|
83
|
%
|
|
Customer 2
|
|
|
11
|
%
|
|
|
13.
|
RELATED PARTY TRANSACTIONS
|
The Company performed consulting services for an entity that is
controlled by a former director. Consulting services for the fiscal years ended May 31, 2016 and 2015 were $78,872 and $44,800,
respectively.
|
|
14.
|
BUSINESS SEGMENT INFORMATION
|
The Company’s reportable segments are distinguished by types
of service, customers and methods used to provide their services. The operating results of these business segments are regularly
reviewed by the Company’s chief operating decision maker.
The accounting policies of each of the segments are the same as
those described in the Summary of Significant Accounting Policies. The Company evaluates performance based primarily on income
(loss) from operations.
Operating results for the business segments of the Company were
as follows:
|
|
|
|
Arkados
|
|
|
|
AES
|
|
|
|
Total
|
|
|
Year Ended May 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
730,249
|
|
|
$
|
1,140,781
|
|
|
$
|
1,871,030
|
|
|
Loss from operations
|
|
$
|
(2,171,333
|
)
|
|
$
|
(907,579
|
)
|
|
$
|
(3,078,912
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended May 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
403,852
|
|
|
$
|
80,410
|
|
|
$
|
484,262
|
|
|
Loss from operations
|
|
$
|
(4,059,619
|
)
|
|
$
|
(66,667
|
)
|
|
$
|
(4,126,286
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
May 31, 2016
|
|
$
|
236,797
|
|
|
$
|
347,846
|
|
|
$
|
584,643
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
May 31, 2015
|
|
$
|
283,154
|
|
|
$
|
254,772
|
|
|
$
|
537,926
|
|
On August 11, 2016, the Company executed a Promissory Note in the
amount of $150,000. The Promissory Notes bear interest at 10% per year, compounded quarterly. The Note matures January 15, 2017.
The proceeds were used for working capital.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE.
Effective January 7, 2016, the
Company dismissed Liggett & Webb P.A. (“LW”) (formerly Ligget, Vogt & Webb, P.A.) as its certifying
independent accountant. LW issued reports on the Company’s financial statements for the fiscal years ended May 31,
2011 through May 31, 2015. There were no disagreements between the Company and LW on any matter of accounting principles or
practices, financial statement disclosure or auditing scope or procedure, which disagreements if not resolved to the
satisfaction of LW would have caused them to make reference to this subject matter of the disagreements in connection with
their report, nor were there any “reportable events” as such term as described in Item 304(a)(1)(v) of Regulation
S-K. The reports did not contain any adverse opinion or disclaimer of opinion and were not qualified or modified as to
uncertainty, audit scope or accounting principles, except that such reports included an explanatory paragraph with respect to
the Company’s ability, in light of its history of losses, to continue as a going concern.
Contemporaneous with the dismissal of LW,
the Company engaged RBSM LLP (“RBSM”) as the Company’s independent registered public accountant.
ITEM 9A. CONTROLS AND PROCEDURES.
We strive to maintain a set of disclosure controls and procedures
designed to ensure that information required to be disclosed by us in the reports filed under the Exchange Act, is recorded,
processed, summarized and reported within the time periods specified by the SEC’s rules and forms. Disclosure controls are
also designed with the objective of ensuring that this information is accumulated and communicated to our management, including
our chief executive officer, as appropriate, to allow timely decisions regarding required disclosure. As a result of this evaluation,
we concluded that our disclosure controls and procedures were not effective for the period ended May 31, 2016.
Our management is responsible for establishing and maintaining adequate
internal control over financial reporting (as defined in Section 15d-15(f) of the Exchange Act) for our Company. Our sole officer
and director, who is chief executive officer and is also acting in the capacity of principal accounting officer, conducted an evaluation
of the design and operation of our internal control over financial reporting as of the end of the period covered by this report,
based on the criteria set forth in the Internal Control- Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission. As a result of this evaluation, we concluded that our financial reporting controls and procedures were
not effective for the period ended May 31, 2016. 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 also include a lack of timely financial statement preparation and account reconciliations, as well as,
and as a result of limited financial resources, the ability to retain personnel with sufficient technical expertise regarding accounting
for certain equity-based transactions. 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. There is no CFO at this time,
however, and the CEO is also acting in the capacity of Principal Accounting Officer.
This annual report does not include an attestation report of our
registered public accounting firm regarding internal control over financial reporting. Management’s report was
not subject to attestation by our registered public accounting firm pursuant to an exemption for non-accelerated filers set forth in Section 989G of the Dodd-Frank Wall Street Reform and Consumer Protection
Act.
There has been no change in our internal control over financial
reporting identified in connection with the evaluation that occurred during the last fiscal quarter (our fourth fiscal quarter
in the case of an annual report) that has materially affected, or is reasonably likely to materially affect our internal control
over financial reporting.
ITEM 9B. OTHER INFORMATION.
None.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
AND CORPORATE GOVERNANCE; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
For the period ended May 31, 2016, the directors, officers and key
employees of the Company were as follows:
|
Name
|
Age
|
Position
|
|
Terrence DeFranco
|
50
|
Chairman/Director, President/Chief Executive Officer and Chief Accounting Officer
|
Terrence DeFranco
Mr. DeFranco is also the Managing Member of Gary Lee Company, LLC,
a corporate consulting firm focused on providing strategic advisory services to boards of directors of public companies. Previously,
Mr. DeFranco was Chief Executive Officer and founder of Edentify, Inc., an identity management software company and Chairman and
CEO of Titan International Partners, a merchant banking and research firm focused on providing corporate and strategic advisory
services and equity and debt financing to small-cap and middle market companies.
His background is primarily in the area of corporate finance and
capital raising, previously serving as head of investment banking for Baird, Patrick & Co., Inc., a 50-year old NYSE-member
firm and head of investment banking and founding partner of Burlington Securities Corp., a New York based investment banking and
institutional equity trading firm.
Mr. DeFranco began his career on Wall Street in 1991 with PaineWebber,
Inc., now UBS PaineWebber. Mr. DeFranco has been an active principal investor, senior manager and advisor to many early-stage companies
and has extensive experience in dealing with issues related to the management and operations of small public companies. Mr. DeFranco
is a graduate of the University of North Carolina at Chapel Hill with a BA in Economics.
The Company does not currently retain the services of a chief accounting
officer and Mr. DeFranco also serves in that role. We continue our search for a full time Chief Financial Officer, but there can
be no assurance that the Company will be able to identify and hire a qualified candidate in the near future.
Board Committees
During the period covered by this report, our Board did not have
a standing Audit or Compensation Committee. We hope to appoint new directors in the near future, however, and would re-establish
both an Audit Committee and Compensation Committee promptly thereafter. The charters of the Audit and Compensation Committees were
filed as exhibits to our report on Form 10-K for the period ended May 31, 2010.
Board Nominations and Appointments
In considering whether to nominate any particular candidate for
election to the Board, the Board will use various criteria to evaluate each candidate, including an evaluation of each candidate’s
integrity, business acumen, knowledge of our business and industry, experience, diligence, conflicts of interest and the ability
to act in the interests of our Stockholders. The Board plans to evaluate biographical information and interview selected candidates.
The Board also plans to consider whether a potential nominee would satisfy the NASDAQ listing standards for “independence”
and the SEC’s definition of “audit committee financial expert.” The Board does not plan to assign specific weights
to particular criteria and no particular criterion will be a prerequisite for each prospective nominee.
We do not have a formal policy with regard to the consideration
of director candidates recommended by our stockholders, however, stockholder recommendations relating to director nominees may
be submitted in accordance with the procedures set forth below under the heading “Communicating with the Board of Directors”.
Communicating with the Board of Directors
Stockholders who wish to send communications to the Board may do
so by writing to Mr. Terrence DeFranco, CEO Arkados Group, Inc., 211 Warren Street, Suite 320, Newark, New Jersey 07103. The
mailing envelope must contain a clear notation indicating that the enclosed letter is a “Stockholder-Board Communication.”
All such letters must identify the author as a stockholder and must include the stockholder’s full name, address and a valid
telephone number. The name of any specific intended Board recipient should be noted in the communication. We will forward any such
correspondence to the intended recipients; however, prior to forwarding any such correspondence, we will review such correspondence,
and in our discretion, may not forward communications that relate to ordinary business affairs, communications that are primarily
commercial in nature, personal grievances or communications that relate to an improper or irrelevant topic or are otherwise inappropriate
for the Board’s consideration.
Code of Ethics
As part of our system of corporate governance, our Board of Directors
has adopted a Code of Business Conduct and Ethics for directors and executive officers of the Company. This Code is intended to
focus the Board and each director and executive officer on areas of ethical risk, provide guidance to directors and executive officer
to help them recognize and deal with ethical issues, provide mechanisms to report unethical conduct, and help foster a culture
of honesty and accountability. Each director and executive officer must comply with the letter and spirit of this Code. We
intend to disclose any changes in or waivers from our Code of Business Conduct and Ethics by filing a Form 8-K or by posting such
information on our website.
Section 16(a) Beneficial Ownership Reporting Compliance
We have determined that the following persons, who, during the
fiscal year ended May 31, 2016, was a “Reporting Person” defined as a director, officer or beneficial owner of
more than ten percent of our common stock which is the only class of securities registered under Section 12 of the Exchange
Act, failed to file on a timely basis, reports required by Section 16 of the Exchange Act during the most recent fiscal
year:
Tai Jee Pan
Ruben Sklar
We continue to plan to assist, when possible, in filing all
such forms timely in the future and to assist in filing any omitted filing. The foregoing is based solely upon a
review of Forms 3 and 4 during the most recent fiscal year as furnished to us under Rule 16a-3(d) under the Exchange Act, and
Forms 5 and amendments thereto furnished to us with respect to its most recent fiscal year, and any representation received
by the Company from any reporting person that no Form 5 is required.
ITEM 11. EXECUTIVE COMPENSATION.
Compensation Discussion and Analysis.
At present, Terrence DeFranco, our Chairman and CEO is an at-will
employee of the Company by virtue of an oral agreement entered into by the previous sitting Board of Directors. The
agreement requires Mr. DeFranco to serve on a full-time basis and provides for bi-weekly compensation, based on a rate determined
by comparison to executives of similarly sized companies in our industry. In addition, Mr. DeFranco is paid a reimbursement of
business-related expenses. Determinations with regard to bonus or option grants are made by Mr. DeFranco, the Company's sole director at this time.
SUMMARY COMPENSATION TABLE
The following table summarizes the total compensation of our Chief
Executive Officer in 2016 and 2015. There were no other executive officers who received or would have received compensation in
excess of $100,000 for the years ended May 31, 2016 and 2015.
|
|
|
|
|
|
|
|
Deferred
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salary
|
|
|
Option
|
|
|
All Other
|
|
|
Total
|
|
|
Name/ Principal Position
|
|
Year
|
|
Salary
|
|
|
Paid
|
|
|
Award (2)
|
|
|
Compensation
|
|
|
Compensation
|
|
|
Terrence DeFranco (1)
|
|
2016
|
|
$
|
198,000
|
|
|
$
|
-
|
|
|
$
|
150,000
|
|
|
$
|
-
|
|
|
$
|
348,000
|
|
|
President, Chief Executive Officer
|
|
2015
|
|
$
|
198,000
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
198,000
|
|
|
|
(1)
|
The amounts in the table do not include amounts received for serving on our board of directors.
|
|
|
(2)
|
Reflects the aggregate grant date fair value computed in accordance with FASB ASC 718.
|
GRANTS OF PLAN-BASED AWARDS
On June 25, 2015, the Company issued options, which vested immediately
and are exercisable for three years, to its chairman/chief executive officer and an officer/former director for services rendered
to the Company’s board of directors during fiscal 2015 for the purchase of up to a total of 1,300,000 shares of its common
stock under the 2004 Plan as follows:
|
|
1.
|
Chairman/chief executive officer – options to purchase 1,000,000 shares of the Company's common stock at $0.60 per share.
|
|
|
2.
|
Officer/former director – options to purchase 300,000 shares of the Company's common stock at $0.60 per share.
|
On April 22, 2016, the Company issued shares
of Common Stock and options, which vested immediately and are exercisable for ten years, to certain of its key employees, including
its chairman/chief executive officer for services rendered to the Company during fiscal 2016 for 500,000 shares of Common Stock
and the option to purchase up to a total of 1,100,000 shares of its common stock under the 2004 Plan as follows:
|
|
1.
|
Chairman/chief executive officer – options to purchase 500,000 shares of the Company's common stock at $0.60 per share.
|
|
|
2.
|
Chairman/chief executive officer – options to purchase 300,000 shares of the Company's common stock at $1.20 per share.
|
|
|
2.
|
Chairman/chief executive officer – options to purchase 300,000 shares of the Company's common stock at $2.00 per share.
|
OPTION EXERCISES AND STOCK VESTED IN 2016
There were no exercises of options by executives or directors in
the year ended May 31, 2016. No additional stock vested under previously issued options.
OUTSTANDING EQUITY AWARDS AT 2016 FISCAL YEAR-END
OPTION AWARDS
The following table sets forth for each named executive officer,
information regarding outstanding equity awards as of May 31, 2016. The option awards and per share amounts reflects the Company’s
1-for-30 reverse stock split, which was effective March 18, 2015.
|
|
|
|
|
|
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incentive
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plan awards:
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
Number of
|
|
|
Number of
|
|
|
|
|
|
|
|
|
|
securities
|
|
|
securities
|
|
|
securities
|
|
|
|
|
|
|
|
|
|
underlying
|
|
|
Underlying
|
|
|
Underlying
|
|
|
|
|
|
|
|
|
|
unexercised
|
|
|
unexercised
|
|
|
unexercised
|
|
|
Option
|
|
|
Option
|
|
|
|
options (#)
|
|
|
options (#)
|
|
|
Unearned
|
|
|
Exercise
|
|
|
Expiration
|
|
|
|
Exercisable
|
|
|
Un-exercisable
|
|
|
Options (#)
|
|
|
Price ($)
|
|
|
Date
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Terrence DeFranco
|
|
|
1,000,000
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
0.60
|
|
|
6/25/2018
|
|
|
|
|
500,000
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
0.60
|
|
|
4/22/2026
|
|
|
|
|
675,000
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
1.20
|
|
|
4/8/2024
|
|
|
|
|
300,000
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
1.20
|
|
|
4/22/2026
|
|
|
|
|
300,000
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
2.00
|
|
|
4/22/2026
|
|
|
|
|
2,775,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Option Plans
Our current policy is that all full time key employees are considered
annually for the possible grant of stock options, depending upon employee performance. The criteria for the awards are experience,
uniqueness of contribution to our business and the level of performance shown during the year. Stock options are intended to generate
greater loyalty and help make each employee aware of the importance of their business success of the Company.
On June 25, 2015, the Company issued options under its 2004 Plan
to its chairman/chief executive officer and an officer/former director for services rendered to the Company’s board of directors
during fiscal 2015 to purchase a total of 1,300,000 shares of its common stock as follows:
|
|
1.
|
Chairman/chief executive officer – options to purchase 1,000,000 shares of the Company's common stock at $0.60 per share.
|
|
|
2.
|
Officer/former director – options to purchase 300,000 shares of the Company's common stock at $0.60 per share.
|
These options vested immediately and are exercisable for three years.
On October 16, 2015, the Company issued options under its 2004 Plan
to employees to purchase 700,000 shares of its common stock at $1.00 per share.
On April 22, 2016, the Company issued options outside of its 2004
Plan to employees to purchase 2,100,000 shares of its common stock at various exercise prices ranging from $0.60 to $2.00.
As of May 31, 2016, there were options to purchase 5,112,500 shares
of our Common Stock outstanding,
3,012,500 of which were issued under the 2004 Plan.
A summary of our existing stock option plan is as follows:
Our 2004 Plan, which was, in April, 2014, extended for an additional
10 years, is currently administered by our sole director. Our sole director designates the persons to receive options, the number
of shares subject to the options and the terms of the options, including the option price and the duration of each option, subject
to certain limitations. All stock options grants during 2014 were made from the 2004 Plan. The 2004 Plan also permits
the issuance of restricted stock which is subject to vesting and forfeiture at such times, amounts and conditions.
The maximum number of shares of Common Stock available for issuance
under the 2004 Plan, as amended, is 3,333,333 shares. The plan is subject to adjustment in the event of stock splits, stock dividends,
mergers, consolidations and the like. Common Stock subject to options granted under the 2004 Plan that expire or terminate will
again be available for options to be issued under each Plan.
The option price is payable in cash or by check or under cashless
exercise provision determined by the Compensation Committee.
In the absence of a contrary provision in option agreements adopted
by the Board of Directors, under the 2004 Plan, upon termination of an optionee’s employment or consultancy, all options
held by such optionee will terminate, except that any option that was exercisable on the date employment or consultancy terminated
may, to the extent then exercisable, be exercised within three months thereafter (or six months thereafter if the termination is
the result of permanent and total disability of the holder), and except such three month period may be extended by our Board in
its discretion. If an optionee dies while he is an employee or a consultant or during such three-month period, the option may be
exercised within six months after death by the decedent’s estate or his legatees or distributees, but only to the extent
exercisable at the time of death.
The 2004 Plan provides that outstanding options shall vest and become
immediately exercisable in the event consolidation, merger or acquisition of stock, the result of which our stockholders will own
less than 50% of the voting power of the reorganized, merged or consolidated company or the sale of substantially all of our assets
and the options are not assumed by the surviving company. In such event, the holder will have 15 days to exercise the
option and options will terminate on the expiration of such fifteen day period.
Compensation of Directors
There was no compensation for Directors in the fiscal year ending
May 31, 2016.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS.
The following table sets forth information known to us regarding
the beneficial ownership of our common stock as of August 22, 2016 by (i) each of our directors and executive officers, and (ii)
all of our directors and executive officers as a group. Except for the directors and executive officers listed in the
table below, no other individual or entity owns more than five (5%) of our outstanding shares of common stock. Except as otherwise
indicated, we believe, based on information provided by each of the individuals named in the table below, that such
individuals have sole investment and voting power with respect to such shares, subject to community property laws, where
applicable. As of September 21, 2016, we had outstanding 13,373,167 shares of common stock. Except as stated in the table, the
address of the holder is c/o our company, 211 Warren Street, Suite 320, Newark, NJ 07103.
|
|
|
Amount and
|
|
|
|
|
|
|
Name of Beneficial Owner or
|
|
Nature of
|
|
|
|
Percent of
|
|
|
Number of Persons in Group
|
|
Beneficial Ownership (1)
|
|
|
|
Class (2)
|
|
|
|
|
|
|
|
|
|
|
|
(a) Executive Officers & Directors
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Terrence DeFranco
|
|
|
3,383,333
|
|
(3)
|
|
|
21.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
All executive officers and directors as a group (1 person)
|
|
|
3,383,333
|
|
(3)
|
|
|
21.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
(b) Other Beneficial Holders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tai Jee Pan
|
|
|
3,660,844
|
|
(4)
|
|
|
26.7
|
%
|
|
Richmake International Limited
|
|
|
2,977,543
|
|
(5)
|
|
|
21.4
|
%
|
|
Andreas Typaldos
|
|
|
1,038,012
|
|
(6)
|
|
|
7.8
|
%
|
|
Oleg Logvinov
|
|
|
856,145
|
|
(7)
|
|
|
6.0
|
%
|
|
Ruben Sklar
|
|
|
875,208
|
|
(8)
|
|
|
6.5
|
%
|
|
Robert Catell
|
|
|
833,334
|
|
(9)
|
|
|
6.0
|
%
|
|
Burton LaSalle Capital Corp.
|
|
|
819,583
|
|
(8)
|
|
|
6.1
|
%
|
|
MAT Research LLC
|
|
|
999,998
|
|
(4)
|
|
|
7.3
|
%
|
|
|
(1)
|
Beneficial ownership is determined in accordance with the rules of the Commission generally includes voting or investment power
with respect to securities. Under the rules of the Commission, a person (or group of persons) is deemed to be a “beneficial
owner” of a security if he or she, directly or indirectly, has or shares a power to vote or to direct the voting of such
security. Accordingly, more than one person may be deemed to be a beneficial owner of the same security. In
accordance with Commission rules, shares of Common Stock that may be acquired upon exercise of stock options or warrants which
are currently exercisable or which become exercisable within 60 days of the date of the table are deemed beneficially owned by
the optionees. Subject to community property laws, where applicable, we believe the persons or entities named in
the table above have sole voting and investment power with respect to all shares of the Common Stock indicated as beneficially
owned by them.
|
|
|
(2)
|
In determining percentage of outstanding, we included shares issued and outstanding, shares obligated to be issued and the
securities identified (if consisting of derivative securities) as if issued.
|
|
|
(3)
|
Includes 608,333 shares of common stock held in his name and options to purchase 2,775,000 shares of common stock.
|
|
|
(4)
|
Includes 2,660,846 shares of common stock held in his name, and 666,666 shares of common stock and warrants to purchase
333,332 shares of common stock issued to MAT Research LLC, of which Mr. Pan is the managing member. The beneficial ownership
reported here results from warrants with an exercise price that exceeds the current market price, but are otherwise
currently exercisable.
|
|
|
(5)
|
Includes 2,477,545 shares of common stock held in the company’s name and warrants to purchase 499,998 shares of common
stock. The beneficial ownership reported here results from warrants with an exercise price that exceeds the current
market price, but are otherwise currently exercisable.
|
|
|
(6)
|
Includes 784,964 shares owned by Andreas Typaldos individually, 164,672 shares held in the name of the Andreas Typaldos
Family Limited Partnership, of which Andreas Typaldos is General Partner and 88,376 shares owned by family members of Mr.
Typaldos. Beneficial ownership of shares held by the entity and by his family members is disclaimed by Mr.
Typaldos.
|
|
|
(7)
|
Includes warrants to purchase 856,145 shares of common stock.
|
|
|
(8)
|
Includes 819,583 shares owned by Burton LaSalle Capital Corp, of which Mr. Sklar is managing member and 55,625 owned by Mr. Sklar
individually. Beneficial ownership of shares held by the entity is disclaimed by Mr. Sklar.
|
|
|
(9)
|
Includes 416,667 shares of common stock held in his name and warrants to purchase 416,667 shares of common stock. The
beneficial ownership reported here results from warrants with an exercise price that exceeds the current market price, but are
otherwise currently exercisable.
|
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE.
Consulting Fees
In fiscal 2015, the Company performed consulting services for an
entity that is controlled by Mark Gelnaw. Consulting services amounted to $44,800 for the year ended May 31, 2015.
Review, Approval or Ratification of Transactions with Related
Persons
The Board of Directors reviews transactions with related parties,
but has no formal policies in place with respect to such reviews or the approval of such transactions. During fiscal 2016 there
were no reported related party transactions with directors, executive officers or other related parties, which might have required
disclosure under SEC rules or which were otherwise material to the Company.
Director Independence
The Board applies the definition of independent director as set
forth in NASDAQ Stock Market Rule 5605 (a)(2), as well as Rule 10A-3 under the Exchange Act.
In accordance with this guidance, the Board did not
consider our sole director to be independent.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Audit Fees
The aggregate fees billed and unbilled for the fiscal years
ended May 31, 2016 and 2015 for professional services rendered by our principal accountants for the audits of our annual
financial statements, and the review of our financial statements included in our quarterly reports on Form 10-Q were
approximately $29,000 and $31,000, respectively.
Audit-Related Fees
The aggregate fees billed for the fiscal years ended May 31, 2016
and 2015 for assurance and related services rendered by our principal accountants related to the performance of the audit or review
of our financial statements, specifically accounting research, were $0 and $0, respectively.
Tax and Other Fees
There aggregate fees billed for the fiscal years ended May 31, 2016
and 2015 for tax related or other services rendered by our principal accountants in connection with the preparation of our federal
and state tax returns were $4,000 and $3,500, respectively.
Approval of Non-audit Services and Fees
We do not have an audit committee. Our sole director/CEO pre-approves
all services, including both audit and non-audit services, provided by our independent accountants. For audit services, each year
the independent auditor provides our sole director with an engagement letter outlining the scope of the audit services proposed
to be performed during the year, which must be formally accepted by the sold director before the audit commences.
PART IV
ITEM 15. EXHIBITS.
