IOTA COMMUNICATIONS, INC. - FORM 10-Q

Attached files

file	filename
EX-32.2 - 906 CERTIFICATION - CFO - IOTA COMMUNICATIONS, INC.	exh32-2_17089.htm
EX-31.2 - 302 CERTIFICATION - CFO - IOTA COMMUNICATIONS, INC.	exh31-2_17089.htm
EX-31.1 - 302 CERTIFICATION - CEO - IOTA COMMUNICATIONS, INC.	exh31-1_17089.htm
EX-32.1 - 906 CERTIFICATION - CEO - IOTA COMMUNICATIONS, INC.	exh32-1_17089.htm

UNITED STATES OF AMERICA

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q


(Mark One)

ý		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED: February 28, 2011

o		TRANSITION REPORT PURSUANT TO 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 small business issuer as specified in its charter)


Delaware (State or other jurisdiction of incorporation or organization)		22-3586087 (I.R.S. Employer Identification No.)
87 Fairfield Rd. Fairfield, NJ 07004 (Address of principal executive offices)
(732) 465-9300 Ext. 0 (Issuer’s telephone number)
(Former name, former address and former fiscal year, if changed since last report)

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

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


Large accelerated filer o		Accelerated filer o		Non-accelerated filer o (Do not check if a smaller reporting company)		Smaller reporting company ý

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

The number of the registrant’s shares of common stock outstanding was 44,951,261 as of April 14, 2011.

INTRODUCTORY NOTES

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

The forward-looking statements included herein are based on current expectations that involve a number of risks and uncertainties set forth under “Risk Factors” in our Annual Report on Form 10-K for the year ended May 31, 2010 and other periodic reports filed with the SEC. Accordingly, to the extent that this Report contains forward-looking statements regarding the financial condition, operating results, business prospects or any other aspect of the Company, please be advised that Arkados’ actual financial condition, operating results and business performance may differ materially from that projected or estimated in such forward-looking statements.

Arkados Group, Inc.

Quarterly Report on Form 10-Q

Quarter Ended February 28, 2011

Table of Contents


PART I—FINANCIAL INFORMATION
	Item 1.	Financial Statements	4
		Consolidated Balance Sheets as of February 28, 2011 (UNAUDITED) and May 31, 2010	4
		Consolidated Statements of Operations Cumulative During the Development Stage (March 24, 2004 to February 28, 2011) and for the Three and Nine Months Ended February 28, 2011 and 2010 (UNAUDITED)	5
		Consolidated Statements of Cash Flows – Cumulative During the Development Stage (March 24, 2004 to February 28, 2011) and for the Nine Months Ended February 28, 2011 and 2010 (UNAUDITED)	6
		Notes to Consolidated Financial Statements (unaudited)	7
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	25
	Item 4.	Controls and Procedures	25
PART II—OTHER INFORMATION
	Item 1.	Legal Proceedings	27
	Item 1A.	Risk Factors	27
	Item 6.	Exhibits	27
Signatures			28

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

ARKADOS GROUP, INC. & SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Unaudited)

	February 28,2011 (Unaudited)			May 31,2010
Assets
Current assets

Cash	$	157		$	16,345

Accounts Receivable		—			7,709

Total current assets		157			24,054

Equipment, net					28,272

Deferred financing expenses, net		—			284,126

Intangible assets, net		—			139,921

Other assets		—			33,768
	$	157		$	510,141
Liabilities and Stockholders’ Deficiency

Current liabilities:

Accrued expenses and other liabilities	$	10,723,954		$	9,927,810

Related Party Borrowings		102,512			247,700

Note Payable		1,171,301			1,142,301

Current portion convertible debentures and penalties		4,331,777			16,127,388

Payroll taxes and related penalties and interest payable		936,906			936,906

Total current liabilities		17,266,450			28,382,105

Stockholders’ deficiency

Convertible preferred stock - $.0001 par value; 5,000,000 shares authorized, zero shares outstanding

Common stock, $.0001 par value; 100,000,000 shares authorized 44,951,261 and 34,926,261, respectively, issued and outstanding		4,496			3,493

Additional paid-in capital		23,442,686			22,890,547

Treasury stock		(16,000	)		(16,000	)

Accumulated Deficit during Development Stage		(40,697,475	)		(50,750,004	)

Total stockholder’s deficiency		(17,266,293	)		(27,871,964	)
	$	157		$	510,141

The accompanying notes to consolidated interim financial statements are an integral part of these consolidated financial statements.

ARKADOS GROUP, INC. & SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

	For the Three Months Ended February 28, 2010			For the Three Months Ended February 28, 2011			For the Nine Months Ended February 28, 2010			For the Nine Months Ended February 28, 2011			Cumulative during the Development Stage (March 24, 2004 to February 28, 2011)
Net Sales	$	46,346		$	6,069		$	173,246		$	134,480		$	3,127,478

Cost of Goods Sold		46,346			6,834			172,352			145,245			2,160,042

Gross Profit		—			(765	)		894			(10,765	)		967,436

Research and Development Expenses		671,241			90,947			2,030,220			830,294			12,152,200

General and Administrative Expenses		471,637			22,919			1,450,585			474,341			21,125,402

Net Loss From Operations		(1,142,878	)		(114,631	)		(3,479,911	)		(1,315,400	)		(32,310,166	)


Other Income (Expense)

Sale of License and IP Agreements		—			7,000,000			—			7,000,000			7,000,000

Settlement of Secured Debt		—			6,662,633			—			6,662,633			6,662,631

Interest Expense		(835,611	)		(378,000	)		(5,919,253	)		(2,195,602	)		(14,615,134	)

Net ( Loss) Income Before Income Taxes		(1,978,489	)		13,170,002			(9,399,165	)		10,151,631			(33,262,667	)

Provision for Income Taxes (Benefit)		—			100,000			—			100,000			(841,562	)

(Net Loss)Income	$	(1,978,489	)	$	13,070,002		$	(9,399,165	)	$	10,051,631		$	(32,421,105	)

(Net Loss) Income per share - Basic	$	(0.06	)	$	0.29		$	(0.29	)	$	0.26

Weighted Average of Common Shares Outstanding - Basic		32,738,697			44,951,261			32,738,697			38,627,928

(Net Loss) Income per share – Fully Diluted	$	(0.06	)	$	0.13		$	(0.29	)	$	0.11

Weighted Average of Common Shares Outstanding - Fully Diluted		32,738,697			100,000,000			32,738,697			100,000,000

The accompanying notes to consolidated interim financial statements are an integral part of these consolidated financial statements.

ARKADOS GROUP, INC. & SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	For the Nine Months Ended February 28, 2010			For the Nine Months Ended February 28, 2011			Cumulative During the Development Stage (March 24, 2004 to February 28, 2011)
Cash Flows From Operating Activities:
Net Loss	$	(9,399,165	)	$	10,051,629		$	(32,421,107	)
Adjustments to reconcile net loss to net cash provided by (used) in operating activities
Depreciation and Amortization		63,737			168,193			1,745,915
Common stock and warrants issued for services		1,076,065			551,136			11,653,651
Warrants and beneficial conversion rights with debt		—			—			627,716
Gain on Settlement of Debt		—			(6,762,633	)		(6,762,633	)
Debt and Interest penalty		(3,670,339	)		—			4,683,122
Accounts Receivable		65,023			7,709
Inventory		29,819			—			630
Deferred Expenses		183,891			284,126			958,372
Prepaid and Other assets		20,460			33,768			(47,213	)
Payroll Taxes and related penalties and interest payable		—			—			(22,916	)
Related Party Payable		—			(85,188	)		(85,188	)
Accounts Payable and accrued expenses		3,766,844			797,044			10,710,141
Net Cash Provided by (Used) in Operating Activities		(522,987	)		5,045,784			(8,959,510	)
Cash Flows from Investing Activities:
Purchases of capital expenditures and Patents		—			—			(140,671	)
Net Cash Used in Investing Activities		—			—			(140,671	)

Cash Provided by Financing Activities:
Loan payable - related party		—			—			1,586,726
Note Payable		513,150			(31,000	)		1,296,302
Contribution of capital		—			—			1,232,646
Exercise of stock options					—			23,635
Private Placement		—			—			810,038
Proceeds from Convertible Debt		—			—			1,066,550
Repayment of debt		—			(7,000,000	)		(7,469,256	)
Proceeds from Notes and LoansPayable					1,969,028			1,969,028
Issuance of Debentures		—			—			9,533,411
Repayment of related party debt		—			—			(949,027	)
Net Cash Provided by (Used) in Financing Activities		513,150			(5,061,972	)		9,100,053
Net (Decrease) Increase in Cash		(9,838	)		(16,188	)		(128	)
Cash, beginning of the period		10,371			16,345			285
Cash, end of the period	$	533		$	157		$	157

Supplemental cash flow information
Cash paid for interest	$	—		$	—
Cash paid for taxes	$	—		$	—
Supplemental non-cash financing activities:
Conversion of debt to equity	$	—		$	401,000

The accompanying notes to consolidated interim financial statements are an integral part of these consolidated financial statements.

