10-Q/A

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q/A

(Mark One)

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

FOR THE QUARTERLY PERIOD ENDED: August 31, 2015

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

FOR THE TRANSITION PERIOD FROM _________ TO _________

Commission file number: 0-27587

ARKADOS GROUP, INC.

(Exact name of registrant as specified in its charter)

Delaware	22-3586087
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
211 Warren Street, Suite 320, Newark, New Jersey	07103
(Address of principal executive offices)	Zip code
Issuer’s telephone number: (862) 373-1988

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

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

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

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

The number of the registrant’s shares of common stock outstanding was 12,081,500 as of October 15, 2015.

ARKADOS GROUP, INC.

Quarterly Report on Form 10-Q

Quarter Ended August 31, 2015

(FY 2016)

TABLE OF CONTENTS

	Page
PART I. FINANCIAL INFORMATION	F-1
Item 1.  Financial Statements	F-1 to F-19
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	2
Item 3. Quantitative And Qualitative Disclosures About Market Risk	10
Item 4. Controls and Procedures	10
PART II - OTHER INFORMATION	11
Item 1. Legal Proceedings	11
Item 1A.  Risk Factors	11
Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds	11
Item 4.  Mine Safety Disclosures	11
Item 5. Other Information	11
Item 6. Exhibits	12
SIGNATURES	13

i

EXPLANATORY NOTE

We are filing this Amendment No. 1 (“Form 10-Q/A-1”) to our Quarterly Report on Form 10-Q for the Quarter Ended August 31, 2015, originally filed with the Securities and Exchange Commission (the “SEC”) on October 14, 2015 (the “Form 10-Q”), to check the Box labelled “No” which responds to the instruction “Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act).”

INTRODUCTORY NOTES

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

The forward-looking statements included herein are based on current expectations that involve a number of risks and uncertainties set forth under “Risk Factors” in our Annual Report on Form 10-K for the years ended May 31, 2015 and 2014 and other periodic reports filed with the SEC. Accordingly, to the extent that this Report contains forward-looking statements regarding the financial condition, operating results, business prospects or any other aspect of the Company, please be advised that Arkados’ actual financial condition, operating results and business performance may differ materially from that projected or estimated in such forward-looking statements.

The information contained in this report, except as specifically dated, is as of August 31, 2015.

1

PART I. FINANCIAL INFORMATION

	Page
Item 1. Financial Statements
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets	F – 2
Condensed Consolidated Statements of Operations	F – 3
Condensed Consolidated Statements of Cash Flows	F – 4
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS	F – 5 to F –19

F-1

ARKADOS GROUP, INC AND SUBSIDIARIES 

CONDENSED CONSOLIDATED BALANCE SHEETS

	August 31, 2015			May 31, 2015
		(unaudited)
ASSETS
Current assets:
Cash	$	290,622		$	234,994
Accounts receivable		61,322			132,349
Inventory		343,504			156,705
Prepaid expenses and other current assets		11,436			12,004
Total current assets		706,884			536,052
Security deposits		20,384			1,874
Total assets	$	727,268		$	537,926
LIABILITIES AND STOCKHOLDERS’ DEFICIENCY
Current liabilities:
Accounts payable and accrued expenses	$	931,724		$	2,655,132
Deferred revenue		332,191			267,291
Accrued income tax		63,082			63,082
Debt subject to equity being issued		456,930			456,930
Notes payable		345,832			345,832
Total current liabilities		2,129,759			3,788,267
Total liabilities		2,129,759			3,788,267
Commitments
Stockholders’ deficiency:
Convertible preferred stock, $.0001 par value; 5,000,000 shares authorized, zero shares outstanding		—			—
Common stock, $.0001 par value; 600,000,000 shares authorized; 12,081,500 and 11,099,833 issued and outstanding		1,208			1,110
Additional paid-in capital		39,216,670			36,840,157
Accumulated deficit		(40,620,369	)		(40,091,608	)
Total stockholders’ deficiency		(1,402,491	)		(3,250,341	)
Total liabilities and stockholders’ deficiency	$	727,268		$	537,926

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

F-2

ARKADOS GROUP, INC AND SUBSIDIARIES 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

	Three months ended
	August 31,			August 31,
	2015			2014
Net sales	$	106,836		$	40,000
Operating expenses:
Selling and general and administrative		529,192			1,187,174
Research and development		98,429			52,192
Total operating expenses		627,621			1,239,366
Loss from operations		(520,785	)		(1,199,366	)
Other expenses:
Interest expense		(7,414	)		(115,664	)
Loss on translation adjustments		(562	)		—
Total other expenses		(7,976	)		(115,664	)
Loss before provision for income taxes		(528,761	)		(1,315,030	)
Provision for income taxes		—			—
Net loss	$	(528,761	)	$	(1,315,030	)
Loss per common share - basic and diluted	$	(0.04	)	$	(0.32	)
Weighted average of common shares outstanding - basic and diluted		11,804,761			4,144,962

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

F-3

ARKADOS GROUP, INC. AND SUBSIDIARIES 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS 

(Unaudited) 

	Three Months Ended
	August 31, 2015			August 31, 2014
Cash flows from operating activities:
Net loss	$	(528,761	)	$	(1,315,030	)
Adjustments to reconcile net loss to net cash used in operating activities:
Amortization of debt discount		—			93,866
Issuance of common stock for services		—			1,000,000
Changes in operating assets and liabilities:
Accounts receivable		71,027			—
Inventory		(186,799	)		—
Prepaid expenses and other current assets		568			7,757
Security deposits		(18,510	)
Accounts payable and accrued expenses		150,203			17,947
Deferred revenue		64,900			—
Net cash used in operating activities		(447,372	)		(195,460	)
Cash flows from financing activities:
Proceeds from sales of common stock		503,000			—
Proceeds from convertible debt		—			200,000
Net cash provided by financing activities		503,000			200,000
Net increase in cash		55,628			4,540
Cash at beginning of period		234,994			118,505
Cash at end of period	$	290,622		$	123,045
Schedule of non-cash transactions:
Common stock issued for accrued stock based compensation	$	250,833		$	—
Stock options issued for accrued stock based compensation	$	1,622,778		$	—
Warrants issued to former employees to settle debt subject to equity being issued	$	—		$	747,536
Common stock issued or to be issued for debt subject to equity being issued	$	—		$	466,000
Valuation of beneficial conversion feature of debt raise	$	—		$	71,000
Supplemental disclosure of cash flow information:
Interest paid	$	—		$	—
Income taxes paid	$	—		$	—

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

F-4

ARKADOS GROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE MONTHS ENDED AUGUST 31, 2015 and 2014

( UNAUDITED )

1. DESCRIPTION OF BUSINESS

Arkados Group, Inc. (the “Parent”) conducts business activities principally through two of its wholly-owned subsidiaries, Arkados, Inc. (“Arkados”) and Arkados Energy Solutions, LLC (“AES”) (collectively, the “Company”).

The Company underwent a significant restructuring following December 23, 2010, during which substantially all of its assets were acquired by STMicroelectronics (sometimes referred to hereinafter as the “Asset Sale”), as disclosed in the Form 8-K filed December 29, 2010 and further described (as to the closing) in the Form 8-K filed July 12, 2011. Settlements reached in connection with the Asset Sale and the fulfillment of obligations in connection therewith, have just recently been (post the period covered by this report) substantially completed.

Following the sale of its assets associated with the manufacture of microchips, the Company shifted its focus towards the following businesses:

Arkados - Software and hardware design and developing solutions that enable machine to machine communications for the Internet of Things (IoT). Arkados’ solutions support smart grid and smart building applications primarily in the areas of building automation and energy management and are uniquely designed to drive a wide variety of wireless and powerline communication (PLC)-based products, such as sensors, gateways, video cameras, appliances and other devices.

AES - Energy services provider with focus on the design, installation and maintenance of innovative, sustainable, and cost-effective energy solutions for both residential and commercial customers. AES implements smart grid applications primarily in the areas of LED lighting, building automation, and energy management. These applications are uniquely designed to drive a wide variety of wireless and powerline communication (PLC)-based products, such as sensors, gateways, video cameras, appliances and other devices.

Effective March 18, 2015, the Company implemented a reverse stock split of its outstanding common stock at a ratio of 1-for-30 shares. All share figures and results are reflected on a post-split basis. See Note 6.

The accompanying condensed consolidated financial statements as of August 31, 2015 (unaudited) and May 31, 2015 and for the three month periods ended August 31, 2015 and 2014 (unaudited) have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission including Form 10-Q and Regulation S-X. The information furnished herein reflects all adjustments (consisting of normal recurring accruals and adjustments) which are, in the opinion of management, necessary to fairly present the operating results for the respective periods. Certain information and footnote disclosures normally present in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted pursuant to such rules and regulations. These financial statements and the information included under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations” should be read in conjunction with the audited financial statements and explanatory notes for the year ended May 31, 2015 as disclosed in our annual report on Form 10-K for that year. The results of the three months ended August 31, 2015 (unaudited) are not necessarily indicative of the results to be expected for the pending full year ending May 31, 2016.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

a. Going concern - The accompanying condensed consolidated financial statements have been prepared assuming that the Company will continue as a going concern. The Company has incurred net losses of approximately $40.6 million since inception, including a net loss of approximately $529,000 for the three months ended August 31, 2015. Additionally, the Company still had both working capital and stockholders’ deficiencies at August 31, 2015 and May 31, 2015 and negative cash flow from operations since inception. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. Management expects to incur additional losses in the foreseeable future and recognizes the need to raise capital to remain viable. The accompanying consolidated financial statements do not include any adjustments that might be necessary should the Company be unable to continue as a going concern.

b. Principles of consolidation - The consolidated financial statements include the accounts of the Parent, and its wholly-owned subsidiaries, which include: AES, Arkados, CDKnet, LLC and Creative Technology, LLC. Currently, Arkados and AES are the only active entities with operations. Intercompany accounts and transactions have been eliminated in consolidation.

F-5

c.	Revenue Recognition -
	Arkados
	Revenues from software licensing are recognized in accordance with Accounting Standards Codification (“ASC”) 985-605, “Software Revenue Recognition.” Accordingly, revenue from software licensing is recognized when all of the following criteria are met: persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, and collectability is probable. The Company intends to enter into arrangements with end users for items which may include software license fees, and services or various combinations thereof. For each arrangement, revenues will be recognized when evidence of an agreement has been documented, the fees are fixed or determinable, collection of fees is probable, delivery of the product has occurred and no other significant obligations remain. License revenues are recognized at the time of delivery of the software and all other revenue recognition criteria discussed above have been met. Deferred revenue represents license revenues billed but not yet earned. AES   Sales of products are recognized when the products are shipped and the customer takes risk of ownership and assumes the risk of loss. Service revenue is recognized when the service is completed. Deferred revenue represents revenues billed but not yet earned.

d. Cash equivalents - The Company considers investments in highly liquid instruments with a maturity of three months or less to be cash equivalents. The Company did not have any cash equivalents at both August 31, 2015 and May 31, 2015.

e. Accounts receivable - Accounts receivable are reported at their outstanding unpaid principal balances net of allowances for uncollectible accounts. The Company provides for allowances for uncollectible receivables based on management’s estimate of uncollectible amounts considering age, collection history, and any other factors considered appropriate. The Company writes off accounts receivable against the allowance for doubtful accounts when a balance is determined to be uncollectible.  At August 31, 2015 and May 31, 2015, the Company determined that an allowance for doubtful accounts was not needed.

f.

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. As defined in Accounting Standards Codification (“ASC”) Topic No. 820, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). The Company utilizes market data or assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated, or generally unobservable. ASC 820 establishes a fair value hierarchy that prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurement) and the lowest priority to unobservable inputs (level 3 measurement). This fair value measurement framework applies at both initial and subsequent measurement.

The three levels of the fair value hierarchy defined by ASC Topic No. 820 are as follows: Level 1 – Quoted prices are available in active markets for identical assets or liabilities as of the reporting date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis. Level 1 primarily consists of financial instruments such as exchange-traded derivatives, marketable securities and listed equities. Level 2 – Pricing inputs are other than quoted prices in active markets included in level 1, which are either directly or indirectly observable as of the reported date. Level 2 includes those financial instruments that are valued using models or other valuation methodologies. These models are primarily industry-standard models that consider various assumptions, including quoted forward prices for commodities, time value, volatility factors, and current market and contractual prices for the underlying instruments, as well as other relevant economic measures. Substantially all of these assumptions are observable in the marketplace throughout the full term of the instrument, can be derived from observable data or are supported by observable levels at which transactions are executed in the marketplace. Instruments in this category generally include non-exchange-traded derivatives such as commodity swaps, interest rate swaps, options and collars. Level 3 – Pricing inputs include significant inputs that are generally less observable from objective sources. These inputs may be used with internally developed methodologies that result in management’s best estimate of fair value.

F-6

g.	Earnings (Loss) Per Share (“EPS”) - Basic EPS is computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding. Diluted EPS includes the effect from potential issuance of common stock, such as stock issuable pursuant to the exercise of stock options and warrants and the assumed conversion of convertible notes.
	The following table summarizes the securities that were excluded from the diluted per share calculation because the effect of including these potential shares was antidilutive even though the exercise price could be less than the average market price of the common shares.

	Three Months ended August 31,
	2015		2014
Convertible notes		114,795		2,000,000
Stock options		2,312,500		1,181,250
Warrants		4,776,320		3,023,990
Potentially dilutive securities		7,203,615		6,205,240

h.

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

Stock based compensation expense for the three months ended August 31, 2015 and 2014 was $0 and $1,000,000, respectively. The expense was included in selling and general and administrative expenses. See Note 6a.

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

j. Inventory - Inventory, which will consist solely of finished goods of AES, is valued at the lower of cost on a first-in, first-out basis or market.   Inventory consists of the following at August 31, 2015 and May 31, 2015.