EXHIBIT INDEX
|
|
|
|
|
|
|
Incorporated by
Reference
|
|
|
|
Exhibit
Number
|
|
Exhibit Description
|
|
Form
|
|
File
Number
|
|
Exhibit
|
|
Filing
Date
|
|
Filed
Herewith
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.5
|
|
Asset Purchase Agreement, dated as of December 23, 2010, by and among Arkados, Inc., Arkados Group, Inc., Arkados Wireless Technologies, Inc. and STMicroelectronics, Inc.
|
|
8-K
|
|
0-27587
|
|
2.1
|
|
12/29/10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3i.1
|
|
Articles of Incorporation of the Registrant.
|
|
10-SB
|
|
0-27587
|
|
3.1
|
|
10/7/99
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3i.2
|
|
Amendment to the Articles of Incorporation.
|
|
10-SB
|
|
0-27587
|
|
3.2
|
|
10/7/99
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3i.3
|
|
Certificate of Merger of the Registrant.
|
|
10-SB
|
|
0-27587
|
|
3.4
|
|
10/7/99
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3i.4
|
|
Amendment to the Articles of Incorporation.
|
|
10-SB
|
|
0-27587
|
|
3.5
|
|
10/7/99
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3i.6
|
|
Amendment to Certificate of Incorporation (Reverse Split) filed November 31, 2003.
|
|
10-QSB
|
|
0-27587
|
|
3.1
|
|
2/17/04
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3i.7
|
|
Certificate of Amendment to Certificate of Incorporation.
|
|
10-QSB
|
|
0-27587
|
|
3.2
|
|
2/17/04
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3i.7a
|
|
Certificate of Amendment to Certificate of Incorporation.
|
|
10-K
|
|
0-27587
|
|
3i.7a
|
|
8/27/14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3i.8
|
|
Certificate of Ownership and Merger dated August 30, 2006.
|
|
8-K
|
|
0-27587
|
|
3.1
|
|
9/1/06
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3ii.1
|
|
By-Laws of the Registrant.
|
|
DEF14C
|
|
0-27587
|
|
3.3
|
|
2/24/15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.1
|
|
Specimen of Common Stock Certificate.
|
|
10-K
|
|
0-27587
|
|
4.1
|
|
10/10/06
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.2
|
|
Form of Option exercisable at $0.04 issued to employees in April, 2014.
|
|
10-K
|
|
0-27587
|
|
4.16
|
|
8/27/14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.3a
|
|
Form of 6% Convertible Note due November 15, 2014.
|
|
10-K
|
|
0-27587
|
|
4.17
|
|
8/27/14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.3b
|
|
Form of 6% Convertible Note due April 30, 2015.
|
|
10-K
|
|
0-27587
|
|
4.17b
|
|
8/27/14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.3c
|
|
Form of 6% Convertible Note due October, 2015.
|
|
10-K
|
|
0-27587
|
|
4.17c
|
|
8/27/14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.1
|
|
License Agreement dated June 24, 2011, by and between STMicroelectronics, Inc., a Delaware corporation and Arkados, Inc., a Delaware corporation.
|
|
10-K
|
|
0-27587
|
|
10.60
|
|
08/30/13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.2
|
|
Form of Employee Release Agreement (Asset Sale).
|
|
8-K
|
|
0-27587
|
|
10.3
|
|
12/29/10
|
|
|
|
10.3
|
|
Form of Unsecured Creditor Release Agreement (Asset Sale).
|
|
8-K
|
|
0-27587
|
|
10.4
|
|
12/29/10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.4
|
|
Form of Secured Creditor Release Agreement (Asset Sale).
|
|
8-K
|
|
0-27587
|
|
10.5
|
|
12/29/10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.5
|
|
Form of Creditor’s Rights Agreement (Asset Sale).
|
|
8-K
|
|
0-27587
|
|
10.6
|
|
12/29/10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.6
|
|
Software Development Agreement with Tatung Co., a Taiwan corporation dated June 28, 2013.
|
|
10-Q
|
|
0-27587
|
|
10.65
|
|
10/11/13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.7
|
|
License Agreement with Exegin Technologies, Limited, dated June 14, 2013.
|
|
10-Q
|
|
0-27587
|
|
10.66
|
|
10/11/13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.8
|
|
Consulting Agreement with MAT Research, LLC, an Oregon company, dated July 1, 2013.
|
|
10-Q
|
|
0-27587
|
|
10.67
|
|
10/11/13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.9
|
|
Securities Purchase Agreement (Tai Jee Pan) dated October 28, 2013.
|
|
10-Q
|
|
0-27587
|
|
10.69
|
|
1/15/14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.10
|
|
Securities Purchase Agreement (Richmake) dated October 28, 2013.
|
|
10-Q
|
|
0-27587
|
|
10.70
|
|
1/15/14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.1
1
|
|
Advisory Agreement with Constellation Asset Advisors, Inc. dated November 20, 2013.
|
|
10-Q
|
|
0-27587
|
|
10.71
|
|
1/15/14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.12
|
|
Investor Services Agreement with Porter LeVay and Rose, Inc. dated September 1, 2013.
|
|
10-Q
|
|
0-27587
|
|
10.72
|
|
1/15/14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.13
|
|
Consulting Agreement with Sentegrity LLC dated March 4, 2014.
|
|
10-Q
|
|
0-27587
|
|
10.73
|
|
4/14/14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.14
|
|
Process and Event Management Master Agreement dated July 10, 2014 between Arkados, Inc. and Tatung Co.
|
|
8-K
|
|
0-27587
|
|
99.1
|
|
7/16/14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.15
|
|
Form of Securities Purchase Agreement with certain accredited investors dated July 23, 2015.
|
|
|
|
|
|
|
|
|
|
X
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.16
|
|
Form of Warrant issued to consultants on November 18, 2015.
|
|
|
|
|
|
|
|
|
|
X
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.17
|
|
Form of Exchange Agreement with certain note holders executed on January 8, 2016.
|
|
|
|
|
|
|
|
|
|
X
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.18
|
|
Consulting Agreement with LP Funding, LLC dated February 23, 2016.
|
|
|
|
|
|
|
|
|
|
X
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.19
|
|
Asset Purchase Agreement with New Dimensions Energy Solutions, LLC and Edward D. Miller dated April 28, 2016.
|
|
|
|
|
|
|
|
|
|
X
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.20
|
|
Form of Warrant issued to Edward Miller dated April 28, 2016.
|
|
|
|
|
|
|
|
|
|
X
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14.1
|
|
Code of Business Conduct and Ethics.
|
|
10-K
|
|
0-27587
|
|
14.1
|
|
9/17/04
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14.2
|
|
Code of Ethics for Financial Executives.
|
|
10-K
|
|
0-27587
|
|
14.2
|
|
9/17/04
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21
|
|
Subsidiaries of the Registrant.
|
|
10-K
|
|
0-27587
|
|
21
|
|
8/27/15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31.1
|
|
Certification of Chief Executive Officer and Principal Accounting Officer of Periodic Report pursuant to Rule 13a-14a and Rule 15d-14(a).
|
|
|
|
|
|
|
|
|
|
X
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32.1
|
|
Certification of Chief Executive Officer of pursuant to 18 U.S.C. - Section 1350.
|
|
|
|
|
|
|
|
|
|
X
|
|
101.INS
|
|
XBRL Instance Document
|
|
X
|
|
|
|
|
|
|
|
101.SCH
|
|
XBRL Taxonomy Extension Schema
|
|
X
|
|
|
|
|
|
|
|
101.CAL
|
|
XBRL Taxonomy Extension Calculation Linkbase
|
|
X
|
|
|
|
|
|
|
|
101.DEF
|
|
XBRL Taxonomy Extension Definition Linkbase
|
|
X
|
|
|
|
|
|
|
|
101.LAB
|
|
XBRL Taxonomy Extension Label Linkbase
|
|
X
|
|
|
|
|
|
|
|
101.PRE
|
|
XBRL Taxonomy Extension Presentation Linkbase
|
|
X
|
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
Registrant caused this report on to be signed on its behalf by the undersigned, thereunto duly authorized.
|
|
Arkados Group, Inc. (Registrant)
|
|
|
|
|
|
Date: September 21, 2016
|
By:
|
/s/ Terrence DeFranco
|
|
|
|
Terrence DeFranco,
President and Chief Executive Officer
|
|
|
|
|
|
Date: September 21, 2016
|
By:
|
/s/ Terrence DeFranco
|
|
|
|
Terrence DeFranco,
Principal Financial and Accounting Officer
|
In accordance with the Exchange Act, this report has been signed
below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
|
Date: September 21, 2016
|
By: /s/ Terrence DeFranco
|
|
|
Terrence DeFranco, Sole Director
|
Exhibit 10.15
SECURITIES PURCHASE AGREEMENT
This
SECURITIES PURCHASE
AGREEMENT
(the “Agreement”), dated as of the 23rd day of July, 2015, by and between
ARKADOS GROUP, INC.
,
a Delaware corporation, with headquarters located at 211 Warren Street, Suite 320, Newark, NJ 07103 (the “Company”),
and
the
undersigned
with principal address set forth on the Purchaser Signature and Subscription Page hereto
(the
“Purchaser”).
WHEREAS
:
A. The
Company and the Purchaser are executing and delivering this Agreement in reliance upon the Regulation S or Regulation D exemption
from securities registration afforded by the rules and regulations as promulgated by the United States Securities and Exchange
Commission (the “SEC”) under the Securities Act of 1933, as amended (the “1933 Act”), or under Section
4(a)(2) of the 1933 Act;
B. Purchaser
desires to purchase, and the Company desires to issue and sell, upon the terms and conditions set forth in this Agreement, such
number of shares of common stock, par value $0.0001 of the Company (the “Common Stock”) set forth on the Purchaser
Signature and Subscription Page for the aggregate purchase price stated on the Purchaser Signature and Subscription Page (the “Purchase
Price), as well as a warrant to acquire such equal number of shares of common stock at an exercise price of $2.00 per share (the
“Warrant”). The Common Stock together with the Warrant shall be referred to hereinafter as the “Offered Units”).
NOW THEREFORE
, the
Company and the Purchaser severally (and not jointly) hereby agree as follows:
1.
Closing
.
a. On
or before the Closing Date (as defined below), (i) the Purchaser shall pay to the Company by wire transfer of immediately available
funds in accordance with the Company’s written wiring instructions, the Purchase Price. The Company, upon confirmation of
the receipt of funds, but in no event later than the Closing Date, shall deliver instructions to its transfer agent to issue the
Common Stock to Purchaser and shall likewise promptly issue the Warrants accompanying such purchased Common Stock to Purchaser.
b. Subject
to the satisfaction (or written waiver) of the conditions thereto set forth in Section 5 and Section 6 below, the date and time
of the issuance and sale of the Offered Units pursuant to this Agreement (the “Closing Date”) shall be 5:00 p.m., Eastern
Daylight Time on or about May 15, 2015, or such other mutually agreed upon time. The closing of the transactions contemplated by
this Agreement (the “Closing”) shall occur on the Closing Date at such location as may be agreed to by the parties.
2.
Purchaser’s
Representations and Warranties.
The Purchaser represents and warrants to the Company that:
a.
Investment
Purpose
. As of the date hereof, the Purchaser is purchasing the Offered Units for its own account and not with a present view
towards the public sale or distribution thereof, except pursuant to sales registered or exempted from registration under the 1933
Act;
provided
,
however
, that by making the representations herein, the Purchaser does not agree to hold any of the
Offered Units for any minimum or other specific term and reserves the right to dispose of the Offered Units at any time in accordance
with or pursuant to a registration statement or an exemption under the 1933 Act
b.
Accredited
Investor Status
. The Purchaser is an “accredited investor” as that term is defined in Rule 501(a) of Regulation
D (an “Accredited Investor”).
c.
Reliance
on Exemptions
. The Purchaser understands that the Offered Units are being offered and sold to it in reliance upon specific
exemptions from the registration requirements of United States federal and state securities laws and that the Company is relying
upon the truth and accuracy of, and the Purchaser’s compliance with, the representations, warranties, agreements, acknowledgments
and understandings of the Purchaser set forth herein in order to determine the availability of such exemptions and the eligibility
of the Purchaser to acquire the Offered Units.
d.
Information
.
The Purchaser and its advisors, if any, have been furnished a copy of the Company’s most recent annual report on Form 10-K,
the most recent interim quarterly report on Form 10-Q and any interim report on Form 8-K filed by the Company since its last Annual
Report, as well as an Executive Summary describing the terms of the purchase and sale of the Offered Units. The Purchaser and its
advisors, if any, have been afforded the opportunity to ask questions of the Company and to promptly receive answers to those questions.
Notwithstanding the foregoing, the Company has not disclosed to the Purchaser any material nonpublic information and will not disclose
such information unless such information is disclosed to the public prior to or promptly following such disclosure to the Purchaser,
or unless Purchaser enters into a non-disclosure agreement with the Company agreeing to maintain the confidentiality of the such
information. Neither such inquiries nor any other due diligence investigation conducted by Purchaser or any of its advisors or
representatives shall modify, amend or affect Purchaser’s right to rely on the Company’s representations and warranties
contained in Section 3 below. The Purchaser understands that its investment in the Offered Units iinvolves a significant degree
of risk.
e.
Governmental
Review
. The Purchaser understands that no United States federal or state agency or any other government or governmental agency
has passed upon or made any recommendation or endorsement of the purchase or sale of the Offered Units.
f.
Transfer
or Re-sale
. The Purchaser understands that (i) the sale or re-sale of the Common Stock and the Warrants has not been and is
not being registered under the 1933 Act or any applicable state securities laws, and the Offered Units may not be transferred unless
(a) the Common Stock or the Warrants are sold pursuant to an effective registration statement under the 1933 Act, (b) the
Purchaser shall have delivered to the Company, at the cost of the Purchaser, an opinion of counsel that shall be in form, substance
and scope customary for opinions of counsel in comparable transactions to the effect that the Offered Units to be sold or transferred
may be sold or transferred pursuant to an exemption from such registration, which opinion shall be reasonably acceptable to the
Company, (c) the Offered Units are sold or transferred to an “affiliate” (as defined in Rule 144 promulgated under
the 1933 Act (or a successor rule) (“Rule 144”)) of the Purchaser who agrees to sell or otherwise transfer the Offered
Units only in accordance with this Section 2(g) and who is an Accredited Investor, (d) the Offered Units are sold pursuant
to Rule 144, or (e) the Offered Units are sold pursuant to Regulation S under the 1933 Act (or a successor rule) (“Regulation
S”), and the Purchaser shall have delivered to the Company, at the cost of the Purchaser, an opinion of counsel that shall
be in form, substance and scope customary for opinions of counsel in corporate transactions, which opinion shall be reasonably
acceptable to the Company; (ii) any sale of such Offered Units made in reliance on Rule 144 may be made only in accordance with
the terms of said Rule and further, if said Rule is not applicable, any re-sale of such Offered Units under circumstances in which
the seller (or the person through whom the sale is made) may be deemed to be an underwriter (as that term is defined in the 1933
Act) may require compliance with some other exemption under the 1933 Act or the rules and regulations of the SEC thereunder; and
(iii) neither the Company nor any other person is under any obligation to register such Offered Units under the 1933 Act or any
state securities laws or to comply with the terms and conditions of any exemption thereunder (in each case). Notwithstanding the
foregoing or anything else contained herein to the contrary, the Offered Units may be pledged as collateral in connection with
a
bona
fide
margin account or other lending arrangement.
g.
Legends
.
The Purchaser understands that the Offered Units may only be sold pursuant to Rule 144, or Regulation S without any restriction
as to the number of securities as of a particular date that can then be immediately sold and the shares of Common Stock and the
Warrant may bear a restrictive legend in substantially the following form (and a stop-transfer order may be placed against transfer
of the certificates for such securities):
“THE SHARES REPRESENTED
BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THE SHARES HAVE BEEN ACQUIRED FOR INVESTMENT
AND MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AND WITH RESPECT TO
THE SHARES OR AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF SAID ACT THAT IS THEN APPLICABLE TO THE SHARES, AS TO WHICH A
PRIOR OPINION OF COUNSEL ACCEPTABLE TO THE ISSUER OR TRANSFER AGENT MAY BE REQUIRED.”
The legend set
forth above shall be removed, and the Company shall issue a certificate without such legend to the holder of any Security upon
which it is stamped, if, unless otherwise required by applicable state securities laws, (a) such Security is registered for sale
under an effective registration statement filed under the 1933 Act or otherwise may be sold pursuant to Rule 144 or Regulation
S without any restriction as to the number of securities as of a particular date that can then be immediately sold, or (b) such
holder provides the Company with an opinion of counsel, in form, substance and scope customary for opinions of counsel in comparable
transactions, to the effect that a public sale or transfer of such Security may be made without registration under the 1933 Act,
which opinion shall be reasonably acceptable to the Company so that the sale or transfer is effected.
h.
Authorization;
Enforcement
. This Agreement has been duly and validly authorized. This Agreement has been duly executed and delivered on behalf
of the Purchaser, and this Agreement constitutes a valid and binding agreement of the Purchaser enforceable in accordance with
its terms.
i.
Residency
.
The Purchaser is a resident of the jurisdiction set forth immediately below the Purchaser’s name on the signature pages hereto.
3.
Representations
and Warranties of the Company
. The Company represents and warrants to the Purchaser that:
a.
Organization
and Qualification
. The Company and each of its Subsidiaries (as defined below), if any, is a corporation duly organized, validly
existing and in good standing under the laws of Delaware, with full power and authority (corporate and other) to own, lease, use
and operate its properties and to carry on its business as and where now owned, leased, used, operated and conducted. The Company
and each of its Subsidiaries is duly qualified as a foreign corporation to do business and is in good standing in every jurisdiction
in which its ownership or use of property or the nature of the business conducted by it makes such qualification necessary except
where the failure to be so qualified or in good standing would not have a Material Adverse Effect. “Material Adverse Effect”
means any material adverse effect on the business, operations, assets, financial condition or prospects of the Company or its Subsidiaries,
if any, taken as a whole, or on the transactions contemplated hereby or by the agreements or instruments to be entered into in
connection herewith. “Subsidiaries” means any corporation or other organization, whether incorporated or unincorporated,
in which the Company owns, directly or indirectly, any equity or other ownership interest.
b.
Authorization;
Enforcement
. (i) The Company has all requisite corporate power and authority to enter into and perform this Agreement, and
to consummate the transactions contemplated hereby and thereby and to issue the Offered Units, in accordance with the terms hereof,
(ii) the execution and delivery of this Agreement, the Offered Units by the Company and the consummation by it of the transactions
contemplated hereby and thereby (including without limitation, the issuance of the Offered Units) have been duly authorized by
the Company’s Board of Directors, (iii) this Agreement has been duly executed and delivered by the Company by its authorized
representative, and such authorized representative is the true and official representative with authority to sign this Agreement
and the other documents executed in connection herewith and bind the Company accordingly, and (iv) this Agreement constitutes,
and upon execution and delivery by the Company of the Offered Units, each of such instruments will constitute, a legal, valid and
binding obligation of the Company enforceable against the Company in accordance with its terms.
c.
Capitalization
.
As of the date hereof, the authorized capital stock of the Company consists of: (i) 600,000,000 shares of Common Stock, $0.0001
par value per share, of which 5,624,383 shares are issued and outstanding, and for which 8,782,119 shares are issuable for derivative
securities outstanding and approximately 535,861 shares are intended to settle outstanding pre-2010 unsecured debt obligations;
and (ii) 5,000,000 shares of Preferred Stock, $0.0001 par value per share, of which no shares are issued and outstanding; All of
such outstanding shares of capital stock are, or upon issuance will be, duly authorized, validly issued, fully paid and non-assessable.
No shares of capital stock of the Company are subject to preemptive rights or any other similar rights of the shareholders of the
Company or any liens or encumbrances imposed through the actions or failure to act of the Company. As of the effective date of
this Agreement, except for those disclosed in the Company’s filed reports with the SEC and options that may be issued to
executives of the Company (i) there are no other outstanding options, warrants, scrip, rights to subscribe for, puts, calls, rights
of first refusal, agreements, understandings, claims or other commitments or rights of any character whatsoever relating to, or
securities or rights convertible into or exchangeable for any shares of capital stock of the Company or any of its Subsidiaries,
or, with the exception of pending obligations to issue incentive options to executive officers of the Company pursuant to employment
contracts, no arrangements by which the Company or any of its Subsidiaries is or may become bound to issue additional shares of
capital stock of the Company or any of its Subsidiaries that are not mentioned here, (ii) there are no agreements or arrangements
under which the Company or any of its Subsidiaries is obligated to register the sale of any of its or their securities under the
1933 Act and (iii) there are no anti-dilution or price adjustment provisions contained in any security issued by the Company (or
in any agreement providing rights to security holders) that will be triggered by the issuance of the Offered Units that are not
contained here. The Company has made available to the Purchaser true and correct copies of the Company’s Certificate of Incorporation
as in effect on the date hereof (“Certificate of Incorporation”), and the Company’s By-laws, as in effect on
the date hereof (the “By-laws”)..
d.
Issuance
of Shares
. The Common Stock is duly authorized and will be validly issued, fully paid and non-assessable, and free from all
taxes, liens, claims and encumbrances with respect to the issue thereof and shall not be subject to preemptive rights or other
similar rights of shareholders of the Company and will not impose personal liability upon the holder thereof.
e.
No
Conflicts
. The execution, delivery and performance of this Agreement, the Offered Units by the Company and the consummation
by the Company of the transactions contemplated hereby and thereby will not (i) conflict with or result in a violation of any provision
of the Certificate of Incorporation or By-laws, or (ii) violate or conflict with, or result in a breach of any provision of, or
constitute a default (or an event which with notice or lapse of time or both could become a default) under, or give to others any
rights of termination, amendment, acceleration or cancellation of, any agreement, indenture, patent, patent license or instrument
to which the Company or any of its Subsidiaries is a party, or (iii) result in a violation of any law, rule, regulation, order,
judgment or decree (including federal and state securities laws and regulations and regulations of any self-regulatory organizations
to which the Company or its securities are subject) applicable to the Company or any of its Subsidiaries or by which any property
or asset of the Company or any of its Subsidiaries is bound or affected (except for such conflicts, defaults, terminations, amendments,
accelerations, cancellations and violations as would not, individually or in the aggregate, have a Material Adverse Effect). Neither
the Company nor any of its Subsidiaries is in violation of its Certificate of Incorporation, By-laws or other organizational documents
and neither the Company nor any of its Subsidiaries is in default (and no event has occurred which with notice or lapse of time
or both could put the Company or any of its Subsidiaries in default) under, and neither the Company nor any of its Subsidiaries
has taken any action or failed to take any action that would give to others any rights of termination, amendment, acceleration
or cancellation of, any agreement, indenture or instrument to which the Company or any of its Subsidiaries is a party or by which
any property or assets of the Company or any of its Subsidiaries is bound or affected. The Company and its Subsidiaries are unaware
of any facts or circumstances which might give rise to any of the foregoing. There are no required consents, authorizations or
orders of, or filings or registrations with, any court, governmental agency, regulatory agency, self regulatory organization or
stock market or any third party in order for it to execute, deliver or perform any of its obligations under this Agreement, to
issue the Common Stock. All consents, authorizations, orders, filings and registrations which the Company is required to obtain
pursuant to the preceding sentence have been obtained or effected on or prior to the date hereof.
f.
SEC
Documents; Financial Statements
. The Company is subject to the reporting requirements of the 1934 Act. The Company is current
on its reporting obligations with the SEC pursuant to the Securities Exchange Act of 1934, as amended (the “1934 Act”).
As of their respective dates, any reports filed within the last fiscal year, as amended, complied in all material respects with
the requirements of the 1934 Act and the rules and regulations of the SEC promulgated thereunder applicable to the SEC Documents,
and none of such reports, as amended, contained any untrue statement of a material fact or omitted to state a material fact required
to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were
made, not misleading. As of their respective dates, the financial statements of the Company included in the SEC Documents complied
as to form in all material respects with applicable accounting requirements and the published rules and regulations of the SEC
with respect thereto. Such financial statements have been prepared in accordance with United States generally accepted accounting
principles, consistently applied, during the periods involved and fairly present in all material respects the consolidated financial
position of the Company and its consolidated Subsidiaries as of the dates thereof and the consolidated results of their operations
and cash flows for the periods then ended (subject, in the case of unaudited statements, to normal year-end audit adjustments).
g.
Absence
of Certain Changes
. Since November 30, 2013, there has been no material adverse change and no material adverse development
in the assets, liabilities, business, properties, operations, financial condition, results of operations, of the Company or any
of its Subsidiaries.
h.
Absence
of Litigation
. There is no action, suit, claim, proceeding, inquiry or investigation before or by any court, public board,
government agency, self-regulatory organization or body pending or, to the knowledge of the Company or any of its Subsidiaries,
threatened against or affecting the Company or any of its Subsidiaries, or their officers or directors in their capacity as such,
that could have a Material Adverse Effect. The Company and its Subsidiaries are unaware of any facts or circumstances which might
give rise to any of the foregoing.
i.