ARKADOS GROUP, INC. & SUBSIDIARIES

NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS

Nine Months Ended February 28, 2011 and 2010

(Unaudited)

NOTE 1 - DESCRIPTION OF BUSINESS

Arkados Group, Inc. (the “Company”), a development stage enterprise, is principally engaged in developing and marketing technology and solutions that enable standard electrical wires to carry digital information, such as broadband communication, multimedia, smart energy and smart grid data, and networking. From May 2004 until December 2011, the Company, through its wholly owned Delaware subsidiary, Arkados, Inc., operated as a “fabless” semiconductor company, meaning the Company designed and produced semiconductors without owning and operating a fabrication facility. 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 powerline communications and networking services and offering services related thereto (the “Asset Sale”) to STMicroelectronics, Inc. (“ST US”), a subsidiary of STMicroelectronics N.V. (“ST”), pursuant to an Asset Purchase Agreement, by and among the Company, the Companies Arkados, Inc., and Arkados Wireless Technologies, Inc. subsidiaries (collectively, “Arkados”) and ST US, dated as of December 23, 2010 (the “Purchase Agreement”). At the same time the Company granted a license (the “License”) to ST US to use the Company’s intellectual property assets included in the Asset Sale pending the closing of such sale. At the time the Asset Sale is completed, ST US has agreed to license back certain intellectual property to Arkados, Inc. on a non-exclusive basis to facilitate the continuation and expansion of our consumer electronics systems business, support our existing customers and, subject to the settlement of our outstanding debt and obtaining adequate financing (of which there is no assurance), permit us to continue the development and marketing of Smart Grid products based on powerline communication semiconductors. The Company will also continue to provide consulting and development services to existing customers and users of powerline communication semiconductors. ST US hired substantially all of our engineering and semiconductor employees (including Oleg Logvinov, our former CEO and director), who was engaged in and directed our semiconductor business.

As of May 31, 2010, $18,426,377 of secured debt principal plus interest, of which $6,923,995 is held by related parties, was in default, as was $1,031,651 in principal and interest on unsecured notes due June 29, 2009. In addition, as of May 31, 2010, $4,167,522 of salary was due to our employees and our accounts payable was approximately $1,959.636 of which $1,656,244 was over 90 days.

As of February 28, 2011, there was $7,874,003 of secured debt principal plus interest outstanding, almost all of which was held by related parties. This secured debt and accrued interest was in default at February 28, 2011 as is $1,079,381 in principal and interest on unsecured notes due June 29, 2009 and $6,794,622 of principal and interest due on bridge notes. In addition, as of February 28, 2011, $3,752,815 due to our employees and our accounts payable was approximately $2,016,571, all of which was over 90 days.

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

As a condition to entering into the Purchase Agreement and the License, ST US required that we have written settlement agreements and releases with all of our secured creditors as well as all of our employees. Under the settlement agreements with secured creditors, the secured creditors agreed to settle the entire amount owed (approximately $20,000,000), for an aggregate amount of $8,990,225, of which $5,467,548 was paid in December 2010 out of proceeds from the $7,000,000 license fee under the License, and $3,522,667 will be paid at the closing out of proceeds from the Asset Sale. In exchange for the settlement amount, the secured creditors agreed to release their security interest in Arkados’s assets and release Arkados from any and all additional claims, if any, that the secured creditors may have against Arkados. The secured creditors also agreed that ST and its affiliates are third party beneficiaries to the settlement agreements.

Under the settlement agreements with our employees, the employees agreed to accept an aggregate of $1,429,941 and an amount of the Company’s common stock to be negotiated after the closing as payment for back wages and unreimbursed expenses. The cash payment was paid to employees in December 2010 out of the license fee paid to the Company by ST US.

Also, as a condition to entering into the Purchase Agreement and the License, the Company entered into standstill agreements with holders of approximately $2,100,000 of unsecured debt pursuant to which those unsecured creditors agreed, among other things, not to exercise remedies that they may have as creditors of Arkados, not to sell or transfer their debt, to release ST and its affiliates from any and all claims that they may have against ST, if any, and not to sue ST for any dealings that the creditors had with Arkados.

The Company is negotiating with its outstanding unsecured debt to settle such debt of for cash payments and in many cases for a

yet to be determined amount of shares of the Company’s common stock and continues to negotiate with the holders of each class of debt to compromise, extend the due date or convert outstanding debt into equity and thereby facilitate raising additional investor capital for the portion of the Company’s business that may continue. Except as set forth above, there is no binding commitment on anyone’s part to complete the transactions.

The attached summary consolidated financial information does not include all disclosures required to be included in a complete set of financial statements prepared in conformity with accounting principles generally accepted in the United States of America. Such disclosures were included with the financial statements of the Company at May 31, 2010, and included in its report on Form 10-K. Such statements should be read in conjunction with the data herein.

The summary consolidated financial information reflects all adjustments, which, in the opinion of management, are necessary for a fair presentation of the results for the interim period expected for the year.

NOTE 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 over $32 million since inception including a net loss in excess of $11.5 million for the year ended May 31, 2010 and a net gain of $10.1 million for the nine months ended , February 28,2011, as a result of a one time event. Additionally, the Company had a net working capital deficiency and shareholders’ deficiencies at February 28, 2011 and May 31, 2010 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 Arkados Group, Inc. and its wholly owned subsidiaries. Intercompany accounts and transactions have been eliminated in consolidation.

Business combinations – We account for acquired businesses using the purchase method of accounting which requires that the assets and liabilities assumed be recorded at the date of acquisition at their respective fair values. Because of the expertise required to value intangible assets and intellectual property research and development “IPR&D”, we typically engage a third party valuation firm to assist management in determining those values. Valuation of intangible assets and IPR&D entails significant estimates and assumptions including, but not limited to: determining the timing and expected costs to complete projects, estimating future cash flows from product sales, and developing appropriate discount rates and probability rates by project. We believe that the fair values assigned to the assets acquired and liabilities assumed are based on reasonable assumptions. To the extent actual results differ from those estimates, our future results of operations may be affected by incurring charges to our statements of operations. Additionally, estimates for purchase price allocations may change as subsequent information becomes available

Fair Value of Financial Instruments – The carrying value of cash, accounts receivable, other receivables, accounts payable and accrued expenses approximate their fair values based on the short-term maturity of these instruments. The carrying amounts of debt were also estimated to approximate fair value. The Company can not estimate the fair value of the remaining outstanding payroll taxes penalties and interest recorded in connection with the merger.

Revenue Recognition – The Company derives revenues from two sources – sales of products and revenues from services in the form of custom development activities. For product sales, revenue is recognized when our products are shipped to our customers. For sales related to development, the Company has recorded revenues pursuant to a number of long term development contracts. The revenues are earned and recorded based on pre-determined milestones. When revenues within a pre-determined milestone have been partially earned, the Company records such progress billings as “Revenues earned not yet billed.” Such revenues are billable under the terms of the arrangement once the milestone has been fully completed. The Company also monitors estimated costs to complete its obligation to fulfill the terms of such long term contracts and compares such costs to the expected revenues to be earned to ensure that estimated losses are recorded on a timely basis.

Income (Loss) Per Share – Basic net loss per common share is computed by dividing net loss by the weighted average number of shares of common stock outstanding. Vested stock options and warrants have not been included since there is a net loss and the effect of including these options and warrants would be anti-dilutive for the periods presented, which have losses. For the periods presented which have income we have not been included 22,146,183 of warrants and options, since such warrants and options have exercise prices greater than the current market price of $0.057 a common share. Under the treasury method, the amount of net shares issuable under the adjusted conversion terms of the convertible debt arrangements of 75,485,922 additional shares has been included to the extent such shares have been limited to the amount of the authorized common shares available to be issued, which is 100,000,000 in total. The interest accrued for the convertible debt has been added back for computing the diluted earnings per share in the amounts of $334,000 and $1,002,000 for the three and nine months ended February 28, 2011.

Tax Provision –A tax provision has been accrued for the potential state taxes payable as a result of having insufficient state loss carryforwards available to cover for the debt settlement arrangements culminated due to the past sales of the state losses discussed hereafter, for the year-end May 31, 2011. Otherwise the Company has established a 100% valuation allowance against the deferred tax asset for the lack of taxable income in excess of the debt settlement arrangements.

The Company sold a portion of its State Net Operating Loss carryforwards under the State of New Jersey’s Technology Business Tax Certificate Transfer Program (the Program). The Program allows qualified technology and biotechnology businesses in New Jersey to sell unused amounts of net operating loss carryforwards and defined research and development tax credits for cash. The State renews the Program annually and limits the aggregate proceeds to $10,000,000. We cannot be certain if we will be able to sell any of our remaining or future carryforwards under the Program.

On September 9, 2008, the Company was approved for the sale of its 2008 Net Operating Losses of approximately $4,200,000 under the Program in addition to the sale of its Research and Development Tax Credits. The actual sale and receipt of funds was received in the first half of December 2008 and has been recorded as a tax benefit in the amount of $441,413

Accounting for Uncertainty of Income Taxes (“FIN 48”) – In June 2006, the Company adopted guidance for the Financial Accounting Standards Board issued Interpretation , Accounting for Uncertainty in Income Taxes (“FIN 48”). This Interpretation clarifies the accounting for uncertainty in income taxes recognized in an entity’s financial statements and prescribes a recognition threshold of more-likely-than-not to be sustained upon examination. Measurement of the tax uncertainty occurs if the recognition threshold has been met. This Interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. Arkados conducts business in the U.S. and, therefore, files U.S. and New Jersey income tax returns. In the normal course of business, the Company is subject to examination by taxing authorities. At present, there are no ongoing audits or unresolved disputes with the various tax authorities with whom the Company files. Given the Company’s substantial net operating loss carryforwards (“NOLs”, which are subject to a full valuation allowance) as well as the historical operating losses.