	August 31, 2015		May 31, 2015
		(unaudited)
Finished goods	$	278,276	$	147,605
Work-in-process (unbilled labor and consulting)		65,228		9,100
	$	343,504	$	156,705

F-7

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

l. Foreign Currency Transactions – The Company accounts for foreign currency translation pursuant to ASC 830. The functional currency of the Company is the United States dollar. Under ASC 830, all assets and liabilities denominated in foreign currencies are translated into United States dollars using the current exchange rate at the end of each fiscal period. Revenues and expenses are translated using the average exchange rates prevailing throughout the respective periods. All transaction gains and losses from the measurement of monetary balance sheet items denominated in foreign currencies are reflected in the statement of operations as gain (loss) on foreign currency transactions.

m

New Accounting Pronouncements –

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers.” The amendments in ASU 2014-09 affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards (e.g., insurance contracts or lease contracts). This ASU will supersede the revenue recognition requirements in ASC 605, “Revenue Recognition,” and most industry-specific guidance, and creates an ASC 606, “Revenue from Contracts with Customers.” The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principle, an entity should apply the following steps: Step 1: Identify the contract(s) with a customer. Step 2: Identify the performance obligations in the contract. Step 3: Determine the transaction price. Step 4: Allocate the transaction price to the performance obligations in the contract. Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation. ASU 2014-09 was scheduled to be effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early application is not permitted. In August 2015, the FASB issued ASU 2015-14, “Revenue from Contracts with Customers (Topic 606): Deferral of Effective Date” (“ASU 2015-14”) which defers the effective date of ASU 2014-09 by one year. ASU 2014-09 is now effective for annual reporting periods after December 15, 2017 including interim periods within that reporting period.  Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. The Company is currently evaluating the effects of adopting ASU 2014-09 on its consolidated financial statements for fiscal 2016 and fiscal 2015 but the adoption is not expected to have a significant impact on the Company’s consolidated financial statements for fiscal 2014 as the Company did not recognize revenues for such year. In June 2014, ASU 2014-12, “Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period” (“ASU No. 2014-12”) was issued.  ASU No. 2014-12 requires that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. An entity should recognize compensation cost in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the periods for which the requisite service has already been rendered. If the performance target becomes probable of being achieved before the end of the requisite service period, the remaining unrecognized compensation cost should be recognized prospectively over the remaining requisite service period. The total amount of compensation cost recognized during and after the requisite service period should reflect the number of awards that are expected to vest and should be adjusted to reflect those awards that ultimately vest. ASU 2014-12 becomes effective for interim and annual periods beginning on or after December 15, 2015. Early adoption is permitted.  The Company is currently evaluating the effects of adopting ASU 2014-12 on its consolidated financial statements but the adoption is not expected to have a significant impact on the Company’s consolidated financial statements.

F-8

In June 2014, ASU 2014-15, “Presentation of Financial Statements – Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern” (“ASU No. 2014-15”) was issued.  Before the issuance of ASU 2014-15, there was no guidance in U.S. GAAP about management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern or to provide related footnote disclosures. This guidance is expected to reduce the diversity in the timing and content of footnote disclosures. ASU 2014-15 requires management to assess an entity’s ability to continue as a going concern by incorporating and expanding upon certain principles that are currently in U.S. auditing standards as specified in the guidance. ASU 2014-15 becomes effective for the annual period ending after December 15, 2016 and for annual and interim periods thereafter. Early adoption is permitted. The Company is currently evaluating the effects of adopting ASU 2014-15 on its consolidated financial statements but the adoption is not expected to have a significant impact on the Company’s consolidated financial statements.

In January 2015, the FASB issued ASU 2015-01, “Income Statement - Extraordinary and Unusual Items (Subtopic 225-20): Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items” (“ASU 2015-01”). ASU 2015-01 eliminates the concept of an extraordinary item from accounting principles generally accepted in the United States of America. As a result, an entity will no longer be required to segregate extraordinary items from the results of ordinary operations, to separately present an extraordinary item on its income statement, net of tax, after income from continuing operations or to disclose income taxes and earnings-per-share data applicable to an extraordinary item. However, ASU 2015-01 will still retain the presentation and disclosure guidance for items that are unusual in nature and occur infrequently. ASU 2015-01 becomes effective for interim and annual periods beginning on or after December 15, 2015. Early adoption is permitted.  The Company is currently evaluating the effects of adopting ASU 2015-01 on its consolidated financial statements but the adoption is not expected to have a significant impact on the Company’s consolidated financial statements.

In April 2015, the FASB issued ASU 2015-03, “Interest – Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs” (“ASU 2015-03”) as part of its initiative to reduce complexity in accounting standards (the Simplification Initiative). The Board received feedback that having different balance sheet presentation requirements for debt issuance costs and debt discount and premium creates unnecessary complexity. Recognizing debt issuance costs as a deferred charge (that is, an asset) also is different from the guidance in International Financial Reporting Standards, which requires that transaction costs be deducted from the carrying value of the financial liability and not recorded as separate assets. Additionally, the requirement to recognize debt issuance costs as deferred charges conflicts with the guidance in FASB Concepts Statement No. 6, “Elements of Financial Statements,” which states that debt issuance costs are similar to debt discounts and in effect reduce the proceeds of borrowing, thereby increasing the effective interest rate. FASB Concepts Statement No. 6 further states that debt issuance costs cannot be an asset because they provide no future economic benefit. To simplify presentation of debt issuance costs, the amendments in this Update require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this Update. For public business entities, the amendments in this Update are effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. The Company will evaluate the effects of adopting ASU 2015-03 if and when it is deemed to be applicable.

F-9

3. SALE OF LICENSE AND IP AGREEMENTS

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

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

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

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

F-10

4.     ACCRUED EXPENSES AND OTHER LIABILITIES

As of August 31, 2015 and May 31, 2015, accounts payable and accrued expenses consist of the following amounts: 

	August 31, 2015		May 31, 2015
	(Unaudited)
Accounts payable	$	700,742	$	463,911
Accrued board of director fees (see Notes 6i and 7A)		—		1,873,611
Accrued interest payable		105,492		98,078
Accrued payroll		51,187		54,882
Accrued other		74,303		164,650
	$	931,724	$	2,665,132

Accounts payable transactions included the following:

On September 10, 2013, the Company entered into a Settlement Agreement and Release with an unsecured creditor whereby the Company was released from all existing debt, including interest, in exchange for the issuance of 23,776,513 shares of common stock within 90 days of the signing of the Agreement. The Company issued such shares under this Settlement Agreement in September 2014. As of both August 31, 2015 and May 31, 2015, there was $0 of payables due. See Note 6b.

In fiscal 2015, the Company determined that certain accounts payable had been settled in prior periods and should be written off. Balances totaling $124,793 were reversed and recognized as other income.

5.     NOTES PAYABLE, RELATED PARTY PAYABLES, DEBT SUBJECT TO EQUITY BEING ISSUED 

Notes Payable 

As a result of the Company’s Asset Sale to ST US, the notes payable and convertible debentures of $17,269,689 and the related accrued interest of $3,671,137 as of May 31, 2010, have been settled in part with the December 2010 closing in the amount of $5,570,059 and the balance in June 2011 closing with cash of $3,526,523, an undetermined amount of equity yet to be issued and $688,768 of remaining notes payable as of May 31, 2012. In fiscal 2014, the Company received loans of $400,000. As of May 31, 2014, there was $939,894 of notes payable, net of debt discounts of $309,263. In fiscal 2015, the Company received loans of $200,000 and refinanced related party payables totaling $130,000. In addition, as discussed below, the Company issued common stock for the conversion of various notes payable and accrued interest. As of August 31, 2015 and May 31, 2015, there was notes payable of $345,832, net of debt discounts of $0. All notes payable mature on or before October 31, 2015 and as such, are classified as current liabilities on the consolidated balance sheet.

Notes payable transactions include the following:

FY 2013 (Year Ended May 31, 2013) Transactions: 

In November 2012, the Company received a loan in the form of a Convertible Note in the principal amount of $180,000. The Convertible Note bears interest at 6% per year and was scheduled to mature on November 15, 2014. In November 2014, the maturity date was extended to January 15, 2015. At any time during the term of the Convertible Note, the holder had the right to convert any unpaid portion of the Convertible Note into shares of common stock at a conversion price of $0.30 per share. The beneficial conversion feature was fair valued at $180,000 and was amortized over the life of the debt instrument. On April 1, 2015, the Company issued 687,921 shares for the conversion of the principal and accrued interest of $26,377. As a result of the conversion of the notes, the remaining unamortized beneficial conversion feature was written off in March 2015. See Note 6h. 

F-11

In December 2012, the Company received a loan in the form of a Convertible Note in the principal amount of $20,000. The Convertible Note bears interest at 6% per year and was scheduled to mature on November 15, 2014. In November 2014, the maturity date was extended to January 31, 2015. Under the terms of the Convertible Note, if the Convertible Note was not paid upon maturity, the interest rate increased to 12% per year. At any time during the term of the Convertible Note, the holder had the right to convert any unpaid portion of the Convertible Note into shares of common stock at a conversion price of $0.30 per share. The beneficial conversion feature was fair valued at $20,000 and was amortized over the life of the debt instrument. On April 1, 2015, the Company issued 76,373 shares for the conversion of the principal and accrued interest of $2,912. As a result of the conversion of the notes, the remaining unamortized beneficial conversion features was written off in March 2015. See Note 6h.

On April 22, 2013, the Company executed two Convertible Notes for loans in principal amount of $40,000 each. Each Convertible Note bore interest at 6% per year and was scheduled to mature on April 30, 2015. At any time during the term of the Convertible Notes, the holders had the right to convert any unpaid portion of the Convertible Notes into shares of common stock at an original conversion price of $0.60 per share for both Convertible Notes. The beneficial conversion feature was fair valued at $40,000 each and was being amortized over the lives of the debt instruments. On March 16, 2015, the conversion price for the two notes was amended to $0.30 per share. On April 1, 2015, the Company issued 298,111 shares for the conversion of the principal and accrued interest of $9,433. As a result of the conversion of the notes, the remaining unamortized beneficial conversion features were written off in March 2015. See Note 6h.

On April 22, 2013, the Company executed a Convertible Note for a loan in the principal amount of $120,000. The Convertible Note bore interest at 6% per year and was scheduled to mature on April 30, 2015. At any time during the term of the Convertible Note, the holder had the right to convert any unpaid portion of the Convertible Note into shares of common stock at an original conversion price of $0.60 per share. The beneficial conversion feature was fair valued at $120,000 and was being amortized over the life of the debt instrument. On March 16, 2015, the conversion price for the note was amended to $0.30 per share. On April1, 2015, the Company issued 447,167 shares for the conversion of the principal and accrued interest to date of $14,150. As a result of the conversion of the notes, the remaining unamortized beneficial conversion feature was written off in March 2015. See Note 6h.

On May 2, 2013, the Company executed a Convertible Note for a loan in the principal amount of $200,000. The Convertible Note bore interest at 6% per year and was scheduled to mature on April 30, 2015. At any time during the term of the Convertible Note, the holder had the right to convert any unpaid portion of the Convertible Note into shares of common stock at an original conversion price of $0.60 per share. The beneficial conversion feature was fair valued at $200,000 and was being amortized over the life of the debt instrument. On March 16, 2015, the conversion price for the note was amended to $0.30 per share. On April 1, 2015, the Company issued 741,872 shares for the conversion of the principal and accrued interest of $22,562. As a result of the conversion of the note, the remaining unamortized beneficial conversion feature was written off in March 2015. See Note 6h. 

FY 2014 (Year Ended May 31, 2014) Transactions:

On October 28, 2013, the Company executed a Convertible Note for a loan in the principal amount of $200,000. The Convertible Note bore interest at 6% per year and was scheduled to mature on October 31, 2015. At any time during the term of the Convertible Note, the holder had the right to convert any unpaid portion of the Convertible Note into shares of common stock at an original conversion price of $1.20 per share. The beneficial conversion feature was fair valued at $7,500 and was being amortized over the life of the debt instrument. On March 16, 2015, the conversion price for the note was amended to $0.30 per share. On April 1, 2015, the Company issued 723,706 shares for the conversion of the principal and accrued interest of $17,112. As a result of the conversion of the note, the remaining unamortized beneficial conversion feature was written off in March 2015. See Note 6h.

On November 12, 2013, the Company executed a Convertible Note for a loan in the principal amount of $200,000. The Convertible Note bore interest at 6% per year and was scheduled to mature on October 31, 2015. At any time during the term of the Convertible Note, the holder had the right to convert any unpaid portion of the Convertible Note into shares of common stock at an original conversion price of $1.20 per share. The beneficial conversion feature was fair valued at $100,000 and was being amortized over the life of the debt instrument. On March 16, 2015, the conversion price for the note was amended to $0.30 per share. On April 1, 2015, the Company issued 722,066 shares for the conversion of the principal and accrued interest of $16,620. As a result of the conversion of the note, the remaining unamortized beneficial conversion feature was written off in March 2015. See Note 6h. 

F-12

FY 2015 (Year Ended May 31, 2015) Transactions:

On August 11, 2014, the Company executed a Convertible Note for a loan in the principal amount of $100,000. The Convertible Note bore interest at 6% per year and was scheduled to mature on October 31, 2015. At any time during the term of the Convertible Note, the holder had the right to convert any unpaid portion of the Convertible Note and accrued interest into shares of common stock at an original conversion price of $0.60 per share. The beneficial conversion feature was fair valued at $35,500 and was being amortized over the life of the debt instrument. On March 16, 2015, the conversion price for the note was amended to $0.30 per share. On April 1, 2015, the Company issued 345,360 shares for the conversion of the principal and accrued interest of $3,608. As a result of the conversion of the note, the remaining unamortized beneficial conversion feature was written off in March 2015. See Note 6h.

On August 12, 2014, the Company executed a Convertible Note for a loan in the principal amount of $100,000. The Convertible Note bore interest at 6% per year and was scheduled to mature on October 31, 2015. At any time during the term of the Convertible Note, the holder had the right to convert any unpaid portion of the Convertible Note and accrued interest into shares of common stock at an original conversion price of $0.60 per share. The beneficial conversion feature was fair valued at $35,500 and was being amortized over the life of the debt instrument. On April 1, 2015, the Company issued 345,303 shares for the conversion of the principal and accrued interest of $3,591. As a result of the conversion of the notes, the remaining unamortized beneficial conversion features were written off in March 2015. See Note 6h.

On September 10, 2014, the Company executed two Convertible Notes to refinance due to related party, a previously issued outstanding note payable and accrued interest totaling $174,071. Each of these Convertible Notes has a principal balance of $65,000, bear interest at 6% per year and mature on October 31, 2015. At any time during the term of the Convertible Notes, the holders have the right to convert any unpaid portion of the Convertible Notes and accrued interest into shares of common stock at a conversion price of $1.20 per share. There was no beneficial conversion feature. The Company recognized a gain on the settlement of debt of $44,071 for the year ended May 31, 2015.

Debt Subject To Equity Being Issued

As a direct result of the Sale of the License and IP Agreements to ST US and the mandate to obtain debt releases, the Company has been able to reach settlements with its secured creditors and employees, with cash payments to the secured creditors made as of the December 2010 and June 2011 closings. Nothing further is owed to the Company’s secured creditors. There remains, however, approximately $179,000 of payments due the former employees as of both August 31, 2015 and May 31, 2015.

The continuing settlements with unsecured and related parties resulted in gains being recorded in the amount of $482,784 in fiscal 2012. As of both August 31, 2015 and May 31, 2015, there remained $456,930 of debts to be settled via cash payments and/or the issuance of equity on as yet to be determined or negotiated terms. The majority of debt holders who have settled have agreed to accept equity for their remaining debt.

FY 2013 (Year Ended May 31, 2013):

On January 6, 2013, the Company and Andreas Typaldos (“Typaldos”), former officer and director, entered into a Separation and Release Agreement (Separation Agreement”). Under the Separation Agreement, all prior agreements with Typaldos were terminated and certain debts and obligations to Typaldos were released in exchange for (1) a cash payment of $15,920 and (2) 469,132 shares of common stock. In addition, $19,000 was to be paid to Typaldos’ son for an existing loan with the Company. The Company issued such shares under this Separation Agreement in September 2014. As of both August 31 and May 31, 2015 no payables were due to Typaldos. See Note 6c.