Patents,
Copyrights, etc
. The Company and each of its Subsidiaries owns or possesses the requisite licenses or rights to use all patents,
patent applications, patent rights, inventions, know-how, trade secrets, trademarks, trademark applications, service marks, service
names, trade names and copyrights (“Intellectual Property”) necessary to enable it to conduct its business as now operated
(and, as presently contemplated to be operated in the future); there is no claim or action by any person pertaining to, or proceeding
pending, or to the Company’s knowledge threatened, which challenges the right of the Company or of a Subsidiary with respect
to any Intellectual Property necessary to enable it to conduct its business as now operated (and, as presently contemplated to
be operated in the future); to the best of the Company’s knowledge, the Company’s or its Subsidiaries’ current
and intended products, services and processes do not infringe on any Intellectual Property or other rights held by any person;
and the Company is unaware of any facts or circumstances which might give rise to any of the foregoing. The Company and each of
its Subsidiaries have taken reasonable security measures to protect the secrecy, confidentiality and value of their Intellectual
Property.
j.
No
Materially Adverse Contracts, Etc
. Neither the Company nor any of its Subsidiaries is subject to any charter, corporate or
other legal restriction, or any judgment, decree, order, rule or regulation which in the judgment of the Company’s officers
has or is expected in the future to have a Material Adverse Effect. Neither the Company nor any of its Subsidiaries is a party
to any contract or agreement which in the judgment of the Company’s officers has or is expected to have a Material Adverse
Effect.
k.
Tax
Status
. The Company and each of its Subsidiaries has made or filed all federal, state and foreign income and all other tax
returns, reports and declarations required by any jurisdiction to which it is subject (unless and only to the extent that the Company
and each of its Subsidiaries has set aside on its books provisions reasonably adequate for the payment of all unpaid and unreported
taxes) and has paid all taxes and other governmental assessments and charges that are material in amount, shown or determined to
be due on such returns, reports and declarations, except those being contested in good faith and has set aside on its books provisions
reasonably adequate for the payment of all taxes for periods subsequent to the periods to which such returns, reports or declarations
apply. With the exception of taxes due the State of New Jersey for fiscal year ended May 31, 2011 in the approximate amount of
$65,000, there are no unpaid taxes claimed to be due by the taxing authority of any jurisdiction, and the officers of the Company
know of no basis for any such claim. The Company has not executed a waiver with respect to the statute of limitations relating
to the assessment or collection of any foreign, federal, state or local tax. None of the Company’s tax returns is presently
being audited by any taxing authority, nor is the Company subject to any tax investigation by any governmental agency.
l.
Certain
Transactions
. Except for arm’s length transactions pursuant to which the Company or any of its Subsidiaries makes payments
in the ordinary course of business upon terms no less favorable than the Company or any of its Subsidiaries could obtain from third
parties and other than the grant of stock options to officers of the Company, none of the officers, directors, or employees of
the Company is presently a party to any transaction with the Company or any of its Subsidiaries (other than for services as employees,
officers and directors), including any contract, agreement or other arrangement providing for the furnishing of services to or
by, providing for rental of real or personal property to or from, or otherwise requiring payments to or from any officer, director
or such employee or, to the knowledge of the Company, any corporation, partnership, trust or other entity in which any officer,
director, or any such employee has a substantial interest or is an officer, director, trustee or partner.
m.
Disclosure
.
All information relating to or concerning the Company or any of its Subsidiaries set forth in this Agreement and provided to the
Purchaser pursuant to Section 2(e) hereof and otherwise in connection with the transactions contemplated hereby is true and correct
in all material respects and the Company has not omitted to state any material fact necessary in order to make the statements made
herein or therein, in light of the circumstances under which they were made, not misleading. No event or circumstance has occurred
or exists with respect to the Company or any of its Subsidiaries or its or their business, properties, prospects, operations or
financial conditions, which, under applicable law, rule or regulation, requires public disclosure or announcement by the Company
but which has not been so publicly announced or disclosed (assuming for this purpose that the Company’s reports filed under
the 1934 Act are being incorporated into an effective registration statement filed by the Company under the 1933 Act).
n.
Acknowledgment
Regarding Purchase of Securities
. The Company acknowledges and agrees that the Purchaser is acting solely in the capacity of
arm’s length purchaser with respect to this Agreement and the transactions contemplated hereby. The Company further acknowledges
that the Purchaser is not acting as a financial advisor or fiduciary of the Company (or in any similar capacity) with respect to
this Agreement and the transactions contemplated hereby and any statement made by the Purchaser or any of its respective representatives
or agents in connection with this Agreement and the transactions contemplated hereby is not advice or a recommendation and is merely
incidental to the Purchaser’s purchase of the Offered Units. The Company further represents to the Purchaser that the Company’s
decision to enter into this Agreement has been based solely on the independent evaluation of the Company and its representatives.
o.
No
Integrated Offering
. Neither the Company, nor any of its affiliates, nor any person acting on its or their behalf, has directly
or indirectly made any offers or sales in any security or solicited any offers to buy any security under circumstances that would
require registration under the 1933 Act of the issuance of the Offered Units to the Purchaser. The issuance of the Offered Units
to the Purchaser will not be integrated with any other issuance of the Company’s securities (past, current or future) for
purposes of any shareholder approval provisions applicable to the Company or its securities.
p.
No
Brokers
. The Company has taken no action which would give rise to any claim by any person for brokerage commissions, transaction
fees or similar payments relating to this Agreement or the transactions contemplated hereby.
q.
Permits;
Compliance
. The Company and each of its Subsidiaries is in possession of all franchises, grants, authorizations, licenses,
permits, easements, variances, exemptions, consents, certificates, approvals and orders necessary to own, lease and operate its
properties and to carry on its business as it is now being conducted (collectively, the “Company Permits”), and there
is no action pending or, to the knowledge of the Company, threatened regarding suspension or cancellation of any of the Company
Permits. Neither the Company nor any of its Subsidiaries is in conflict with, or in default or violation of, any of the Company
Permits, except for any such conflicts, defaults or violations which, individually or in the aggregate, would not reasonably be
expected to have a Material Adverse Effect. Since November 30, 2013, neither the Company nor any of its Subsidiaries has received
any notification with respect to possible conflicts, defaults or violations of applicable laws, except for notices relating to
possible conflicts, defaults or violations, which conflicts, defaults or violations would not have a Material Adverse Effect.
r.
Environmental
Matters
.
(i) There
are, to the Company’s knowledge, with respect to the Company or any of its Subsidiaries or any predecessor of the Company,
no past or present violations of Environmental Laws (as defined below), releases of any material into the environment, actions,
activities, circumstances, conditions, events, incidents, or contractual obligations which may give rise to any common law environmental
liability or any liability under the Comprehensive Environmental Response, Compensation and Liability Act of 1980 or similar federal,
state, local or foreign laws and neither the Company nor any of its Subsidiaries has received any notice with respect to any of
the foregoing, nor is any action pending or, to the Company’s knowledge, threatened in connection with any of the foregoing.
The term “Environmental Laws” means all federal, state, local or foreign laws relating to pollution or protection of
human health or the environment (including, without limitation, ambient air, surface water, groundwater, land surface or subsurface
strata), including, without limitation, laws relating to emissions, discharges, releases or threatened releases of chemicals, pollutants
contaminants, or toxic or hazardous substances or wastes (collectively, “Hazardous Materials”) into the environment,
or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of
Hazardous Materials, as well as all authorizations, codes, decrees, demands or demand letters, injunctions, judgments, licenses,
notices or notice letters, orders, permits, plans or regulations issued, entered, promulgated or approved thereunder.
(ii) Other
than those that are or were stored, used or disposed of in compliance with applicable law, no Hazardous Materials are contained
on or about any real property currently owned, leased or used by the Company or any of its Subsidiaries, and no Hazardous Materials
were released on or about any real property previously owned, leased or used by the Company or any of its Subsidiaries during the
period the property was owned, leased or used by the Company or any of its Subsidiaries, except in the normal course of the Company’s
or any of its Subsidiaries’ business.
(iii) There
are no underground storage tanks on or under any real property owned, leased or used by the Company or any of its Subsidiaries
that are not in compliance with applicable law.
s.
Title
to Property
. The Company and its Subsidiaries have good and marketable title in fee simple to all real property and good and
marketable title to all personal property owned by them which is material to the business of the Company and its Subsidiaries,
in each case free and clear of all liens, encumbrances and defects or such as would not have a Material Adverse Effect. Any real
property and facilities held under lease by the Company and its Subsidiaries are held by them under valid, subsisting and enforceable
leases with such exceptions as would not have a Material Adverse Effect.
t.
Insurance
.
The Company and each of its Subsidiaries are insured by insurers of recognized financial responsibility against such losses and
risks and in such amounts as management of the Company believes to be prudent and customary in the businesses in which the Company
and its Subsidiaries are engaged. Neither the Company nor any such Subsidiary has any reason to believe that it will not be able
to renew its existing insurance coverage as and when such coverage expires or to obtain similar coverage from similar insurers
as may be necessary to continue its business at a cost that would not have a Material Adverse Effect. Upon written request the
Company will provide to the Purchaser true and correct copies of all policies relating to directors’ and officers’
liability coverage, errors and omissions coverage, and commercial general liability coverage.
u.
Internal
Accounting Controls
. The Company and each of its Subsidiaries maintain a system of internal accounting controls sufficient,
in the judgment of the Company’s board of directors, to provide reasonable assurance that (i) transactions are executed in
accordance with management’s general or specific authorizations, (ii) transactions are recorded as necessary to permit preparation
of financial statements in conformity with generally accepted accounting principles and to maintain asset accountability, (iii)
access to assets is permitted only in accordance with management’s general or specific authorization and (iv) the recorded
accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect
to any differences.
v.
Foreign
Corrupt Practices
. Neither the Company, nor any of its Subsidiaries, nor any director, officer, agent, employee or other person
acting on behalf of the Company or any Subsidiary has, in the course of his actions for, or on behalf of, the Company, used any
corporate funds for any unlawful contribution, gift, entertainment or other unlawful expenses relating to political activity; made
any direct or indirect unlawful payment to any foreign or domestic government official or employee from corporate funds; violated
or is in violation of any provision of the U.S. Foreign Corrupt Practices Act of 1977, as amended, or made any bribe, rebate, payoff,
influence payment, kickback or other unlawful payment to any foreign or domestic government official or employee.
w.
Solvency
.
The Company (after giving effect to the transactions contemplated by this Agreement) is solvent (
i.e.
, its assets have a
fair market value in excess of the amount required to pay its probable liabilities on its existing debts as they become absolute
and matured) and currently the Company has no information that would lead it to reasonably conclude that the Company would not,
after giving effect to the transaction contemplated by this Agreement, have the ability to, nor does it intend to take any action
that would impair its ability to, pay its debts from time to time incurred in connection therewith as such debts mature. The Company
did not receive a qualified opinion from its auditors with respect to its most recent fiscal year end and, after giving effect
to the transactions contemplated by this Agreement, does not anticipate or know of any basis upon which its auditors might issue
a qualified opinion in respect of its current fiscal year.
x.
No
Investment Company
. The Company is not, and upon the issuance and sale of the Offered Units as contemplated by this Agreement
will not be an “investment company” required to be registered under the Investment Company Act of 1940 (an “Investment
Company”). The Company is not controlled by an Investment Company.
y.
Use
of Proceeds
. The Company shall use the net proceeds from the sale of Offered Units hereunder for working capital purposes.
4.
COVENANTS
.
a.
Best
Efforts
. The parties shall use their best efforts to satisfy timely each of the conditions described in Section 5 and 6 of
this Agreement.
b.
Form
D; Blue Sky Laws
. Unless it believes it is exempt from any such filings, the Company agrees to file a Form D with respect to
the Offered Units as required under Regulation D and to provide a copy thereof to the Purchaser promptly after such filing. The
Company shall, on or before the Closing Date, take such action as the Company shall reasonably determine is necessary to qualify
the Offered Units for sale to the Purchaser at the applicable closing pursuant to this Agreement under applicable securities or
“blue sky” laws of the states of the United States (or to obtain an exemption from such qualification), and shall provide
evidence of any such action so taken to the Purchaser on or prior to the Closing Date.
c.
Use
of Proceeds
. The Company shall use the proceeds for general working capital purposes, including legal and accounting expenses
related to SEC filings.
d.
Listing
.
The Company will comply in all respects with the Company’s reporting, filing and other obligations under the bylaws or rules
to maintain listing on the OTCQB or any equivalent replacement exchange, as applicable. .
e.
No
Integration
. The Company shall not knowingly make any offers or sales of any security (other than the Offered Units) under
circumstances that would require registration of the ssecurities being offered or sold hereunder under the 1933 Act or cause the
offering of the ssecurities to be integrated with any other offering of securities by the Company for the purpose of any stockholder
approval provision applicable to the Company or its securities.
5.
Conditions
to the Company’s Obligation to Sell
. The obligation of the Company hereunder to issue the Offered Units to the Purchaser
at the Closing is subject to the satisfaction, at or before the Closing Date of each of the following conditions thereto, provided
that these conditions are for the Company’s sole benefit and may be waived by the Company at any time in its sole discretion:
a. The
Purchaser shall have executed this Agreement and delivered the same to the Company.
b. The
Purchaser shall have delivered the Purchase Price in accordance with Section 1(b) above.
c. The
representations and warranties of the Purchaser shall be true and correct in all material respects as of the date when made and
as of the Closing Date as though made at that time (except for representations and warranties that speak as of a specific date),
and the Purchaser shall have performed, satisfied and complied in all material respects with the covenants, agreements and conditions
required by this Agreement to be performed, satisfied or complied with by the Purchaser at or prior to the Closing Date.
d. No
litigation, statute, rule, regulation, executive order, decree, ruling or injunction shall have been enacted, entered, promulgated
or endorsed by or in any court or governmental authority of competent jurisdiction or any self-regulatory organization having authority
over the matters contemplated hereby which prohibits the consummation of any of the transactions contemplated by this Agreement.
6.
Conditions
to The Purchaser’s Obligation to Purchase
. The obligation of the Purchaser hereunder to loan the Purchase Price to the
Company at the Closing is subject to the satisfaction, at or before the Closing Date of each of the following conditions, provided
that these conditions are for the Purchaser’s sole benefit and may be waived by the Purchaser at any time in its sole discretion:
a. The
Company shall have executed this Agreement and delivered the same to the Purchaser.
b. The
representations and warranties of the Company shall be true and correct in all material respects as of the date when made and as
of the Closing Date as though made at such time (except for representations and warranties that speak as of a specific date), and
the Company shall have performed, satisfied and complied in all material respects with the covenants, agreements and conditions
required by this Agreement to be performed, satisfied or complied with by the Company at or prior to the Closing Date. The Purchaser
shall have received a certificate or certificates, executed by the chief executive officer of the Company, dated as of the Closing
Date, to the foregoing effect and as to such other matters as may be reasonably requested by the Purchaser including, but not limited
to certificates with respect to the Company’s Certificate of Incorporation, By-laws and Board of Directors’ resolutions
relating to the transactions contemplated hereby.
c. No
litigation, statute, rule, regulation, executive order, decree, ruling or injunction shall have been enacted, entered, promulgated
or endorsed by or in any court or governmental authority of competent jurisdiction or any self-regulatory organization having authority
over the matters contemplated hereby which prohibits the consummation of any of the transactions contemplated by this Agreement.
d. No
event shall have occurred which could reasonably be expected to have a Material Adverse Effect on the Company including but not
limited to a change in the 1934 Act reporting status of the Company or the failure of the Company to be timely in its 1934 Act
reporting obligations.
7.
Miscellaneous
.
a.
Replacement
of Securities
. If any certificate or instrument evidencing any securities is mutilated, lost, stolen or destroyed, the Company
shall issue or cause to be issued in exchange and substitution for and upon cancellation thereof, or in lieu of and substitution
therefor, a new certificate or instrument, but only upon receipt of evidence reasonably satisfactory to the Company of such loss,
theft or destruction and customary and reasonable indemnity, if requested. The holder/applicant(s) for a new certificate or instrument
under such circumstances shall also pay any reasonable third-party costs associated with the issuance of such replacement securities.
b.
Governing
Law
. This Agreement shall be governed by and construed in accordance with the laws of the State of New Jersey without regard
to principles of conflicts of laws. Any action brought by either party against the other concerning the transactions contemplated
by this Agreement shall be brought only in the state courts of New Jersey or in the federal courts located in the state. The parties
to this Agreement hereby irrevocably waive any objection to jurisdiction and venue of any action instituted hereunder and shall
not assert any defense based on lack of jurisdiction or venue or based upon
forum non conveniens
. The Company and Purchaser
waive trial by jury. The prevailing party shall be entitled to recover from the other party its reasonable attorney's fees and
costs. In the event that any provision of this Agreement or any other agreement delivered in connection herewith is invalid or
unenforceable under any applicable statute or rule of law, then such provision shall be deemed inoperative to the extent that it
may conflict therewith and shall be deemed modified to conform with such statute or rule of law. Any such provision which may prove
invalid or unenforceable under any law shall not affect the validity or enforceability of any other provision of any agreement.
Each party hereby irrevocably waives personal service of process and consents to process being served in any suit, action or proceeding
in connection with this Agreement or any other Transaction Document by mailing a copy thereof via registered or certified mail
or overnight delivery (with evidence of delivery) to such party at the address in effect for notices to it under this Agreement
and agrees that such service shall constitute good and sufficient service of process and notice thereof. Nothing contained herein
shall be deemed to limit in any way any right to serve process in any other manner permitted by law.
c.
Counterparts
.
This Agreement may be executed by facsimile and in one or more counterparts, each of which shall be deemed an original but all
of which shall constitute one and the same agreement and shall become effective when counterparts have been signed by each party
and delivered to the other party.
d.
Headings
.
The headings of this Agreement are for convenience of reference only and shall not form part of, or affect the interpretation of,
this Agreement.
e.
Severability
.
In the event that any provision of this Agreement is invalid or unenforceable under any applicable statute or rule of law, then
such provision shall be deemed inoperative to the extent that it may conflict therewith and shall be deemed modified to conform
with such statute or rule of law. Any provision hereof which may prove invalid or unenforceable under any law shall not affect
the validity or enforceability of any other provision hereof.
f.
Entire
Agreement; Amendments
. This Agreement and the instruments referenced herein contain the entire understanding of the parties
with respect to the matters covered herein and therein and, except as specifically set forth herein or therein, neither the Company
nor the Purchaser makes any representation, warranty, covenant or undertaking with respect to such matters. No provision of this
Agreement may be waived or amended other than by an instrument in writing signed by the majority in interest of the Purchaser.
g.
Notices
.
All notices, demands, requests, consents, approvals, and other communications required or permitted hereunder shall be in writing
and, unless otherwise specified herein, shall be (i) hand delivered, (ii) deposited in the mail, registered or certified, return
receipt requested, postage prepaid, (iii) delivered by reputable national courier service with charges prepaid, or (iv) transmitted
by facsimile, addressed as set forth below or to such other address as such party shall have specified most recently by written
notice. Any notice or other communication required or permitted to be given hereunder shall be deemed effective (a) upon hand delivery
or delivery by facsimile, with accurate confirmation generated by the transmitting facsimile machine, at the address or number
designated below (if delivered on a business day during normal business hours where such notice is to be received), or the first
business day following such delivery (if delivered other than on a business day during normal business hours where such notice
is to be received) or (b) on the second business day following the date of mailing by express courier service, fully prepaid, addressed
to such address, or upon actual receipt of such mailing, whichever shall first occur. The addresses for such communications shall
be:
If to the Company,
to:
Arkados Group,
Inc.
Attn: Terrence
DeFranco
211 Warren
Street, Suite 320
Newark, NJ
07103
With a copy by
fax only to (which copy shall not constitute notice):
Kenneth R.
Vennera
General Counsel
211 Warren
Street, Suite 320
Newark, NJ
07103
Fax: 610-272-1562
If to the
Purchaser:
To the address first set forth in the
Purchaser Signature and Subscription Page
of this Agreement
Each party
shall provide notice (in accordance with the requirements of this provision) to the other party of any change in address.
h.
Successors
and Assigns
. This Agreement shall be binding upon and inure to the benefit of the parties and their successors and assigns.
Neither the Company nor the Purchaser shall assign this Agreement or any rights or obligations hereunder without the prior written
consent of the other.
i.
Third
Party Beneficiaries
. This Agreement is intended for the benefit of the parties hereto and their respective permitted successors
and assigns, and is not for the benefit of, nor may any provision hereof be enforced by, any other person.
j.
Survival
.
The representations and warranties of the Company and the agreements and covenants set forth in this Agreement shall survive the
closing hereunder notwithstanding any due diligence investigation conducted by or on behalf of the Purchaser. The Company agrees
to indemnify and hold harmless the Purchaser and all their officers, directors, employees and agents for loss or damage arising
as a result of or related to any breach or alleged breach by the Company of any of its representations, warranties and covenants
set forth in this Agreement or any of its covenants and obligations under this Agreement, including advancement of expenses as
they are incurred.
k.
Publicity
.
The Company shall have the right to make, without prior approval, any SEC, OTCBB or FINRA filings, or any other public statements
with respect to the transactions contemplated hereby as is required by applicable law and regulations.
l.
Further
Assurances
. Each party shall do and perform, or cause to be done and performed, all such further acts and things, and shall
execute and deliver all such other agreements, certificates, instruments and documents, as the other party may reasonably request
in order to carry out the intent and accomplish the purposes of this Agreement and the consummation of the transactions contemplated
hereby.
m.
No
Strict Construction
. The language used in this Agreement will be deemed to be the language chosen by the parties to express
their mutual intent, and no rules of strict construction will be applied against any party.
n.
Remedies
.
Each of the parties acknowledges that a breach by it of its obligations hereunder will cause immediate and irreparable harm to
the other party by vitiating the intent and purpose of the transaction contemplated hereby. Accordingly, each party acknowledges
that the remedy at law for a breach of its obligations under this Agreement will be inadequate and agrees, in the event of a breach
or threatened breach by a party of the provisions of this Agreement, that the other party shall be entitled, in addition to all
other available remedies at law or in equity, to an injunction or injunctions restraining, preventing or curing any breach of this
Agreement and to enforce specifically the terms and provisions hereof, without the necessity of showing economic loss and without
any bond or other security being required.
[REMAINDER OF PAGE LEFT INTENTIONALLY BLANK
SIGNATURE PAGES FOLLOW]
COMPANY SIGNATURE PAGE
TO ARKADOS SECURITIES PURCHASE AGREEMENT
IN WITNESS WHEREOF,
the undersigned Purchaser and the Company have caused this Securities Purchase Agreement to be duly executed as of the date
first written above
.
COMPANY
:
ARKADOS GROUP, INC.
|
By:
|
/s/ Terrence DeFranco
|
|
|
|
Terrence DeFranco
|
|
|
|
President and Chief Executive Officer
|
|
[PURCHASER SIGNATURE AND SUBSCRIPTION PAGE TO
FOLLOW]
PURCHASER SIGNATURE AND SUBSCRIPTION PAGE
TO ARKADOS SECURITIES PURCHASE AGREEMENT
IN WITNESS WHEREOF
,
each of the undersigned has caused this Securities Purchase Agreement to be duly executed by their respective authorized signatories
as of the date first indicated above.
Instructions: Please complete Section
1 through Section 4 below.
PURCHASER:
Section 1
INVESTOR INFORMATION AND SUBSCRIPTION:
(choose one alternative by placing “X”
in box):
¨
(if entity):
Entity Name: ____________________________________
(must be exact legal name)
By:_____________________________________________
(Signature)
Name
(Printed): ___________________________________
Title:____________________________________________
Entity Taxpayer
Identification Number: ______________________________________
Email Address of Authorized contact:________________________________________________
|
¨
(if individual):
|
|
¨
(if joint ownership with individual named):
|
|
|
|
|
|
By:
|
|
|
By:
|
|
|
(Signature)
|
|
(Signature)
|
|
|
|
|
|
Name
(Printed):
|
|
|
Name
(Printed):
|
|
|
|
|
|
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SSN:
|
|
|
SSN:
|
|
Section 2:
ADDRESS, FACSIMILE, EMAIL FOR NOTICE (SECTION 7(G)) TO PURCHASER:
Section 3:
ADDRESS FOR DELIVERY OF SECURITIES TO PURCHASER (if different from
Section 2 above):
Section 4:
AGGREGATE SUBSCRIPTION AMOUNT:
|
Aggregate Number of Shares Purchased:
|
|
|
|
|
|
|
Aggregate Purchase Price:
|
$
|
|
Annex A
CLOSING STATEMENT
All funds will be wired into the account listed
below. All funds will be disbursed in accordance with this Closing Statement.