Stock Options –. The Company adopted Guidance for , “Share Based Payments.” The guidance requires companies to expense the value of employee stock options and similar awards and applies to all outstanding and vested stock-based awards.

In computing the impact, the fair value of each option is estimated on the date of grant based on the Black-Scholes options-pricing model utilizing certain assumptions for a risk free interest rate; volatility; and expected remaining lives of the awards. The assumptions used in calculating the fair value of share-based payment awards represent management’s best estimates, but these estimates involve inherent uncertainties and the application of management judgment. As a result, if factors change and the Company uses different assumptions, the Company’s stock-based compensation expense could be materially different in the future. In addition, the Company is required to estimate the expected forfeiture rate and only recognize expense for those shares expected to vest. In estimating the Company’s forfeiture rate, the Company analyzed its historical forfeiture rate, the remaining lives of unvested options, and the amount of vested options as a percentage of total options outstanding. If the Company’s actual forfeiture rate is materially different from its estimate, or if the Company reevaluates the forfeiture rate in the future, the stock-based compensation expense could be significantly different from what we have recorded in the current period. The impact of applying such guidance approximated $152,142 and $1,022,063, respectively, in additional compensation expense during the nine months ended February 28, 2011 and 2010. Such amount is included general and administrative expenses on the statement of operations.

In accordance with the guidance for share based payments, the fair value of each option grant has been estimated as of the date of the grant using the Black-Scholes option pricing model with the following weighted average assumptions:

	For Nine Months Ended	For Nine Months Ended
	February 28, 2011	February 28, 2010
Risk free interest rate	1.47-2.00%	2.57 - 2.71%
Expected life	3-5 years	3-5 years
Dividend rate	0.0%	0.00%
Expected volatility	223-294%	223-294%

Recently Issued Accounting Pronouncements

All new and not effective accounting pronouncements have been deemed not to be relevant.

Subsequent Events

The Company evaluates subsequent events for inclusion in the financial statements through the date that the financial statements are available to be issued. There have been material subsequent events since the quarter ended February 28, 2011 through the date of this filing.

NOTE 3 – REVENUE RECOGNITION

During the three and nine month periods ended February 28, 2011 and the same periods of the prior fiscal year, the Company sold and delivered $0 and $0 of chips, respectively, to customers. In addition, during the three and nine month period ended February 28, 2011 and the same period of the prior fiscal year, the Company recognized revenues related to development contracts in the amounts of approximately $6,069 and $46,346 and $134,480 and $173,246, respectively. Revenue was recognized as was an amount for cost of goods sold amount that was calculated based upon the estimated costs the Company incurred to deliver the products. These costs were, for the most part, related to labor, outside fabrication services, and supplies and materials.

NOTE 4 – CONVERTIBLE DEBENTURES AND RELATED PARTY PAYABLES

2005 6% Convertible Notes - During the period from July 7, 2005 to September 23, 2005, the Company raised $1,066,500 of gross proceeds from the private placement of an aggregate of 10.665 units (the “Units”) each consisting of $100,000 principal amount 6% convertible subordinated promissory notes (the “6% Notes”) and 14,286 detached warrants (the “Warrants”) to purchase a like number of shares of the Company’s common stock, for $0.35 per share. The Company issued an aggregate of 152,359 Warrants to the purchasers of the Units, which have been valued at $74,802 and will be amortized as interest expense over the term of the 6% Notes. In addition, the Company issued 238,213 common stock warrants exercisable at $0.65 as part compensation to the placement agent, which have been valued at $111,668 and will be amortized as interest expense along with other expenses of the offering. Both the $0.35 and $0.65 Warrants have a “net exercise” provision that permits the holder to convert the Warrants into shares of the Company’s common stock. The 6% Notes (1), when issued were due July 7, 2007 with interest at the annual rate of 6% from the date of original issuance (increasing to 12% per annum from an event of default as defined in the 6% Notes); (2) are unsecured obligations of the Company and subordinated to senior secured loans to the Company (if any) from banks, finance companies and similar institutions that extend credit in the regular cause of such institution’s business; (3) are convertible, subject to certain conditions and at two different price levels ($1.125 and $1.575 for a period of twenty trading days following the bid price of common stock closing above $1.50 and $2.50, respectively, for a period of five consecutive trading days), into shares of common stock; and (4) may be redeemed by the Company in certain limited circumstances described below prior to maturity. Since the beneficial conversion feature of the 6% Notes is (at the lowest price) at a price greater than the market price of the stock upon issuance of the 6% Notes, no value has been estimated or recorded for the beneficial conversion feature.

On July 6, 2007, the Company reached an agreement with more than the requisite holders of 2/3 of the outstanding $1,066,500 principal amount of 6% Notes to extend the due date of the Notes to June 30, 2008. In exchange for the amendment, the Company agreed to issue approximately 188,200 three year warrants to purchase shares of the Company’s common stock for $0.85 per share and lowered conversion prices in the Notes to $0.85. In connection with the amendments, the Company retained entered into a Solicitation Agreement with Trident Partners, Ltd., who served as placement agent for the Notes in 2005, to solicit the consent of Note holders that were their customers. Under the Solicitation Agreement, the Company paid Trident $25,000 and issued Trident 137,656 Warrants for their successful efforts.

On July 9, 2008, the Company reached an agreement with the holders of more than the requisite of the outstanding $1,066,500 principal amount of 6% Notes (the “Notes”) due June 30, 2008 to extend the due date of the 6% Notes to June 30, 2009. In exchange for the amendment, the Company agreed to exchange approximately 876,100 shares of common stock, pro rata, for notes in the original principal amount of $313,214. The debt was converted at $0.35 versus $0.85 in the original agreement.

The Company did not pay the $999,733 principal and interest due on the 6% when due on June 30, 2009 and, accordingly the 6% Notes accrue interest at the penalty rate of 12% per annum from the date of default. The Company has discussed forbearance or conversion with Trident, who was the placement agent for the sales of the 6% Notes to investors and who has twice served as Solicitation Agent in obtaining an extension of the 6% and while neither Trident

or any of the holders of the 6% have agreed to any extension or conversion, none of them have taken any judicial collection action.

During the first half of 2008, the Company borrowed $855,000 at the times set forth below, on an unsecured basis from affiliates of the Company’s Chairman and two non-employee directors, with the understanding that these advances would be exchanged for additional 6% Secured Debentures and related warrants. On December 15, 2007, this related party debt was converted to additional principal of the 6% Secured Debentures on substantially the same terms as the 6% Secured Debentures previously issued by the Company.

From March 1, 2008 through November 30, 2009, the Company borrowed $197,700 from two directors. $187,700 of these advances were due on demand with interest at the annual rate of 6%.

6% Secured Debentures - On December 19, 2005, the Company borrowed $267,900 from one of the accredited investors that ultimately purchased 6% secured convertible debentures (the “6% Secured Debentures”) in the December 28, 2005 financing. The loan was made on an unsecured basis, was due on demand and was forgiven in exchange for $267,900 of 6% secured convertible debenture due December 28, 2008 (the “6% Secured Debentures”). On December 28, 2005, the Company issued $2.0 million aggregate principal amount authorized $3.5 million 6% secured convertible debenture due December 28, 2008 (the “6% Secured Debentures”) to three institutional investors. The 6% Secured Debentures had, at the time they were issued, a term of three years and were to mature on December 28, 2008, pay interest at the rate of 6% per annum, payable semi-annually on January 1 and July 1 of each year beginning July 1, 2006, and are secured by a grant of a security interest into substantially all of the Company’s assets.

The 6% Secured Debentures were, at the time they were issued convertible at any time at the option of the holder into shares of the Company’s common stock at a price of $0.85 per share, subject to adjustment as set forth therein. If after the effective date of the registration statement we agreed to file under the Securities Act (the “Registration”), the closing price for the Company’s common stock exceeds $1.70 for any 20 consecutive trading days, then the Company may, within one trading day after the end of such period, require the holders of the 6% Secured Debentures to immediately convert all or part of the then outstanding principal amount of their 6% Secured Debentures. As a result of later amendments to facilitate equity financing in July 2008, principal and accrued and unpaid interest on one third of the outstanding principal amount of 6% Secured Convertible Debentures ($2,845,815), and related warrants were exchanged for identical securities, except that the conversion and exercise prices of the newly issued securities is $0.25 rather than $0.85. The terms of the conversion rights also contain certain dilution provisions.