F-13

FY 2015 (Year Ended May 31, 2015):

In fiscal 2015, the Company entered into final supplemental agreements with former employees to settle all outstanding claims. The Company issued warrants to purchase 622,947 shares of common stock at $1.20 per share for a five-year period to settle claims totaling $747,535.

During the year ended May 31, 2015, the Company entered into final supplemental agreements with bridge note holders to settle all outstanding claims. The Company issued 648,381 shares of common stock to settle claims totaling $466,000 in September 2014 and 256,486 shares of common stock to settle claims totaling $207,753 on April 1, 2015. See Note 6d.

During the year ended May 31, 2015, the Company agreed to issue 418,669 shares of common stock to settle claims totaling $502,408 from previous holders of unsecured debt. The shares were issued in January 2015. See Note 6e.

6. STOCKHOLDERS’ DEFICIENCY

Reverse Stock Split  

Effective March 18, 2015, the Company implemented a reverse stock split of its outstanding common stock at a ratio of 1-for-30 shares.  In connection with the reverse stock split, the Company’s Certificate of Incorporation was amended such that the Company’s issued and outstanding common stock was proportionally reduced. The number of authorized shares and the par value of the Company’s common stock and preferred stock were not affected by the reverse stock split. Stockholders will not receive fractional shares but instead will receive cash in an amount equal to the fraction of a share that stockholder would have been entitled to receive multiplied by the sale price of the common stock as last reported on February 12, 2015, the last business day prior to the first public disclosure/announcement of the reverse stock split.

Private Placement Offering (“PPO”)

On March 15, 2015, the Company commenced a PPO for accredited investors to issue up to 2,500,000 shares of common stock and warrants to purchase 2,500,000 shares of common stock at $2.00 per share (each share and warrant constitutes a “Unit”) for total gross proceeds of $1,500,000. The warrants are immediately exercisable and have a term of three years. The Units are being offered by the Company on a “best efforts” “any-or-none” basis in Units of 166,666 shares although the Company may accept fractional Units. See Notes 6g, 6j and 7B for the shares and warrants subscribed for through the date of this report.

Issuances of Common Stock

FY 2015 (Year Ended May 31, 2015):

a. On July 16, 2014, the Company issued 666,667 shares of common stock to a consultant under the terms of a consulting agreement.  The shares were valued at $1.50 per share which was the price of the common stock on the date of the consummation of an agreement with a customer.  See Note 9.

b. As described above, the Company signed a Settlement Agreement and Release with an unsecured creditor and agreed to issue 792,550 shares of common stock for $550,000 of accounts payable and $310,977 of a promissory note and accrued interest. The Company issued such shares under this Settlement Agreement in September 2014.  Prior to the issuance date, such shares were classified as common stock to be issued.

c. As described above, the Company entered into a Separation Agreement with Typaldos and agreed to issue 469,132 shares of common stock as part of the Agreement. The Company issued such shares under this Separation Agreement in September 2014.  Prior to the issuance date, such shares were classified as common stock to be issued.

d. As described above, the Company entered into final supplemental agreements with bridge note holder to settle all outstanding claims. In September 2014, the Company agreed to issue 648,381 shares of common stock to settle claims totaling $466,000. Prior to the issuance date, such shares were classified as common stock to be issued.  On April 1, 2015, the Company issued 256,486 shares of common stock to settle claims totaling $207,754.

F-14

e. As described above, the Company settled all outstanding claims with previous holders of unsecured debt. In September 2014, the Company issued 418,669 shares of common stock to settle claims totaling $502,408.

f. On February 19, 2015, the Company issued 50,000 shares of common stock to a consultant under the terms of an investor relations agreement.  The shares were valued at $1.20 per share which was the price of the common stock on the date the agreement was signed.   See Note 9.

g. For the period March 15, 2015 through May 31, 2015, 833,330 shares of common stock were subscribed for under the PPO and the Company received proceeds of $500,000. The shares were issued on April 7, 2015. 

h. As described above, on April 1, 2015, the Company issued 4,387,879 shares of common stock for the conversion of notes payable of $1,200,000 and accrued interest of $116,364.  

FY 2016 (Year Ended May 31, 2016):  

i. On June 25, 2015, the Company issued 108,333 shares of common stock to its chairman/chief executive officer and 35,000 shares of common stock to an officer/former director for services rendered to the Company’s board of directors in fiscal 2015.  The shares were valued at $1.75 per share.  The value of the shares totaling $250,833 was charged as stock compensation in fiscal 2015.

j. For the period June 1, 2015 through the date of the filing of this report, 838,334 shares of common stock have been subscribed for under the PPO and the Company received proceeds of $503,000.

7. STOCK-BASED COMPENSATION

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

A. Options

No options were granted in the year ended May 31, 2015.

On June 25, 2015, the Company issued options to its chairman/chief executive officer and an officer/former director for services rendered to the Company’s board of directors in fiscal 2015 to purchase a total of 1,300,000 shares of common stock as follows:

1.        Chairman/chief executive officer – options to purchase 1,000,000 shares of common stock at $0.60 per share.

2.        Officer/former director – options to purchase 300,000 shares of common stock at $0.60 per share.

The options vested immediately and are exercisable for three years. The options issued were valued using the Black-Scholes option pricing model under the assumptions below. The value of the options totaling $1,622,778 was charged as stock compensation in fiscal 2015.

The assumptions are as follows - stock price - $1.75; strike price - $0.60; expected volatility – 91.35%; risk-free interest rate - 0.73%; dividend rate - 0%; and expected term – 1.5 years.

F-15

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

				Weighted
				Average
	Shares			Exercise Price
Outstanding at June 1, 2014		1,247,917		$	1.53
Granted		—			—
Exercised		—			—
Expired or cancelled		(235,417	)		2.95
Outstanding at May 31, 2015		1,012,500			1.20
Granted		1,300,000			0.60
Exercised		—			—
Expired or cancelled		—			—
Outstanding at August 31, 2015		2,312,500		$	0.86

The following table summarizes information about options outstanding and exercisable at August 31, 2015:

	Options Outstanding and Exercisable
	Number Outstanding		Weighted- Average Remaining Life In Years		Weighted- Average Exercise Price		Number Exercisable
Range of exercise prices:
$0.60		1,300,000		2.82	$	0.60		1,300,000
$1.20		1,012,500		8.64		1.20		1,012,500
		2,312,500		5.37	$	0.86		2,312,500

The compensation expense attributed to the issuance of the options and warrants will be recognized as they vest / earned. These stock options and warrants are exercisable for three to ten years from the grant date.

The employee stock option plan stock options are exercisable for ten years from the grant date and vest over various terms from the grant date to three years.

B. Warrants

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

			Weighted
			Average
	Shares		Exercise Price
Outstanding at June 1, 2014		2,401,043	$	1.34
Granted		1,536,943		1.63
Exercised		—		—
Expired or cancelled		—		—
Outstanding at May 31, 2015		3,937,986		1.45
Granted		838,334		2.00
Exercised		—		—
Expired or cancelled		—		—
Outstanding at August 31, 2015		4,776,320	$	1.55

F-16

The following table summarizes information about warrants outstanding and exercisable at August 31, 2015:

	Outstanding and exercisable
	Number Outstanding		Weighted- average remaining life in years		Weighted- Average Exercise Price		Number Exercisable
Range of exercise prices:
$1.20		3,004,656		4.14	$	1.20		3,004,656
$2.00		1,671,664		2.99		2.00		1,671,664
$3.00 to $6.00		100,000		1.48		4.50		100,000
		4,776,320		3.13	$	1.55		4,776,320

Issuances of warrants were as follows:

FY 2015 (Year Ended May 31, 2015):  

a. Warrants to purchase 622,947 shares of common stock were issued in exchange for certain past due indebtedness outstanding. Such warrants were determined to have been issued at fair value since such settlements were negotiated by the Company with each debt holder.

b. Warrants to purchase 80,666 shares of common stock were issued to a consultant for services rendered under a consulting contract. The warrants issued were valued using the Black-Scholes option pricing model under the following assumptions: stock price - $0.46 - $1.87; strike price - $1.20; expected volatility - 100.00%; risk-free interest rate - 1.5%; dividend rate - 0%; and expected term - 3 years. See Note 9.

c. As discussed above, warrants to purchase 833,330 shares of common stock were issued under the PPO.

FY 2016 (Year Ended May 31, 2016):  

d. As discussed above, warrants to purchase 838,334 shares of common stock were issued under the PPO.

The expense attributed to the issuances of the warrants was recognized as they vested/earned. These warrants are exercisable for three years from the grant date.

8. LICENSE AGREEMENTS

The Company earned all of its revenue from one customer under the following agreements.

Master Agreement – License of (“PEMS-SF”™)

On July 10, 2014, the Company entered into a Master Agreement to license our Process and Event Management System (“PEMS-SF”™) with Tatung Corporation (“Tatung”).

The basic fee generation structure of the Agreement allows for (1) a one-time licensing fee for each PEMS-SF-enabled stations or subsystems installed, (2) separate fees of up to 10% of the software fees for software updates, maintenance and technical support, (3) on-going service fees based on units of products manufactured utilizing PEMS-SF; and (4) an annual service fee for cloud-based services and data storage.

The Master Agreement has a year-to-year term but can be terminated by either party upon sixty (60) days’ advance written notice. Upon termination or expiration of this agreement, we are not required to provide any continuing or ongoing processing of data or other services that, pursuant to a sub-agreement, are discontinued upon termination, however, the customer shall retain any perpetual rights granted in a sub-agreement or schedule. The term of any sub-agreements is concomitant and co-terminus with the Master Agreement term.

Revenue recognized under the Master Agreement amounted to $66,000 and $40,000 for the three months ended August 31, 2015 and 2014, respectively.

F-17

Agreement – License of Meter Collar and Bridge Programmable Logic Controllers

In October 2014, the Company entered into a year-to-year term agreement with Tatung to license its meter collar and bridge programmable logic controllers. The license is paid on a per copy (ordered) fee, and is on a perpetual, worldwide, non-exclusive, transferable basis.

Revenue recognized under the agreement amounted to $42,500 and $0 for the three months ended August 31, 2015 and 2014, respectively. 

9. COMMITMENTS

Leases

The Company sublet office space on a month-to-month basis from a company affiliated with its chief executive officer at a rate of $1,668 per month through September 2014.

Effective October 1, 2014 as amended on January 15, 2015, the Company entered a lease for its office space at a total monthly rental of $1,874. The lease expires on January 15, 2016 but can be renewed for two additional one-year terms.

Our AES subsidiary leases offices in Jericho, New York. The facility is approximately 1,850 square feet, occupied pursuant to a lease that commenced on August 1, 2015 and expires September 30, 2018. The average annual rent over the term of the lease is approximately $57,300. This amount does not include taxes and other occupancy costs for the premises.

Rent expense including occupancy costs for the three months ended August 31, 2015 and 2014 was $10,766 and $5,004, respectively.

Consulting Agreements

On July 1, 2013, the Company entered into a consulting agreement whereby the consultant would be paid in shares of the Company’s common stock in lieu of cash after achieving certain milestones. 666,667 shares were issued on July 16, 2014 upon the consummation of an agreement with a customer, another 1 million shares each will be issued upon gross revenue receipts of $500,000, $2,000,000 and $4,000,000, respectively.

On February 19, 2015, the Company entered into a one-year consulting agreement whereby the consultant received a payment of $5,000 and 50,000 shares of common stock valued at $1.20 per share. In addition, the consultant is entitled to payments of $5,000 per month for the duration of the agreement if and when the Company receives $500,000 or more in debt or equity financing.

On May 12, 2015, the Company entered into a three month consulting agreement for the raising of capital whereby the consultant received a payment of approximately $3,000. In addition, the consultant is entitled to a success fee of 5% of all monies raised as a direct result of introductions (as defined) made by the consultant.

10. CONCENTRATIONS OF CREDIT RISK

Cash

The Company maintains principally all cash balances in two financial institutions which, at times, may exceed the amount insured by the Federal Deposit Insurance Corporation. The exposure to the Company is solely dependent upon daily bank balances and the respective strength of the financial institutions. The Company has not incurred any losses on these accounts.

Net Sales

Major customers for the three months ended August 31, 2015 and 2014 are set forth in the table below. 

	Three Months Ended August 31,
	2015			2014
Customer 1		60	%		100	%
Customer 2		40	%		—

F-18

Accounts Receivable

Major accounts receivable as of August 31, 2015 and May 31, 2015 are set forth in the table below. 

	August 31, 2015			May 31, 2015
	(unaudited)
Customer 1		63	%		39	%
Customer 2		29	%		29	%
Customer 3		8	%		28	%

11. RELATED PARTY TRANSACTIONS

For the period from March 2015 to May 31, 2015, AES performed consulting services for an entity that is controlled by an officer of AES and a former director of the Company. No consulting services were performed for both the three months ended August 31, 2015 and 2014. In August 2015, AES entered into an agreement to provide energy services for the related entity. For the three months ended August 31, 2015, no net sales were recognized. A deposit of $55,000 was received and classified as part of deferred revenue.

12. BUSINESS SEGMENT INFORMATION

As of August 31 2015, the Company had two operating segments, Arkados and AES.

The Company’s reportable segments are distinguished by types of service, customers and methods used to provide their services. The operating results of these business segments are regularly reviewed by the Company’s chief operating decision maker.

The accounting policies of each of the segments are the same as those described in the Summary of Significant Accounting Policies. The Company evaluates performance based primarily on income (loss) from operations.

Operating results for the business segments of the Company were as follows: 

	Arkados			AES			Consolidated
Three Months Ended August 31, 2015
Revenues	$	106,836		$	—		$	106,836
Loss from operations		(257,737	)		(263,048	)		(520,785	)
Three Months Ended August 31, 2014
Revenues	$	40,000		$	—		$	40,000
Loss from operations		(1,199,366	)		—			(1,199,366	)
Total assets for the business segments of the Company were as follows:
August 31, 2015 (unaudited)	$	282,300		$	444,968		$	727,268
May 31, 2015		283,154			254,772			537,926

F-19

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

Overview

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

Arkados Group, Inc., through its subsidiaries (together, the “Company”), is a global provider of scalable and interoperable Internet of Things solutions focused on industrial automation and energy management. We execute our business as a software developer and system integrator focused on developing unique, cutting-edge solutions that enable machine to machine communications with specific applications for Smart Lighting, Smart Factory and Smart Building. We have strong partnerships with Tatung Corporation (“Tatung”), a major developer of advanced technologies and global network of operation, and ST Microelectronics, Inc. (“STMicroelectronics”), a leading worldwide manufacturer of semiconductor chips. Each of these relationships enhances our ability to capitalize globally on the emerging opportunities for IoT and Smart Facility applications.