Disbursement
Date:
upon receipt by the Company
|
I.
PURCHASE PRICE
|
|
|
|
|
|
|
|
|
|
|
|
Gross Proceeds to be Received
|
|
$
|
1,500,000.00
|
|
|
|
|
|
|
|
|
II.
DISBURSEMENTS
|
|
|
|
|
|
|
|
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Fees
|
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$
|
5,000.00
|
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|
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Total Amount Disbursed to Company:
|
|
$
|
1,495,000.00
|
1
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|
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1
|
does not include commissions of up to ten percent (10%)
of gross proceeds received from investors introduced by these broker dealers
|
WIRE INSTRUCTIONS
:
Arkados Group, Inc.
211 Warren Street
Suite 320
Newark, NJ 07103
Bank Information:
JPMorgan Chase
360 Park Avenue
New York, NY 10022
Account Number: 000000949188122
ABA/Routing Number: 021000021
Swift Code: CHASUS33
Exhibit 10.16
No. 2015-C-C-___
ARKADOS GROUP, INC.
COMMON STOCK PURCHASE WARRANT
THE WARRANT REPRESENTED BY THIS CERTIFICATE
HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), AND IS SUBJECT TO RESTRICTIONS ON TRANSFERABILITY
AS SET FORTH IN THIS CERTIFICATE. THIS WARRANT MAY NOT BE SOLD, TRANSFERRED, OR OTHERWISE DISPOSED OF IN THE ABSENCE OF AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE ACT OR AN OPINION OF COUNSEL, REASONABLY ACCEPTABLE TO COUNSEL FOR THE COMPANY, TO THE EFFECT
THAT THE PROPOSED SALE, TRANSFER, OR DISPOSITION MAY BE EFFECTUATED WITHOUT REGISTRATION UNDER THE ACT.
WARRANT CERTIFICATE
THIS WARRANT CERTIFICATE
(the "Warrant Certificate") certifies that for value received,
_______________ (
the "Holder"), is the
owner of this warrant (the "Warrant"), which entitles the Holder to purchase at any time on or before the Expiration
Date (as defined below) ___________________ (_________) shares (the "Warrant Shares") of fully paid non-assessable shares
of the common stock (the "Common Stock") of ARKADOS GROUP, INC., a Delaware corporation (the "Company"), at
a purchase price per Warrant Share of One Dollar ($1.00) (the "Purchase Price"), in lawful money of the United States
of America by bank or certified check, subject to adjustment as hereinafter provided or by cashless exercise as provided in Section
2(a). This Warrant is issued for services rendered by Holder to Company.
|
|
1.
|
WARRANT; PURCHASE PRICE
.
|
This Warrant shall entitle
the Holder to purchase the Warrant Shares at the Purchase Price. The Purchase Price and the number of Warrant Shares evidenced
by this Warrant Certificate are subject to adjustment as provided in Article 6.
|
|
2.
|
EXERCISE; EXPIRATION DATE
.
|
(a) This
Warrant is exercisable, at the option of the Holder, at any time after the date of issuance and on or before the Expiration Date
(as defined below) by (i) delivering to the Company written notice of exercise (the "Exercise Notice"), stating the number
of Warrant Shares to be purchased thereby, accompanied by bank or certified check payable to the order of the Company for the Warrant
Shares being purchased or (ii) presentation and surrender of this Warrant to the Company at its principal executive offices with
a written notice of the holder's intention to effect a cashless exercise, including a calculation of the number of shares of Common
Stock to be issued upon such exercise in accordance with the terms hereof (a "Cashless Exercise. In the event of a Cashless
Exercise, in lieu of paying the Exercise Price in cash, the holder shall surrender this Warrant for that number of shares of Common
Stock determined by multiplying the number of Warrant Shares to which it would otherwise be entitled by a fraction, (x) the numerator
of which shall be the difference between the closing market price per share of the Common Stock on the last business day prior
to the date the exercise is delivered to the Company (the “Current Market Price”) and the Purchase Price and (y) the
denominator of which shall be the Current Market Price per share of Common Stock. Within ten (10) business days of the Company's
receipt of the Exercise Notice accompanied by the consideration for the Warrant Shares being purchased, or a Cashless Exercise,
the Company shall instruct its transfer agent to issue and deliver to the Holder a certificate representing the Warrant Shares
being purchased. In the case of exercise for less than all of the Warrant Shares represented by this Warrant Certificate, the Company
shall cancel this Warrant Certificate upon the surrender thereof and shall execute and deliver a new Warrant Certificate for the
balance of such Warrant Shares.
(b)
Expiration
.
The term "Expiration Date" shall mean 5:00 p.m., New York time, on the third (3
rd
) anniversary of the date
set forth in the signature block of this Warrant or if such date in the State of New York shall be a holiday or a day on which
banks are authorized to close, then 5:00 p.m., New York time, the next following day which in the State of New York is not a holiday
or a day on which banks are authorized to close.
|
|
3.
|
RESTRICTIONS ON TRANSFER
.
|
(a)
Restrictions
.
This Warrant, and the Warrant Shares or any other security issuable upon exercise of this Warrant may not be assigned, transferred,
sold, or otherwise disposed of unless (i) there is in effect a registration statement under the Act covering such sale, transfer,
or other disposition or (ii) the Holder furnishes to the Company an opinion of counsel, reasonably acceptable to counsel for the
Company, to the effect that the proposed sale, transfer, or other disposition may be effected without registration under the Act,
as well as such other documentation incident to such sale, transfer, or other disposition as the Company's counsel shall reasonably
request.
(b)
Legend
.
Any Warrant Shares issued upon the exercise of this Warrant shall bear substantially the following legend:
“The shares
represented by this certificate have not been registered under the Securities Act of 1933, as amended. The shares have been acquired
for investment and may not be offered, sold or otherwise transferred in the absence of an effective registration statement and
with respect to the shares or an exemption from the registration requirements of said act that is then applicable to the shares,
as to which a prior opinion of counsel acceptable to the issuer or transfer agent may be required.”
|
|
4.
|
RESERVATION OF SHARES
.
|
The Company covenants that
it will at all time reserve and keep available out of its authorized Common Stock, solely for the purpose of issuance upon exercise
of this Warrant, such number of shares of Common Stock as shall then be issuable upon the exercise of this Warrant. The Company
covenants that all shares of Common Stock which shall be issuable upon exercise of this Warrant shall be duly and validly issued
and fully paid and non-assessable and free from all taxes, liens, and charges with respect to the issue thereof.
If the Holder loses this
Warrant, or if this Warrant is stolen, destroyed or mutilated, the Company shall issue an identical replacement Warrant upon the
Holder's delivery to the Company of a customary agreement to indemnify the Company for any losses resulting from the issuance of
the replacement Warrant.
|
|
6.
|
PROVISIONS REGARDING ADJUSTMENTS TO STOCK
.
|
(a)
Stock
Dividends, Subdivisions and Combinations
. If at any time the Company shall:
(i) take
a record of the holders of its Common Stock for the purpose of entitling them to receive a dividend payable in, or other distribution
of, additional shares of Common Stock,
(ii) subdivide
its outstanding shares of Common Stock into a larger number of shares of Common Stock, or
(iii) combine
its outstanding shares of Common Stock into a smaller number of shares of Common Stock,
then (A) the number of shares of Common Stock
for which this Warrant is exercisable into immediately after the occurrence of any such event shall be adjusted to equal the number
of shares of Common Stock which a record holder of the same number of shares of Common Stock for which this Warrant is exercisable
into immediately prior to the occurrence of such event would own or be entitled to receive after the happening of such event, and
(B) the Purchase Price shall be adjusted to equal (x) the current Purchase Price immediately prior to the adjustment multiplied
by the number of shares of Common Stock for which this Warrant is exercisable into immediately prior to the adjustment divided
by (y) the number of shares of Common Stock for which this Warrant is exercisable into immediately after such adjustment.
(b)
Certificate as to
Adjustments
. Upon the occurrence of each adjustment or readjustment of the Purchase Price, the Company, at its expense, shall
promptly compute such adjustment or readjustment in accordance with the terms hereof and prepare and furnish to the Holder a certificate
setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based.
The Company shall, upon the written request at any time of the Holder, furnish or cause to be furnished to such holder a like certificate
setting forth (i) such adjustments and readjustments, (ii) the Purchase Price at the time in effect for this Warrant and (iii)
the number of shares of Common Stock and the amount, if any, or other property which at the time would be received upon the exercise
of this Warrant.
(c)
Notices
of Record Date
. In the event of any fixing by the Company of a record date for the holders of any class of securities for the
purpose of determining the holders thereof who are entitled to receive any dividend (other than a cash dividend) or other distribution,
any shares of Common Stock or other securities, or any right to subscribe for, purchase or otherwise acquire, or any option for
the purchase of, any shares of stock of any class or any other securities or property, or to receive any other right, the Company
shall mail to the Holder at least thirty (30) days prior to the date specified therein, a notice specifying the date on which any
such record is to be taken for the purpose of such dividend, distribution or rights, and the amount and character of such dividend,
distribution or right.
(d)
Merger,
Consolidation, etc
. In case of any capital reorganization or any reclassification of the capital stock of the Company or in
case of the consolidation or merger of the Company with another corporation (or in the case of any sale, transfer, or other disposition
to another corporation of all or substantially all the property, assets, business, and goodwill of the Company), the Holder of
this Warrant shall thereafter be entitled to purchase the kind and amount of shares of capital stock which this Warrant entitled
the Holder to purchase immediately prior to such capital reorganization, reclassification of capital stock, consolidation, merger,
sale, transfer, or other disposition; and in any such case appropriate adjustments shall be made in the application of the provisions
of this Section 6 with respect to rights and interests thereafter of the Holder of this Warrant to the end that the provisions
of this Section 6 shall thereafter be applicable, as near as reasonably may be, in relation to any shares or other property thereafter
purchasable upon the exercise of this Warrant.
(e)
Fractional
Shares
. No certificate for fractional shares shall be issued upon the exercise of this Warrant, but in lieu thereof the Company
shall purchase any such fractional shares calculated to the nearest cent or round up the fraction to the next whole share.
(f)
Rights
of the Holder
. The Holder of this Warrant shall not be entitled to any rights of a shareholder of the Company in respect of
any Warrant Shares purchasable upon the exercise hereof until such Warrant Shares have been paid for in full and issued to it.
As soon as practicable after such exercise, the Company shall deliver a certificate or certificates for the number of full shares
of Common Stock issuable upon such exercise, to the person or persons entitled to receive the same.
|
|
7.
|
RepResentations
and Warranties
.
|
The Holder, by acceptance
of this Warrant, represents and warrants to, and covenants and agrees with, the Company as follows:
(a) The
Warrant is being acquired for the Holder's own account for investment and not with a view toward resale or distribution of any
part thereof, and the Holder has no present intention of selling, granting any participation in, or otherwise distributing the
same.
(b) The
Holder is aware that the Warrant is not registered under the Act or any state securities or blue sky laws and, as a result, substantial
restrictions exist with respect to the transferability of the Warrant and the Warrant Shares to be acquired upon exercise of the
Warrant.
(c) The
Holder is an accredited investor as defined in Rule 501(a) of Regulation D under the Act and is a sophisticated investor familiar
with the type of risks inherent in the acquisition of securities such as the Warrant, and its financial position is such that it
can afford to retain the Warrant and the Warrant Shares for an indefinite period of time without realizing any direct or indirect
cash return on this investment.
The Company shall not by
any action including, without limitation, amending its certificate of incorporation or through any reorganization, transfer of
assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the
observance or performance of any of the terms of this Warrant, but will at all times in good faith assist in the carrying out of
all such terms and in the taking of all such actions as may be necessary or appropriate to protect the rights of Holder against
impairment. Without limiting the generality of the foregoing, the Company will (a) not increase the par value of any shares of
Common Stock receivable upon the exercise of this Warrant above the amount payable therefore upon such exercise immediately prior
to such increase in par value, (b) take all such actions as may be necessary or appropriate in order that the Company may validly
and legally issue fully paid and non assessable shares of Common Stock upon the exercise of this Warrant, and (c) use its best
efforts to obtain all such authorizations, exemptions or consents from any public regulatory body having jurisdiction thereof as
may be necessary to enable the Company to perform its obligations under this Warrant. Upon the request of Holder, the Company will
at any time during the period this Warrant is outstanding acknowledge in writing, in form satisfactory to Holder, the continuing
validity of this Warrant and the obligations of the Company hereunder.
|
|
9.
|
NO REGISTRATION RIGHTS.
|
There are no registration
rights associated with this Warrant or the underlying Warrant Shares when issued.
|
|
10.
|
SUPPLYING INFORMATION.
|
The Company shall cooperate
with Holder and each holder of Warrant Shares in supplying such information pertaining to the Company as may be reasonable necessary
for such Holder and each holder of Warrant Shares to complete and file any information reporting forms presently or hereafter required
by the Securities and Exchange Commission as a condition to the availability of an exemption from the Act for the sale of Warrant
Shares.
|
|
11
|
LIMITATION OF LIABILITY.
|
No provision hereof, in
the absence of affirmative action by Holder to purchase shares of Common Stock, and no enumeration herein of the rights or privileges
of Holder hereof, shall give rise to any liability of Holder for the purchase price of any Common Stock or as a stockholder of
the Company, whether such liability is asserted by the Company or by creditors of the Company.
(a)
Transfer
Taxes; Expenses
. The Holder shall pay any and all underwriters' discounts, brokerage fees, and transfer taxes incident to the
sale or exercise of this Warrant or the sale of the underlying shares issuable hereunder, and shall pay the fees and expenses of
any special attorneys or accountants retained by it.
(b)
Successors
and Assigns
. Subject to compliance with the provisions of Section 3, this Warrant and the rights evidenced hereby shall inure
to the benefit of and be binding upon the successors of the Company and the successors and assigns of Holder. The provisions of
this Warrant are intended to be for the benefit of all Holders from time to time of this Warrant, and shall be enforceable by any
such Holder.
(c)
Notice
.
Any notice or other communication required or permitted to be given to the Company shall be in writing and shall be delivered by
certified mail with return receipt or delivered in person against receipt, addressed to the Company at 211 Warren Street, Suite
320, Newark, New Jersey 07103.
(d)
Governing
Law
. This Warrant Certificate shall be governed by, and construed in accordance with, the internal laws of the State of New
Jersey, without reference to the conflicts of laws provisions thereof.
IN WITNESS WHEREOF, the Company
has caused this Warrant Certificate to be duly executed as of the date set forth below.
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Arkados Group, Inc.
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By:
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/s/ Terrence DeFranco
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Name:
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Terrence DeFranco
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Title:
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CEO
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Issuance Date: November 18, 2015
ARKADOS GROUP, INC.
FORM OF EXERCISE OF WARRANT
No. 2015-C-C-____
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The undersigned hereby elects to exercise this Warrant as to _____________ shares of the Common Stock of Arkados Group,
Inc., a Delaware corporation, covered thereby. Enclosed herewith is a bank or certified check in the amount of $_____________ payable
to the Company.
Delivery of exercise notice
requiring a payment by check must be by national courier (Fedex, UPS, etc.) to:
Arkados Group,
Inc.
211 Warren Street,
Suite 320,
Newark, NJ 07103
Attn: Terrence
DeFranco
□
The
undersigned hereby elects to effect a cashless exercise of this Warrant as to _____________ shares. The Company is authorized to
deduct from the requested number exercised and to issue me that number of shares of its Common Stock determined by the formula
set forth in Section 2(a) of the Warrant.
Please note: if the exercise involves a
cashless exercise for the entire amount (i.e. no cash due the Company), please execute this notice in blue ink, scan and email
to the Company’s general counsel via email at generalcounsel@arkadosgroup.com.
The shares should be sent to me at the address
provided below.
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(Signature)
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Name
(Printed)
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Address:
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Social Security Number
(
for individual
holder)
or Employer Identification Number (Tax ID)
(for entity)
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Exhibit 10.17
EXCHANGE AGREEMENT
This Exchange Agreement
(this “
Agreement
”), effective as of the 8th day of January, 2016 (the “
Effective Date
”),
is entered into by and between Arkados Group, Inc., a Delaware corporation (the “
Company
”), with headquarters
located at 211 Warren St., Suite 320, Newark, NJ 07103, and William Carson (“
Mr. Carson
”) and Susan Carson (“
Mrs.
Carson
,” and, collectively with Mr. Carson, the “
Holders
”), individuals having their address at 2703
Cottonwood Lane, Colleyville, TX 76034.
WHEREAS, Mr. Carson
and the Company entered into that certain Securities Purchase Agreement, dated September 10, 2014 (the “
Individual SPA
”),
pursuant to which Mr. Carson purchased, and the Company sold and issued to Mr. Carson its 6% Convertible Note No. 2014-3 dated
September 10, 2014 (“
Note 2014-3
”) in the original principal amount of $65,000;
WHEREAS, the Holders
and the Company entered into that certain Securities Purchase Agreement, dated August __, 2014 (the “
Joint SPA
,”
and, together with the Individual SPA, the “SPAs”), pursuant to which the Holders purchased, and the Company sold and
issued to the Holders its 6% Convertible Note No. 2014-4 dated September 10, 2014 (“
Note 2014-4
,” and, together
with Note 2014-3, the “
Notes
”) also in the original principal amount of $65,000;
WHEREAS, the Notes
matured on October 31, 2015, and the Company has requested the Holders to extend the Maturity Date (as defined in the Notes) to
December 31, 2016;
WHEREAS, the Holders
are willing to reduce the amount due under the Notes to $40,000 and to extend the Maturity Date in exchange for a cash payment
of $60,000 and the Company’s issuance to the Holders of 50,000 shares of its Common Stock, par value $0.001 per share (the
“
Common Stock
”) and certain changes to the terms and conditions of the Notes.
NOW THEREFORE, in consideration
of the sum of $10.00 paid in hand, the sufficiency and receipt of which is hereby acknowledged, the parties, intending to be legally
bound, hereby agree as follows:
1. Immediately
upon the full execution of this Agreement, the Holders will tender the Notes for cancellation by the Company. In exchange the Company
will issue, sell and deliver to the Holders its 6% Convertible Note due December 31, 2016 in the original principal amount of $40,000,
such note to be in the form set forth as
Exhibit “A”
to this Agreement (“Note 2016-1”).
2. Immediately
upon the full execution of this Agreement, the Company will pay the sum of $60,000 to the Holders by wire transfer of immediately
available fund to the following bank account of the Holders:
[insert bank name, routing number, bank a/c number]
3. Immediately
upon the full execution of this Agreement, the Company will immediately instruct its transfer agent to issue 50,000 shares of the
Common Stock (the Shares”). The Shares are “restricted securities” as defined in Rule 144 under the Securities
Act of 1933, as amended, and, accordingly, the certificate representing the Shares will bear a restrictive legend.
4. The
Holders hereby accept the Shares and the sum of $60,000 as payment in full for all interest accrued on the Notes (including interest,
Default Interest and all other penalty amounts due under the Notes) through the Effective Date and $70,000 aggregate principal
amount of the Notes. The Holders hereby release the Company from any and all claims that have accrued or may have accrued under
the SPAs or the Notes up to the Effective Date.
5. In
order to induce the Company to issue Note 2016-1 and the Shares, the Holders repeat and reconfirm their representations and warranties
contained in Sections 1d through 1i of the SPAs.
6. The
SPAs are hereby amended to the extent required to reflect the terms of this Agreement.
7.
Each
party to this Agreement shall use its, his or her commercially reasonable efforts at its own expense to take all actions and to
do all things necessary, proper or advisable in order to consummate and make effective the transactions contemplated by this Agreement.
8. This
Agreement shall supersede any and all prior amendments or agreements between the parties with respect to the subject matter. This
Agreement may not be amended except by a written instrument executed by all of the parties.
9. This
Agreement may be executed in counterparts and facsimile of same shall be deemed an original.
IN WITNESS WHEREOF,
the parties have hereafter set their signature as of the Effective Date.
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HOLDERS:
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/s/ William Carson
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(
Signature
)
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Name:
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William Carson
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/s/ SusanCarson
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(
Signature
)
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Name:
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Susan Carson
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COMPANY:
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Arkados GROUP, Inc.
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By:
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s/ Terrence DeFranco
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Name:
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Terrence DeFranco
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Title:
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Chief Executive Officer
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EXHIBIT A
Form of Convertible Note
This
Note and the securities represented hereby have not been registered under the Securities Act of 1933, as amended, or any state
securities laws and may not be transferred in violation of such Act, the rules and regulations thereunder or any state securities
laws or the provisions of this Note.
ARKADOS GROUP, INC.
6% CONVERTIBLE NOTE
DUE DECEMBER 31, 2016
Number: 2016-1
Principal: US$40,000
Original Issue Date: January 8, 2016
Registered Holder: William Carson and Susan Carson, jointly
Arkados Group, Inc., a Delaware corporation
(the “
Company
”) with principal offices at 211 Warren Street, Suite 320, Newark, NJ 07103, for value received,
hereby promises to pay the registered holder hereof (the “Holder”) the principal sum set forth above on December 31,
2016 (the “
Maturity Date
”), in such coin or currency of the United States of America as at the time of payment
shall be the legal tender for the payment of public and private debts, and to pay interest, less any amounts required by law to
be deducted or withheld, computed on the basis of a 365-day year, on the unpaid principal balance hereof from the date hereof (the
“
Original Issue Date
”), at the rate of 6% per year, compounded quarterly, until such principal sum shall have
become due and payable, or has been converted pursuant to Section 1.1, below. Interest shall be paid, on the Maturity Date, or
if the principal of the Note is earlier converted pursuant to Section 1.1 below, upon such exchange or conversion. All references
herein to dollar amounts refer to U.S. dollars and all references to Common Stock shall refer to voting stock.
This Note may not be prepaid in whole or
in part except as otherwise explicitly set forth herein. Any amount of principal or interest on this Note which is not paid when
due shall bear interest at the rate of twelve percent 12% per annum from the due date thereof until the same is paid (“
Default
Interest
”). Interest shall commence accruing on the date that the Note is made and shall be computed on the basis of
a 365-day year and the actual number of days elapsed. All payments due hereunder (to the extent not converted into common stock,
$0.001 par value per share (the “
Common Stock
”) in accordance with the terms hereof) shall be made in lawful
money of the United States of America. All payments shall be made at such address as the Holder shall hereafter give to the Company
by written notice made in accordance with the provisions of this Note. Whenever any amount expressed to be due by the terms of
this Note is due on any day which is not a business day, the same shall instead be due on the next succeeding day which is a business
day and, in the case of any interest payment date which is not the date on which this Note is paid in full, the extension of the
due date thereof shall not be taken into account for purposes of determining the amount of interest due on such date. As used in
this Note, the term “
business day
” shall mean any day other than a Saturday, Sunday or a day on which commercial
banks in the city of New York, New York are authorized or required by law or executive order to remain closed. Each capitalized
term used herein, and not otherwise defined, shall have the meaning ascribed thereto in that certain Securities Purchase Agreement
dated the date hereof, pursuant to which this Note was originally issued (the “
Purchase Agreement
”).
This Note is free from
all taxes, liens, claims and encumbrances with respect to the issue thereof and shall not be subject to preemptive rights or other
similar rights of shareholders of the Company and will not impose personal liability upon the holder thereof.
The following terms
shall apply to this Note:
ARTICLE I. CONVERSION RIGHTS
(a)
Conversion Right
. The Holder shall have the right from time to time, and at any time during the period beginning on the effective
date of the Company’s Amendment to its Certificate of Incorporation increasing the Company’s authorized shares of Common
Stock discussed in Section 1.3 below, and ending on the later of: (i) the Maturity Date and (ii) the date of payment of the Default
Amount (as defined in Article III) — each in respect of the remaining outstanding principal amount of this Note — to
convert all or any part of the outstanding and unpaid principal amount of this Note and any outstanding accrued interest into fully
paid and non-assessable shares of Common Stock, as such Common Stock exists on the Issue Date, or any shares of capital stock or
other securities of the Company into which such Common Stock shall hereafter be changed or reclassified, at the conversion price
(the “
Conversion Price
”) determined as provided herein (a “
Conversion
”). The number of shares
of Common Stock to be issued upon each conversion of this Note shall be determined by dividing the Conversion Amount (as defined
below) by the applicable Conversion Price then in effect on the date specified in the notice of conversion, in the form attached
hereto as Exhibit A (the “
Notice of Conversion
”), delivered to the Company by the Holder in accordance with
Section 1.4 below; provided that the Notice of Conversion is submitted by facsimile or e-mail to the Company before 6:00 p.m.,
New York, New York time on such conversion date (the “
Conversion Date
”). The term “
Conversion Amount
”
means, with respect to any conversion of this Note, the sum of (1) the principal amount of this Note to be converted in such conversion
plus
(2) at the Holder’s option, accrued and unpaid interest, if any, on such principal amount at the interest rates
provided in this Note to the Conversion Date,
plus
(3) at the Holder’s option, Default Interest, if applicable, on
the amounts referred to in the immediately preceding clauses (1) and/or (2)
plus
(4) at the Holder’s option, any amounts
owed to the Holder pursuant to this Note.