The Company reviewed the accounting for registration rights terms relating to the shares of common stock issuable upon the conversion and exercise, respectively, of the 6% Secured Convertible Debentures and related warrants under the FASB guidance. The Company granted demand registration rights to the purchasers of the 6% Secured Debentures which requires the Company to file an initial registration statement under the Securities Act 45 days following demand made by the holders of 60% of the securities eligible for registration under the agreement. Under the registration rights agreement, the Company incurs a penalty if it fails to file such a registration statement within 45 day following such a demand or if the SEC had not declared the registration effective 90 days after filing. The holders of the 6% Secured Debentures have not demanded registration. The Company believes it can comply with a demand for registration in a timely manner and therefore no accrual for possible penalties under the registration rights agreement has been made.

On December 28, 2005, pursuant to the purchase agreements with the purchasers of the 6% Secured Debentures, the Company issued warrants to purchase an aggregate of 941,176 shares of common stock for $1.00 per share, on or prior to December 28, 2010 and short term warrants to purchase up to an aggregate of 941,176 additional shares of common stock for $0.85 per share, each subject to anti-dilution adjustments, including a “full ratchet down” to the purchasers of the 6% Secured Debentures. The short term warrants are exercisable at any time prior to the earlier of December 28, 2007 and twelve months after the effective date of the Registration Statement. If no effective registration statement is obtained after one year, then such warrants have a cashless exercise option feature.

On August 18, 2006, the Company entered into an amendment agreement with the holders of $3,875,884 principal amount of 6% Secured Debentures outstanding as of May 31, 2006, including a limited liability company owned by the wife of our Chairman, and one of our directors. The Amendment agreement made material changes to the securities purchase agreements, warrants, registration rights agreements, security agreements and other ancillary documents we executed in connection with an aggregate of $3,875,884 of 6% debentures the Company sold during the period from December 28, 2005 to March 31, 2006. As a result of the Amendment, all of the 6% Secured Debentures and warrants must be redeemed by the Company at a premium if it agrees to sell all of the Company’s assets to a third party for cash and cash equivalents. In addition, as a result of the amendment, all holders of the 6% Secured Debentures have the right to have shares of Common Stock issuable upon conversion of the debentures and exercise of the related warrants registered for resale under the Securities Act of 1933 within 60 days after receiving written demand of the holders of 60.1% of such securities and have it declared effective 90 days thereafter.

On December 15, 2007, $855,000 of related party debt was converted to additional principal of the 6% Secured Debentures on substantially the same terms as the 6% Secured Debentures previously issued by the Company. The Company issued 402,353 short-term and 402,353 long-term warrants to the purchasers of the 6% Secured Debentures. Based on the issuance date of the debentures, debt discounts were recorded in the third quarter of 2008 in the amount of $118,723, respectively for 402,353 short and 402,353 long term warrants issued with these 6% Secured Debentures.

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

During the quarter ended February 28, 2008, a deferred expense was recorded in the amount of $774,789 for the extension of the expiration date of the warrants to December 28, 2012. The amortization recorded was $51,653 and has been recorded as interest expense for the quarter ended August 31, 2008.

On April 2, 2008, the Company entered into a Waiver and Amendment Agreement with the holders of $9,283,461 issued principal amount of 6% secured convertible debentures due December 28, 2008. Pursuant to the Waiver and Amendment, the Holders agreed to waive all potential defaults caused by our not making a scheduled interest payment of approximately $255,000 which became due under the terms of the Debentures, as previously amended on March 3, 2008. The Holders agreed to add the interest due to principal and make such a waiver in exchange for the Company issuing additional Debentures equal to 10% of the principal amount of the Debentures held by the Holders (after adding the past due interest to principal).

The Company failed to pay the interest and principal and interest due on the Secured Debentures on the extended due date of June 30, 2009. As a result, the principal obligation increased to 130% of the principal balance and the interest rate increased to 18%. On December 22, 2010, certain creditors of the Company, including Andreas Typaldos, the Company’s Chairman, agreed to convert an aggregate $401,000 of unsecured debt into an aggregate 10,025,000 shares of common stock. The debt due to Mr. Typaldos arose from cash advances previously made to the Company in the form of working capital loans and from unpaid fees under a consulting agreement between the Company and Mr. Typaldos entered into in 2004. The conversion of debt for equity triggers a ratchet adjustment in certain outstanding warrants and secured debentures. The Company is negotiating with the holders of these instruments for a waiver to avoid the unintended consequences of these adjustments.

Related Party Activities - As of February 28, 2011 the Company has reported a related party payable in the amount of $102,512 which represents funds that were advanced to the Company by two of the Directors of the Company. In aggregate, at February 28, 2011, all of the $7,874,003 of the principal and interest due on the 18% Secured Debentures is due to related parties.

Derivative Liabilities

Effective June 1, 2009, the Company adopted the provisions of EITF 07-05 “Determining Whether an Instrument (or Embedded Feature) is Indexed to a Company’s Own Stock,” which was codified into ASC Topic 815 – Derivatives and Hedging. ASC 815 applies to any freestanding financial instruments or embedded features that have characteristics of a derivative and to any freestanding financial instruments that are potentially settled in an entity’s own common stock. The Company has 11,018,576 of warrants with exercise reset provisions, which are considered freestanding derivative instruments. ASC 815 requires these warrants to be recorded as liabilities as they are no longer afforded equity treatment assumptions: risk free rates from 1.32% to 1.39%, expected life terms ranging from 0.5 years to 2.0 years, an expected volatility range of 206% to 251% depending on the term of such equity contracts and a dividend rate of 0.0%. The fair value of the warrants issued and outstanding at August 31, 2010, November 30, 2010 and February 28, 2011attributed to this derivative liability has been determined to be immaterial due to the low stock price in comparison to the exercise price, hence there was no adjustment to make upon adoption of this accounting standard.

NOTE 5 – PAYROLL LIABILITIES

On January 17, 2006, the Company paid an aggregate of $873,993 of payroll liabilities of the company from which it acquired assets in 2004 at a public foreclosure sale, representing all of the fiduciary funds due. The Company had agreed to pay up to $1.2 million of such liabilities and accrued an additional $600,000 in the event there were any additional claims related to interest and penalties pursuant to its 2004 merger agreement. Currently, there is $937,000 still recorded on the Company’s books as due and outstanding for the federal and state tax authorities for penalties and interest under such agreement. The Company does not believe that it has a legal obligation to pay anything more to any taxing authority, but until such clearance is received from the appropriate agencies or the statute of limitation has expired, the Company has elected to keep the liability on its books.

NOTE 6 – DEFERRED FINANCING EXPENSES

The Company capitalizes financing expenses of legal fees, finders fees, value of warrants as extension fees in connection with the related convertible debt financing. Through November 30, 2010, these expenses were being amortized over the related term of the convertible debt instruments issued in such financing, which approximated two years. As a result of the $7 million in proceeds received from License Sale and Asset Purchase Agreement effective December 23, 2010 and the repayment of certain secured debts, all remaining deferred financing expenses have been written off in the quarter ended February 28, 2011.

NOTE 7 – EQUITY TRANSACTIONS

Effective June 1, 2005, the Company adopted Guidance for “Accounting for Stock-Based Compensation”. Compensation based stock option and warrant activity for warrants and qualified and unqualified stock options are summarized as follows:

	Shares		Weighted Average Exercise Price
Outstanding at May 31, 2010		17,150,236	$	0.30
Granted		—		—
Exercised		—		—
Expired or cancelled		240,000		0.40
Outstanding at February 28, 2011		16,910,236	$	0.30

No stock option grants were made during the nine months period ended February 28, 2011

The compensation expense attributed to the issuance of the options and warrants is recognized as they vest or are otherwise earned. The Company has recorded $ 152,142 of compensation for options vested / earned in the nine month period ended February 28, 2011 for employees. No options were granted during the nine month period ended February 28, 2011. Outstanding stock options and warrants are exercisable for three to ten years from the grant date.

The employee stock option plan stock options are exercisable for ten years from the grant date and vest over various terms from the grant date to three years. As of February 28, 2011, all granted options have vested.

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

	Shares		Weighted Average Exercise Price
Outstanding at May 31, 2010		11,735,004	$	0.63
Granted		—		—
Exercised		—		—
Expired or cancelled		6,499,057		0.70
Outstanding at February 28, 2011		5,235,947	$	0.55

No warrants were issued during the nine months ended February 28, 2011.

On December 22, 2010, certain creditors of the Company, including Andreas Typaldos, the Company’s Chairman, agreed to convert an aggregate $401,000 of unsecured debt into an aggregate 10,025,000 shares of common stock. The debt due to Mr. Typaldos arose from cash advances previously made to the Company in the form of working capital loans and from unpaid fees under a consulting agreement between the Company and Mr. Typaldos entered into in 2004. Interest expense attributed to the aforementioned warrants is being amortized over the ratable term of each respective debt arrangement. See “NOTE 4 – CONVERTIBLE DEBENTURES AND RELATED PARTY PAYABLES,” above.

Note 8.-ASSET PURCHASE AGREEMENT AND LICENSE OF COMPANY’S INTELLECTUAL PROPERTY

On December 23, 2010, the Company entered into an Asset Purchase Agreement (the “APA”) with ST Microelectronics, Inc., a Delaware corporation (“ST”), a wholly owned subsidiary of STMicroelectronics N.V. The Company pursuant to the APA, also entered into a license agreement granting ST a license to use the Company’s intellectual property assets pending closing of the purchase (the “License”). Pursuant to the APA , the Sellers agreed to sell assets used in the Company’s semiconductor business to ST for aggregate consideration of $11 million, of which $7 million was paid on the execution of the APA pursuant to the License and the balance of $4,000,000 which is due at closing; closing is anticipated to be by May 31, 2011.