As a software developer, we design licensable middleware and application software that is integrated into circuit boards and modules for incorporation into various types of IoT products, such as smart lighting, smart cameras, sensors and EV charging stations, As a system integrator, we incorporate the software and modules into products that we design with our partners and sell directly to property and facilities owners.

We remain engaged in the process of seeking settlements with certain of our unsecured creditors from the periods prior to the Asset Sale to STMicroelectronics in December 2010.

We have executed several agreements that have enabled us to provide the services contemplated in the industrial automation industry. While we have begun to generate revenue from operations of our Arkados, Inc. subsidiary during the quarter ended November 30, 2014, such revenue is not sufficient to meet our monthly operating expenses and we remain dependent on outside sources of financing to fund our operations. 

We effected a reverse 1-for-30 split of our common stock on March 18, 2015 and also amended our bylaws, both of which were approved by our shareholders. More information on these actions may be reviewed in our Information Statement filed with the Securities and Exchange Commission (“SEC”) on February 24, 2015.

Corporate Background

Arkados Group, Inc. was incorporated in 1998 and carries out its activities through its two wholly-owned subsidiaries, Arkados, Inc. (hereafter, when referring to the operations, we may refer to Arkados, Inc. as “Arkados”), a Delaware corporation and Arkados Energy Solutions, LLC (hereafter, when referring to the operations, we may refer to Arkados Energy Solutions, LLC as “AES”), a Delaware limited liability company. Our two subsidiaries combine to create unique opportunity to exploit the growth in the Internet of Things across multiple verticals with our software solutions, while simultaneously building a focus in smart facility (building, factory, school, hospital, etc.) applications based on our core advantages in industrial types of environments. We are based in Newark, New Jersey at the Economic Development Corporation at the New Jersey Institute of Technology. The Company’s shares trade on the Over-The-Counter QB market under the ticker symbol AKDS.

The Company underwent a significant restructuring after December 23, 2010 when substantially all of its then-existing assets were acquired by STMicroelectronics (sometimes referred to hereinafter as the “Asset Sale”), as disclosed in the 8-K filed December 29, 2010 and further described (as to the closing) in the 8-K filed July 12, 2011. This restructuring, focusing on settlements with unsecured creditors of the Company, continued through August 31, 2015 and the date of this report. 

Following the Asset Sale, the Company has shifted its focus towards development of a universal platform that provides software solutions for smart grid and smart applications primarily in the areas of energy management, health care, smart industrial machines and building security and smart building.

Arkados

Arkados, Inc., our software development subsidiary, develops proprietary, cloud-based device and system management software solutions, LinqUSP™ and the Process and Event Management System (PEMS)™ as well as delivering software services and support. Arkados, Inc. sells its software and services through an OEM/ODM relationship with Tatung, a channel relationship with STMicroelectronics as well as through AES.

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AES 

AES, our system integration subsidiary, was organized in 2013 but did not commence operations until early 2015. AES provides energy conservation and management services and solutions to commercial and residential buildings throughout the northeastern United States. These services include energy management assessments and recommendations for the implementation of LED lighting and building controls and automation to help owners and managers save money. AES sells its services directly to building owners and managers.

 Industry Background & Market Opportunities

Arkados is positioning itself at the intersection of two revolutionary driving forces: the proliferation of the Internet of Things and the intensifying, worldwide focus on the Energy Management and the Smart Grid. As these drivers converge to change the way we work, live and interact with the objects around us, Arkados is positioning itself as a leading player in developing innovative solutions that address the needs of customers across multiple industrial industries.

A. Internet of Things

The Internet of Things (IoT) is a concept describing a network of interconnected objects otherwise known as machine to machine communication. The IoT goes beyond just objects talking to other objects and includes device and sensor capabilities in performing functions such as gathering data, sending communications and learning behaviors through machine learning and analytics. The IoT represents an explosive internet phenomenon that is estimated to grow to include upwards of 50 billion connected objects by 2020 according to Cisco Systems. The IoT is expected to usher in a transformative era in virtually all industries much like the internet revolution transformed our world beginning 20 years ago.

The IoT is not a new concept. The cellular telephone is a wireless device connected to a network and has been in existence for over 30 years. What is new is the ability to connect virtually any object and assign and enable a purpose for that connectivity. For example, a small sensor in embedded in the soil of your house plants to send you an email or text when the plant needs watering. Taken a step further, that same sensor communicating the need for water to a sprinkler system with a connected actuator that will automatically water the plant when the sensor calls for water, followed by a text message to you stating not only that the watering was completed, but how much water was used, how it compared to the previous watering, what the trending temperatures and moisture readings for the day were, etc.

The main drivers making the IoT a reality are the advancements in mobile and cloud computing, data processing technologies, wireless and broadband technologies and energy storage technologies. The compounding effects of these advancements taken in sum come together to create a world that is potentially more comfortable, safe, productive and intelligent.

The Internet of Things, according to the Gartner Group, will consist of 26 billion connected devices (not including phones and tablets) by 2020. In 2008, the number of devices connected to the internet surpassed the number of human beings on earth. The market size for IoT overall, according to BI Intelligence, will reach 18 billion devices by 2018. Whatever the estimate, the numbers are very large and the opportunity is extraordinary. A subset of this overall market is the Industrial IoT, which includes 2 key components: a) the connection of industrial machine sensors and actuators to local processing and to the internet, and b) the onward connection to other important industrial networks that can independently generate value. Our focus is on Smart Building, Smart Factory and Smart Lighting applications. The market size of the Industrial IoT is expected to grow from $20 billion in 2012 to $514 billion in 2020, representing a CAGR of 50.05%. Furthermore, according to Global Information, Inc., the Smart Building market will grow to $214 billion by 2020 with a CAGR of 17%.

We believe Arkados is uniquely positioned to become a significant player in the Internet of Things ecosystem for the following reasons:

1.)		Relationship with Tatung, STM and other significant players
	a.		Commitment with manufacturer for inclusion of proprietary software in all IoT products
	b.		Partnership on key customer engagements for intermediate and long term revenue
	c.		Insight into key product development and other market related intelligence
2.)		Knowledge and experience in IoT technology design
3.)		Financial backing from significant industry players
4.)		Software design expertise, with specific experience in PLC, wireless and hybrid solutions for the broadband space

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B. Energy Management/Smart Grid

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

According to research firm Zpryme, the smart grid core and enabled technology market will reach $220 billion in size by 2020. The current prevailing trend in the smart grid technology market is the upgrading of old technology as well as adopting a new technology, both of which will lead to a more efficient usage of electricity. It is estimated that the increase in investment from federal, state, and foreign governments, as well as from utilities themselves is expected to reach $1 billion in the next five years

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

Smart grid intends to modernize the power grid by using the latest technology that supports the utility to reduce the transmission and distribution loss.  Smart grid can balance the electricity supply and demand. It can improve the grid reliability by monitoring the frequency and duration of power outages and the number of disturbances, including reduction of the possibility of regional blackouts. Smart grid will improve the efficiency and dependability in energy distribution and assist in optimizing utilization of resources. Reduction in transmission and distribution loss, coupled with an increase in energy efficiency, is one of the major drivers of this market. The governments of various countries are playing important roles in the commercialization of this and passing on mandates and regulations for the same. The high cost of installation of the entire smart grid network is one of the restraints of the smart grid market. Another major restraint is the lack of interoperability of standards. There is a huge amount of investment currently in this market, which is an opportunity for the growth of those in the market. Prepaid electricity is also en-route, wherein the users will prepay for the electricity that will be consumed by them. Lack of interoperability standards exists at all the levels in a system, especially between countries. There are numerous service providers across the globe with different standards of operating and creating a consensus is very important for the growth of any industry. This is lacking in the smart grid market as every country has its own rules and mandates. This leads to a slower adoption of technology and increases risks for the industry as a whole, including a negative return on investment where large upfront investment is required

The electric grid as we know it today has been a core part of our infrastructure for nearly 100 years. According to the U.S. Department of Energy, the power grid is the largest interconnected machine on Earth, consisting of 9200 electric generating units and more than 1,000,000 megawatts of generating capacity connected to more than 300,000 miles of transmission lines. This power grid has a 99.97% uptime, but even the small number of outages and disruptions cost the economy $150 billion per year.

As our economy grows, so does the cost of producing electricity, particularly when also factoring in the opportunity cost. Since 1982, growth in peak demand for electricity, driven by population growth, larger homes with more electricity-consuming devices, has exceeded transmission growth by almost 25% every year. Alternatively, spending on research and development in this area is among the lowest of all industries.

Energy is the backbone to the growth in developed economies and has evolved into a patchwork of additions and augmentations that is more susceptible to black outs, outages, disruptions, inefficiency and national security vulnerabilities. The grid has certainly served us well, however future energy demands will continue to strain this aged infrastructure and revolution is underway with evidence from several drivers, including:

1.)	Utility companies MUST upgrade: increased demand is approaching the point where many utility companies will not be able to meet peak demand
2.)	Government incentive: The U.S. Government has appropriated $11 billion through the American Recovery and Reinvestment Act of 2009 to fund projects for “clean, efficient American energy.”

Smart meter roll out: Smart meters are becoming ubiquitous, which sets the stage for the introduction of new technologies on both the delivery and consumption sides of the equation.

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While utility companies already maintain communication between the central generation facility and substations, the smart grid will enable decentralization of energy delivery (source), opening the door for renewable energy usage. In addition, the expansion of that communication network will facilitate end-to-end two-way communication between the utility and the end user, creating an opportunity for solution providers in the FAN/HAN space.

It is in this area where Arkados plans, in part, to concentrate its efforts in energy management: using IoT to enable more efficient use of energy. We believe Arkados is uniquely positioned to become a significant player in the smart grid for the following reasons:

1.)		Relationship with Tatung and STMicroelectronics:
	a.		Software development for product releases
	b.		Partnership on key customer engagements for intermediate and long term revenue
	c.		Insight into key product development and other market related intelligence
2.)		Knowledge and experience in smart grid technology design
3.)		Financial backing from significant industry players
4.)		Software design expertise, with specific experience in PLC, wireless and hybrid solutions for the broadband space

 Arkados’ position, as it relates to the Smart Grid, is one of a facilitator of demand response, particularly as it relates to the local area network and its integration with the Smart Grid. The gateway and meter bridge products of Tatung, utilizing the PLC capabilities of STMicroelectronics and the device and system management software of Arkados, comprise a very unique and valuable set of features that allow us to compete in the Smart Grid marketplace. In addition, our solutions comprise machine to machine (M2M) communication for the Internet of Things, which represents even larger opportunities.

Sales Force Development

Arkados

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

AES

We expect to develop our direct sales force to focus mainly on opportunities in the northeastern region of the United States. These sales activities target commercial facilities owners and managers of virtually all kinds, including commercial office buildings, warehouses, hotels, hospitals, etc. Regularly, we will work with partners such as construction companies and property managers to reach the end customers. For the foreseeable future, we expect to maintain our focus on the current region and penetrate the large number of opportunities that exist there. We anticipate supplementing our direct sales force with other representatives and channel partners. The scope and development of our sales and marketing organization will depend, among other things, on the amount of capital available to us.

Strategic Relationships

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

Research and Development

Arkados 

Research and development in a rapidly changing technology environment is one of the keys to our success. We allocate resources as much as possible without our current operational limits to explore and exploit advancements in mobile and cloud computing, data processing technologies, wireless and broadband technologies and energy storage technologies that will lead to new products and services within our core competencies. These include the development of new software with a focus on M2M bridges, home area networks (HA) and the Internet of Things within the smart home/smart grid industries via our strategic partnerships. We may engage in certain activities in pursuit of further commercial development as opportunities arise from these relationships.  

AES

AES has no research and development activities at this time.

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Patents, Licenses and Trademarks

We will continue to maintain our provisional application (Application No. 61/873,249) for a patent covering systems and methods for provisioning of electronic devises onto a network and the subsequent monitoring and operation of the devices, as filed with the U.S. Patent and Trademark Office on September 3, 2013.

We continue to maintain our license with STMicroelectronics for patents relating to home automation services.

In addition, we maintain the federal registration of our “Arkados” and “ArkTIC” marks as well as a stylized “a” design mark.

Other than as stated above, the Company did not acquire any patents, licenses or trademarks during the period of this report.

Competition

Arkados 

We face competition both from established device management and cloud service providers both nationally and internationally, as well as recent entrants in the field. Some of these competitors create solutions that are compliant with existing standards and specifications, while other competitors’ products are based on proprietary technologies.

Since our operations are still developing, and therefore, somewhat in flux, it is difficult to pinpoint direct competitors, however, companies such as Arkessa that provides device operation for IoT, LogMeIn that provides public cloud services for IoT, Microstrain, which provides cloud and data analytics for IoT, and Thingworx, which provides application development platforms are some of those providing goods and services within our space. A more complete listing has been provided in our annual report on Form 10-K filed October 14, 2014. There has been no change during the period covered by this report to our competitive analysis.

AES

The competition for LED lighting and building automation solutions is highly competitive. Large LED lighting companies such as General Electric, Phillips and Cree, as well as a large number of China-based manufacturers represent significant competition to AES for LED lighting and companies such as Johnson Controls, Rockwell Automation and Schneider Electric represent significant competition to AES for building automation solutions. While these companies potentially represent sources of product for AES as a system integrator, there are situations where these companies are competing directly with AES, particularly for large commercial customer opportunities. We also face competition from a large number of Energy Savings Companies (ESCOs) in the northeast region of the United States.

Results of Operations

Arkados

We have been diligently undertaking negotiations with partners and industry contacts to establish joint ventures and other commercial relationships that would enable us to sell solutions in the energy management and home automation industries to service providers that would include these applications in product or service offerings to their customers.

As described in our prior report (1^st quarter 2015), we rolled out to Tatung our Process and Event Management System for Smart Factory (PEMS-SF). This system is intended to improve efficiency of a factory by Arkados’ software solutions residing in the factory’s computer systems and in the Arkados’ cloud computing platform. The PEMS-SF system will have several applications developed, from time to time, by Arkados, for production testing (PTS), logistic material tracking (MTS), environment management (EMS), video analytics (VAS), quality reporting (QRS) and others (as may be developed by Arkados as needed for the customer needs).

We also introduced to Tatung our In-Home Bridge programmable logic controller (PLC) software that operates on or in connection with a single in-home control device, such as a thermostat, as well as our Meter Collar PLC software that operates on or in connection with a single utility meter, such as a power meter.

Both of these roll-outs have begun generating revenue for us and have the potential for additional revenue as other modules are introduced. 

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AES

AES has begun marketing its services and solutions beginning in February 2015 and to date, has been engaged by two major customers for the provision of energy savings services, including the provision of LED lighting retrofit services. AES’ direct sales force is in the process of building a sales pipeline that is expected to generate additional revenue in subsequent periods.

Since inception, we have incurred losses of approximately $40.6 million.   We have financed operating losses since January 2013 with the proceeds primarily from related party lending from our major stockholders and affiliated lenders, as well as other stockholders and lenders.

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

We evaluate the performance of our operating business segments based primarily on loss from operations. Accordingly, the income and expense line items below loss from operations are only included in our discussion of the consolidated results of operations.