1.2 Conversion Price
.
The conversion price (the “
Conversion Price
”) shall be equal to $1.20 (subject to equitable adjustments for
stock splits, stock dividends or rights offerings by the Company relating to the Company’s securities or the securities of
any subsidiary of the Company, combinations, recapitalization, reclassifications, extraordinary distributions and similar events).
1.3 Authorized Shares
.
The Company covenants that during the period the conversion right exists, the Company will reserve from its authorized and unissued
Common Stock a sufficient number of shares, free from preemptive rights, to provide for the issuance of Common Stock upon the full
conversion of this Note issued pursuant to the Purchase Agreement. The Company is required at all times to have authorized and
reserved a sufficient number of shares equal to at least the number issuable upon full conversion of the Note (based on the Conversion
Price of the Notes in effect from time to time)(the “
Reserved Amount
”). The Reserved Amount shall be increased
from time to time in accordance with the Company’s obligations pursuant to the Purchase Agreement. The Company represents
that upon issuance, such shares will be duly and validly issued, fully paid and non-assessable. In addition, if the Company shall
issue any securities or make any change to its capital structure which would change the number of shares of Common Stock into which
the Notes shall be convertible at the then current Conversion Price, the Company shall at the same time make proper provision so
that thereafter there shall be a sufficient number of shares of Common Stock authorized and reserved, free from preemptive rights,
for conversion of the outstanding Notes. The Company hereby acknowledges that the number of shares of its Common Stock authorized
and reserved for issuance is below the number of Conversion Shares issued and issuable upon conversion of or otherwise pursuant
to the Note (based on the Conversion Price) and any other shares of Common Stock issued or issuable pursuant to the terms of this
Note, the Company will promptly take all corporate action necessary to authorize and reserve a sufficient number of shares, including,
without limitation, calling a special meeting of stockholders, if necessary, to authorize additional shares to meet the Company’s
obligations under this Section 1.3, in the case of an insufficient number of authorized shares, and using its best efforts to obtain
stockholder approval of an increase in such authorized number of shares.
1.4
Method of Conversion
.
(i)
Mechanics
of Conversion
. Subject to Section 1.1, this Note may be converted by the Holder in whole or in part at any time from time to
time after the Issue Date, by (A) submitting to the Company a Notice of Conversion (by facsimile, e-mail or other reasonable
means of communication dispatched on the Conversion Date prior to 6:00 p.m., New York, New York time) and (B) subject to Section
1.4(b), surrendering this Note at the principal office of the Company.
(ii)
Surrender
of Note Upon Conversion
. Notwithstanding anything to the contrary set forth herein, upon conversion of this Note in accordance
with the terms hereof, the Holder shall not be required to physically surrender this Note to the Company unless the entire unpaid
principal amount of this Note is so converted. The Holder and the Company shall maintain records showing the principal amount so
converted and the dates of such conversions or shall use such other method, reasonably satisfactory to the Holder and the Company,
so as not to require physical surrender of this Note upon each such conversion. In the event of any dispute or discrepancy, such
records of the Company shall,
prima
facie,
be controlling
and determinative in the absence of manifest error. Notwithstanding the foregoing, if any portion of this Note is converted as
aforesaid, the Holder may not transfer this Note unless the Holder first physically surrenders this Note to the Company, whereupon
the Company will forthwith issue and deliver upon the order of the Holder a new Note of like tenor, registered as the Holder (upon
payment by the Holder of any applicable transfer taxes) may request, representing in the aggregate the remaining unpaid principal
amount of this Note. The Holder and any assignee, by acceptance of this Note, acknowledge and agree that, by reason of the provisions
of this paragraph, following conversion of a portion of this Note, the unpaid and unconverted principal amount of this Note represented
by this Note may be less than the amount stated on the face hereof.
(iii)
Payment
of Taxes
. The Company shall not be required to pay any tax which may be payable in respect of any transfer involved in the
issue and delivery of shares of Common Stock or other securities or property on conversion of this Note in a name other than that
of the Holder (or in street name), and the Company shall not be required to issue or deliver any such shares or other securities
or property unless and until the person or persons (other than the Holder or the custodian in whose street name such shares are
to be held for the Holder’s account) requesting the issuance thereof shall have paid to the Company the amount of any such
tax, or shall have established to the satisfaction of the Company that such tax has been paid.
(iv)
Delivery
of Common Stock Upon Conversion
. Upon receipt by the Company from the Holder of a facsimile transmission or e-mail (or other
reasonable means of communication) of a Notice of Conversion meeting the requirements for conversion as provided in this Section
1.4, the Company shall issue and deliver or cause to be issued and delivered to or upon the order of the Holder certificates for
the Common Stock issuable upon such conversion within three (3) business days after such receipt (the “
Deadline
”)
(and, solely in the case of conversion of the entire unpaid principal amount hereof, surrender of this Note) in accordance with
the terms hereof and the Purchase Agreement.
(v)
Obligation
of Company to Deliver Common Stock
. Upon receipt by the Company of a Notice of Conversion, the Holder shall be deemed to be
the holder of record of the Common Stock issuable upon such conversion, the outstanding principal amount and the amount of accrued
and unpaid interest on this Note shall be reduced to reflect such conversion, and, unless the Company defaults on its obligations
under this Article I, all rights with respect to the portion of this Note being so converted shall forthwith terminate except the
right to receive the Common Stock or other securities, cash or other assets, as herein provided, on such conversion. If the Holder
shall have given a Notice of Conversion as provided herein, the Company’s obligation to issue and deliver the certificates
for Common Stock shall be absolute and unconditional, irrespective of the absence of any action by the Holder to enforce the same,
any waiver or consent with respect to any provision thereof, the recovery of any judgment against any person or any action to enforce
the same, any failure or delay in the enforcement of any other obligation of the Company to the holder of record, or any setoff,
counterclaim, recoupment, limitation or termination, or any breach or alleged breach by the Holder of any obligation to the Company,
and irrespective of any other circumstance which might otherwise limit such obligation of the Company to the Holder in connection
with such conversion. The Conversion Date specified in the Notice of Conversion shall be the Conversion Date so long as the Notice
of Conversion is received by the Company before 6:00 p.m., New York, New York time, on such date.
(vi)
Delivery
of Common Stock by Electronic Transfer
. In lieu of delivering physical certificates representing the Common Stock issuable
upon conversion, provided the Company is participating in the Depository Trust Company (“
DTC
”) Fast Automated
Securities Transfer (“
FAST
”) program, upon request of the Holder and its compliance with the provisions contained
in Section 1.1 and in this Section 1.4, the Company shall use its best efforts to cause its transfer agent to electronically transmit
the Common Stock issuable upon conversion to the Holder by crediting the account of Holder’s Prime Broker with DTC through
its Deposit Withdrawal Agent Commission (“
DWAC
”) system.
(vii)
Failure
to Deliver Common Stock Prior to Deadline
. Without in any way limiting the Holder’s right to pursue other remedies, including
actual damages and/or equitable relief, the parties agree that if delivery of the Common Stock issuable upon conversion of this
Note is not delivered by the Deadline (other than a failure due to the circumstances described in Section 1.3 above, which failure
shall be governed by such Section) a reasonable equivalent approximation of the damages would be $100 per day, for each day beyond
the Deadline that the Company fails to deliver such Common Stock through willful or deliberate acts on the part of the Company.
Such cash amount shall be paid to Holder by the fifth day of the month following the month in which it has accrued or, at the option
of the Holder (by written notice to the Company by the first day of the month following the month in which it has accrued), shall
be added to the principal amount of this Note, in which event interest shall accrue thereon in accordance with the terms of this
Note and such additional principal amount shall be convertible into Common Stock in accordance with the terms of this Note. The
Company agrees that the right to convert is a valuable right to the Holder. The damages resulting from a failure, attempt to frustrate,
and interference with such conversion right are difficult if not impossible to qualify. Accordingly the parties acknowledge that
the liquidated damages provision contained in this Section 1.4(g) are justified.
1.5 Concerning the Shares
.
The shares of Common Stock issuable upon conversion of this Note may not be sold or transferred unless (i) such shares are
sold pursuant to an effective registration statement under the Act or (ii) the Company or its transfer agent shall have been furnished
with an opinion of counsel (which opinion shall be in form, substance and scope customary for opinions of counsel in comparable
transactions) to the effect that the shares to be sold or transferred may be sold or transferred pursuant to an exemption from
such registration or (iii) such shares are sold or transferred pursuant to Rule 144 under the Act (or a successor rule) (“
Rule
144
”) or (iv) such shares are transferred to an “
affiliate
” (as defined in Rule 144) of the Company
who agrees to sell or otherwise transfer the shares only in accordance with this Section 1.5 and who is an Accredited Investor
(as defined in the Purchase Agreement). Except as otherwise provided in the Purchase Agreement (and subject to the removal provisions
set forth below), until such time as the shares of Common Stock issuable upon conversion of this Note have been registered under
the Act or otherwise may be sold pursuant to Rule 144 without any restriction as to the number of securities as of a particular
date that can then be immediately sold, each certificate for shares of Common Stock issuable upon conversion of this Note that
has not been so included in an effective registration statement or that has not been sold pursuant to an effective registration
statement or an exemption that permits removal of the legend, shall bear a legend substantially in the following form, as appropriate:
“NEITHER THE ISSUANCE
AND SALE OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE EXERCISABLE HAVE
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS. THE SECURITIES MAY NOT BE OFFERED
FOR SALE, SOLD, TRANSFERRED OR ASSIGNED (I) IN THE ABSENCE OF (A) AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER
THE SECURITIES ACT OF 1933, AS AMENDED, OR (B) AN OPINION OF COUNSEL, IN A GENERALLY ACCEPTABLE FORM, THAT REGISTRATION IS NOT
REQUIRED UNDER SAID ACT OR (II) UNLESS SOLD PURSUANT TO RULE 144 OR RULE 144A UNDER SAID ACT. NOTWITHSTANDING THE FOREGOING, THE
SECURITIES MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN OR FINANCING ARRANGEMENT SECURED BY THE SECURITIES.”
The legend set forth
above shall be removed and the Company shall issue to the Holder a new certificate therefore free of any transfer legend if (i)
the Company or its transfer agent shall have received an opinion of counsel, in form, substance and scope customary for opinions
of counsel in comparable transactions, to the effect that a public sale or transfer of such Common Stock may be made without registration
under the Act, which opinion shall be reasonably acceptable by the Company so that the sale or transfer is effected or (ii) in
the case of the Common Stock issuable upon conversion of this Note, such security is registered for sale by the Holder under an
effective registration statement filed under the Act or otherwise may be sold pursuant to Rule 144 without any restriction as to
the number of securities as of a particular date that can then be immediately sold. In the event that the Company does not reasonably
accept the opinion of counsel provided by the Buyer with respect to the transfer of Securities pursuant to an exemption from registration,
such as Rule 144 or Regulation S, at the Deadline, it will be considered an Event of Default pursuant to Section 3.2 of the Note.
1.6 Effect of Certain Events.
(a)
Effect of Merger, Consolidation, Etc.
At the option of the Holder, the sale, conveyance or disposition of all or substantially all of the assets of the Company, the
effectuation by the Company of a transaction or series of related transactions in which more than 50% of the voting power of the
Company is disposed of, or the consolidation, merger or other business combination of the Company with or into any other Person
(as defined below) or Persons when the Company is not the survivor shall either: (i) be deemed to be an Event of Default (as defined
in Article III) pursuant to which the Company shall be required to pay to the Holder upon the consummation of and as a condition
to such transaction an amount equal to the Default Amount (as defined in Article III) or (ii) be treated pursuant to Section 1.6(b)
hereof. “
Person
” shall mean any individual, corporation, limited liability company, partnership, association,
trust or other entity or organization.
(b)
Adjustment Due to Merger, Consolidation,
Etc.
If, at any time when this Note is issued and outstanding and prior to conversion of all of the Notes,
there shall be any merger, consolidation, exchange of shares, recapitalization, reorganization, or other similar event,
as a result of which shares of Common Stock of the Company shall be changed into the same or a different number of shares of another
class or classes of stock or securities of the Company or another entity, or in case of any sale or conveyance of all or substantially
all of the assets of the Company other than in connection with a plan of complete liquidation of the Company, then the Holder of
this Note shall thereafter have the right to receive upon conversion of this Note, upon the basis and upon the terms and conditions
specified herein and in lieu of the shares of Common Stock immediately theretofore issuable upon conversion, such stock, securities
or assets which the Holder would have been entitled to receive in such transaction had this Note been converted in full immediately
prior to such transaction (without regard to any limitations on conversion set forth herein), and in any such case appropriate
provisions shall be made with respect to the rights and interests of the Holder of this Note to the end that the provisions hereof
(including, without limitation, provisions for adjustment of the Conversion Price and of the number of shares issuable upon conversion
of the Note) shall thereafter be applicable, as nearly as may be practicable in relation to any securities or assets thereafter
deliverable upon the conversion hereof. The Company shall not affect any transaction described in this Section 1.6(b) unless (a)
it first gives, to the extent practicable, thirty (30) days prior written notice (but in any event at least fifteen (15) days prior
written notice) of the record date of the special meeting of shareholders to approve, or if there is no such record date, the consummation
of, such merger, consolidation, exchange of shares, recapitalization, reorganization or other similar event or sale of assets (during
which time the Holder shall be entitled to convert this Note), and (b) the Holder hereof has an opportunity to participate in the
transaction as if such Holder was a holder of common stock immediately prior to the closing of such transaction and receive the
consideration paid to the other holders of Common Stock of the Company, or have this Note assumed by the acquirer giving effect
to the identical conversion price, at the election of the Holder hereof. The above provisions shall similarly apply to successive
consolidations, mergers, sales, transfers or share exchanges.
(c)
Adjustment Due
to Distribution
. If the Company shall declare or make any distribution of its assets (or rights to acquire its assets) to holders
of Common Stock as a dividend, stock repurchase, by way of return of capital or otherwise (including any dividend or distribution
to the Company’s shareholders in cash or shares (or rights to acquire shares) of capital stock of a subsidiary (i.e., a spin-off))
(a “
Distribution
”), then the Holder of this Note shall be entitled, upon any conversion of this Note after the
date of record for determining shareholders entitled to such Distribution, to receive the amount of such assets which would have
been payable to the Holder with respect to the shares of Common Stock issuable upon such conversion had such Holder been the holder
of such shares of Common Stock on the record date for the determination of shareholders entitled to such Distribution.
(d) Adjustment Due
to Dilutive Issuance
. If, at any time when any Notes are issued and outstanding, the Company issues or sells, or in accordance
with this Section 1.6(d) hereof is deemed to have issued or sold, any shares of Common Stock for no consideration or for a consideration
per share (before deduction of reasonable expenses or commissions or underwriting discounts or allowances in connection therewith)
less than the Conversion Price in effect on the date of such issuance (or deemed issuance) of such shares of Common Stock (a “
Dilutive
Issuance
”), then immediately upon the Dilutive Issuance, the Conversion Price will be reduced to the amount of the consideration
per share received by the Company in such Dilutive Issuance.
The Company shall be
deemed to have issued or sold shares of Common Stock if the Company in any manner issues or grants any warrants, rights or options
(not including employee stock option plans), whether or not immediately exercisable, to subscribe for or to purchase Common Stock
or other securities convertible into or exchangeable for Common Stock (“
Convertible Securities
”) (such warrants,
rights and options to purchase Common Stock or Convertible Securities are hereinafter referred to as “
Options
”)
and the price per share for which Common Stock is issuable upon the exercise of such Options is less than the Conversion Price
then in effect, then the Conversion Price shall be equal to such price per share. For purposes of the preceding sentence, the “price
per share for which Common Stock is issuable upon the exercise of such Options” is determined by dividing (i) the total amount,
if any, received or receivable by the Company as consideration for the issuance or granting of all such Options, plus the minimum
aggregate amount of additional consideration, if any, payable to the Company upon the exercise of all such Options, plus, in the
case of Convertible Securities issuable upon the exercise of such Options, the minimum aggregate amount of additional consideration
payable upon the conversion or exchange thereof at the time such Convertible Securities first become convertible or exchangeable,
by (ii) the maximum total number of shares of Common Stock issuable upon the exercise of all such Options (assuming full conversion
of Convertible Securities, if applicable). No further adjustment to the Conversion Price will be made upon the actual issuance
of such Common Stock upon the exercise of such Options or upon the conversion or exchange of Convertible Securities issuable upon
exercise of such Options.
Additionally, the Company
shall be deemed to have issued or sold shares of Common Stock if the Company in any manner issues or sells any Convertible Securities,
whether or not immediately convertible (other than where the same are issuable upon the exercise of Options), and the price per
share for which Common Stock is issuable upon such conversion or exchange is less than the Conversion Price then in effect, then
the Conversion Price shall be equal to such price per share. For the purposes of the preceding sentence, the “price per share
for which Common Stock is issuable upon such conversion or exchange” is determined by dividing (i) the total amount, if any,
received or receivable by the Company as consideration for the issuance or sale of all such Convertible Securities, plus the minimum
aggregate amount of additional consideration, if any, payable to the Company upon the conversion or exchange thereof at the time
such Convertible Securities first become convertible or exchangeable, by (ii) the maximum total number of shares of Common Stock
issuable upon the conversion or exchange of all such Convertible Securities. No further adjustment to the Conversion Price will
be made upon the actual issuance of such Common Stock upon conversion or exchange of such Convertible Securities.
(e)
Purchase Rights
. If, at any time
when any Notes are issued and outstanding, the Company issues any convertible securities or rights to purchase stock, warrants,
securities or other property (the “
Purchase Rights
”) pro rata to the record holders of any class of Common Stock,
then the Holder of this Note will be entitled to acquire, upon the terms applicable to such Purchase Rights, the aggregate Purchase
Rights which such Holder could have acquired if such Holder had held the number of shares of Common Stock acquirable upon complete
conversion of this Note (without regard to any limitations on conversion contained herein) immediately before the date on which
a record is taken for the grant, issuance or sale of such Purchase Rights or, if no such record is taken, the date as of which
the record holders of Common Stock are to be determined for the grant, issue or sale of such Purchase Rights.
(f)
Notice of Adjustments
. Upon the
occurrence of each adjustment or readjustment of the Conversion Price as a result of the events described in this Section 1.6,
the Company, at its expense, shall promptly compute such adjustment or readjustment and prepare and furnish to the Holder a certificate
setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based.
The Company shall, upon the written request at any time of the Holder, furnish to such Holder a like certificate setting forth
(i) such adjustment or readjustment, (ii) the Conversion Price at the time in effect and (iii) the number of shares of Common Stock
and the amount, if any, of other securities or property which at the time would be received upon conversion of the Note.
1.7 Status as Shareholder.
Upon submission
of a Notice of Conversion by a Holder, (i) the shares covered thereby (other than the shares, if any, which cannot be issued because
their issuance would exceed such Holder’s allocated portion of the Reserved Amount or Maximum Share Amount)
all be deemed converted into shares of Common Stock and (ii) the Holder’s rights as a Holder of such converted
portion of this Note shall cease and terminate, excepting only the right to receive certificates for such shares of Common Stock
and to any remedies provided herein or otherwise available at law or in equity to such Holder because of a failure by the Company
to comply with the terms of this Note. In all cases, the Holder shall retain all of its rights and remedies (including, without
limitation, (i) the right to receive Conversion Default Payments pursuant to Section 1.3 to the extent required thereby for such
Conversion Default and any subsequent Conversion Default and (ii) the right to have the Conversion Price with respect to subsequent
conversions determined in accordance with Section 1.3) for the Company’s failure to convert this Note.
1.8 Prepayment.
The
Company shall have no right of prepayment or redemption of this Note.
1.9 Qualifying Financing
. Upon the
closing of a financing transaction in which the Company raises cash proceeds net of the costs of the transaction of not less than
$1,000,000 in one transaction or in a series of related transactions in which the Company issues equity securities or securities
convertible into or exchangeable for, equity securities, or options or rights to purchase equity securities to one or more investors,
this Note shall immediately become due and payable.
ARTICLE II. CERTAIN COVENANTS
2.1 Distributions on Capital Stock
.
So long as the Company shall have any obligation under this Note, the Company shall not without the Holder’s written consent
(a) pay, declare or set apart for such payment, any dividend or other distribution (whether in cash, property or other securities)
on shares of capital stock other than dividends on shares of Common Stock solely in the form of additional shares of Common Stock
or (b) directly or indirectly or through any subsidiary make any other payment or distribution in respect of its capital stock
except for distributions pursuant to any shareholders’ rights plan which is approved by a majority of the Company’s
disinterested directors.
2.2 Restriction on Stock Repurchases
.
So long as the Company shall have any obligation under this Note, the Company shall not without the Holder’s written consent
redeem, repurchase or otherwise acquire (whether for cash or in exchange for property or other securities or otherwise) in any
one transaction or series of related transactions any shares of capital stock of the Company or any warrants, rights or options
to purchase or acquire any such shares.
2.3 Sale of Assets
. So long as the
Company shall have any obligation under this Note, the Company shall not, without the Holder’s written consent, sell, lease
or otherwise dispose of any significant portion of its assets outside the ordinary course of business. Any consent to the disposition
of any assets may be conditioned on a specified use of the proceeds of disposition.
2.4 Advances and Loans
. So long as
the Company shall have any obligation under this Note, the Company shall not, without the Holder’s written consent, lend
money, give credit or make advances to any person, firm, joint venture or corporation, including, without limitation, officers,
directors, employees, subsidiaries and affiliates of the Company, except loans, credits or advances (a) in existence or committed
on the date, (b) made in the ordinary course of business or (c) not in excess of $500,000
.
2.5
Stockholder Approval.
The Company will promptly take all corporate action necessary to authorize and reserve a sufficient number of shares, including,
without limitation, calling a special meeting of stockholders to authorize additional shares to meet the Company’s obligations
under this Section 2.5, in the case of an insufficient number of authorized shares, and using its best efforts to obtain stockholder
approval of an increase in such authorized number of shares.
2.6
Reporting Requirements.
The Company will within 60 days from the date of this Note to take all necessary actions to bring the Company current with
its reporting requirements of the Exchange Act.
ARTICLE III. EVENTS OF DEFAULT
If any of the following
events of default (each, an “
Event of Default
”) shall occur:
3.1 Failure to Pay Principal or Interest
.
The Company fails to pay the principal hereof or interest thereon when due on this Note, whether at maturity, upon acceleration
or otherwise.
3.2 Conversion and the Shares
. The
Company fails to issue shares of Common Stock to the Holder (or announces or threatens in writing that it will not honor its obligation
to do so) upon exercise by the Holder of the conversion rights of the Holder in accordance with the terms of this Note, fails to
transfer or cause its transfer agent to transfer (issue) (electronically or in certificated form) any certificate for shares of
Common Stock issued to the Holder upon conversion of or otherwise pursuant to this Note as and when required by this Note, the
Company directs its transfer agent not to transfer or delays, impairs, and/or hinders its transfer agent in transferring (or issuing)
(electronically or in certificated form) any certificate for shares of Common Stock to be issued to the Holder upon conversion
of or otherwise pursuant to this Note as and when required by this Note, or fails to remove (or directs its transfer agent not
to remove or impairs, delays, and/or hinders its transfer agent from removing) any restrictive legend (or to withdraw any stop
transfer instructions in respect thereof) on any certificate for any shares of Common Stock issued to the Holder upon conversion
of or otherwise pursuant to this Note as and when required by this Note (or makes any written announcement, statement or threat
that it does not intend to honor the obligations described in this paragraph) and any such failure shall continue uncured (or any
written announcement, statement or threat not to honor its obligations shall not be rescinded in writing) for five (5) business
days after the Holder shall have delivered a Notice of Conversion. It is an obligation of the Company to remain current in its
obligations to its transfer agent. It shall be an event of default of this Note, if a conversion of this Note is delayed, hindered
or frustrated due to a balance owed by the Company to its transfer agent. If at the option of the Holder, the Holder advances any
funds to the Company’s transfer agent in order to process a conversion; such advanced funds shall be paid by the Company
to the Holder within forty eight (48) hours of a demand from the Holder.