The remaining $4 million due for the culmination of the aforementioned transaction with ST, has not been recorded as an asset as the items contingent to close remain substantive enough and requires certain pre-defined conditions yet to be completed to be able render the final closing to be eminent. The conditions of substance remaining to be accomplished are; (a) the mailing of Information Statement on Schedule 14C as approved by the Securities and Exchange Commission, (b) releases and settlement agreements with the unsecured creditors for all but $500,000, (c) all Trident debt holders are required to release ST and not sue with regards to any liabilities and (d) signed consents from all third parties to the assignment of contracts.

A portion of this payment was applied by the Company to settle approximately $12 million of $20 million of outstanding secured debt and the balance applied to past due salaries and other past due accounts payable. The Company will focus on development, manufacturing, and sales of consumer electronics and Smart Grid products based on power line communication semiconductors. The Company will also continue to provide consulting and development services to existing customers and users of powerline communication semiconductors. At the same time, ST hired most of the Company’s employees, each of whom were engaged in the Company’s semiconductor business.

Pursuant to and simultaneously with the execution of the APA, the Company entered into Settlement and Release agreements with holders of approximately $8 million of secured debt to standstill pending the closing of the transaction contemplated by the APA and to accept approximately $3.5 million in settlement of their claims at such closing. In addition, the Company entered into standstill agreements with the holders of approximately $2.1 million of unsecured debt. In connection with these releases and those of certain employees, the Company granted rights to the releasing parties that still hold unsecured obligations of the Company which protect such holder from dilution resulting from additional issuance of common stock or common stock equivalents at a price less than $0.04 per share in settlement of debt from the date of the APA to the earlier of closing or termination of the APA.

The transactions were approved on December 22, 2010 by the written consent of 10 holders of the Company’s common stock, whose holdings aggregated 22,173,381 shares and constitute more than a majority of the outstanding shares of the Company’s common stock. Notice of the action will be given to the non-consenting holders in an Information Statement the Company plans to prepare and file with the Securities and Exchange Commission to comply with the notice requirements of Delaware law as soon as reasonably possible.

Note 9- UNAUDITED PRO-FORMA FINANCIAL INFORMATION

The following unaudited pro-forma consolidated financial information gives effect to the Asset Sale to ST US pursuant to the Purchase Agreement, and the grant of the License to ST US to use our intellectual property assets included in the Asset Sale pending the closing of such sale. At the time the Asset Sale is completed, ST US has agreed to license back certain intellectual property to us on a non-exclusive basis, to facilitate the continuation and expansion of our consumer electronics systems business, support our existing customers and, subject to the settlement of our outstanding debt and obtaining adequate financing (of which there is no assurance), permit us to continue the development and marketing of Smart Grid products based on powerline communication semiconductors. Upon entering into the License and with our consent, ST US hired substantially all of our engineering and semi-conductor employees (including Oleg Logvinov, our former CEO and director), each of whom were engaged in the Arkados’ semiconductor business.

The statements are derived from, and should be read in conjunction with our historical financial statements and notes thereto, as presented in our Annual Report on Form 10K for the year ended May 31, 2010, filed with the SEC on September 14, 2010 and Form 8-K reporst filed since September 14, 2010.

The unaudited pro-forma consolidated financial information is presented for informational purposes only and is based upon estimates made by our management, which are based upon available information and certain assumptions that our management believes are reasonable. The unaudited pro-forma financial information is not intended to be indicative of actual results of operations or financial position that would have been achieved had the transaction been consummated as of the beginning of each period indicated above, nor does it purport to indicate results which may be attained in the future. Actual amounts could differ materially from these estimates.

The pro forma adjustments are based upon available information and certain assumptions that management believes are reasonable in the circumstances. The unaudited pro forma consolidated financial statements should be read in conjunction with the notes thereto.

As of the date of this Form 10Q filing, Arkados has yet to negotiate settlement agreements with its former employees for the issuance of equity in lieu of the accrued and unpaid compensation and has not received $4 million in cash from ST US pursuant to the Purchase Agreement, both of which are conditions precedent to settlement of debt reflected in the pro forma unaudited financial information that follows.

ARKADOS GROUP, INC.

PRO-FORMA CONSOLIDATED BALANCE SHEET

( Unaudited )

	February 28, 2011
	Historical			Adjustments			Pro Forma
Assets
Current Assets:
	$	157		$	4,000,000 (3,990,000)	A B	$	10,157
Cash	$	157		$	4,000,000 (3,990,000)	A B	$	10,157
Total Current Assets		157			10,000			10,157
Total Assets	$	157		$	10,000		$	10,157

Liabilities and Stockholders’ Deficiency
Current Liabilities:
Accrued Expenses and Other Liabilities		10,723,954			(4,833,616	)B,C		5,890,338
Related Party Debt		102,512			—			102,512
Notes Payable		1,171,301			—			1,171,301
Convertible Debentures		4,331,777			(3,275,596	)B,C		1,056,181
Payroll Taxes and related interest & penalties		936,906			—			936,906
								—
Total Current Liabilities		17,266,450			(8,109,212	)		9,157,238

Stockholders’ Deficency
Common stock, $.0001 par value; 100,000,000 shares authorized, 44,951,261 shares issued and outstanding		4,496			—			4,496
Additional paid-in capital		23,442,686			—			23,442,686
Treasury Stock		(16,000	)		—			(16,000	)
Accumulated Deficit		(40,697,475	)		8,119,212			(32,578,263	)
Total Stockholder’s deficiency		(17,266,293	)		8,119,212			(9,147,081	)
Total Liabilities & Stockholders’ Deficiency	$	157		$	10,000		$	10,157

See notes to unaudited pro-forma consolidated financial information.

ARKADOS GROUP, INC.

PRO-FORMA CONSOLIDATED INCOME STATEMENT

( Unaudited )

	YEAR ENDED MAY 31, 2010
	Historical			Adjustments			Pro Forma

Net Sales	$	295,869		$	—		$	295,869

Cost of Goods Sold		294,593			—			294,593

Gross Profit		1,276			—			1,276

Research and Development Expenses		2,700,413			(2,700,413	)E		—
General and Administrative Expenses		1,958,061			—			1,958,061

Net Loss From Operations		(4,657,198	)		2,700,413			(1,956,785	)

Interest Income (Expense)		(6,821,032	)		6,701,032	D		(120,000	)

Net Loss Before Income Taxes		(11,478,230	)		9,401,445			(2,076,785	)

Provision for Income Taxes		—			—			—

Net Loss	$	(11,478,230	)		9,401,445		$	(2,076,785	)

Net Loss per Share-basic and diluted	$	(0.35	)				$	(0.05	)

Weighted Average Number if Common
Shares Outstanding-basic and diluted		33,109,791			10,025,000	G		43,134,791

See notes to unaudited pro-forma consolidated financial information.

ARKADOS GROUP, INC.

PRO-FORMA CONSOLIDATED INCOME STATEMENT

( Unaudited )

	Nine Months Ended February 28, 2011
	Historical			Adjustments			Pro Forma

Net Sales	$	134,480		$	—		$	134,480

Cost of Goods Sold		145,245			—			145,245

Gross Profit		(10,765	)					(10,765	)

Research and Development Expenses		830,294			(830,294	)E		—
General and Administrative Expenses		474,341			—			474,341

Net Loss From Operations		(1,315,400	)		830,294	E		(485,106	)
Sale of License and IP agreements		7,000,000			4,000,000	A		11,000,000
Settlement of debt		6,662,633			2,348,234	C		9,010,867
Interest Income (Expense)		(2,195,602	)		2,105,602	D		(90,000	)

Net Income Before Income Taxes		10,151,631			9,284,130			19,435,761
Provision for Income Taxes		(100,000	)					(100,000	)

Net Income	$	10,051,631			9,284,130		$	19,335,761

Net Income per Share-Basic	$	0.26					$	0.50
Weighted Average Number if Common
Shares Outstanding-Basic		38,627,928						38,627,928
Net Income per Share-Fully Diluted	$	0.22					$	0.42

Weighted Average Number if Common
Shares Outstanding-Fully Diluted		45,599,699						45,599,699

See notes to unaudited pro-forma consolidated financial information.

ARKADOS GROUP, INC.

NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION

A)	To record the receipt of the $4 million from the sale of the intellectual property

B)	To record the payment of agreed settlement amounts for secured indebtedness outstanding and amounts to accounts payables. An arbitrary $10,000 of cash was left in the account for ongoing operations.

C)	To record the write off of principal, accrued interest and accrued penalties indebtedness attributed to the secured debt.

D)	To reflect the decreases in interest expense related to the elimination of most of the interest bearing debt at 6%.

To reflect the estimated decreases in the research and development expenses as a result of all the employees but certain administrative personnel being hired by ST US, as well as the facilities being transferred to ST US. The applicable rent deposit has been relinquished and used to reduce the outstanding rent payable due as well.