Consolidated

	Three Months Ended August 31,						Change
	2015			2014			$
Net sales	$	106,836		$	40,000		$	66,836
Cost of goods sold		—			—			—
Selling and general and administrative		529,192			1,187,174			(657,982	)
Research and development		98,429			52,192			46,237
Loss from operations		(520,785	)		(1,199,366	)		678,581
Interest expense		(7,414	)		(115,664	)		108,250
Loss on translation adjustment		(562	)		—			(562	)
Loss before income tax benefits		(528,761	)		(1,315,030	)		(786,269	)
Provision for income taxes		—			—			—
Net loss	$	(528,761	)	$	(1,315,030	)	$	786,269

In fiscal 2016, we recorded revenue of $106,836 from the licensing of the PEMS-SF and Meter Collar and IHB PLCs as compared to $40,000 revenue for fiscal 2015 from the licensing of PEMS-SF.

Cost of sales totaled $0 in both fiscal 2016 and fiscal 2015 as we did not sell any lighting.

Total operating expenses for fiscal 2016 was $627,621 consisting primarily of salaries of our management and AES employees, consulting expenses and professional fees. We also incurred net research and development expenses of $98,429 relating to development of new technology. This is compared to total operating expenses for fiscal 2015 of $1,239,366, consisting mainly of consulting expenses, stock based compensation and professional fees. During this period, we incurred consulting fees of $1,000,000 related to the issuance of 666,667 shares of common stock under the terms of a consulting agreement. We also incurred net research and development expenses of $52,192.

Interest expense on our existing debt for fiscal 2016 and 2015 was $7,414 and $115,664, respectively. Interest expense includes the amortization of beneficial conversion features on certain convertible debt securities. Amortization amounted to $0 and $93,866 for fiscal 2016 and 2015, respectively. Interest expense decreased as the result of the conversion of a substantial portion of the notes payable in fiscal 2015.

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Arkados Segment

	Three Months Ended
	August 31,						Change
	2015			2014			$
Net sales	$	106,836		$	40,000		$	66,836
Cost of goods sold		—			—			—
Selling and general and administrative		266,144			1,187,174			(921,030	)
Research and development		98,429			52,192			46,237
Loss from operations	$	(257,737	)	$	(1,199,366	)	$	941,629

In fiscal 2016, we recorded revenue of $106,836 from the licensing of the PEMS-SF and Meter Collar and IHB PLCs as compared to $40,000 revenue for fiscal 2015.

Total operating expenses for fiscal 2016 was $364,573 consisting primarily of salaries of our management, consulting expenses and professional fees. We also incurred net research and development expenses of $98,429 relating to development of new technology. This is compared to total operating expenses for fiscal 2015 of $1,239,366, consisting mainly of consulting expenses, stock based compensation and professional fees. During this period, we incurred consulting fees of $1,000,000 related to the issuance of 666,667 shares of common stock under the terms of a consulting agreement. We also incurred net research and development expenses of $52,192.

AES Segment

	Three Months Ended
	August 31,					Change
	2015			2014		$
Net sales	$	—		$	—	$	—
Cost of goods sold		—			—		—
Selling and general and administrative		263,048			—		263,048
Research and development		—			—		—
Loss from operations	$	(263,048	)	$	—	$	(263,048	)

AES began operations in fiscal 2015 and began earning revenue in the fourth quarter of fiscal 2015. AES did not have revenue in both fiscal 2016 and fiscal 2015, however, in August 2015, AES entered into an agreement to provide energy services for the related entity discussed in Note 7 of the consolidated financial statements. AES expects all services under the agreement to be completed by November 30, 2015. Net sales are estimated to be approximately $580,000.

Cost of sales totaled $0 in both fiscal 2016 and fiscal 2015 as AES did not sell any lighting. Total operating expenses in fiscal 2016 was $263,048. Operating expenses consisted primarily of salaries and payroll taxes.

Liquidity and Capital Resources

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

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

As of August 31, 2015, we had cash of $290,622 and negative working capital of approximately $1.42 million compared to cash of $234,994 and negative working capital of approximately $3.25 million at May 31, 2015, an overall reduction in the working capital deficit of approximately $1.83 million. The change in working capital since May 31, 2015 has resulted from $503,000 received from the sales of units from our March 2015 private placement offering (“PPO” – see below), a decrease of $447,372 in cash used in operating activities to pay current expenses, and a decrease of accounts payable and accrued expenses totaling $1,873,611 which represents the value of the shares of common stock and stock options issued to our sole director and former director in fiscal 2016 for services performed in fiscal 2015. The value of the common stock and stock options was charged as stock compensation in fiscal 2015.

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On March 15, 2015, the Company commenced a PPO for accredited investors to issue up to 2,500,000 shares of common stock and warrants to purchase 2,500,000 shares of common stock at $2.00 per share (each share and warrant constitutes a “Unit”) for total gross proceeds of $1,500,000. The warrants are immediately exercisable and have a term of three years. The Units are being offered by the Company on a “best efforts” “any-or-none” basis in Units of 166,666 shares although the Company may accept fractional Units. For the period March 15, 2015 through the date of this report, 1,671,664 Units have been subscribed for under the PPO and the Company received proceeds of $1,003,000. The proceeds are being used for working capital purposes.

Critical Accounting Policies

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

Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties, and may potentially result in materially different results under different assumptions and conditions. As of August 31, 2015, management believes the critical accounting policies applicable to the Company that are reflective of significant judgments and or uncertainties are limited to equity based transactions or convertible debt instruments.

Revenue Recognition

Arkados

Revenues from software licensing are recognized in accordance with ASC 985-605, “Software Revenue Recognition.” Accordingly, revenue from software licensing is recognized when all of the following criteria are met: persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, and collectability is probable.

The Company intends to enter into arrangements with end users for items which may include software license fees, and services or various combinations thereof. For each arrangement, revenues will be recognized when evidence of an agreement has been documented, the fees are fixed or determinable, collection of fees is probable, delivery of the product has occurred and no other significant obligations remain.

License revenues are recognized at the time of delivery of the software and all other revenue recognition criteria discussed above have been met. Deferred revenue represents license revenues billed but not yet earned.

AES

Sales of products are recognized when the products are shipped and the customer takes risk of ownership and assumes the risk of loss. Service revenue is recognized as the service is performed. Deferred revenue represents revenues billed but not yet earned.

Accounting for Stock Based Compensation

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

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Off Balance Sheet Arrangements

We do not have any off balance sheet arrangements.

Item 3. Quantitative And Qualitative Disclosures About Market Risk.

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

Item 4. Controls and Procedures.

We strive to maintain a set of disclosure controls and procedures designed to ensure that information required to be disclosed by us in the reports filed under the Securities Exchange Act, is recorded, processed, summarized and reported within the time periods specified by the SEC’s rules and forms. Disclosure controls are also designed with the objective of ensuring that this information is accumulated and communicated to our management, including our chief executive officer, as appropriate, to allow timely decisions regarding required disclosure. As a result of this evaluation, we concluded that our disclosure controls and procedures were not effective for the period ended August 31, 2015.

Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Section 15d-15(f) of the Exchange Act) for our Company. Our sole officer and director, who is chief executive officer and is also acting in the capacity of principal accounting officer, conducted an evaluation of the design and operation of our internal control over financial reporting as of the end of the period covered by this report, based on the criteria set forth in the Internal Control- Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. As a result of this evaluation, we concluded that our financial reporting controls and procedures were not effective for the period ended August 31, 2015. Due to its small size and limited financial resources, the Company has only one employee involved in accounting and financial reporting and relies on outside contractors for the majority of its accounting.  As a result of engaging an outside accounting firm to assist with our books, there is some added segregation of duties within the accounting function and financial control, however, all aspects of physical control of cash remains in the hands of the same employee.   The CEO is currently working to retain a full-time Chief Financial Officer and to put it in place additional compensating levels of controls to provide for greater segregation of duties.  There is no CFO at this time, however, and the CEO is also acting in the capacity of Principal Accounting Officer.

There has been no change in our internal control over financial reporting identified in connection with the evaluation that occurred during the last fiscal quarter that has materially affected, or is reasonably likely to materially affect our internal control over financial reporting.

Changes In Internal Control Over Financial Reporting

None.

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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, 2015 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, 2015 which could materially affect our business, financial condition or future results. There have been no other material changes during the quarter ended August 31, 2015 to the risk factors discussed in the periodic reports noted above that have not already been disclosed in the Company’s most recently filed Form 10-K.

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

In June and July 2015, 838,334 units have been subscribed for under the Company’s March 2015 private placement offering and the Company received proceeds of $503,000. Each unit contains one share of common stock and a warrant to purchase shares of common stock at $2.00 per share. The warrants are immediately exercisable and have a term of three years.

On June 25, 2015, the Company issued 108,333 shares of common stock to its chairman/chief executive officer and 35,000 shares of common stock to an officer/former director for services rendered to the Company’s board of directors in fiscal 2015. In addition, the Company issued options to these individuals to purchase a total of 1,300,000 shares of common stock at $0.60 per share. The options vested immediately and are exercisable for three years.

These securities were issued pursuant to the exemption set forth in Section 4(a)(2) of the Securities Act of 1933. The proceeds to the Company were used entirely for working capital.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

None.

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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).

101.INS	XBRL Instance Document
101.SCH	XBRL Taxonomy Extension Schema Document
101.CAL	XBRL Taxonomy Extension Calculation Document
101.DEF	XBRL Taxonomy Extension Definition Document
101.LAB	XBRL Taxonomy Extension Labeled Document
101.PRE	XBRL Taxonomy Extension Presentation Document

12

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: December 23, 2015	ARKADOS GROUP, INC.
	By:	/s/ Terrence DeFranco
		Terrence DeFranco
		President and Chief Executive Officer, Principal Accounting Officer

13

EX-31.1

EXHIBIT 31.1

CERTIFICATIONS

I, Terrence DeFranco, certify that:

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

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

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

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

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

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

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

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

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

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

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

/s/ Terrence DeFranco

Terrence DeFranco

Chief Executive Officer and Principal Accounting Officer

Date:  December 23, 2015

EX-32.1

EXHIBIT 32.1

CERTIFICATION PURSUANT TO

 18 U.S.C. SECTION 1350,

 AS ADOPTED PURSUANT TO

 SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the quarterly report on Form 10-Q of Arkados Group, Inc. (the “Company”) for the quarterly period ended August 31, 2015 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Terrence DeFranco, Chief Executive Officer and Principal Accounting Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:

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

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

/s/Terrence DeFranco

Terrence DeFranco

Chief Executive Officer and Principal Accounting Officer

Date: December 23, 2015

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

XML

Document and Entity Information - shares	3 Months Ended
	Aug. 31, 2015	Oct. 15, 2015
Document And Entity Information
Entity Registrant Name	ARKADOS GROUP, INC.
Entity Central Index Key	0001095130
Document Type	10-Q
Trading Symbol	akds
Document Period End Date	Aug. 31, 2015
Amendment Flag	false
Current Fiscal Year End Date	--05-31
Entity a Well-known Seasoned Issuer	No
Entity a Voluntary Filer	No
Entity's Reporting Status Current	Yes
Entity Filer Category	Smaller Reporting Company
Entity Common Stock, Shares Outstanding		12,081,500
Document Fiscal Period Focus	Q1
Document Fiscal Year Focus	2016

XML

CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) - USD ($)	Aug. 31, 2015	May. 31, 2015
Current assets:
Cash	$ 290,622	$ 234,994
Accounts receivable	61,322	132,349
Inventory	343,504	156,705
Prepaid expenses and other current assets	11,436	12,004
Total current assets	706,884	536,052
Security deposits	20,384	1,874
Total assets	727,268	537,926
Current liabilities:
Accounts payable and accrued expenses	931,724	2,655,132
Deferred revenue	332,191	267,291
Accrued income tax	63,082	63,082
Debt subject to equity being issued	456,930	456,930
Notes payable	345,832	345,832
Total current liabilities	2,129,759	3,788,267
Total liabilities	$ 2,129,759	$ 3,788,267
Commitments
Stockholders' deficiency:
Additional paid-in capital	$ 39,216,670	$ 36,840,157
Accumulated deficit	(40,620,369)	(40,091,608)
Total stockholders' deficiency	(1,402,491)	(3,250,341)
Total liabilities and stockholders' deficiency	$ 727,268	$ 537,926
Preferred Stock [Member]
Stockholders' deficiency:
Convertible preferred stock, $.0001 par value; 5,000,000 shares authorized, zero shares outstanding
Common Stock [Member]
Stockholders' deficiency:
Common stock, $.0001 par value; 600,000,000 shares authorized; 12,081,500 and 11,099,833 issued and outstanding	$ 1,208	$ 1,110

XML

CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) (Parenthetical) - $ / shares	Aug. 31, 2015	May. 31, 2015
Preferred Stock [Member]
Convertible preferred stock, par value (in dollars per share)	$ .0001	$ 0.0001
Convertible preferred stock, shares authorized	5,000,000	5,000,000
Convertible preferred stock, shares outstanding	0	0
Common Stock [Member]
Common stock, par value (in dollars per share)	$ 0.0001	$ 0.0001
Common stock, shares authorized	600,000,000	600,000,000
Common stock, shares issued	12,081,500	11,099,833
Common stock, shares outstanding	12,081,500	11,099,833

XML

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) - USD ($)	3 Months Ended
	Aug. 31, 2015	Aug. 31, 2014
Income Statement [Abstract]
Net sales	$ 106,836	$ 40,000
Operating expenses:
Selling and general and administrative	529,192	1,187,174
Research and development	98,429	52,192
Total operating expenses	627,621	1,239,366
Loss from operations	(520,785)	(1,199,366)
Other expenses:
Interest expense	(7,414)	$ (115,664)
Loss on translation adjustments	(562)
Total other expenses	(7,976)	$ (115,664)
Loss before provision for income taxes	$ (528,761)	$ (1,315,030)
Provision for income taxes
Net loss	$ (528,761)	$ (1,315,030)
Loss per common share - basic and diluted (in dollars per share)	$ (0.04)	$ (0.32)
Weighted average of common shares outstanding - basic and diluted (in shares)	11,804,761	4,144,962

XML

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) - USD ($)	3 Months Ended
	Aug. 31, 2015	Aug. 31, 2014
Cash flows from operating activities:
Net loss	$ (528,761)	$ (1,315,030)
Adjustments to reconcile net loss to net cash used in operating activities:
Amortization of debt discount		93,866
Issuance of common stock for services		$ 1,000,000
Changes in operating assets and liabilities:
Accounts receivable	$ 71,027
Inventory	(186,799)
Prepaid expenses and other current assets	568	$ 7,757
Security deposits	(18,510)
Accounts payable and accrued expenses	150,203	$ 17,947
Deferred revenue	64,900
Net cash used in operating activities	(447,372)	$ (195,460)
Cash flows from financing activities:
Proceeds from sales of common stock	$ 503,000
Proceeds from convertible debt		$ 200,000
Net cash provided by financing activities	$ 503,000	200,000
Net increase in cash	55,628	4,540
Cash at beginning of year	234,994	118,505
Cash at end of year	290,622	$ 123,045
Schedule of non-cash transactions:
Common stock issued for accrued stock based compensation	250,833
Stock options issued for accrued stock based compensation	$ 1,622,778
Warrants issued to former employees to settle debt subject to equity being issued		$ 747,536
Common stock issued or to be issued for debt subject to equity being issued		466,000
Valuation of beneficial conversion feature of debt raise		$ 71,000
Supplemental disclosure of cash flow information:
Interest paid
Income taxes paid

XML

DESCRIPTION OF BUSINESS

3 Months Ended

Aug. 31, 2015

Accounting Policies [Abstract]

DESCRIPTION OF BUSINESS

1. DESCRIPTION OF BUSINESS

Arkados Group, Inc. (the “Parent”) conducts business activities principally through two of its wholly-owned subsidiaries, Arkados, Inc. (“Arkados”) and Arkados Energy Solutions, LLC (“AES”) (collectively, the “Company”).