3.3 Breach of Covenants
. The Company
breaches any covenant or other term or condition contained in this Note and any collateral documents including but not limited
to the Purchase Agreement and such breach continues for a period of ten (10) days after written notice thereof to the Company from
the Holder.
3.4 Breach of Representations and Warranties
.
Any representation or warranty of the Company made herein or in any agreement, statement or certificate given in writing pursuant
hereto or in connection herewith (including, without limitation, the Purchase Agreement), shall be false or misleading in any material
respect when made and the breach of which has (or with the passage of time will have) a material adverse effect on the rights of
the Holder with respect to this Note or the Purchase Agreement.
3.5 Receiver or Trustee
. The Company
or any subsidiary of the Company shall make an assignment for the benefit of creditors, or apply for or consent to the appointment
of a receiver or trustee for it or for a substantial part of its property or business, or such a receiver or trustee shall otherwise
be appointed.
3.6 Judgments
. Any money judgment,
writ or similar process shall be entered or filed against the Company or any subsidiary of the Company or any of its property or
other assets for more than $100,000, and shall remain unvacated, unbonded or unstayed for a period of twenty (20) days unless otherwise
consented to by the Holder, which consent will not be unreasonably withheld.
3.7 Bankruptcy
. Bankruptcy, insolvency,
reorganization or liquidation proceedings or other proceedings, voluntary or involuntary, for relief under any bankruptcy law or
any law for the relief of debtors shall be instituted by or against the Company or any subsidiary of the Company.
3.8 Failure to Comply with the Exchange
Act
. The Company shall fail to comply with the reporting requirements of the Exchange Act; and/or the Company shall cease to
be subject to the reporting requirements of the Exchange Act.
3.9 Liquidation
. Any dissolution, liquidation,
or winding up of Company or any substantial portion of its business.
3.10 Cessation of Operations
.
Any
cessation of operations by Company or Company admits it is otherwise generally unable to pay its debts as such debts become
due, provided, however, that any disclosure of the Company’s ability to continue as a “going concern” shall
not be an admission that the Company cannot pay its debts as they become due.
3.11 Maintenance of Assets
.
The
failure by Company to maintain any material intellectual property rights, personal, real property or other assets which are
necessary to conduct its business (whether now or in the future).
3.12 Financial Statement Restatement
.
The restatement of any financial statements filed by the Company with the SEC for any date or period from two years prior to the
Issue Date of this Note and until this Note is no longer outstanding, if the result of such restatement would, by comparison to
the unrestated financial statement, have constituted a material adverse effect on the rights of the Holder with respect to this
Note or the Purchase Agreement.
3.13 Reverse Splits
.
The
Company effectuates a reverse split of its Common Stock without twenty (20) days prior written notice to the Holder.
3.14
Reserved.
3.15
Cross-Default
.
Notwithstanding anything to the contrary contained in this Note or the other related or companion documents, a breach or default
by the Company of any covenant or other term or condition contained in any of the Other Agreements, after the passage of all applicable
notice and cure or grace periods, shall, at the option of the Holder, be considered a default under this Note and the Other Agreements,
in which event the Holder shall be entitled (but in no event required) to apply all rights and remedies of the Holder under the
terms of this Note and the Other Agreements by reason of a default under said Other Agreement or hereunder
.
“
Other Agreements
” means, collectively, all agreements and instruments between, among or by: (1) the
Company, and, or for the benefit of, (2) the Holder and any affiliate of the Holder, including, without limitation, promissory
notes; provided, however, the term “Other Agreements” shall not include the related or companion documents to this
Note. Each of the loan transactions will be cross-defaulted with each other loan transaction and with all other existing and future
debt of Company to the Holder.Upon the occurrence and during the continuation of any Event of Default specified in Section 3.1
(solely with respect to failure to pay the principal hereof or interest thereon when due at the Maturity Date), the Note shall
become immediately due and payable and the Company shall pay to the Holder, in full satisfaction of its obligations hereunder,
an amount equal to the Default Sum (as defined herein). UPON THE OCCURRENCE AND DURING THE CONTINUATION OF ANY EVENT OF DEFAULT
SPECIFIED IN SECTION 3.2, THE NOTE SHALL BECOME IMMEDIATELY DUE AND PAYABLE AND THE COMPANY SHALL PAY TO THE HOLDER, IN FULL SATISFACTION
OF ITS OBLIGATIONS HEREUNDER, AN AMOUNT EQUAL TO: (Y) THE DEFAULT SUM (AS DEFINED HEREIN); MULTIPLIED BY (Z) TWO (2). Upon the
occurrence and during the continuation of any Event of Default specified in Sections 3.1, 3.3, 3.4, 3.6, 3.8, 3.9, 3.11, 3.12,
3.13, , and/or 3.15 exercisable through the delivery of written notice to the Company by such Holders (the “
Default Notice
”),
and upon the occurrence of an Event of Default specified the remaining sections of Articles III (other than failure to pay the
principal hereof or interest thereon at the Maturity Date specified in Section 3.1 hereof), the Note shall become immediately due
and payable and the Company shall pay to the Holder, in full satisfaction of its obligations hereunder, an amount equal to the
greater of (i) 150%
times
the
sum
of (w) the then outstanding principal amount of this Note
plus
(x) accrued
and unpaid interest on the unpaid principal amount of this Note to the date of payment (the “
Mandatory Prepayment Date
”)
plus
(y) Default Interest, if any, on the amounts referred to in clauses (w) and/or (x)
plus
(z) any amounts owed
to the Holder pursuant to Section 1.4(g) hereof (the then outstanding principal amount of this Note to the date of payment
plus
the amounts referred to in clauses (x), (y) and (z) shall collectively be known as the “
Default Sum
”) and all
other amounts payable hereunder shall immediately become due and payable, all without demand, presentment or notice, all of which
hereby are expressly waived, together with all costs, including, without limitation, legal fees and expenses, of collection, and
the Holder shall be entitled to exercise all other rights and remedies available at law or in equity.
If the Company fails to pay the Default Amount
within twenty (20) business days of written notice that such amount is due and payable, then the Holder shall have the right at
any time, so long as the Company remains in default (and so long and to the extent that there are sufficient authorized shares),
to require the Company, upon written notice, to immediately issue, in lieu of the Default Amount, the number of shares of Common
Stock of the Company equal to the Default Amount divided by the Conversion Price then in effect.
ARTICLE IV. MISCELLANEOUS
4.1 Failure or Indulgence Not Waiver
.
No failure or delay on the part of the Holder in the exercise of any power, right or privilege hereunder shall operate as a waiver
thereof, nor shall any single or partial exercise of any such power, right or privilege preclude other or further exercise thereof
or of any other right, power or privileges. All rights and remedies existing hereunder are cumulative to, and not exclusive of,
any rights or remedies otherwise available.
4.2 Notices
. All
notices, demands, requests, consents, approvals, and other communications required or permitted hereunder shall be in writing and,
unless otherwise specified herein, shall be (i) personally served, (ii) deposited in the mail, registered or certified, return
receipt requested, postage prepaid, (iii) delivered by reputable air courier service with charges prepaid, or (iv) transmitted
by hand delivery, telegram, or facsimile, addressed as set forth below or to such other address as such party shall have specified
most recently by written notice. Any notice or other communication required or permitted to be given hereunder shall be deemed
effective (a) upon hand delivery or delivery by facsimile, with accurate confirmation generated by the transmitting facsimile machine,
at the address or number designated below (if delivered on a business day during normal business hours where such notice is to
be received), or the first business day following such delivery (if delivered other than on a business day during normal business
hours where such notice is to be received) or (b) on the second business day following the date of mailing by express courier service,
fully prepaid, addressed to such address, or upon actual receipt of such mailing, whichever shall first occur. The addresses for
such communications shall be:
If to the
Company, to:
Terrence
DeFranco
President
211 Warren
Street
Suite 320
Newark,
NJ 07103
If to the Holder:
William Carson and
Susan Carson
[insert address]
4.3 Amendments
. This Note and any provision
hereof may only be amended by an instrument in writing signed by the Company and the Holder. The term “
Note
”
and all reference thereto, as used throughout this instrument, shall mean this instrument (and the other Notes issued pursuant
to the Purchase Agreement) as originally executed, or if later amended or supplemented, then as so amended or supplemented.
4.4 Assignability
. This Note shall
be binding upon the Company and its successors and assigns, and shall inure to be the benefit of the Holder and its successors
and assigns. Each transferee of this Note must be an “accredited investor” (as defined in Rule 501(a) of the 1933 Act).
Notwithstanding anything in this Note to the contrary, this Note may be pledged as collateral in connection with a
bona
fide
margin account or other lending arrangement.
4.5 Cost of Collection
. If default
is made in the payment of this Note, the Company shall pay the Holder hereof costs of collection, including reasonable attorneys’
fees.
4.6 Governing Law
. This Note shall
be governed by and construed in accordance with the laws of the State of New Jersey except with respect to the Default Interest
Rate, which will be governed by the law of the State of New York without regard to principles of conflicts of laws. Any action
brought by either party against the other concerning the transactions contemplated by this Note shall be brought only in the state
courts of New Jersey or in the federal courts located in the state and county of Santa Clara. The parties to this Note hereby irrevocably
waive any objection to jurisdiction and venue of any action instituted hereunder and shall not assert any defense based on lack
of jurisdiction or venue or based upon
forum non conveniens
. The Company and Holder waive trial by jury. The prevailing
party shall be entitled to recover from the other party its reasonable attorney's fees and costs. In the event that any provision
of this Note or any other agreement delivered in connection herewith is invalid or unenforceable under any applicable statute or
rule of law, then such provision shall be deemed inoperative to the extent that it may conflict therewith and shall be deemed modified
to conform with such statute or rule of law. Any such provision which may prove invalid or unenforceable under any law shall not
affect the validity or enforceability of any other provision of any agreement. Each party hereby irrevocably waives personal service
of process and consents to process being served in any suit, action or proceeding in connection with this Agreement or any other
Transaction Document by mailing a copy thereof via registered or certified mail or overnight delivery (with evidence of delivery)
to such party at the address in effect for notices to it under this Agreement and agrees that such service shall constitute good
and sufficient service of process and notice thereof. Nothing contained herein shall be deemed to limit in any way any right to
serve process in any other manner permitted by law.
4.7 Certain Amounts
. Whenever pursuant
to this Note the Company is required to pay an amount in excess of the outstanding principal amount (or the portion thereof required
to be paid at that time) plus accrued and unpaid interest plus Default Interest on such interest, the Company and the Holder agree
that the actual damages to the Holder from the receipt of cash payment on this Note may be difficult to determine and the amount
to be so paid by the Company represents stipulated damages and not a penalty and is intended to compensate the Holder in part for
loss of the opportunity to convert this Note and to earn a return from the sale of shares of Common Stock acquired upon conversion
of this Note at a price in excess of the price paid for such shares pursuant to this Note. The Company and the Holder hereby agree
that such amount of stipulated damages is not plainly disproportionate to the possible loss to the Holder from the receipt of a
cash payment without the opportunity to convert this Note into shares of Common Stock.
4.8 Purchase Agreement
. By its acceptance
of this Note, each party agrees to be bound by the applicable terms of the Purchase Agreement.
4.9 Notice of Corporate Events
. Except
as otherwise provided below, the Holder of this Note shall have no rights as a Holder of Common Stock unless and only to the extent
that it converts this Note into Common Stock. The Company shall provide the Holder with prior notification of any meeting of the
Company’s shareholders (and copies of proxy materials and other information sent to shareholders). In the event of any taking
by the Company of a record of its shareholders for the purpose of determining shareholders who are entitled to receive payment
of any dividend or other distribution, any right to subscribe for, purchase or otherwise acquire (including by way of merger, consolidation,
reclassification or recapitalization) any share of any class or any other securities or property, or to receive any other right,
or for the purpose of determining shareholders who are entitled to vote in connection with any proposed sale, lease or conveyance
of all or substantially all of the assets of the Company or any proposed liquidation, dissolution or winding up of the Company,
the Company shall mail a notice to the Holder, at least twenty (20) days prior to the record date specified therein (or thirty
(30) days prior to the consummation of the transaction or event, whichever is earlier), of the date on which any such record is
to be taken for the purpose of such dividend, distribution, right or other event, and a brief statement regarding the amount and
character of such dividend, distribution, right or other event to the extent known at such time. The Company shall make a public
announcement of any event requiring notification to the Holder hereunder substantially simultaneously with the notification to
the Holder in accordance with the terms of this Section 4.9.
4.10 Remedies
. The Company acknowledges
that a breach by it of its obligations hereunder will cause irreparable harm to the Holder, by vitiating the intent and purpose
of the transaction contemplated hereby. Accordingly, the Company acknowledges that the remedy at law for a breach of its obligations
under this Note will be inadequate and agrees, in the event of a breach or threatened breach by the Company of the provisions of
this Note, that the Holder shall be entitled, in addition to all other available remedies at law or in equity, and in addition
to the penalties assessable herein, to an injunction or injunctions restraining, preventing or curing any breach of this Note and
to enforce specifically the terms and provisions thereof, without the necessity of showing economic loss and without any bond or
other security being required.
IN WITNESS WHEREOF,
Company has caused this Note to be signed in its name by its duly authorized officer as of the issuance date.
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ARKADOS GROUP, INC.
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By:
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/s/ Terrence DeFranco
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Terrence DeFranco
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President and Chief Executive Officer
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EXHIBIT
A
NOTICE
OF CONVERSION
The undersigned hereby
elects to convert
US$_______________
principal amount
plus interest in the amount of US$______________ per day accruing
through the Date of Conversion
of the Note (defined below) into that
number of shares
of Common Stock to be issued pursuant to the conversion of the Note
(“Common Stock”) as set forth below, of
ARKADOS GROUP, INC., a Delaware corporation (the “Company”) according to the conditions of the convertible note of
the Company dated as of January 8, 2016 (the “Note”), as of the date written below. No fee will be charged to the Holder
for any conversion, except for transfer taxes, if any.
Box Checked as to applicable
instructions:
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¨
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The
Company shall electronically transmit the Common Stock issuable pursuant to this Notice of Conversion to the account of the undersigned
or its nominee with DTC through its Deposit Withdrawal Agent Commission system (“DWAC Transfer”).
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Name of DTC
Prime Broker:
Account Number:
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¨
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The
undersigned hereby requests that the Company issue a certificate or certificates for the number of shares of Common Stock set
forth below (which numbers are based on the Holder’s calculation attached hereto) in the name(s) specified immediately below
or, if additional space is necessary, on an attachment hereto:
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Date of Conversion:
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___________________
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Total obligation converted:
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US$ ________________
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Applicable Conversion Price:
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US$1.20 per US$1.00 of Principal and interest converted
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Number of Shares of Common Stock to be Issued
Pursuant to Conversion of the Notes:
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____________________
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Amount of Principal Balance Due remaining
Under the Note after this conversion:
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_____________________
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U.S. Social Security Number/Taxpayer
Identification Number/Employer Identification Number
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________________ (William)
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________________ (Susan)
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PLEASE NOTE: If non-US individual or
company, you will be required to complete a W-8-BEN (individual) or W-8-BEN-E (entity) prior to acceptance of the conversion.
Acknowledgement:
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Title:
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Date:
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By:
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(signature)
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Exhibit 10.18
CONSULTING
AGREEMENT
This
Consulting Agreement (the “Agreement”), effective as of February 23, 2016 is entered into by and between, Arkados Group,
Inc., a Delaware corporation, with its principal address at 211 Warren Street, #320, Newark, NJ 07103 (herein referred to as
the “Company”) and LP Funding, LLC DBA LPF Communications, a Nevada limited liability company with principal address
at 3820 Gulf Blvd, #1205, St. Pete beach, FL 33706 (herein referred to as the “Consultant”). As used in this Agreement,
the term “Parties” shall refer to the Company and Consultant jointly.
WHEREAS:
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A.
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The
Company seeks to engage the services of Consultant to assist the Company in its efforts to gain greater recognition and awareness
among investors in the public capital markets.
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B.
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Consultant
will seek to assist the Company in its efforts to better develop investor recognition and awareness in the public capital markets.
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C.
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The
Company is familiar with Consultant and Consultant’s skills and expertise.
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D.
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The
Parties acknowledge and agree that Consultant has completed a preliminary review of the Company and the challenges facing the
Company and the Company and Consultant have had discussions regarding these and other matters relating to the Company’s
objectives.
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NOW
THEREFORE THE PARTIES AGREE AS FOLLOWS:
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1)
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Commencement
and Term of Consulting Services from Consultant.
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The
Company hereby agrees to retain the Consultant to act in a consulting capacity to the Company, and Consultant hereby agrees
to provide certain consulting services to the Company as described in Section 2 of this Agreement for a period of six (6)
months from the date at which a copy of this Agreement is executed and delivered to Consultant with the Fees (defined in
Section 4 of this Agreement) (the “Term”), unless terminated earlier in accordance with the terms of this
Agreement.
Consultant
agrees that it shall provide the following specified consulting services:
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•
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Assist
the Company in packaging its investment story, by analyzing strengths and weaknesses, as well as providing general strategy for
its corporate communications.
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•
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Review
the Company’s marketing materials and provide comments in order to make them effective for distribution to existing and
potential investors.
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•
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Present
the Company’s investment story to Consultant’s network of market participants.
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•
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Through
the term of the Contract, communicate with the Consultant’s network relevant information about the ongoing development of
the Company’s activities.
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•
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At
the Company's request, review business plans, corporate strategies and proposed financing transactions for the purpose of advising
the Company of the public relations implications thereof; and
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•
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Assist
the Company in the development and execution of a strategy to achieve a Nasdaq
listing.
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3)
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Allocation
of Time and Energies.
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The
Consultant hereby agrees to use its best efforts to diligently perform and discharge faithfully the responsibilities which may
be assigned to the Consultant from time to time by the officers and duly authorized representatives of the Company in connection
with the conduct of the Company’s financial, public relations and communications activities, subject to compliance with applicable
state and federal securities laws and regulations, all in accordance with the prevailing standards of the investor relations industry.
The
services to be provided by Consultant shall not be measured by the number of hours devoted by Consultant’s staff on a
per day basis and Consultant and the Company agree that Consultant shall perform the duties set forth in Section 2 of this
Agreement in a diligent and professional manner. The Parties acknowledge and agree that a disproportionately large amount of
the effort to be expended and the costs to be incurred by the Consultant and the benefits to be received by the Company are
expected to occur within or shortly after the first three (3) months from the commencement of the Term of this Agreement. It
is expressly understood that Consultant's performance of its duties hereunder will in no way be measured by the price of the
Company's common stock, nor the trading volume of the Company's common stock.
The
Parties acknowledge and agree that the services to be performed under this Agreement are to be performed by Consultant and not
by any individual staff member of Consultant. At all times hereunder, the death, disability, or incapacity of any member of Consultant’s
staff shall not be deemed a breach of this Agreement.
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4)
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Compensation
to Consultant for Consulting Services.
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In
consideration for the consulting services rendered to the Company as described in Section 2 of this Agreement, the Company hereby
agrees to pay Consultant the following consulting fee (the “Fee”):
Common
Stock Fee
. A service fee equal to three hundred
thousand (300,000) shares of the Company’s common stock, par value $0.0001 per share (the “Shares”), which Shares
shall be restricted as to transferability under applicable securities law.
The
stock certificate(s) should be in the name “
LP Funding. LLC
.”
and the Shares shall be issued in two tranches of one hundred fifty thousand shares (150,000) each. The first tranche of one hundred
fifty thousand shares (150,000) shall be issued no later than March 8, 2016; and the second tranche of one hundred fifty thousand
shares (150,000) shall be issued no later than June 8, 2016;
provided
,
that if the Company terminates this Agreement on or prior to June 8, 2016, the Company shall have no obligation to issue the second
tranche of Shares or pay any other fee or compensation to Consultant. Each certificate shall bear a restrictive securities legend
in compliance with the exemptive provisions of the Securities Act of 1933, as amended. These Fees shall be for all purposes nonrefundable
in every respect when paid. The Shares are fully earned at the time of issuance.
In
order to induce the Company to pay the Fee by issuing the Shares, Consultant has executed and delivered to the Company the
Accredited Investor Representation in the form of Schedule I to this Agreement. Notwithstanding any other provision of this
Agreement, the obligation of the Company to issue the Shares shall be subject to the Company’s execution and delivery
of the Accredited Investor Representation.
The
Company agrees to deliver a true and accurate photocopy
of
the Board of Directors’ resolution(s) duly adopted by the Company’s Board of Directors authorizing and approving this
Agreement and authorizing the issuance of the shares in accordance with the terms and conditions of this Agreement.
Notwithstanding
any other provision of this Agreement, the Company may terminate this Agreement and its obligations hereunder at any time upon
written notice to Consultant delivered to the address set forth in the first paragraph of this Agreement without further liability
except as expressly set forth in this Agreement.
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6)
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Representations
of Each of the Parties.
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The
Company represents that: (1) it has the requisite authority and power to enter into this Agreement; (2) this Agreement and the
obligations recited hereunder have been approved by the respective board of directors or managers of the Parties.
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7)
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Additional
Representations of the Company.
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In
addition, the Company represents that Company, and not Consultant, is responsible to perform any and all due diligence on such
lender, equity purchaser or acquisition candidate introduced to it by Consultant under this Agreement, prior to Company receiving
funds or closing on any acquisition. However, Consultant shall undertake its best efforts to avoid the introduction of any third
party which is known to Consultant to have had a prior reputation or history of questionable, unethical, or illicit activities.
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8)
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Assignment
of Agreement & Assignment of Rights and Obligations.
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Consultant’s
services under this contract are offered to Company only and may not be assigned by the Company to any other person or entity with
which Company merges or which acquires the Company or substantially all of its assets. In the event of said merger or acquisition,
except as otherwise set forth in this Agreement, all compensation to Consultant herein under the schedules set forth herein shall
remain due and payable, and any compensation received by the Consultant may be retained in the entirety by Consultant, all without
any reduction or pro—rating and shall be considered and remain fully paid and non—assessable. Company shall assure
that in the event of any merger, acquisition, or similar change of form of entity that its successor entity shall agree to complete
all obligations to Consultant, including the provision and transfer of all compensation herein, and the preservation of the value
thereof consistent with the rights granted to Consultant by the Company herein, and to Shareholders.
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9)
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Obligation
for Expenses.
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Consultant
agrees to pay for all of its routine business expenses, such as phone, mailing, labor, etc. In the event of the need for expenditures
on extraordinary items, such as travel required by/or specifically requested by the Company, luncheons or dinners to large groups
of investment professionals, print advertisements in publications, etc. the Consultant will discuss those with the Company and
gain its prior written approval to incur those expenses on behalf of the Company, and have it billed directly to the Company.
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10)
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Indemnification
of Consultant and Consultant’s Employees and Agents by the Company.
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The
Company hereby agrees to indemnify and hold Consultant and Consultant’s employees and agents (the “Indemnified
Parties”) harmless against (i) any and all liabilities, obligations, losses, damages, claims, actions, asserted against
any one or more of the Indemnified Parties, based upon, resulting from or arising out of any misstatement or omission of
material fact contained in one or more of the statements, representations, press releases, announcements, reports, or filings
made or prepared by the Company or its agents, except to the extent that the misstatement or the omission was a result of an
act of Consultant, and (ii) any cost or expense (including reasonable attorneys' fees and court costs) incurred by the
Indemnified Parties or any of them in connection with the foregoing (including, without limitation, any cost or expense
incurred by the Indemnified Parties in enforcing their rights pursuant to this Section 9). No demand or claim for
indemnification under this Section 9 may be made after 11:59 p.m., East Coast Standard Time (EST), on the date six (6) years
following the last date at which services were rendered to the Company under this Agreement or any extension
thereof.
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11)
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Obligation
for Compliance with Securities Laws.
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The
Parties agree that the Company shall assume and remain at all times responsible for all information, statements, and documents
released or provided to Consultant and for compliance with Regulation FD or any other provisions of the Securities Exchange Act
of 1934 (the “1934 Act Obligations”).
Each
of the Parties shall hereafter execute all documents and do all acts reasonably necessary to effect the provisions of this Agreement.