F)	No value has been recorded for the licensed technology obtained for the intellectual property Arkados has sold, since Arkados has not established any meaningful sales from such technology.

G)	To reflect the issuance of the issuance of additional equity for existing indebtedness as part of this overall structured transaction.

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

Overview

We are a development stage enterprise, principally engaged in developing and marketing technology and solutions that enable standard electrical wires to carry digital information, such as broadband communication, multimedia, smart energy and smart grid data, and networking. From May 2004 until December 2011, the Company, through our wholly owned Delaware subsidiary, Arkados, Inc., operated as a “fabless” semiconductor company, meaning we designed and produced semiconductors without owning and operating a fabrication facility. In December 2010, we entered into an agreement to sell substantially all of the assets used in our business of designing, developing and selling semiconductor products that incorporate powerline communications and networking services and offering services related thereto (the “Asset Sale”) to STMicroelectronics, Inc. (“ST US”), a subsidiary of STMicroelectronics N.V. (“ST”), pursuant to an Asset Purchase Agreement, by and among the Company, the Companies Arkados, Inc., and Arkados Wireless Technologies, Inc. subsidiaries (collectively, “Arkados”) and ST US, dated as of December 23, 2010 (the “Purchase Agreement”). At the same time, we granted a license (the “License”) to ST US to use our intellectual property assets included in the Asset Sale pending the closing of such sale. At the time the Asset Sale is completed, ST US has agreed to license back certain intellectual property to us on a non-exclusive basis to facilitate the continuation and expansion of our consumer electronics systems business, support our existing customers and, subject to the settlement of our outstanding debt and obtaining adequate financing (of which there is no assurance), permit us to continue the development and marketing of Smart Grid products based on powerline communication semiconductors. We also plan to continue to provide consulting and development services to existing customers and users of powerline communication semiconductors. ST US hired substantially all of our engineering and semiconductor employees (including Oleg Logvinov, our former CEO and director), who was engaged in and directed our semiconductor business.

As of February 28, 2011, there was $7,874,003 of secured debt principal plus interest outstanding, almost all of which was held by related parties. This secured debt and accrued interest was in default at February 28, 2011 as is $1,079,381 in principal and interest on unsecured notes due June 29, 2009 and $1,171,301 of principal and interest due on bridge notes. In addition, as of February 28, 2011, $3,752,815 due to our employees and our accounts payable was approximately $2,016,571, all of which was over 90 days.

Arkados Products

We designed turnkey solutions to be used inside products for both consumers and industry. For example, consumer products can use Arkados solutions as part of a connected home entertainment and computing network, while industry can implement Arkados solutions as a part of a utility company’s “smart grid” and “green energy” solutions. We plan to offer complete hardware and software design solutions that allow them to build devices that will distribute audio, video, voice, and data content throughout the whole house, building, or “smart-grid” infrastructure.

Market Opportunities

Arkados solutions were offered to the following markets:

●

the retail consumer electronics market and the whole-home custom installation market

●

the smart grid market

●

the subscription services market.

We plan, subject to the settlement of debt and the receipt of adequate financing to continue offering software and integrated hardware solutions in these markets but will no longer design or manufacture semiconductors incorporated into these systems.

The Growing Digital Home: Networked Consumer Electronics

As broadband access to the home is becoming ubiquitous, home networking and connectivity demands for digital home applications continues to grow – extending the internet, and the services that travel on it, to every corner of the house.

The promise of sending digital communications over common power lines is now being realized, and Arkados’ products serve several large and growing markets: retail consumer electronic products, whole-house audio installations, smart-grid utility company applications, broadband-over-powerline internet access, and the distribution of internet-based services.

The whole-house audio market category has been particularly active. Arkados’ solutions offer a way to create both retail and custom audio systems with features and functionality heretofore available only in multi-thousand dollar custom audio installations. Arkados’ customers include Devolo AG, Channel Vision, IOGEAR, Gigafast, Tatung, and Zinwell.

Two customers in particular, Russound and Nuvo have begun marketing campaigns for their whole-house systems that use the Arkados chips and software. Russound’s Collage system and Nuvo’s Renovia system are planned to be available in the customer installation channels later this year.

These high-end custom audio systems, which address the existing home market (expanding from their primary market target of newly constructed homes), can feature up to 12 separate audio zones and can process a wide range of sources of audio content which can be streamed from any digital or legacy analog source.

Russound, a leading custom multi-room audio distribution system manufacturer, selected the AI-1100 for use in its iBridge Power Dock and its Collage system. Arkados’ chips can also power cameras, video endpoints, and sensors for other installed home systems, such as for surveillance systems.

Smart Energy and Utility Company Applications

Another large potential market for Arkados’ solutions relates to energy conservation, the “green” applications that help utility companies and their customers save both money and energy. For example, “Smart Grid” applications (Green Energy, demand response, energy efficiency and grid modernization – i.e., reduction of carbon emissions) and home/building automation (such as controlling air conditioner thermostats remotely) represent large and attractive opportunities given today’s surging energy costs. Arkados has design wins at MainNet and Corporate Systems Engineering.

Services

An additional immediate potential market for the Arkados platform is for subscription music services. Arkados software and chips enable the distribution of Internet music services (e.g., Rhapsody, Yahoo! Music, AOL Music, Shoutcast services). The Company is actively working on reference designs and business strategies to address this rapidly developing market.

Corporate Background

On May 24, 2004, we filed a merger certificate completing the acquisition of Miletos, Inc., a previously unaffiliated Delaware corporation (the “Merger”). The consideration for this Merger was 16,090,577 restricted shares of our common stock and the assumption of certain liabilities of Miletos’ predecessor and former controlling equity holders. The merger was completed according to the terms of an Agreement and Plan of Merger dated as of May 7, 2004. Miletos merged into a wholly owned subsidiary we formed for the merger which then changed its name to “Arkados, Inc.”.

On March 3, 2007 we completed the merger of Arkados Wireless Technologies, Inc., our wholly owned subsidiary (“Merger Sub”) with Aster Wireless, Inc. a Delaware corporation (“Aster”) pursuant to an Agreement and Plan of Merger dated February 13, 2007 by and among Merger Sub and Arkados Group, Inc. In this merger, we acquired synergistic talent and technology which has helped improve the reliability and quality of audio streaming in our current generation chipset and we believe will help deliver our next-generation chips to market more quickly, with richer capabilities. This will translate to a better competitive position in the marketplace. The technology enhances the reliable distribution of multimedia content, potentially over multiple distribution media, and is designed to be embedded in new consumer electronics products and accessories for audio, video distribution, set-top boxes and other multimedia entertainment appliances.

Industry Background

Music, movies, the electrical “smart grid”, and a wide range of communication services are experiencing a fundamental shift. The distribution of content to products, and in some cases the products themselves, is transitioning from traditional methods. Digital content is requires a new digital distribution model.

Arkados’ solutions are designed to directly address this opportunity by enabling electrical power sockets to be turned into high-speed network ports, thereby providing a high-speed pathway through which digital information can travel inside a home, to the home, and on the smart grid. We believe that this shift creates demand for new products, and new products will require new types of semiconductors that incorporate digital technologies, supporting such functions as communication, application processing, and media rendering.

The HomePlug technology now dominates the marketplace. Market analyst In-Stat forecasted that by 2010, the technology based on HomePlug specifications will hold 85% of the worldwide market for powerline communications. The HomePlug Powerline Alliance has brought together both personal computer and consumer electronics companies on a global scale. Membership in the Alliance has grown to include nearly 70 industry-leading companies. HomePlug Sponsor companies

include Cisco; Comcast; GE Energy., part of General Electric Co.; Gigle Semiconductor, Intellon (which entered into an Agreement and Plan of Merger with Atheros Communications, Inc. in September, 2009), Motorola; NEC Electronics, and SPiCOM Technologies. Besides Arkados, contributor members include Corporate Systems Engineering; Renesas; Texas Instruments; and YiTran Communications.

Our future success may also depend on assisting our customers with integration of our components into their new products, including providing support from the concept stage through design, launch, and production ramp. In this new converged marketplace, we believe the role of the traditional semiconductor provider is changing, and we have positioned ourselves as a platform provider that becomes an integral part of our customer’s product development process. We believe that our focus on application related features and software may contribute to our success.

Plan of Operation

We have not had significant revenue from operations since inception and, as of February 28, 2011, we are a development stage company with only one employee, our chief executive officer. Furthermore, we have financed operating losses since September 2004 with the proceeds primarily from related party lending from our major stockholder and affiliated lenders, as well as other stockholders and lenders, and from a capital raise to qualified investors through a retail brokerage firm. From December 2005 to December 31, 2007, we sold an aggregate $9,283,461 of 6% secured convertible debentures due December 28, 2008 of which $6,145,884 was purchased by institutional investors, $3,092,577 by our directors and their relatives and $45,000 was issued to settle an equivalent amount of legal fees.