The Company underwent a significant restructuring following December 23, 2010, during which substantially all of its assets were acquired by STMicroelectronics (sometimes referred to hereinafter as the “Asset Sale”), as disclosed in the Form 8-K filed December 29, 2010 and further described (as to the closing) in the Form 8-K filed July 12, 2011. Settlements reached in connection with the Asset Sale and the fulfillment of obligations in connection therewith, have just recently been (post the period covered by this report) substantially completed.

Following the sale of its assets associated with the manufacture of microchips, the Company shifted its focus towards the following businesses:

Arkados - Software and hardware design and developing solutions that enable machine to machine communications for the Internet of Things (IoT). Arkados’ solutions support smart grid and smart building applications primarily in the areas of building automation and energy management and are uniquely designed to drive a wide variety of wireless and powerline communication (PLC)-based products, such as sensors, gateways, video cameras, appliances and other devices.

AES - Energy services provider with focus on the design, installation and maintenance of innovative, sustainable, and cost-effective energy solutions for both residential and commercial customers. AES implements smart grid applications primarily in the areas of LED lighting, building automation, and energy management. These applications are uniquely designed to drive a wide variety of wireless and powerline communication (PLC)-based products, such as sensors, gateways, video cameras, appliances and other devices.

Effective March 18, 2015, the Company implemented a reverse stock split of its outstanding common stock at a ratio of 1-for-30 shares. All share figures and results are reflected on a post-split basis. See Note 6.

The accompanying condensed consolidated financial statements as of August 31, 2015 (unaudited) and May 31, 2015 and for the three month periods ended August 31, 2015 and 2014 (unaudited) have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission including Form 10-Q and Regulation S-X. The information furnished herein reflects all adjustments (consisting of normal recurring accruals and adjustments) which are, in the opinion of management, necessary to fairly present the operating results for the respective periods. Certain information and footnote disclosures normally present in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted pursuant to such rules and regulations. These financial statements and the information included under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations” should be read in conjunction with the audited financial statements and explanatory notes for the year ended May 31, 2015 as disclosed in our annual report on Form 10-K for that year. The results of the three months ended August 31, 2015 (unaudited) are not necessarily indicative of the results to be expected for the pending full year ending May 31, 2016.

XML

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

3 Months Ended

Aug. 31, 2015

Accounting Policies [Abstract]

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

a. Going concern - The accompanying condensed consolidated financial statements have been prepared assuming that the Company will continue as a going concern. The Company has incurred net losses of approximately $40.6 million since inception, including a net loss of approximately $529,000 for the three months ended August 31, 2015. Additionally, the Company still had both working capital and stockholders’ deficiencies at August 31, 2015 and May 31, 2015 and negative cash flow from operations since inception. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. Management expects to incur additional losses in the foreseeable future and recognizes the need to raise capital to remain viable. The accompanying consolidated financial statements do not include any adjustments that might be necessary should the Company be unable to continue as a going concern.

b. Principles of consolidation - The consolidated financial statements include the accounts of the Parent, and its wholly-owned subsidiaries, which include: AES, Arkados, CDKnet, LLC and Creative Technology, LLC. Currently, Arkados and AES are the only active entities with operations. Intercompany accounts and transactions have been eliminated in consolidation.

c.	Revenue Recognition -
	Arkados
	Revenues from software licensing are recognized in accordance with Accounting Standards Codification (“ASC”) 985-605, “Software Revenue Recognition.” Accordingly, revenue from software licensing is recognized when all of the following criteria are met: persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, and collectability is probable. The Company intends to enter into arrangements with end users for items which may include software license fees, and services or various combinations thereof. For each arrangement, revenues will be recognized when evidence of an agreement has been documented, the fees are fixed or determinable, collection of fees is probable, delivery of the product has occurred and no other significant obligations remain. License revenues are recognized at the time of delivery of the software and all other revenue recognition criteria discussed above have been met. Deferred revenue represents license revenues billed but not yet earned. AES   Sales of products are recognized when the products are shipped and the customer takes risk of ownership and assumes the risk of loss. Service revenue is recognized when the service is completed. Deferred revenue represents revenues billed but not yet earned.

d. Cash equivalents - The Company considers investments in highly liquid instruments with a maturity of three months or less to be cash equivalents. The Company did not have any cash equivalents at both August 31, 2015 and May 31, 2015.

e. Accounts receivable - Accounts receivable are reported at their outstanding unpaid principal balances net of allowances for uncollectible accounts. The Company provides for allowances for uncollectible receivables based on management’s estimate of uncollectible amounts considering age, collection history, and any other factors considered appropriate. The Company writes off accounts receivable against the allowance for doubtful accounts when a balance is determined to be uncollectible.  At August 31, 2015 and May 31, 2015, the Company determined that an allowance for doubtful accounts was not needed.

f.

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. As defined in Accounting Standards Codification (“ASC”) Topic No. 820, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). The Company utilizes market data or assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated, or generally unobservable. ASC 820 establishes a fair value hierarchy that prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurement) and the lowest priority to unobservable inputs (level 3 measurement). This fair value measurement framework applies at both initial and subsequent measurement.

The three levels of the fair value hierarchy defined by ASC Topic No. 820 are as follows: Level 1 – Quoted prices are available in active markets for identical assets or liabilities as of the reporting date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis. Level 1 primarily consists of financial instruments such as exchange-traded derivatives, marketable securities and listed equities. Level 2 – Pricing inputs are other than quoted prices in active markets included in level 1, which are either directly or indirectly observable as of the reported date. Level 2 includes those financial instruments that are valued using models or other valuation methodologies. These models are primarily industry-standard models that consider various assumptions, including quoted forward prices for commodities, time value, volatility factors, and current market and contractual prices for the underlying instruments, as well as other relevant economic measures. Substantially all of these assumptions are observable in the marketplace throughout the full term of the instrument, can be derived from observable data or are supported by observable levels at which transactions are executed in the marketplace. Instruments in this category generally include non-exchange-traded derivatives such as commodity swaps, interest rate swaps, options and collars. Level 3 – Pricing inputs include significant inputs that are generally less observable from objective sources. These inputs may be used with internally developed methodologies that result in management’s best estimate of fair value.

g.	Earnings (Loss) Per Share (“EPS”) - Basic EPS is computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding. Diluted EPS includes the effect from potential issuance of common stock, such as stock issuable pursuant to the exercise of stock options and warrants and the assumed conversion of convertible notes.
	The following table summarizes the securities that were excluded from the diluted per share calculation because the effect of including these potential shares was antidilutive even though the exercise price could be less than the average market price of the common shares.

	Three Months ended August 31,
	2015		2014
Convertible notes		114,795		2,000,000
Stock options		2,312,500		1,181,250
Warrants		4,776,320		3,023,990
Potentially dilutive securities		7,203,615		6,205,240

h.

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

Stock based compensation expense for the three months ended August 31, 2015 and 2014 was $0 and $1,000,000, respectively. The expense was included in selling and general and administrative expenses. See Note 6a.

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

j. Inventory - Inventory, which will consist solely of finished goods of AES, is valued at the lower of cost on a first-in, first-out basis or market.   Inventory consists of the following at August 31, 2015 and May 31, 2015.

	August 31, 2015		May 31, 2015
		(unaudited)
Finished goods	$	278,276	$	147,605
Work-in-process (unbilled labor and consulting)		65,228		9,100
	$	343,504	$	156,705

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

l. Foreign Currency Transactions – The Company accounts for foreign currency translation pursuant to ASC 830. The functional currency of the Company is the United States dollar. Under ASC 830, all assets and liabilities denominated in foreign currencies are translated into United States dollars using the current exchange rate at the end of each fiscal period. Revenues and expenses are translated using the average exchange rates prevailing throughout the respective periods. All transaction gains and losses from the measurement of monetary balance sheet items denominated in foreign currencies are reflected in the statement of operations as gain (loss) on foreign currency transactions.

m

New Accounting Pronouncements –

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers.” The amendments in ASU 2014-09 affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards (e.g., insurance contracts or lease contracts). This ASU will supersede the revenue recognition requirements in ASC 605, “Revenue Recognition,” and most industry-specific guidance, and creates an ASC 606, “Revenue from Contracts with Customers.” The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principle, an entity should apply the following steps: Step 1: Identify the contract(s) with a customer. Step 2: Identify the performance obligations in the contract. Step 3: Determine the transaction price. Step 4: Allocate the transaction price to the performance obligations in the contract. Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation. ASU 2014-09 was scheduled to be effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early application is not permitted. In August 2015, the FASB issued ASU 2015-14, “Revenue from Contracts with Customers (Topic 606): Deferral of Effective Date” (“ASU 2015-14”) which defers the effective date of ASU 2014-09 by one year. ASU 2014-09 is now effective for annual reporting periods after December 15, 2017 including interim periods within that reporting period.  Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. The Company is currently evaluating the effects of adopting ASU 2014-09 on its consolidated financial statements for fiscal 2016 and fiscal 2015 but the adoption is not expected to have a significant impact on the Company’s consolidated financial statements for fiscal 2014 as the Company did not recognize revenues for such year. In June 2014, ASU 2014-12, “Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period” (“ASU No. 2014-12”) was issued.  ASU No. 2014-12 requires that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. An entity should recognize compensation cost in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the periods for which the requisite service has already been rendered. If the performance target becomes probable of being achieved before the end of the requisite service period, the remaining unrecognized compensation cost should be recognized prospectively over the remaining requisite service period. The total amount of compensation cost recognized during and after the requisite service period should reflect the number of awards that are expected to vest and should be adjusted to reflect those awards that ultimately vest. ASU 2014-12 becomes effective for interim and annual periods beginning on or after December 15, 2015. Early adoption is permitted.  The Company is currently evaluating the effects of adopting ASU 2014-12 on its consolidated financial statements but the adoption is not expected to have a significant impact on the Company’s consolidated financial statements.

In June 2014, ASU 2014-15, “Presentation of Financial Statements – Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern” (“ASU No. 2014-15”) was issued.  Before the issuance of ASU 2014-15, there was no guidance in U.S. GAAP about management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern or to provide related footnote disclosures. This guidance is expected to reduce the diversity in the timing and content of footnote disclosures. ASU 2014-15 requires management to assess an entity’s ability to continue as a going concern by incorporating and expanding upon certain principles that are currently in U.S. auditing standards as specified in the guidance. ASU 2014-15 becomes effective for the annual period ending after December 15, 2016 and for annual and interim periods thereafter. Early adoption is permitted. The Company is currently evaluating the effects of adopting ASU 2014-15 on its consolidated financial statements but the adoption is not expected to have a significant impact on the Company’s consolidated financial statements.

In January 2015, the FASB issued ASU 2015-01, “Income Statement - Extraordinary and Unusual Items (Subtopic 225-20): Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items” (“ASU 2015-01”). ASU 2015-01 eliminates the concept of an extraordinary item from accounting principles generally accepted in the United States of America. As a result, an entity will no longer be required to segregate extraordinary items from the results of ordinary operations, to separately present an extraordinary item on its income statement, net of tax, after income from continuing operations or to disclose income taxes and earnings-per-share data applicable to an extraordinary item. However, ASU 2015-01 will still retain the presentation and disclosure guidance for items that are unusual in nature and occur infrequently. ASU 2015-01 becomes effective for interim and annual periods beginning on or after December 15, 2015. Early adoption is permitted.  The Company is currently evaluating the effects of adopting ASU 2015-01 on its consolidated financial statements but the adoption is not expected to have a significant impact on the Company’s consolidated financial statements.

In April 2015, the FASB issued ASU 2015-03, “Interest – Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs” (“ASU 2015-03”) as part of its initiative to reduce complexity in accounting standards (the Simplification Initiative). The Board received feedback that having different balance sheet presentation requirements for debt issuance costs and debt discount and premium creates unnecessary complexity. Recognizing debt issuance costs as a deferred charge (that is, an asset) also is different from the guidance in International Financial Reporting Standards, which requires that transaction costs be deducted from the carrying value of the financial liability and not recorded as separate assets. Additionally, the requirement to recognize debt issuance costs as deferred charges conflicts with the guidance in FASB Concepts Statement No. 6, “Elements of Financial Statements,” which states that debt issuance costs are similar to debt discounts and in effect reduce the proceeds of borrowing, thereby increasing the effective interest rate. FASB Concepts Statement No. 6 further states that debt issuance costs cannot be an asset because they provide no future economic benefit. To simplify presentation of debt issuance costs, the amendments in this Update require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this Update. For public business entities, the amendments in this Update are effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. The Company will evaluate the effects of adopting ASU 2015-03 if and when it is deemed to be applicable.

XML

SALE OF LICENSE AND IP AGREEMENTS

3 Months Ended

Aug. 31, 2015

Goodwill and Intangible Assets Disclosure [Abstract]

SALE OF LICENSE AND IP AGREEMENTS

3. SALE OF LICENSE AND IP AGREEMENTS

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

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

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

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

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ACCRUED EXPENSES AND OTHER LIABILITIES

3 Months Ended

Aug. 31, 2015

Payables and Accruals [Abstract]

ACCRUED EXPENSES AND OTHER LIABILITIES

4.     ACCRUED EXPENSES AND OTHER LIABILITIES 

As of August 31, 2015 and May 31, 2015, accounts payable and accrued expenses consist of the following amounts: 

	August 31, 2015		May 31, 2015
	(Unaudited)
Accounts payable	$	700,742	$	463,911
Accrued board of director fees (see Notes 6i and 7A)		—		1,873,611
Accrued interest payable		105,492		98,078
Accrued payroll		51,187		54,882
Accrued other		74,303		164,650
	$	931,724	$	2,665,132

Accounts payable transactions included the following:

On September 10, 2013, the Company entered into a Settlement Agreement and Release with an unsecured creditor whereby the Company was released from all existing debt, including interest, in exchange for the issuance of 23,776,513 shares of common stock within 90 days of the signing of the Agreement. The Company issued such shares under this Settlement Agreement in September 2014. As of both August 31, 2015 and May 31, 2015, there was $0 of payables due. See Note 6b.