The
provisions of this Agreement shall be deemed to obligate, extend to and inure to the benefit of the successors, assigns, transferees,
grantees, and indemnities of each of the Parties to this Agreement.
Each
of the Parties to this Agreement acknowledges and agrees that it has been represented by independent counsel of its own choice
throughout all negotiations which preceded the execution of this Agreement and the transactions referred to in this Agreement,
and each has executed this Agreement with the consent and upon the advice of said independent counsel. Each party represents that
he or it fully understands the provisions of this Agreement, has consulted with counsel concerning its terms and executes this
Agreement of his or its own free choice without reference to any representations, promises or expectations not set forth herein.
This
Agreement, after full execution, acknowledgment and delivery, memorializes and constitutes the entire agreement and understanding
between the parties and supersedes and replaces all prior negotiations and agreements of the parties, whether written or unwritten.
Each of the Parties to this Agreement acknowledges that no other party, nor any agent or attorney of any other party has made any
promises, representations, or warranty whatsoever, express or implied, which is not expressly contained in this Agreement; and
each party further acknowledges that he or it has not executed this Agreement in reliance upon any belief as to any fact not expressly
recited hereinabove.
In
the event of a dispute between the parties concerning the enforcement or interpretation of this Agreement, the prevailing party
in such dispute, whether by legal proceedings or otherwise, shall be reimbursed immediately for the reasonably incurred attorneys’
fees and other costs and expenses by the other Parties to the dispute.
The captions by which the sections and subsections
of this Agreement are identified are for convenience only, and shall have no effect whatsoever upon its interpretation.
If any provision of this Agreement is held to be illegal
or invalid by a court of competent jurisdiction, such provision shall be deemed to be severed and deleted; and neither such provision,
nor its severance and deletion, shall affect the validity of the remaining provisions.
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19)
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Expenses Associated With This Agreement.
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Each of the Parties agrees to bear its own costs, attorney’s
fees and related expenses associated with this Agreement.
Any dispute or claim arising to or in any way related
to this Agreement shall be settled by arbitration in the State of New York. All arbitration shall be conducted in accordance with
the rules and regulations of the American Arbitration Association ("AAA"). AAA shall designate an arbitrator from an
approved list of arbitrators following both parties' review and deletion of those arbitrators on the approved list having a conflict
of interest with either party. Each of the Parties shall pay its own expenses associated with such arbitration. A demand for arbitration
shall be made within a reasonable time after the claim, dispute or other matter has arisen and in no event shall such demand be
made after the date when institution of legal or equitable proceedings based on such claim, dispute or other matter in question
would be barred by the applicable statutes of limitations. The decision of the arbitrators shall be rendered within 60 days of
submission of any claim or dispute, shall be in writing and mailed to all the Parties included in the arbitration. The decision
of the arbitrator shall be binding upon the Parties and judgment in accordance with that decision may be entered in any court having
jurisdiction thereof.
A responsible officer of the Company has read and understands
the contents of this Agreement and is empowered and duly authorized on behalf of the Company to execute it.
The Parties agree that the terms
of this Agreement shall be kept strictly confidential (a) except to the extent necessary to protect the rights of the Parties or
to satisfy he Company’s obligations under the Securities Exchange Act of 1934 and the rules adopted by the Securities and
Exchange Commission thereunder and (b) unless the term of this Agreement have been disclosed by the other Party or have otherwise
become part of the public domain.
IN WITNESS WHEREOF,
the parties
have executed this Agreement as of the date set forth above.
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Arkados Group, Inc.
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LPF Communications
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By:
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/s/ T.DeFranco
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By:
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/s/
William
Luckman
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William Luckman, Director
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Title:
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CEO
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211 Warren Street #320
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Newark, NJ 07103
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Accredited Investor Representations
The undersigned Consultant hereby
represents and warrants to Arkados, Inc. (the “Company”) as follows:
1.1. Consultant
understands that the Shares (as defined in the Consulting Agreement, dated February 23, 2016, to which this Schedule is annexed)
have not been, and will not be, registered under the Securities Act, by reason of a specific exemption from the registration provisions
of the Securities Act which depends upon, among other things, the bona fide nature of the investment intent and the accuracy of
the Consultant’s representations as expressed herein. The Consultant understands that the Shares are “restricted securities”
under applicable U.S. federal and state securities laws and that, pursuant to these laws, the Consultant must hold them indefinitely
unless they are registered with the Securities and Exchange Commission and qualified by state authorities, or an exemption from
such registration and qualification requirements is available. The Consultant acknowledges that the Company has no obligation to
register or qualify Shares for further transfer. The Consultant further acknowledges that if an exemption from registration or
qualification is available for further transfer, it may be conditioned on various requirements, including, but not limited to,
the time and manner of sale, the holding period for the the Shares and requirements relating to the Company which are outside of
the Consultant’s control, and which the Company is under no obligation, and may not be able, to satisfy.
1.2.
No
Public Market
. The Consultant understands that no public market now exists for the Shares, and that the Company has made no
assurances that a public market will ever exist for the Shares.
1.3.
Legends
.
The Consultant understands that the Shares may bear the following legend:
“THE SECURITIES REPRESENTED
BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AND HAVE BEEN ACQUIRED FOR INVESTMENT AND NOT WITH
A VIEW TO, OR IN CONNECTION WITH, THE SALE OR DISTRIBUTION THEREOF. NO SUCH TRANSFER MAY BE EFFECTED WITHOUT AN EFFECTIVE REGISTRATION
STATEMENT RELATED THERETO OR AN OPINION OF COUNSEL IN A FORM SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED
UNDER THE SECURITIES ACT OF 1933.”
1.4.
Accredited
Investor
. The Consultant is an accredited investor as defined in Rule 501(a) of Regulation D promulgated under the
Securities Act. The Consultant is a sophisticated investor with substantial experience in evaluating and investing in private
offerings of securities in companies similar to the Company, so that the Consultant is capable of evaluating the merits and
risks of the investment in the Shares and in the Company, and has the capacity to protect the Consultant’s own
interests. The Consultant has adequate means of providing for the Consultant’s current financial needs and
contingencies, is able to bear the substantial economic risks of an investment in the Shares for an indefinite period of
time, has no need for liquidity in such investment and, at the present time, could afford a complete loss of such investment.
The Consultant has not relied on the Company, or any manager, officer, employee, agent, representative or professional
advisor of the Company, for any legal, tax or financial advice, and the Consultant has, to the extent the Consultant has
deemed it to be advisable, consulted with the Consultant’s own professional legal, financial and/or tax advisors in
connection with the Consultant’s receipt of the Shares.
1.5.
No
General Solicitation
. Neither the Consultant, nor (if an entity) any of its officers, directors, managers, employees,
agents, stockholders, members or partners has either directly or indirectly (a) responded to any general solicitation or (b)
responded to any advertisement in connection with the offer and sale of the Shares.
IN WITNESS WHEREOF,
the undersigned
has executed these Accredited Investor Representations as of the date set forth below.
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LP FUNDING, LLC
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/s/ William Luckman
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(signature)
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Print Name: William Luckman, Director
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Date: February 23, 2016
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Exhibit 10.19
ASSET PURCHASE AGREEMENT
ASSET PURCHASE AGREEMENT
dated as of the 28th day of April, 2016, by and among Arkados Energy Solutions, LLC ("Acquiror"), a Delaware corporation,
Arkados, Inc., a Delaware corporation (“AKDS”), New Dimensions Energy Solutions, LLC, a Delaware limited liability
company (“NDES” or the “Seller”) and Edward D. Miller (“Miller”)
WITNESSETH
Whereas, the Seller owns all the right,
title and interest in, to and under certain customer/client lists (the “NDES Customer Lists”) relating to the business
of non-residential energy-efficient lighting or lighting solutions services (the “NDES Customers”);
Whereas, the members of NDES intend to dissolve
NDES and accordingly are in the process of selling the assets of NDES;
Whereas,
NDES owes Miller certain amounts in respect of funds Miller advanced to NDES as evidenced by that
certain promissory note
having a principal amount of $100,000 and any accrued interest thereupon (the “NDES Indebtedness”)
;
Whereas, the Acquiror is a wholly-owned
subsidiary of AKDS, which is engaged in the business of providing software and other services various involving energy solutions;
Whereas, AKDS has registered its Common
Stock, par value $0.001 per share (the “AKDS Common Shares”) with the U.S. Securities and Exchange Commission;
Whereas, NDES desires to sell all of its
right, title and interest in, to and under the NDES Customer Lists to Acquiror and to apply the proceeds thereof to the repayment
of its obligations to Miller, all on the terms and conditions set forth herein (the “Acquisition”); and
Whereas, Acquiror wishes to buy from NDES
all of NDES’ right, title and interest in, to and under the NDES Customer Lists, all on the terms and conditions set forth
herein.
NOW, THEREFORE,
in consideration
of the premises and of the mutual promises and covenants contained herein, the parties, intending to be legally bound, hereby represent,
warrant and agree as follows:
I. DEFINITIONS
1.1
Defined
Terms
.
As used in this Agreement, the following terms shall have the meanings indicated below:
“Closing”
shall mean the consummation of the Transactions on the date hereof.
“Consents”
shall refer to the consents or approval of any third party including any governmental agency required in connection with the Acquisition
including, but not limited to, any consent required in connection with the transfer of the Assets as hereinafter defined or resulting
from completion of the Acquisition required by or necessary to prevent any termination of a Material Contract referred to in Section
5.5 and listed in the Disclosure Schedules.
“Contract”
shall mean any agreement, contract, license, indenture, lease, mortgage, plan, arrangement, commitment or instrument including
any note or other debt instrument (whether written or oral to the extent any of the foregoing represent binding obligations of
a party).
“Enforceability
Exceptions”
shall mean the extent to which enforceability of an obligation may be limited by applicable bankruptcy, insolvency,
re-organization or other similar laws affecting the enforcement of creditors’ rights generally and by principles of equity
regarding the availability of remedies.
“Knowledge”
shall mean with respect to a party's awareness of the presence or absence of a fact, event or condition (a) actual knowledge
plus, if different, (b) the knowledge that would be obtained if such party conducted itself faithfully and exercised a sound discretion
in the management of his own affairs. The knowledge of any party making a representation for warranties hereunder shall be attributable
to all other parties making such representations for warranties.
“Laws”
shall mean all laws, common laws, rules, regulations, ordinances, codes, judgments, injunctions, orders, decrees, permits,
policies and other requirements of the United States, including all local governments and all agencies and instrumentalities thereof,
including any administrative agencies or administrative body created by any such government.
“Liabilities”
shall mean any indebtedness, liability, claim, loss, damage, deficiency, obligation or responsibility, fixed or unfixed, choate
or inchoate, liquidated or unliquidated, secured or unsecured, accrued, absolute, contingent or otherwise, whether or not of a
kind required by generally accepted accounting principles to be set forth on a financial statement including the notes thereto.
“Lien”
means any mortgage, pledge, lien, encumbrance, charge, adverse claim or restriction of any kind affecting title or resulting
in an encumbrance against property, real or personal, tangible or intangible, or a security interest of any kind (including any
conditional sale or other title retention agreement, any lease in the nature thereof, any third party option or other agreement
to sell and any filing of or agreement to give, any financing statement under the Uniform Commercial Code (or equivalent statute)
of any jurisdiction).
“Material
Adverse Effect”
or “
Material Adverse Change”
with respect to a party means a change which would in
the aggregate have material adverse effect on the assets, liabilities (whether absolute, accrued, contingent or otherwise), condition
(financial or otherwise), results of operations, business or future business or financial condition on a consolidated or combined
basis of such party.
“Person”
shall mean any natural person, corporation, division of a corporation, partnership, trust, joint venture, association, company,
estate, unincorporated organization or governmental entity.
“
Regulation
D
” means Regulation D promulgated under the Securities Act.
“Returns”
shall mean all returns (including, without limitation, information returns and other material information), reports and forms
relating to Taxation required by any Law to be filed with any tax authority.
“
Securities
Act
” shall mean the Securities Act of 1933, as amended.
“Subsidiary”
shall refer to any corporation or other entities in which a Person has a majority interest or which is otherwise controlled
by such Person.
“
Taxation
Authority”
shall mean any taxing or other authority, whether of the United
States or elsewhere, competent to impose
any Tax liability.
“Tax”
shall mean:
1.
All taxes, duties, charges, levies, deductions or withholdings wherever imposed and whether of the United States or elsewhere including
without limitation income tax, (including income tax required to be deducted or withheld from or accounted for in respect of any
payment) capital gains tax, inheritance tax, corporation tax, withholding tax, social security and other similar contributions;
2 . Any interest penalty,
fine and surcharge related to or arising in connection with any of the matters specified in the preceding sub-paragraph.
“Transactions”
shall mean, in respect of any party, all transactions set forth in or contemplated by this Agreement that involve, relate to
or affect such party, including, without limitation, the Acquisition.
II. PURCHASE AND SALE
2.1
Assets
To Be Conveyed
.
Subject to the terms and conditions herein set forth, and on the basis of the mutual representations, warranties
and covenants herein set forth, at the Closing (as hereinafter defined), the Seller hereby sells, and Acquiror hereby buys, the
NDES Customer Lists (collectively the "Assets"), as more fully set forth in Schedule 2.1, free and clear of all Liens,
except as set forth in the Disclosure Schedules, including (but not limited to):
(1) all
of the Seller’s right, title and interest in, to and under all contracts with any NDES Customers (the “Material Contracts”);
and
(2) all
books, papers, files, documents, and records (including without limitation, records stored on electronic media) pertaining to or
embodying the Assets.
2.2
Disclosure
Schedules
.
The Seller has delivered schedules relating to the Assets, the NDES Customers and other matters as required
herein (collectively, the "Disclosure Schedules") setting forth the matters required to be set forth in the Disclosure
Schedules as described elsewhere in this Agreement. The Disclosure Schedules shall be deemed to be part of this Agreement.
III. PURCHASE
PRICE;
PAYMENT
3.1
Purchase
Price; Payment.
(a) In
consideration for the purchase of the Assets, subject to Section 3.1(b), at the Closing AKDS will deliver to NDES or upon the instruction
of NDES: (i) One Hundred Sixty-Six Thousand Six Hundred Sixty-Seven (166,667) AKDS Common Shares (the “Acquisition Shares”),
and (ii) a warrant to purchase One Hundred Sixty-Six Thousand Six Hundred Sixty-Seven (166,667) Common Shares at an exercise price
of $2.00 per share (the “Acquisition Warrant”) substantially in the form of
Exhibit A
to this Agreement; the
Acquisition Shares and the Acquisition Warrant being collectively referred to as the “Acquisition Securities”). The
certificates that represent the Acquisition Shares (the “Share Certificates”), the Acquisition Warrant and the certificate
that will represent the AKDS Common Shares to be issued upon the exercise of the Acquisition Warrant (the “Underlying Acquisition
Shares”) shall each bear legends restricting their transferability to comply with the exemption from registration under Section
4(a)(2) of the Securities Act.
(b) NDES
hereby instructs AKDS to deliver the Acquisition Securities to Miller at his address set forth in Section 9.6. In lieu of delivering
the Share Certificates to Miller at the Closing, the Acquiror may deliver to NDES and Miller a true copy of the irrevocable written
instruction of AKDS to its transfer agent instructing the transfer agent to issue the Acquisition Shares to Miller within three
days of the date of the letter (the “Irrevocable Order”).
(c) Upon
delivery of the Acquisition Securities (or, in the alternative, the Irrevocable Order and the Acquisition Warrant) to Miller, Miller
will accept the Acquisition Securities in full satisfaction of, and in exchange for his cancellation of, the NDES Indebtedness
and shall deliver the original of any evidence of the NDES Indebtedness to NDES marked “cancelled.”
IV. DELIVERIES
4.1
The Seller’s Deliveries to Acquiror
. As a condition to the obligations of the Acquiror under this Agreement,
at the Closing the Seller will deliver to Acquiror:
(1)
originals
of all Materials Contracts;
(2) the
written consents of all of the members of NDES which irrevocably authorizes and directs the dissolution and winding up of NDES
in accordance with the applicable law of the jurisdiction of its formation and the payment of the NDES Indebtedness to Miller by
the delivery of the Acquisition Securities to Miller; and
(3) such other
documents as may be reasonably requested by counsel for the Acquiror or AKDS as may be necessary for the implementation and consummation
of this Agreement and the other transactions contemplated hereby.
4.2
Deliveries
to the Seller by AKDS and the Acquiror
.
At Closing, AKDS and the Acquiror will make the deliveries of the Acquisition Securities
required to be made by it under Section 3.1 as the purchase price for the Assets.
V. REPRESENTATIONS AND WARRANTIES OF
THE SELLER AND MILLER
Except as set forth
in the Disclosure Schedule, in addition to any other representations or warranties, the Seller makes the following representations
and warranties to AKDS and the Acquiror on the date hereof with the knowledge and understanding that AKDS and the Acquiror are
relying materially upon such representations and warranties. References to Schedule numbers shall refer to the subdivisions of
the Disclosure Schedule.
5.1
Business
Organization; Due Authorization.
The Seller is a duly formed and validly existing limited liability company in good standing
under the laws of the jurisdiction of its formation. This Agreement and the Transactions contemplated hereby have been duly authorized
by the Seller by all necessary action.
5.2
Authority;
Enforceability
.
The Seller has all the requisite power and authority to execute and delivery and perform its obligations
under this Agreement and all related transactions as provided hereunder. This Agreement is a valid and binding agreement, enforceable
against the Seller in accordance with its respective terms, subject to the Enforceability Exceptions.
5.3
Title
to Assets; Absence of Liens
.
The Seller has good and marketable title to, or in the case of leases and licenses, valid
and subsisting leasehold interest or licenses in, the Assets, including without limitation, all of the properties and assets that
are listed in Schedule 2.1, in each case free and clear of any and all Liens. There are no customers of NDES not included in the
NDES Customer Lists.
5.4
Contracts.
Schedule 5.4 consists of a true and complete list of all Material Contracts, which relate to the NDES Customer List.
Except as set forth
on Schedule 5.4 (i) each Material Contract is a full force and effect and there is no default under any Material Contract either
by the Seller or, to the knowledge of the Seller, by any other party thereto, and no event has occurred that with the lapse of
time or the giving of notice or both would constitute a default thereunder by Seller or to the knowledge of the Seller, any other
party of which could result in termination of a Material Agreement or which would provide the basis for a claim against the Seller;
(ii) no party to any such Material Contract has given notice to the Seller of or made a claim against the Seller with respect to
any breach or default thereunder; and (iii) the Seller has not received any payment from any contracting party in connection with,
or as an inducement for, entering into any contract, agreement, commitment or instrument with the Seller except for payment for
actual services rendered or to be rendered by the Seller, consistent with amounts historically charged for such service.
Schedule 5.4 also lists
all pending executed letters of intent. To the Knowledge of the Seller no letter of intent has been canceled or terminated.
5.5
Litigation
.
There is no claim, action, proceeding, or investigation pending or, to the Knowledge of the Seller, threatened against or affecting
the Seller, any member of the Seller, any Material Contract or any of the Seller’s relationship or agreements with NDES Customers,
or any of the Assets before or by any court, arbitrator or governmental agency or authority which, in their reasonable judgment,
could have a Material Adverse Effect on the Seller or the Material Contracts. There are no decrees, injunctions or orders of any
court, governmental department, agency or arbitration outstanding against the Seller or any member of the Seller and with respect
to any action or claim covered by insurance, the Seller has complied with all requirements of any such policy which are conditions
to the defense and continued defense of such claim or action. Neither the Seller, any NDES Customers or any person for whose acts
or defaults in the matter it may be contractually or vicariously liable is involved in any civil criminal or arbitration proceedings
or reference of any dispute to any expert and, to the Knowledge of the Seller, no such proceeding is pending or threatened against
the Seller, any member of the Seller or any NDES Customer and there are no facts likely to give rise to such proceedings or reference.
5.6
No
Conflict
.
The execution and delivery of this Agreement by the Seller does not, and the consummation by the Seller of
the Transactions will not, violate, conflict with or result in a breach of any provision of, or constitute a default (or in an
event which, with notice or lapse of time or both, would constitute a default) under, or result in the termination of, or accelerate
the performance required by, or result in a right of termination or acceleration under, or result in the creation of any lien,
security interest, charge or encumbrance upon any of the properties or Assets under any (i) any statute, law, ordinance, rule,
regulation, judgment, decree, order, injunction, writ, permit or license of any court or governmental authority applicable to any
NDES Customer or any of the Assets, or (iii) except as set forth in Schedule 5.6, any note, bond, mortgage, indenture, deed of
trust, license, franchise, permit, concession, contract, lease or other instrument, obligation or agreement of any kind to which
the Seller is now a party or by which the Seller or any of its properties or the Assets may be bound or affected, excluding from
the foregoing clauses (i) and (ii), such violations, conflicts, breaches, defaults, terminations, accelerations or creations of
liens, security interests, charges or encumbrances that would not, in the aggregate, have a Material Adverse Effect.
5.7
Compliance
With Law
.
The Seller does not know of any assertion by any party that Seller is in violation in any material respect of
any such laws, rules, regulations, orders, restrictions or requirements with respect to its operations, and no notice in that regard
has been received by the Seller or any member of the Seller.
5.8
Employee
Matters.
The Seller has no employees and has never maintained or contributed to any employee benefit plan, or any stock
purchase plan, stock option plan, fringe benefit plan, bonus plan or any other deferred compensation agreement, plan or funding
arrangement, whether or not such plan has been terminated and whether or not such plan is of legally binding nature in the form
of an informal understanding.
5.9
Non
Governmental Consents
.
Except as listed in Schedule 5.9, no Consent of any third party is required pursuant to any Material
Contract or by any non governmental third party to preserve any material right of the Seller being transferred hereby or which
relates to the Assets.
5.10
Liabilities.
Aside from the NDES Obligation, NDES does not have any Liabilities.
5.11
Accounts
Receivable
.
NDES has no accounts receivable.
5.12
Investment
Intent; Requisite Sophistication and Delivery of Information
. The Seller and Miller hereby represent and warrant that Miller
will be acquiring the Acquisition Securities solely for his investment purposes, for his own account, and not with a view to the
distribution of any of the Acquisition Securities. Miller hereby represents that he is an “accredited investor,” as
defined in Regulation D. The Seller and Miller further represent and warrant that each understands that AKDS is issuing the Acquisition
Securities at the Seller’s instruction to Miller in reliance upon an exemption from the registration requirements of Section
5 of the Securities Act contained in Section 4(a)(2) of the Securities Act. Miller acknowledges that the Acquisition Shares may
not be sold, transferred, pledged, hypothecated, assigned or otherwise disposed of by Miller unless Miller has provided AKDS with
a legal opinion reasonably satisfactory in form and substance and stating that such transfer, pledge, hypothecation, assignment
or other transfer is exempt from the registration requirements of the Securities Act. Furthermore, Miller acknowledges that the
Share Certificates, the Acquisition Warrant and the Underlying Acquisition Shares each shall bear an appropriate restrictive legend
to reflect the foregoing restrictions and that stop transfer instructions will be placed against the Acquisition Shares and, when
issued, the Underlying Acquisition Shares with respect thereto. Miller acknowledges that he can bear the economic risk and complete
loss of its investment in the Acquisition Securities and has such knowledge and experience in financial or business matters that
he is capable of evaluating the merits and risks of the Acquisition Securities. Miller has had an opportunity to receive all information
related to AKDS requested by him and to ask questions of and receive answers from AKDS regarding AKDS, its business and the Acquisition
Securities.
VI. REPRESENTATIONS
AND WARRANTIES OF THE ACQUIROR AND AKDS
AKDS and the Acquiror
jointly and severally represent and warrant to the Seller as follows as of the date hereof, with the Knowledge that the Seller
is relying materially on such representations and warranties:
6.1
Organization
and Standing of Acquiror
.
Each of AKDS and the Acquiror is a corporation duly organized, validly existing and in good standing
under the laws of the State of Delaware. Each of AKDS and the Acquiror has all requisite corporate power to carry on its business
as it is now being conducted.
6.2
Due
Authority
.
This Agreement and the Transactions have been duly authorized by all necessary action on the part of AKDS and
the Acquiror. This Agreement constitutes the valid and binding obligations of AKDS and the Acquiror, enforceable in accordance
with its terms, subject to the Enforceability Exceptions.
6.3
Governmental
Approval; Consents
.