We require additional funding to finance inventory, support operations for the expansion of our systems business discussed above, and the expansion of our management team and sales and marketing organization. I

At the time we entered into the Purchase Agreement and the License, we had entered into agreements to settle or otherwise satisfy approximately$20 million of secured debt and $5,070,510 of payroll and other employee claims (of which $3,640,570 remains to be settled for an unspecified amount of shares of Arkados common stock) which will significantly improve our balance sheet upon completion of the Asset Sale. After those settlements, we will still owe amounts to unsecured creditors that far exceeds the estimated net proceeds of the Asset Sale.

After paying the settlement amounts that we have committed to as the time of signing the Purchase Agreement and the License and transaction expenses, we estimate that we will have $284,833 remaining from the proceeds of the Asset Sale and the License, less operating expenses that we incur between signing the Purchase Agreement and the closing of the Asset Sale. Our intention is to further improve our balance sheet and thereby improve our ability to raise capital to pursue our Systems Business after the closing of the Asset Sale, by settling with our remaining creditors, i.e. holders of the Subordinated Notes and Bridge Notes and our vendors to whom we owe money, and as a condition to the closing of the Asset Sale, we must obtain agreements from most of our unsecured creditors acknowledging that ST and its affiliates are not assuming and are not liable for Arkados’s debts or obligations and agreeing to release any claims against ST and its affiliates, if any. ST US may waive or modify this or any other condition that is not fully satisfied, but is under no obligation to do so. We may enter into further agreements with ST US in order to close the Asset Sale if this condition is not fully satisfied, however, as of the date of this Information Statement, no agreements have been reached. Any such agreement that affects either the timing or amount of payments to either secured creditors or unsecured creditors that have claims which might impair our ability to convey clear title for any assets to ST US, will require the approval of such creditors, in their sole discretion.

Because we will only have a fraction of the amount of cash required to satisfy our remaining unsecured debt and accounts payable, it is likely that settlements with unsecured creditors will predominately be in the form of Arkados stock or extended payment terms. Additional settlement agreements with our creditors will be disclosed in future filings with the SEC consistent with our reporting obligations pursuant to SEC rules and regulations. To the extent such agreements involve the issuance of equity, such settlements will have to either be pursuant to a registration statement filed and effective under the Securities Act of 1933, as amended (the “Securities Act”), or pursuant to one or more exemptions from such registration such as exemptions for transactions not involving a public offering under Section 4(2) of the Securities Act and Rule 506 of Regulation D thereunder or the statutory exemption set forth in Section 3(a)(9) of the Securities Act for securities exchanged for outstanding securities of the same issuer without the payment of fees to solicit the exchange. If we are successful in settling all or most of our outstanding debts, we believe that we will be in a much better position to secure additional financing required to pursue the Systems Business that we will retain after the Asset Sale. We have entered into agreements with several creditors (and expect to enter into more such agreements after the date of this information statement for the issuance of an unspecified amount of shares of our common stock that provides that such creditors will be offered the right to convert their debt remaining after a partial cash payment at the closing of the Asset Sale at the same price any person agrees to convert their debt to equity. The agreement

requires us to additional shares if we convert debt into equity at a lower price per share following their acceptance of such an offer. Solely for illustrative purposes, if all of the unsecured debt of (estimated at $7.9 million) was exchanged for shares or share equivalents at the rate of $0.036 per share (the actual average reported closing price for the ten trading days ended April 4, 2011), we would be required to issue 219,415,861 shares. That number of shares exceeds the amount of our currently authorized and unissued shares of common stock and therefore the issuance would be subject to an amendment of our certificate of incorporation to issue such shares or our board of directors authorizing the issuance of a voting convertible preferred stock, with little or no preference to the rights of common stockholders, that automatically converted into common stock upon the due authorization and filing of an amendment authorizing the issuance of sufficient amount of common stock to satisfy our obligation to issue such shares. Our common stockholders will not receive any proceeds from this transaction. Our current stockholders will retain their equity interest in Arkados, but will suffer significant dilution as a result of any settlements of debt in exchange for shares of our stock. The sale will not result in any changes in the rights of our stockholders.

Plans After the Asset Sale

Upon the completion of the Asset Sale, we will have limited ongoing business operations, consisting principally of continuing to support customers that utilize Arkados chips and solutions in consumer products. We have not yet determined what our strategic direction will be following the consummation of the Asset Sale and are considering the following possible alternatives.

Continuing and Expanding the Systems Business. Depending on our ability to settle outstanding unsecured debt and raise capital following the Asset Sale, we may decide to continue and expand the Systems Business emphasizing the design, marketing and sale of integrated powerline solutions for consumer products such as whole house audio and the development of Smart Grid applications and developing applications that use powerline communications to monitor and control heating and cooling for multiple unit dwellings.

Wind Down the Business and Dissolve. We may decide to cease all of our operations and seek stockholder approval of a plan of liquidation and dissolution so that we may liquidate all of our remaining assets, pay our known liabilities, distribute any remaining cash on hand and dissolve.

Seek Bankruptcy Protection. We may elect to seek protection under bankruptcy laws after the closing of the Asset Sale as a means of liquidating our remaining assets and paying our creditors.

At this time, we cannot predict which (if any) of these options we will pursue, although, as mentioned above, we are hopeful that we can obtain further financing to continue the Systems Business. Whichever option we ultimately decide to pursue, we anticipate setting aside a portion of the proceeds from the Asset Sale for potential expenses in connection with a wind down of our business.

Our board of directors will have sole authority and discretion with respect to which of the above options or other options we will pursue. The determination will in large part be determined by the availability of financing and what success we have in settling our remaining debt. Accordingly, except in the case of a distribution as part of a plan of liquidation and dissolution, as required by Delaware law, no additional or subsequent vote of the stockholders will be required to approve any such distribution.

Results of Operations

For The Three Months Ended February 28, 2011

During the three month period ended February 28, 2011, we had total revenue of $6,069 compared to $46,346 for the same period in 2010. As of February 28, 2011, there was approximately $0 in backlog. Total operating expenses for the three month period ended February 28, 2011 were $113,866 compared to total operating expenses for the same period in fiscal 2010 of $1,142,879. In both periods, the most significant expenses were personnel, professional fees and research related expenses. The reduction in operating expenses is due principally to ST US hiring substantially all employees engaged in our microprocessor business and the resignation of our other executive officers.

The Company failed to pay the interest and principal due on the Secured Debentures on the extended due date of June 30, 2009. As a result, the principal obligation increased to 130% of the principal balance resulting in a default penalty of $3,622,083 booked in the quarter ended August 31, 2009 and additional penalty interest at 18% per annum for the quarter ended August 31 and the nine month period February 28, 2010 in the amounts of $359,399 and $1,990,890, respectively.

We recognized the receipt of the $7 million license fee in the three month and nine month period ended February 28, 2011, as well as $6,662,633 of income from the reduction of secured debt in excess of the $ 5,467,548 paid to settle such debt.

For The Nine Months Ended February 28, 2011

During the nine month period ended February 28, 2011, we had total revenue of $134,480, compared to $173,246 for the

same period in fiscal 2010. $134,480 of the revenue in the nine months ended February 28, 2011 was related to development agreements with two customers as compared with $173,246 of development revenue in the same period ended February 28, 2010 from two customers. Total operating expenses for the nine month period ended February 28, 2011 were $1,304,635 compared to total operating expenses for the same period in fiscal 2010 totaling $3,480,805. The Company failed to pay the interest and principal due on the Secured Debentures on the extended due date of June 30, 2009. As a result, the principal obligation increased to 130% of the principal balance resulting in a default penalty of $3,622,083 booked in the quarter ended August 31, 2009 and additional penalty interest at 18% per annum for the quarter ended August 31, 2009 and the nine month period February 28, 2010 in the amounts of $737,753 and $1,972,619, respectively. Additional penalty interest for the three month and nine month periods ended February 28, 2011 were $378,000 and $1,993,779, respectively.

Liquidity and Capital Resources

Our principal source of operating capital has been provided in the form of equity investments and the private placement of debt securities, coupled with warrants and related party loans. We do not have any significant sources of revenue from our operations. No assurance can be given that we can engage in any public or private sales of our equity or debt securities to raise working capital. We have depended, in part, upon loans from our present stockholders or management and there can be no assurances that our present stockholders or management will make any additional loans to us. If we are not able to raise capital in the near term we will have to curtail our operations and our business and potential value could be substantially impaired.

There can be no assurance that our efforts to raise additional capital will be successful, or even if successful will fund our planned operations or capital commitments.

At February 28, 2011, we had $157 in cash and negative working capital of $17.3 million, compared to $16,345 in cash and negative working capital of $28.4 at May 31, 2010. Working capital reflects the short-term maturities of all of the secured 18% convertible debentures. The significant reduction of our working capital deficit resulted from the receipt of $ 7.0 million of proceeds from the License and the application of $ 5,467,548 if such proceeds to settle $12,399,188 of secured debt.

As of July 6, 2009 the $1,066,500 principal amount of 6% Convertible Subordinated Notes (the “Notes”) due June 30, 2009 were also in default by reason on non-payment. Under the terms of the Notes, the interest rate increases to 12% during the period the Notes are in default and the holders are entitled to the costs of collection. We plan to discuss forbearance or extension of the due dates of the Notes, as well as conversion of the Notes into equity with the holders and their representatives, but there can be no assurance that any such agreement can be reached.