In fiscal 2015, the Company determined that certain accounts payable had been settled in prior periods and should be written off. Balances totaling $124,793 were reversed and recognized as other income.

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NOTES PAYABLE, RELATED PARTY PAYABLES, DEBT SUBJECT TO EQUITY BEING ISSUED

3 Months Ended

Aug. 31, 2015

Debt Disclosure [Abstract]

NOTES PAYABLE, RELATED PARTY PAYABLES, DEBT SUBJECT TO EQUITY BEING ISSUED

5.     NOTES PAYABLE, RELATED PARTY PAYABLES, DEBT SUBJECT TO EQUITY BEING ISSUED 

Notes Payable 

As a result of the Company’s Asset Sale to ST US, the notes payable and convertible debentures of $17,269,689 and the related accrued interest of $3,671,137 as of May 31, 2010, have been settled in part with the December 2010 closing in the amount of $5,570,059 and the balance in June 2011 closing with cash of $3,526,523, an undetermined amount of equity yet to be issued and $688,768 of remaining notes payable as of May 31, 2012. In fiscal 2014, the Company received loans of $400,000. As of May 31, 2014, there was $939,894 of notes payable, net of debt discounts of $309,263. In fiscal 2015, the Company received loans of $200,000 and refinanced related party payables totaling $130,000. In addition, as discussed below, the Company issued common stock for the conversion of various notes payable and accrued interest. As of August 31, 2015 and May 31, 2015, there was notes payable of $345,832, net of debt discounts of $0. All notes payable mature on or before October 31, 2015 and as such, are classified as current liabilities on the consolidated balance sheet.

Notes payable transactions include the following:

FY 2013 (Year Ended May 31, 2013) Transactions: 

In November 2012, the Company received a loan in the form of a Convertible Note in the principal amount of $180,000. The Convertible Note bears interest at 6% per year and was scheduled to mature on November 15, 2014. In November 2014, the maturity date was extended to January 15, 2015. At any time during the term of the Convertible Note, the holder had the right to convert any unpaid portion of the Convertible Note into shares of common stock at a conversion price of $0.30 per share. The beneficial conversion feature was fair valued at $180,000 and was amortized over the life of the debt instrument. On April 1, 2015, the Company issued 687,921 shares for the conversion of the principal and accrued interest of $26,377. As a result of the conversion of the notes, the remaining unamortized beneficial conversion feature was written off in March 2015. See Note 6h.

In December 2012, the Company received a loan in the form of a Convertible Note in the principal amount of $20,000. The Convertible Note bears interest at 6% per year and was scheduled to mature on November 15, 2014. In November 2014, the maturity date was extended to January 31, 2015. Under the terms of the Convertible Note, if the Convertible Note was not paid upon maturity, the interest rate increased to 12% per year. At any time during the term of the Convertible Note, the holder had the right to convert any unpaid portion of the Convertible Note into shares of common stock at a conversion price of $0.30 per share. The beneficial conversion feature was fair valued at $20,000 and was amortized over the life of the debt instrument. On April 1, 2015, the Company issued 76,373 shares for the conversion of the principal and accrued interest of $2,912. As a result of the conversion of the notes, the remaining unamortized beneficial conversion features was written off in March 2015. See Note 6h.

On April 22, 2013, the Company executed two Convertible Notes for loans in principal amount of $40,000 each. Each Convertible Note bore interest at 6% per year and was scheduled to mature on April 30, 2015. At any time during the term of the Convertible Notes, the holders had the right to convert any unpaid portion of the Convertible Notes into shares of common stock at an original conversion price of $0.60 per share for both Convertible Notes. The beneficial conversion feature was fair valued at $40,000 each and was being amortized over the lives of the debt instruments. On March 16, 2015, the conversion price for the two notes was amended to $0.30 per share. On April 1, 2015, the Company issued 298,111 shares for the conversion of the principal and accrued interest of $9,433. As a result of the conversion of the notes, the remaining unamortized beneficial conversion features were written off in March 2015. See Note 6h.

On April 22, 2013, the Company executed a Convertible Note for a loan in the principal amount of $120,000. The Convertible Note bore interest at 6% per year and was scheduled to mature on April 30, 2015. At any time during the term of the Convertible Note, the holder had the right to convert any unpaid portion of the Convertible Note into shares of common stock at an original conversion price of $0.60 per share. The beneficial conversion feature was fair valued at $120,000 and was being amortized over the life of the debt instrument. On March 16, 2015, the conversion price for the note was amended to $0.30 per share. On April1, 2015, the Company issued 447,167 shares for the conversion of the principal and accrued interest to date of $14,150. As a result of the conversion of the notes, the remaining unamortized beneficial conversion feature was written off in March 2015. See Note 6h.

On May 2, 2013, the Company executed a Convertible Note for a loan in the principal amount of $200,000. The Convertible Note bore interest at 6% per year and was scheduled to mature on April 30, 2015. At any time during the term of the Convertible Note, the holder had the right to convert any unpaid portion of the Convertible Note into shares of common stock at an original conversion price of $0.60 per share. The beneficial conversion feature was fair valued at $200,000 and was being amortized over the life of the debt instrument. On March 16, 2015, the conversion price for the note was amended to $0.30 per share. On April 1, 2015, the Company issued 741,872 shares for the conversion of the principal and accrued interest of $22,562. As a result of the conversion of the note, the remaining unamortized beneficial conversion feature was written off in March 2015. See Note 6h. 

FY 2014 (Year Ended May 31, 2014) Transactions:

On October 28, 2013, the Company executed a Convertible Note for a loan in the principal amount of $200,000. The Convertible Note bore interest at 6% per year and was scheduled to mature on October 31, 2015. At any time during the term of the Convertible Note, the holder had the right to convert any unpaid portion of the Convertible Note into shares of common stock at an original conversion price of $1.20 per share. The beneficial conversion feature was fair valued at $7,500 and was being amortized over the life of the debt instrument. On March 16, 2015, the conversion price for the note was amended to $0.30 per share. On April 1, 2015, the Company issued 723,706 shares for the conversion of the principal and accrued interest of $17,112. As a result of the conversion of the note, the remaining unamortized beneficial conversion feature was written off in March 2015. See Note 6h.

On November 12, 2013, the Company executed a Convertible Note for a loan in the principal amount of $200,000. The Convertible Note bore interest at 6% per year and was scheduled to mature on October 31, 2015. At any time during the term of the Convertible Note, the holder had the right to convert any unpaid portion of the Convertible Note into shares of common stock at an original conversion price of $1.20 per share. The beneficial conversion feature was fair valued at $100,000 and was being amortized over the life of the debt instrument. On March 16, 2015, the conversion price for the note was amended to $0.30 per share. On April 1, 2015, the Company issued 722,066 shares for the conversion of the principal and accrued interest of $16,620. As a result of the conversion of the note, the remaining unamortized beneficial conversion feature was written off in March 2015. See Note 6h. 

FY 2015 (Year Ended May 31, 2015) Transactions:

On August 11, 2014, the Company executed a Convertible Note for a loan in the principal amount of $100,000. The Convertible Note bore interest at 6% per year and was scheduled to mature on October 31, 2015. At any time during the term of the Convertible Note, the holder had the right to convert any unpaid portion of the Convertible Note and accrued interest into shares of common stock at an original conversion price of $0.60 per share. The beneficial conversion feature was fair valued at $35,500 and was being amortized over the life of the debt instrument. On March 16, 2015, the conversion price for the note was amended to $0.30 per share. On April 1, 2015, the Company issued 345,360 shares for the conversion of the principal and accrued interest of $3,608. As a result of the conversion of the note, the remaining unamortized beneficial conversion feature was written off in March 2015. See Note 6h.

On August 12, 2014, the Company executed a Convertible Note for a loan in the principal amount of $100,000. The Convertible Note bore interest at 6% per year and was scheduled to mature on October 31, 2015. At any time during the term of the Convertible Note, the holder had the right to convert any unpaid portion of the Convertible Note and accrued interest into shares of common stock at an original conversion price of $0.60 per share. The beneficial conversion feature was fair valued at $35,500 and was being amortized over the life of the debt instrument. On April 1, 2015, the Company issued 345,303 shares for the conversion of the principal and accrued interest of $3,591. As a result of the conversion of the notes, the remaining unamortized beneficial conversion features were written off in March 2015. See Note 6h.

On September 10, 2014, the Company executed two Convertible Notes to refinance due to related party, a previously issued outstanding note payable and accrued interest totaling $174,071. Each of these Convertible Notes has a principal balance of $65,000, bear interest at 6% per year and mature on October 31, 2015. At any time during the term of the Convertible Notes, the holders have the right to convert any unpaid portion of the Convertible Notes and accrued interest into shares of common stock at a conversion price of $1.20 per share. There was no beneficial conversion feature. The Company recognized a gain on the settlement of debt of $44,071 for the year ended May 31, 2015.

Debt Subject To Equity Being Issued

As a direct result of the Sale of the License and IP Agreements to ST US and the mandate to obtain debt releases, the Company has been able to reach settlements with its secured creditors and employees, with cash payments to the secured creditors made as of the December 2010 and June 2011 closings. Nothing further is owed to the Company’s secured creditors. There remains, however, approximately $179,000 of payments due the former employees as of both August 31, 2015 and May 31, 2015.

The continuing settlements with unsecured and related parties resulted in gains being recorded in the amount of $482,784 in fiscal 2012. As of both August 31, 2015 and May 31, 2015, there remained $456,930 of debts to be settled via cash payments and/or the issuance of equity on as yet to be determined or negotiated terms. The majority of debt holders who have settled have agreed to accept equity for their remaining debt.

FY 2013 (Year Ended May 31, 2013):

On January 6, 2013, the Company and Andreas Typaldos (“Typaldos”), former officer and director, entered into a Separation and Release Agreement (Separation Agreement”). Under the Separation Agreement, all prior agreements with Typaldos were terminated and certain debts and obligations to Typaldos were released in exchange for (1) a cash payment of $15,920 and (2) 469,132 shares of common stock. In addition, $19,000 was to be paid to Typaldos’ son for an existing loan with the Company. The Company issued such shares under this Separation Agreement in September 2014. As of both August 31 and May 31, 2015 no payables were due to Typaldos. See Note 6c.

FY 2015 (Year Ended May 31, 2015):

In fiscal 2015, the Company entered into final supplemental agreements with former employees to settle all outstanding claims. The Company issued warrants to purchase 622,947 shares of common stock at $1.20 per share for a five-year period to settle claims totaling $747,535.

During the year ended May 31, 2015, the Company entered into final supplemental agreements with bridge note holders to settle all outstanding claims. The Company issued 648,381 shares of common stock to settle claims totaling $466,000 in September 2014 and 256,486 shares of common stock to settle claims totaling $207,753 on April 1, 2015. See Note 6d.

During the year ended May 31, 2015, the Company agreed to issue 418,669 shares of common stock to settle claims totaling $502,408 from previous holders of unsecured debt. The shares were issued in January 2015. See Note 6e.

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STOCKHOLDERS' DEFICIENCY

3 Months Ended

Aug. 31, 2015

Equity [Abstract]

STOCKHOLDERS' DEFICIENCY

6. STOCKHOLDERS’ DEFICIENCY

Reverse Stock Split  

Effective March 18, 2015, the Company implemented a reverse stock split of its outstanding common stock at a ratio of 1-for-30 shares.  In connection with the reverse stock split, the Company’s Certificate of Incorporation was amended such that the Company’s issued and outstanding common stock was proportionally reduced. The number of authorized shares and the par value of the Company’s common stock and preferred stock were not affected by the reverse stock split. Stockholders will not receive fractional shares but instead will receive cash in an amount equal to the fraction of a share that stockholder would have been entitled to receive multiplied by the sale price of the common stock as last reported on February 12, 2015, the last business day prior to the first public disclosure/announcement of the reverse stock split.

Private Placement Offering (“PPO”)

On March 15, 2015, the Company commenced a PPO for accredited investors to issue up to 2,500,000 shares of common stock and warrants to purchase 2,500,000 shares of common stock at $2.00 per share (each share and warrant constitutes a “Unit”) for total gross proceeds of $1,500,000. The warrants are immediately exercisable and have a term of three years. The Units are being offered by the Company on a “best efforts” “any-or-none” basis in Units of 166,666 shares although the Company may accept fractional Units. See Notes 6g, 6j and 7B for the shares and warrants subscribed for through the date of this report.

Issuances of Common Stock

FY 2015 (Year Ended May 31, 2015):

a. On July 16, 2014, the Company issued 666,667 shares of common stock to a consultant under the terms of a consulting agreement.  The shares were valued at $1.50 per share which was the price of the common stock on the date of the consummation of an agreement with a customer.  See Note 9.

b. As described above, the Company signed a Settlement Agreement and Release with an unsecured creditor and agreed to issue 792,550 shares of common stock for $550,000 of accounts payable and $310,977 of a promissory note and accrued interest. The Company issued such shares under this Settlement Agreement in September 2014.  Prior to the issuance date, such shares were classified as common stock to be issued.

c. As described above, the Company entered into a Separation Agreement with Typaldos and agreed to issue 469,132 shares of common stock as part of the Agreement. The Company issued such shares under this Separation Agreement in September 2014.  Prior to the issuance date, such shares were classified as common stock to be issued.

d. As described above, the Company entered into final supplemental agreements with bridge note holder to settle all outstanding claims. In September 2014, the Company agreed to issue 648,381 shares of common stock to settle claims totaling $466,000. Prior to the issuance date, such shares were classified as common stock to be issued.  On April 1, 2015, the Company issued 256,486 shares of common stock to settle claims totaling $207,754.

e. As described above, the Company settled all outstanding claims with previous holders of unsecured debt. In September 2014, the Company issued 418,669 shares of common stock to settle claims totaling $502,408.

f. On February 19, 2015, the Company issued 50,000 shares of common stock to a consultant under the terms of an investor relations agreement.  The shares were valued at $1.20 per share which was the price of the common stock on the date the agreement was signed.   See Note 9.

g. For the period March 15, 2015 through May 31, 2015, 833,330 shares of common stock were subscribed for under the PPO and the Company received proceeds of $500,000. The shares were issued on April 7, 2015. 

h. As described above, on April 1, 2015, the Company issued 4,387,879 shares of common stock for the conversion of notes payable of $1,200,000 and accrued interest of $116,364.  

FY 2016 (Year Ended May 31, 2016):  

i. On June 25, 2015, the Company issued 108,333 shares of common stock to its chairman/chief executive officer and 35,000 shares of common stock to an officer/former director for services rendered to the Company’s board of directors in fiscal 2015.  The shares were valued at $1.75 per share.  The value of the shares totaling $250,833 was charged as stock compensation in fiscal 2015.

j. For the period June 1, 2015 through the date of the filing of this report, 838,334 shares of common stock have been subscribed for under the PPO and the Company received proceeds of $503,000.