Based on the representation and warranties contained in Section 5.12, no authorization, license, permit,
franchise, approval, order or consent of, and no registration, declaration or filing by AKDS or the Acquiror with, any governmental
authority, domestic or foreign, federal, state or local, is required in connection with the execution, delivery and performance
of this Agreement or any other agreement contemplated hereby by AKDS or the Acquiror.
6.4
Valid
Issuance
.
The issuance of the Acquisition Securities has been duly and validly authorized and, when issued and paid for
pursuant to this Agreement, shall be free and clear of all encumbrances and restrictions (other than those created by the Seller
or Miller), except for restrictions on transfer imposed by applicable securities laws. Upon the due exercise of the Acquisition
Warrant, the Underlying Acquisition Shares will be validly issued, fully paid and non-assessable free and clear of all encumbrances
and restrictions, except for restrictions imposed by applicable securities laws or those created by Miller. AKDS shall have reserved
a sufficient number of shares of AKDS Common Shares for issuance upon the exercise of the Acquisition Warrant, free and clear of
all encumbrances and restrictions, except for restrictions on transfer imposed by applicable securities laws and except for those
created by the Seller or Miller.
VII. INDEMNIFICATION
7.1
General
.
The Seller and its members (collectively, the “Indemnitors”) shall indemnify, defend, and hold the Acquiror and AKDS
(each, an “Indemnitee”) harmless from and against any and all losses, costs, liabilities, damages, and expenses (including
reasonable legal and other expenses incident thereto) of every kind, nature, and description, including any unassumed liabilities,
and any undisclosed liabilities (collectively "Losses") that result from or arise out of (i) the breach of any representation
or warranty of the Seller set forth in this Agreement (including the exhibits hereto) or in any certificate or schedule, or other
instrument delivered to the Acquiror pursuant hereto; (ii) the breach of any of the covenants of the Seller contained in this Agreement;
(iii) any liability of the Seller with respect to the ownership or use of the Assets prior to the date hereof, whether or not such
liability arises prior to, on or following the Closing; or (iv) any Taxes of the Seller for any and all taxable periods up to and
including the date hereof , without regard to whether or not the existence of such tax liability would constitute a breach of a
representation or warranty made by the Seller hereunder.
7.2
Claims
Procedure
.
Should any claim covered by Section 7.1 be asserted against any Indemnitee, the Indemnitee shall promptly notify
the Seller;
provided
, that no delay or failure in notifying any Indemnitor shall reduce or adversely affect the Indemnitor's
liability under this Article VII if such delay or failure was not prejudicial to the Indemnitor. Upon receipt of such notice, the
Indemnitor shall assume the defense of such claim with counsel reasonably satisfactory to the Indemnitee, and the Indemnitee shall
extend reasonable cooperation to the Indemnitor in connection with such defense. No settlement of any such claim shall be made
without the consent of the Indemnitor, such consent not to be unreasonably withheld, nor shall any such settlement be made by the
Indemnitor which does not provide for the absolute, complete, and unconditional release of the Indemnitee from such claim. In the
event that the Indemnitor shall fail, within a reasonable time, to defend a claim, the Indemnitee shall have the right to assume
the defense thereof without prejudice to its rights to indemnification hereunder.
VIII. POST-CLOSING COVENANTS
8.1
No
Transferee Liability.
Neither Acquiror nor AKDS will by virtue of the transactions contemplated hereby assume any liabilities
or obligations of the Seller whatsoever and, accordingly, the Seller will take all actions which Acquiror and AKDS may reasonably
request so as to fully indemnify, defend and hold Acquiror and AKDS harmless from and against any and all transferee liability
arising out of the Acquisition.
8.2
Brokers'
Fees
.
Neither the Seller nor the Acquiror has engaged the services of any broker or finder in connection with the Transactions.
The Seller and the Acquiror will indemnify, defend and hold the other harmless from and against any claims made against the other
on account of or arising out of their acts or alleged acts from any person for any other agent's, broker's or finder's fee or commission
incurred in connection with the Transactions. The provisions of this Section 8.2 (and not the provisions of Article VII) shall
apply to any claim with the scope of the proceeding sentence.
8.3
Further
Assurances
.
From time to time, as the Acquiror may reasonably request in writing, whether at or after the Closing and without
further consideration, the Seller, at its expense, will execute and deliver such further instruments of conveyance, transfer and
confirmation and take such other action as the Acquiror may reasonably request in order more effectively to convey, confirm and
transfer to the Acquiror of any of the Assets to be acquired.
IX. MISCELLANEOUS
9.1
Waiver
of Bulk Sales Law Compliance; Indemnity
.
The Acquiror and AKDS hereby waive compliance with any applicable bulk sales laws,
if applicable. The Seller will fully indemnify AKDS or the Acquiror, without any deductible, for any and all liabilities, expenses
and costs resulting from the parties' failure to fully comply with applicable bulk sales laws.
9.2
Expenses
.
Each party shall pay its own expenses incident to the negotiation, preparation, and performance of this Agreement, including all
fees and expenses of its counsel and accountants for all activities of such counsel and accountants undertaken pursuant to this
Agreement, whether or not the Transactions are consummated.
9.3
Survival
of Representations, Warranties and Covenants
.
All statements contained in this Agreement (including the exhibits hereto)
or in any schedule, certificate or other instrument delivered by or on behalf of the Seller pursuant to this Agreement or in connection
with the Transactions shall be deemed representations, warranties, agreements and covenants by the Seller or the Acquiror, as the
case may be, hereunder. All representations and warranties made by the Seller in this Agreement shall survive the Closing for a
period of two years. All covenants made by the Seller in this Agreement shall survive the Closing until performed.
9.4
Succession
and Assignments; Third Party Beneficiaries
.
This Agreement may not be assigned (either voluntarily or involuntarily) by
any party hereto without the prior written consent of the other party. Any attempted assignment in violation of this Section shall
be void and ineffective for all purposes. In the event of an assignment permitted by this Section, this Agreement shall be binding
upon the heirs, successors and assigns of the parties hereto. Except for AKDS, there are no third party beneficiaries of this Agreement.
The provisions of this
Section shall not apply to the acquisition of the Assets by a different wholly owned subsidiary entity of AKDS, or to the transfer
following such acquisition, to any affiliate of AKDS. Without limiting the generality of the preceding sentence, references to
the Acquiror shall be deemed to include references to any other subsidiary of AKDS.
9.5
Accuracy
of Documents
.
All documents delivered by the Seller to Acquiror , and by Acquiror to the Seller, as photocopies faithfully
reproduce the originals thereof, and such originals are authentic and were, to the extent execution was required, duly executed.
9.6
Notices
.
Any notice, demand or request required or permitted to be given by any party to any other party pursuant to the terms of
this Agreement shall be in writing and shall be deemed to have been given (a) when delivered personally, by e -mail or by
verifiable facsimile transmission (with an original to follow) (but if so delivered after 5:00 p.m., New York time, or on a day
that is not a Business Day, at 9:00 a.m., New York time, on the next Business Day), or (b) on the next Business Day after timely
delivery to a nationally-recognized overnight courier and on the Business Day actually received if deposited in the United States
mail (certified or registered mail, return receipt requested, postage prepaid), if to a party at its address as such appears below
in this Section (or at such other address for any party as such party shall notify the other parties) and if to the Company to
its principal office,
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If to the Seller, at:
New Dimension Energy Solutions, LLC
c/o Steven Zelkowitz
P.O. Box 759
Wellfleet, MA 02667
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If to the Acquiror, at:
211 Warren Street, Suite 323
Newark New Jersey 07103
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If to Miller, at:
American Express Company
200 Vesey Street, 7th Floor
MC 01-07-14
New York, NY 10285
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9.7
Construction
.
This Agreement shall be construed and enforced in accordance with the internal laws of the State of New Jersey without giving effect
to the principles of conflicts of law thereof.
9.8
Counterparts
.
This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which shall together
constitute one and the same Agreement. Facsimile copies shall be deemed to be originals of the original executed document.
9.9
No
Implied Waiver; Remedies
.
No failure or delay on the part of the parties hereto to exercise any right, power, or privilege
hereunder or under any instrument executed pursuant hereto shall operate as a waiver nor shall any single or partial exercise of
any right, power, or privilege preclude any other or further exercise thereof or the exercise of any other right, power, or privilege.
All rights, powers, and privileges granted herein shall be in addition to other rights and remedies to which the parties may be
entitled at law or in equity.
9.10
Entire
Agreement
.
This Agreement, including the Exhibits and Schedules attached hereto, sets forth the entire understandings of
the parties with respect to the subject matter hereof, and it incorporates and merges and supersedes any and all previous communications,
representations, warranties, understandings, agreements, oral or written and cannot be amended or changed except in writing, signed
by the parties.
9.11
Headings
.
The headings of the Sections of this Agreement, where employed, are for the convenience of reference only and do not form a part
hereof and in no way modify, interpret or construe the meanings of the parties.
9.12
Severability
.
To the extent that any provision of this Agreement shall be invalid or unenforceable, it shall be considered deleted hereof and
the remainder of such provision and of this Agreement shall be unaffected and shall continue in full force and effect.
[REMAINDER OF PAGE LEFT INTENTIONALLY BLANK
SIGANATURE PAGE TO FOLLOW]
IN WITNESS WHEREOF,
the parties hereto have executed this Agreement the day and year first above written.
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ARKADOS ENERGY SOLUTIONS, LLC
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By:
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/s/ Terrence De Franco
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Name:
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Terrence De Franco
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Title:
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CEO
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ARKADOS, INC.
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By:
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/s/ Terrence De Franco
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Name:
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Terrence De Franco
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Title:
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President and CEO
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NEW DIMENSIONS ENERGY SOLUTIONS, LLC
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By:
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/s/ Steven L. Zelkowitz
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Name:
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Steven L. Zelkowitz
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Title:
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Sole Member
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/s/ Edward Miller
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Edward Miller
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Exhibit 10.20
No. 2016-C-C-01
ARKADOS GROUP, INC.
COMMON STOCK PURCHASE WARRANT
THE WARRANT REPRESENTED BY THIS CERTIFICATE
HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), AND IS SUBJECT TO RESTRICTIONS ON TRANSFERABILITY
AS SET FORTH IN THIS CERTIFICATE. THIS WARRANT MAY NOT BE SOLD, TRANSFERRED, OR OTHERWISE DISPOSED OF IN THE ABSENCE OF AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE ACT OR AN OPINION OF COUNSEL, REASONABLY ACCEPTABLE TO COUNSEL FOR THE COMPANY, TO THE EFFECT
THAT THE PROPOSED SALE, TRANSFER, OR DISPOSITION MAY BE EFFECTUATED WITHOUT REGISTRATION UNDER THE ACT.
WARRANT CERTIFICATE
THIS WARRANT CERTIFICATE
(the "Warrant Certificate") certifies that for value received,
Edward Miller (
the "Holder"), is the
owner of this warrant (the "Warrant"), which entitles the Holder to purchase at any time on or before the Expiration
Date (as defined below) One Hundred Sixty-Six Thousand Six Hundred Sixty-Seven (166,667) shares (the "Warrant Shares")
of fully paid non-assessable shares of the common stock (the "Common Stock") of ARKADOS GROUP, INC., a Delaware corporation
(the "Company"), at a purchase price per Warrant Share of Two Dollars ($2.00) (the "Purchase Price"), in lawful
money of the United States of America by bank or certified check, subject to adjustment as hereinafter provided.
1.
WARRANT;
PURCHASE PRICE
.
This Warrant shall
entitle the Holder to purchase the Warrant Shares at the Purchase Price. The Purchase Price and the number of Warrant Shares evidenced
by this Warrant Certificate are subject to adjustment as provided in Article 6.
2.
EXERCISE;
EXPIRATION DATE
.
(a) This
Warrant is exercisable, at the option of the Holder, at any time after the date of issuance and on or before the Expiration Date
(as defined below) by delivering to the Company written notice of exercise (the "Exercise Notice"), stating the number
of Warrant Shares to be purchased thereby, accompanied by bank or certified check payable to the order of the Company for the Warrant
Shares being Within ten (10) business days of the Company's receipt of the Exercise Notice accompanied by the consideration for
the Warrant Shares being purchased, the Company shall instruct its transfer agent to issue and deliver to the Holder a certificate
representing the Warrant Shares being purchased. In the case of exercise for less than all of the Warrant Shares represented by
this Warrant Certificate, the Company shall cancel this Warrant Certificate upon the surrender thereof and shall execute and deliver
a new Warrant Certificate for the balance of such Warrant Shares.
(b)
Expiration
.
The term "Expiration Date" shall mean 5:00 p.m., New York time, on the third (3
rd
) anniversary of the date
set forth in the signature block of this Warrant or if such date in the State of New York shall be a holiday or a day on which
banks are authorized to close, then 5:00 p.m., New York time, the next following day which in the State of New York is not a holiday
or a day on which banks are authorized to close.
3.
RESTRICTIONS
ON TRANSFER
.
(a)
Restrictions
.
This Warrant, and the Warrant Shares or any other security issuable upon exercise of this Warrant may not be assigned, transferred,
sold, or otherwise disposed of unless (i) there is in effect a registration statement under the Act covering such sale, transfer,
or other disposition or (ii) the Holder furnishes to the Company an opinion of counsel, reasonably acceptable to counsel for the
Company, to the effect that the proposed sale, transfer, or other disposition may be effected without registration under the Act,
as well as such other documentation incident to such sale, transfer, or other disposition as the Company's counsel shall reasonably
request.
(b)
Legend
.
Any Warrant Shares issued upon the exercise of this Warrant shall bear substantially the following legend:
“The shares
represented by this certificate have not been registered under the Securities Act of 1933, as amended. The shares have been acquired
for investment and may not be offered, sold or otherwise transferred in the absence of an effective registration statement and
with respect to the shares or an exemption from the registration requirements of said act that is then applicable to the shares,
as to which a prior opinion of counsel acceptable to the issuer or transfer agent may be required.”
4.
RESERVATION
OF SHARES
.
The Company covenants
that it will at all time reserve and keep available out of its authorized Common Stock, solely for the purpose of issuance upon
exercise of this Warrant, such number of shares of Common Stock as shall then be issuable upon the exercise of this Warrant. The
Company covenants that all shares of Common Stock which shall be issuable upon exercise of this Warrant shall be duly and validly
issued and fully paid and non-assessable and free from all taxes, liens, and charges with respect to the issue thereof.
5.
LOSS OR MUTILATION
.
If the Holder loses this
Warrant, or if this Warrant is stolen, destroyed or mutilated, the Company shall issue an identical replacement Warrant upon the
Holder's delivery to the Company of a customary agreement to indemnify the Company for any losses resulting from the issuance of
the replacement Warrant.
6.
PROVISIONS
REGARDING ADJUSTMENTS TO STOCK
.
(a)
Stock
Dividends, Subdivisions and Combinations
. If at any time the Company shall:
(i) take
a record of the holders of its Common Stock for the purpose of entitling them to receive a dividend payable in, or other distribution
of, additional shares of Common Stock,
(ii) subdivide
its outstanding shares of Common Stock into a larger number of shares of Common Stock, or
(iii) combine
its outstanding shares of Common Stock into a smaller number of shares of Common Stock,
then (A) the number of shares of Common
Stock for which this Warrant is exercisable into immediately after the occurrence of any such event shall be adjusted to equal
the number of shares of Common Stock which a record holder of the same number of shares of Common Stock for which this Warrant
is exercisable into immediately prior to the occurrence of such event would own or be entitled to receive after the happening of
such event, and (B) the Purchase Price shall be adjusted to equal (x) the current Purchase Price immediately prior to the adjustment
multiplied by the number of shares of Common Stock for which this Warrant is exercisable into immediately prior to the adjustment
divided by (y) the number of shares of Common Stock for which this Warrant is exercisable into immediately after such adjustment.
(b)
Certificate
as to Adjustments
. Upon the occurrence of each adjustment or readjustment of the Purchase Price, the Company, at its expense,
shall promptly compute such adjustment or readjustment in accordance with the terms hereof and prepare and furnish to the Holder
a certificate setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment
is based. The Company shall, upon the written request at any time of the Holder, furnish or cause to be furnished to such holder
a like certificate setting forth (i) such adjustments and readjustments, (ii) the Purchase Price at the time in effect for this
Warrant and (iii) the number of shares of Common Stock and the amount, if any, or other property which at the time would be received
upon the exercise of this Warrant.
(c)
Notices
of Record Date
. In the event of any fixing by the Company of a record date for the holders of any class of securities for the
purpose of determining the holders thereof who are entitled to receive any dividend (other than a cash dividend) or other distribution,
any shares of Common Stock or other securities, or any right to subscribe for, purchase or otherwise acquire, or any option for
the purchase of, any shares of stock of any class or any other securities or property, or to receive any other right, the Company
shall mail to the Holder at least thirty (30) days prior to the date specified therein, a notice specifying the date on which any
such record is to be taken for the purpose of such dividend, distribution or rights, and the amount and character of such dividend,
distribution or right.
(d)
Merger, Consolidation,
etc
. In case of any capital reorganization or any reclassification of the capital stock of the Company or in case of the consolidation
or merger of the Company with another corporation (or in the case of any sale, transfer, or other disposition to another corporation
of all or substantially all the property, assets, business, and goodwill of the Company), the Holder of this Warrant shall thereafter
be entitled to purchase the kind and amount of shares of capital stock which this Warrant entitled the Holder to purchase immediately
prior to such capital reorganization, reclassification of capital stock, consolidation, merger, sale, transfer, or other disposition;
and in any such case appropriate adjustments shall be made in the application of the provisions of this Section 6 with respect
to rights and interests thereafter of the Holder of this Warrant to the end that the provisions of this Section 6 shall thereafter
be applicable, as near as reasonably may be, in relation to any shares or other property thereafter purchasable upon the exercise
of this Warrant.
(e)
Fractional
Shares
. No certificate for fractional shares shall be issued upon the exercise of this Warrant, but in lieu thereof the Company
shall purchase any such fractional shares calculated to the nearest cent or round up the fraction to the next whole share.
(f)
Rights
of the Holder
. The Holder of this Warrant shall not be entitled to any rights of a shareholder of the Company in respect of
any Warrant Shares purchasable upon the exercise hereof until such Warrant Shares have been paid for in full and issued to it.
As soon as practicable after such exercise, the Company shall deliver a certificate or certificates for the number of full shares
of Common Stock issuable upon such exercise, to the person or persons entitled to receive the same.
7.
RepResentations
and Warranties
.
The Holder, by acceptance
of this Warrant, represents and warrants to, and covenants and agrees with, the Company as follows:
(a) The Warrant is
being acquired for the Holder's own account for investment and not with a view toward resale or distribution of any part thereof,
and the Holder has no present intention of selling, granting any participation in, or otherwise distributing the same.
(b) The Holder is aware
that the Warrant is not registered under the Act or any state securities or blue sky laws and, as a result, substantial restrictions
exist with respect to the transferability of the Warrant and the Warrant Shares to be acquired upon exercise of the Warrant.
(c ) The Holder is
an accredited investor as defined in Rule 501(a) of Regulation D under the Act and is a sophisticated investor familiar with the
type of risks inherent in the acquisition of securities such as the Warrant, and its financial position is such that it can afford
to retain the Warrant and the Warrant Shares for an indefinite period of time without realizing any direct or indirect cash return
on this investment.
8.
NO
IMPAIRMENT.
The Company shall not
by any action including, without limitation, amending its certificate of incorporation or through any reorganization, transfer
of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid
the observance or performance of any of the terms of this Warrant, but will at all times in good faith assist in the carrying out
of all such terms and in the taking of all such actions as may be necessary or appropriate to protect the rights of Holder against
impairment. Without limiting the generality of the foregoing, the Company will (a) not increase the par value of any shares of
Common Stock receivable upon the exercise of this Warrant above the amount payable therefore upon such exercise immediately prior
to such increase in par value, (b) take all such actions as may be necessary or appropriate in order that the Company may validly
and legally issue fully paid and non assessable shares of Common Stock upon the exercise of this Warrant, and (c) use its best
efforts to obtain all such authorizations, exemptions or consents from any public regulatory body having jurisdiction thereof as
may be necessary to enable the Company to perform its obligations under this Warrant. Upon the request of Holder, the Company will
at any time during the period this Warrant is outstanding acknowledge in writing, in form satisfactory to Holder, the continuing
validity of this Warrant and the obligations of the Company hereunder.
9.
NO REGISTRATION
RIGHTS.
There are no registration
rights associated with this Warrant or the underlying Warrant Shares when issued.
10.
SUPPLYING INFORMATION.
The Company shall cooperate
with Holder and each holder of Warrant Shares in supplying such information pertaining to the Company as may be reasonable necessary
for such Holder and each holder of Warrant Shares to complete and file any information reporting forms presently or hereafter required
by the Securities and Exchange Commission as a condition to the availability of an exemption from the Act for the sale of Warrant
Shares.
11
LIMITATION OF LIABILITY.
No provision hereof,
in the absence of affirmative action by Holder to purchase shares of Common Stock, and no enumeration herein of the rights or privileges
of Holder hereof, shall give rise to any liability of Holder for the purchase price of any Common Stock or as a stockholder of
the Company, whether such liability is asserted by the Company or by creditors of the Company.
12
MISCELLANEOUS
.
(a)
Transfer
Taxes; Expenses
. The Holder shall pay any and all underwriters' discounts, brokerage fees, and transfer taxes incident to the
sale or exercise of this Warrant or the sale of the underlying shares issuable hereunder, and shall pay the fees and expenses of
any special attorneys or accountants retained by it.
(b)
Successors
and Assigns
. Subject to compliance with the provisions of Section 3, this Warrant and the rights evidenced hereby shall inure
to the benefit of and be binding upon the successors of the Company and the successors and assigns of Holder. The provisions of
this Warrant are intended to be for the benefit of all Holders from time to time of this Warrant, and shall be enforceable by any
such Holder.
( c)
Notice
. Any notice or other
communication required or permitted to be given to the Company shall be in writing and shall be delivered by certified mail with
return receipt or delivered in person against receipt, addressed to the Company at 211 Warren Street, Suite 320, Newark, New Jersey
07103.
(d)
Governing Law
. This Warrant Certificate
shall be governed by, and construed in accordance with, the internal laws of the State of New Jersey, without reference to the
conflicts of laws provisions thereof.
IN WITNESS WHEREOF, the
Company has caused this Warrant Certificate to be duly executed as of the date set forth below.
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Arkados Group, Inc.
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By:
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Name: Terrence DeFranco
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Title: Chairman and CEO
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Issuance Date:
April
28, 2016
ARKADOS GROUP, INC.
FORM OF EXERCISE OF WARRANT
No.
The undersigned hereby
elects to exercise this Warrant as to _____________ shares of the Common Stock of Arkados Group, Inc., a Delaware corporation,
covered thereby. Enclosed herewith is a bank or certified check in the amount of $_____________ payable to the Company.
Delivery of exercise
notice requiring a payment by check must be by national courier (Fedex, UPS, etc.) to:
Arkados Group,
Inc.
211 Warren
Street, Suite 320,
Newark, NJ
07103
Attn: Terrence
DeFranco
Please note: please execute this notice
in blue ink, scan and email to the Company’s Chief Executive Officer via email at
tmdefranco@arkadosgroup.com
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The shares should be sent to me at the
address provided below.
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Date:
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(Signature)
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Name
(Printed)
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Address:
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Social
Security Number
(for individual holder)
or Employer Identification Number (Tax ID)
(for entity)
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EXHIBIT 31.1
CERTIFICATION
I, Terrence DeFranco, certify that:
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1.
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I have reviewed this Annual Report on SEC Form 10-K of Arkados Group, Inc.;
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2.
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Based on my knowledge, the 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;
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3.
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Based on my knowledge, the financial statements, and other financial information included in the
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 the Report;
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4.
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As sole executive 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:
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a.
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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 me by others within those entities, particularly during the period in which this Report is being
prepared;
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b.
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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;
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c.
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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
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d.
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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
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5.
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As sole executive officer of the Registrant, 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):
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a.
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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
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b.
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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.
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/s/
Terrence DeFranco
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Terrence DeFranco
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Chief Executive Officer and Principal Accounting Officer
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Date: September 21, 2016
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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 Annual Report on SEC
Form 10-K of Arkados Group, Inc. (the “Company”) for the fiscal year ended May 31, 2016 as filed with the Securities
and Exchange Commission on the date hereof (the “Report”), I, Terrence DeFranco, Chief Executive Officer and 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:
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(1)
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The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
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(2)
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The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations
of the Company.
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/s/
Terrence DeFranco
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Terrence DeFranco
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Chief Executive Officer and Principal Accounting Officer
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Date: September 21, 2016
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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