Our lack of working capital has constrained and can be expected to continue to constrain all aspects of our operations. As design solutions are completed for existing customers, our need to finance the purchase of chip inventory will increase. If we are unable to finance the purchase of chip inventory, we will not be able to fulfill sale commitments and will not be able to recognize revenue on firm orders; such failures will have an adverse impact on our important technical relationships and future marketing efforts. In additional to general efforts to raise capital to support our operations, we will explore arrangements specifically relating to inventory that may be costly (in the case of a factoring arrangement), require the consent of holders of secured debt and may involve the licensing of technology in exchange for manufacturing services.

We continue to seek financing to meet the commitments either in the form of the sale of equity, additional secured or unsecured debt and any combination of the foregoing, as well as have discussion with all of our creditors to settle the debt for partial payment, shares of our common stock or a combination thereof. There is no assurance sufficient financing to meet these commitments will be available, and, if they are not met, our business could be suspended or, upon a material default in our obligations to the holders of our convertible secured debt, face the acceleration of our obligations and the seizure of our assets to satisfy the debt.

Commitments

We do not have any commitments which are required to be disclosed in tabular form as of February 28, 2011.

Critical Accounting Policies

Financial Reporting Release No. 60 requires all companies to include a discussion of critical accounting policies or methods used in the preparation of financial statements. Our accounting policies are described in Note 2 of the notes to our consolidated financial statements included in this report. Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America, which requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The following is a brief discussion of the more significant accounting policies and methods used by

us. In addition, Financial Reporting Release No. 67 was recently released by the SEC to require all companies to include a discussion to address, among other things, liquidity, off-balance sheet arrangements, contractual obligations and commercial commitments.

Basis of Presentation

Our consolidated financial statements have been prepared assuming we will continue as a going concern despite substantial doubt as to our ability to do so. Management anticipates losses in the foreseeable future and plans to finance losses by raising additional capital. If we are unable to continue as a going concern, adjustments would have to be made to the carrying value of assets.

We recognize revenue in accordance with SEC Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements, as amended (“SAB 101”). SAB 101 requires that four basic criteria must be met before revenue can be recognized: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services rendered; (3) the fee is fixed or determinable; and (4) collectibility is reasonably assured. Under the provisions of SAB 101, we recognize revenue when products are shipped, and the collection of the resulting receivable is probable. If revenues are from a long term arrangement, revenues are recognized when pre-determined milestones, which generally are related to substantial scientific or technical achievement, are accomplished.

Accounting for Stock Based Compensation

The computation of the expense associated with stock-based compensation requires the use of a valuation model. The accounting guidance for stock based compensation is a new and very complex accounting standard, the application of which requires significant judgment and the use of estimates, particularly surrounding Black-Scholes assumptions such as stock price volatility, expected option lives, and expected option forfeiture rates, to value equity-based compensation. We currently use a Black-Scholes option pricing model to calculate the fair value of its stock options. We primarily use historical data to determine the assumptions to be used in the Black-Scholes model and have no reason to believe that future data is likely to differ materially from historical data. However, changes in the assumptions to reflect future stock price volatility and future stock award exercise experience could result in a change in the assumptions used to value awards in the future and may result in a material change to the fair value calculation of stock-based awards. The guidance 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.

Off Balance Sheet Arrangements

We do not have any off balance sheet arrangements.

Derivative Liabilities

Effective June 1, 2009, the Company adopted the provisions of EITF 07-05 “Determining Whether an Instrument (or Embedded Feature) is Indexed to a Company’s Own Stock,” which was codified into ASC Topic 815 – Derivatives and Hedging. ASC 815 applies to any freestanding financial instruments or embedded features that have characteristics of a derivative and to any freestanding financial instruments that are potentially settled in an entity’s own common stock. The Company has 11,018,576 of warrants with exercise reset provisions, which are considered freestanding derivative instruments. ASC 815 requires these warrants to be recorded as liabilities as they are no longer afforded equity treatment assumptions: risk free rates from 1.32% to 1.39%, expected life terms ranging from 0.5 years to 2.0 years, an expected volatility range of 206% to 251% depending on the term of such equity contracts and a dividend rate of 0.0%. The fair value of the warrants issued and outstanding at August 31, 2010 and November 30, 2010, attributed to this derivative liability has been determined to be immaterial due to the low stock price in comparison to the exercise price, hence there was no adjustment to make upon adoption of this accounting standard

Item 3. Quantitative And Qualitative Disclosures About Market Risk

Not applicable.

Item 4. Controls and Procedures.

Based on an evaluation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended) required by paragraph (b) of Rule 13a-15 or Rule 15d-15, as of February 28, 2011, our sole executive officer (who serves as our Chief Executive Officer and Principal Financial Officer) concluded that our disclosure controls and procedures were not effective in ensuring that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms.

In connection with the preparation of our annual financial statements, our management performed an assessment of the effectiveness of internal control over financial reporting as of May 31, 2010. Management’s assessment included an evaluation of the design of our internal control over financial reporting and the operational effectiveness of those controls. Based on this

evaluation, management determined that, as of May 31, 2010, there were material weaknesses in our internal control over financial reporting. The material weaknesses identified during management’s assessment were (i) a lack of sufficient internal accounting personnel having expertise to provide reasonable assurance that our financial statements and notes thereto, are prepared in accordance with generally accepted accounting principles (GAAP) and (ii) we failed to maintain an effective anti-fraud program designed to detect and prevent fraud relating to (i) an effective whistle-blower program or other comparable mechanism and (ii) an ongoing program to manage identified fraud risks. In light of these material weaknesses, management concluded that, as of May 31, 2010, we did not maintain effective internal control over financial reporting. As defined by Regulation S-X, Rule 1-02(a)(4), a material weakness is a deficiency or a combination of deficiencies, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected.

We have insufficient cash or other resources to formulate or implement a plan of remediation. As of January 31, 2011 we have one executive officer and, although the board of directors and audit committee have been supportive of plans to seek a qualified Chief Financial Officer and staff, in the past, absent financing, there are no resources to do so. If and when we are able to raise sufficient resources we plan to seek and hire qualified personnel to develop a remedial plan and implement such plan.

These measures are insufficient to address any of the identified material weaknesses and material misstatements in our interim or annual financial statements may occur in the future and we to be delinquent in our filings. In addition to adequate financial resources to pay qualified individuals, a key element of our remediation effort is the ability to recruit and retain qualified individuals to support our remediation efforts. In addition to financial constraints, improvement in internal control will be hampered if we can not recruit and retain more qualified professionals. Among other things, any unremediated material weaknesses could result in material post-closing adjustments in future financial statements.

Changes In Internal Control Over Financial Reporting

During the period ended February 28, 2011, our chief financial officer resigned and we no longer have a part-time bookkeeper. The responsibilities of chief financial officer were assumed de facto by our sole executive officer Andreas Typaldos. While we plan to recruit a qualified chief financial officer and staff with appropriate qualifications and experience, these changes are likely to have a material adverse effect on our internal and disclosure controls.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings.

There has been no material change in any of the matters set forth in Item 3. of our Form 10-K report for the fiscal year ended May 31, 2010 and no new litigation commenced since the filing of our Form 10-K that would be required to be disclosed in response to this Item.

Item 1A. Risk Factors

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended May 31, 2010 which could materially affect our business, financial condition or future results. Further, as a result of the Purchase Agreement and License Agreement with ST US, as well as the departure of all of our employees the following should be considered significant risks of any investment in the our company:

Uncertain Business Plan. Although we plan to continue the development of our Systems Business, the viability are developing a plan of financing and need to hire personnel to operate the remaining systems business. There are no commitments for financing and the $4 million of potential proceed from the Asset Purchase is not sufficient to complete the settlement of outstanding debt or fund operations.

Lack of Qualified Personnel. We currently only have one part time executive officer, our Acting CEO, and do not have either candidates for executive or line positions to manage the company, operate our Systems Business or take additional actions to finance the company and settle outstanding unsecured debt. In addition we lat the financial resources to recruit and hire such persons. We believe that certain software consulting services will be available from arms length vendors to provide services to our existing customers but, but in the absence of significant debt settlements and financing will not be able to engage them. Accordingly, we may not be able to continue our Systems Business or make strategic changes to our business plans.

Uncertainty with Respect to Closing the Asset Sale. The closing of the Asset Sale remains subject to conditions including obtaining the acknowledgment by the holders of most of our outstanding unsecured debt that ST US has not assumed any liability for any of our obligations and the mailing of an Information Statements concerning the Asset Purchase to our stockholders that are not part of the holders that approved the Asset Purchase by written consent. As of April 18, 2011 we lack the financial resources to pay for the printing and mailing. If this disability hinders to closing of the Asset Sale, the remaining secured creditors could foreclose upon and take all assets of our company and any investment in the company would be worthless.

Item 6. Exhibits.

(a) Exhibits.

31.1

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

31.2

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

32.1

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

32.2

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

SIGNATURES

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

Dated: April 19, 2011	ARKADOS GROUP, INC.



	By:	/s/ Andreas Typaldos
		Andreas Typaldos
		Acting President and Chief Executive Officer
		(chief executive and financial officer)

Attached files

Stock widget

Investing forum

IOTA COMMUNICATIONS, INC. Reports

Also read