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STOCK-BASED COMPENSATION

3 Months Ended

Aug. 31, 2015

Disclosure of Compensation Related Costs, Share-based Payments [Abstract]

STOCK-BASED COMPENSATION

7. STOCK-BASED COMPENSATION

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

A. Options

No options were granted in the year ended May 31, 2015.

On June 25, 2015, the Company issued options to its chairman/chief executive officer and an officer/former director for services rendered to the Company’s board of directors in fiscal 2015 to purchase a total of 1,300,000 shares of common stock as follows:

1.        Chairman/chief executive officer – options to purchase 1,000,000 shares of common stock at $0.60 per share.

2.        Officer/former director – options to purchase 300,000 shares of common stock at $0.60 per share.

The options vested immediately and are exercisable for three years. The options issued were valued using the Black-Scholes option pricing model under the assumptions below. The value of the options totaling $1,622,778 was charged as stock compensation in fiscal 2015.

The assumptions are as follows - stock price - $1.75; strike price - $0.60; expected volatility – 91.35%; risk-free interest rate - 0.73%; dividend rate - 0%; and expected term – 1.5 years.

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

				Weighted
				Average
	Shares			Exercise Price
Outstanding at June 1, 2014		1,247,917		$	1.53
Granted		—			—
Exercised		—			—
Expired or cancelled		(235,417	)		2.95
Outstanding at May 31, 2015		1,012,500			1.20
Granted		1,300,000			0.60
Exercised		—			—
Expired or cancelled		—			—
Outstanding at August 31, 2015		2,312,500		$	0.86

The following table summarizes information about options outstanding and exercisable at August 31, 2015:

	Options Outstanding and Exercisable
	Number Outstanding		Weighted- Average Remaining Life In Years		Weighted- Average Exercise Price		Number Exercisable
Range of exercise prices:
$0.60		1,300,000		2.82	$	0.60		1,300,000
$1.20		1,012,500		8.64		1.20		1,012,500
		2,312,500		5.37	$	0.86		2,312,500

The compensation expense attributed to the issuance of the options and warrants will be recognized as they vest / earned. These stock options and warrants are exercisable for three to ten years from the grant date.

The employee stock option plan stock options are exercisable for ten years from the grant date and vest over various terms from the grant date to three years.

B. Warrants

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

			Weighted
			Average
	Shares		Exercise Price
Outstanding at June 1, 2014		2,401,043	$	1.34
Granted		1,536,943		1.63
Exercised		—		—
Expired or cancelled		—		—
Outstanding at May 31, 2015		3,937,986		1.45
Granted		838,334		2.00
Exercised		—		—
Expired or cancelled		—		—
Outstanding at August 31, 2015		4,776,320	$	1.55

The following table summarizes information about warrants outstanding and exercisable at August 31, 2015:

	Outstanding and exercisable
	Number Outstanding		Weighted- average remaining life in years		Weighted- Average Exercise Price		Number Exercisable
Range of exercise prices:
$1.20		3,004,656		4.14	$	1.20		3,004,656
$2.00		1,671,664		2.99		2.00		1,671,664
$3.00 to $6.00		100,000		1.48		4.50		100,000
		4,776,320		3.13	$	1.55		4,776,320

Issuances of warrants were as follows:

FY 2015 (Year Ended May 31, 2015):  

a. Warrants to purchase 622,947 shares of common stock were issued in exchange for certain past due indebtedness outstanding. Such warrants were determined to have been issued at fair value since such settlements were negotiated by the Company with each debt holder.

b. Warrants to purchase 80,666 shares of common stock were issued to a consultant for services rendered under a consulting contract. The warrants issued were valued using the Black-Scholes option pricing model under the following assumptions: stock price - $0.46 - $1.87; strike price - $1.20; expected volatility - 100.00%; risk-free interest rate - 1.5%; dividend rate - 0%; and expected term - 3 years. See Note 9.

c. As discussed above, warrants to purchase 833,330 shares of common stock were issued under the PPO.

FY 2016 (Year Ended May 31, 2016):  

d. As discussed above, warrants to purchase 838,334 shares of common stock were issued under the PPO.

The expense attributed to the issuances of the warrants was recognized as they vested/earned. These warrants are exercisable for three years from the grant date.

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LICENSE AGREEMENTS

3 Months Ended

Aug. 31, 2015

Notes to Financial Statements

LICENSE AGREEMENTS

8. LICENSE AGREEMENTS

The Company earned all of its revenue from one customer under the following agreements.

Master Agreement – License of (“PEMS-SF”™)

On July 10, 2014, the Company entered into a Master Agreement to license our Process and Event Management System (“PEMS-SF”™) with Tatung Corporation (“Tatung”).

The basic fee generation structure of the Agreement allows for (1) a one-time licensing fee for each PEMS-SF-enabled stations or subsystems installed, (2) separate fees of up to 10% of the software fees for software updates, maintenance and technical support, (3) on-going service fees based on units of products manufactured utilizing PEMS-SF; and (4) an annual service fee for cloud-based services and data storage.

The Master Agreement has a year-to-year term but can be terminated by either party upon sixty (60) days’ advance written notice. Upon termination or expiration of this agreement, we are not required to provide any continuing or ongoing processing of data or other services that, pursuant to a sub-agreement, are discontinued upon termination, however, the customer shall retain any perpetual rights granted in a sub-agreement or schedule. The term of any sub-agreements is concomitant and co-terminus with the Master Agreement term.

Revenue recognized under the Master Agreement amounted to $66,000 and $40,000 for the three months ended August 31, 2015 and 2014, respectively. 

Agreement – License of Meter Collar and Bridge Programmable Logic Controllers

In October 2014, the Company entered into a year-to-year term agreement with Tatung to license its meter collar and bridge programmable logic controllers. The license is paid on a per copy (ordered) fee, and is on a perpetual, worldwide, non-exclusive, transferable basis.

Revenue recognized under the agreement amounted to $42,500 and $0 for the three months ended August 31, 2015 and 2014, respectively. 

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COMMITMENTS

3 Months Ended

Aug. 31, 2015

Commitments and Contingencies Disclosure [Abstract]

COMMITMENTS

9. COMMITMENTS

Leases

The Company sublet office space on a month-to-month basis from a company affiliated with its chief executive officer at a rate of $1,668 per month through September 2014.

Effective October 1, 2014 as amended on January 15, 2015, the Company entered a lease for its office space at a total monthly rental of $1,874. The lease expires on January 15, 2016 but can be renewed for two additional one-year terms.

Our AES subsidiary leases offices in Jericho, New York. The facility is approximately 1,850 square feet, occupied pursuant to a lease that commenced on August 1, 2015 and expires September 30, 2018. The average annual rent over the term of the lease is approximately $57,300. This amount does not include taxes and other occupancy costs for the premises.

Rent expense including occupancy costs for the three months ended August 31, 2015 and 2014 was $10,766 and $5,004, respectively.

Consulting Agreements

On July 1, 2013, the Company entered into a consulting agreement whereby the consultant would be paid in shares of the Company’s common stock in lieu of cash after achieving certain milestones. 666,667 shares were issued on July 16, 2014 upon the consummation of an agreement with a customer, another 1 million shares each will be issued upon gross revenue receipts of $500,000, $2,000,000 and $4,000,000, respectively.

On February 19, 2015, the Company entered into a one-year consulting agreement whereby the consultant received a payment of $5,000 and 50,000 shares of common stock valued at $1.20 per share. In addition, the consultant is entitled to payments of $5,000 per month for the duration of the agreement if and when the Company receives $500,000 or more in debt or equity financing.

On May 12, 2015, the Company entered into a three month consulting agreement for the raising of capital whereby the consultant received a payment of approximately $3,000. In addition, the consultant is entitled to a success fee of 5% of all monies raised as a direct result of introductions (as defined) made by the consultant.

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CONCENTRATIONS OF CREDIT RISK

3 Months Ended

Aug. 31, 2015

Risks and Uncertainties [Abstract]

CONCENTRATIONS OF CREDIT RISK

10. CONCENTRATIONS OF CREDIT RISK

Cash

The Company maintains principally all cash balances in two financial institutions which, at times, may exceed the amount insured by the Federal Deposit Insurance Corporation. The exposure to the Company is solely dependent upon daily bank balances and the respective strength of the financial institutions. The Company has not incurred any losses on these accounts.

Net Sales

Major customers for the three months ended August 31, 2015 and 2014 are set forth in the table below. 

	Three Months Ended August 31,
	2015			2014
Customer 1		60	%		100	%
Customer 2		40	%		—

Accounts Receivable

Major accounts receivable as of August 31, 2015 and May 31, 2015 are set forth in the table below. 

	August 31, 2015			May 31, 2015
	(unaudited)
Customer 1		63	%		39	%
Customer 2		29	%		29	%
Customer 3		8	%		28	%

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RELATED PARTY TRANSACTIONS

3 Months Ended

Aug. 31, 2015

Related Party Transactions [Abstract]

RELATED PARTY TRANSACTIONS

11. RELATED PARTY TRANSACTIONS

For the period from March 2015 to May 31, 2015, AES performed consulting services for an entity that is controlled by an officer of AES and a former director of the Company. No consulting services were performed for both the three months ended August 31, 2015 and 2014. In August 2015, AES entered into an agreement to provide energy services for the related entity. For the three months ended August 31, 2015, no net sales were recognized. A deposit of $55,000 was received and classified as part of deferred revenue.

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BUSINESS SEGMENT INFORMATION

3 Months Ended

Aug. 31, 2015

Segment Reporting [Abstract]

BUSINESS SEGMENT INFORMATION

12. BUSINESS SEGMENT INFORMATION

As of August 31 2015, the Company had two operating segments, Arkados and AES.

The Company’s reportable segments are distinguished by types of service, customers and methods used to provide their services. The operating results of these business segments are regularly reviewed by the Company’s chief operating decision maker.

The accounting policies of each of the segments are the same as those described in the Summary of Significant Accounting Policies. The Company evaluates performance based primarily on income (loss) from operations.

Operating results for the business segments of the Company were as follows: 

	Arkados			AES			Consolidated
Three Months Ended August 31, 2015
Revenues	$	106,836		$	—		$	106,836
Loss from operations		(257,737	)		(263,048	)		(520,785	)
Three Months Ended August 31, 2014
Revenues	$	40,000		$	—		$	40,000
Loss from operations		(1,199,366	)		—			(1,199,366	)
Total assets for the business segments of the Company were as follows:
August 31, 2015 (unaudited)	$	282,300		$	444,968		$	727,268
May 31, 2015		283,154			254,772			537,926

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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Policies)

3 Months Ended

Aug. 31, 2015

Accounting Policies [Abstract]

Going concern

a. Going concern - The accompanying condensed consolidated financial statements have been prepared assuming that the Company will continue as a going concern. The Company has incurred net losses of approximately $40.6 million since inception, including a net loss of approximately $529,000 for the three months ended August 31, 2015. Additionally, the Company still had both working capital and stockholders’ deficiencies at August 31, 2015 and May 31, 2015 and negative cash flow from operations since inception. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. Management expects to incur additional losses in the foreseeable future and recognizes the need to raise capital to remain viable. The accompanying consolidated financial statements do not include any adjustments that might be necessary should the Company be unable to continue as a going concern.

Principles of consolidation

b. Principles of consolidation - The consolidated financial statements include the accounts of the Parent, and its wholly-owned subsidiaries, which include: AES, Arkados, CDKnet, LLC and Creative Technology, LLC. Currently, Arkados and AES are the only active entities with operations. Intercompany accounts and transactions have been eliminated in consolidation.

Revenue Recognition

c.	Revenue Recognition -
	Arkados
	Revenues from software licensing are recognized in accordance with Accounting Standards Codification (“ASC”) 985-605, “Software Revenue Recognition.” Accordingly, revenue from software licensing is recognized when all of the following criteria are met: persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, and collectability is probable. The Company intends to enter into arrangements with end users for items which may include software license fees, and services or various combinations thereof. For each arrangement, revenues will be recognized when evidence of an agreement has been documented, the fees are fixed or determinable, collection of fees is probable, delivery of the product has occurred and no other significant obligations remain. License revenues are recognized at the time of delivery of the software and all other revenue recognition criteria discussed above have been met. Deferred revenue represents license revenues billed but not yet earned. AES   Sales of products are recognized when the products are shipped and the customer takes risk of ownership and assumes the risk of loss. Service revenue is recognized when the service is completed. Deferred revenue represents revenues billed but not yet earned.

Cash equivalents

d. Cash equivalents - The Company considers investments in highly liquid instruments with a maturity of three months or less to be cash equivalents. The Company did not have any cash equivalents at both August 31, 2015 and May 31, 2015.

Accounts receivable

e. Accounts receivable - Accounts receivable are reported at their outstanding unpaid principal balances net of allowances for uncollectible accounts. The Company provides for allowances for uncollectible receivables based on management’s estimate of uncollectible amounts considering age, collection history, and any other factors considered appropriate. The Company writes off accounts receivable against the allowance for doubtful accounts when a balance is determined to be uncollectible.  At August 31, 2015 and May 31, 2015, the Company determined that an allowance for doubtful accounts was not needed.

Fair Value of Financial Instruments

f.

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. As defined in Accounting Standards Codification (“ASC”) Topic No. 820, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). The Company utilizes market data or assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated, or generally unobservable. ASC 820 establishes a fair value hierarchy that prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurement) and the lowest priority to unobservable inputs (level 3 measurement). This fair value measurement framework applies at both initial and subsequent measurement.

The three levels of the fair value hierarchy defined by ASC Topic No. 820 are as follows: Level 1 – Quoted prices are available in active markets for identical assets or liabilities as of the reporting date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis. Level 1 primarily consists of financial instruments such as exchange-traded derivatives, marketable securities and listed equities. Level 2 – Pricing inputs are other than quoted prices in active markets included in level 1, which are either directly or indirectly observable as of the reported date. Level 2 includes those financial instruments that are valued using models or other valuation methodologies. These models are primarily industry-standard models that consider various assumptions, including quoted forward prices for commodities, time value, volatility factors, and current market and contractual prices for the underlying instruments, as well as other relevant economic measures. Substantially all of these assumptions are observable in the marketplace throughout the full term of the instrument, can be derived from observable data or are supported by observable levels at which transactions are executed in the marketplace. Instruments in this category generally include non-exchange-traded derivatives such as commodity swaps, interest rate swaps, options and collars. Level 3 – Pricing inputs include significant inputs that are generally less observable from objective sources. These inputs may be used with internally developed methodologies that result in management’s best estimate of fair value.

Earnings (Loss) Per Share ("EPS")

g.	Earnings (Loss) Per Share (“EPS”) - Basic EPS is computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding. Diluted EPS includes the effect from potential issuance of common stock, such as stock issuable pursuant to the exercise of stock options and warrants and the assumed conversion of convertible notes.
	The following table summarizes the securities that were excluded from the diluted per share calculation because the effect of including these potential shares was antidilutive even though the exercise price could be less than the average market price of the common shares.

	Three Months ended August 31,
	2015		2014
Convertible notes		114,795		2,000,000
Stock options		2,312,500		1,181,250
Warrants		4,776,320		3,023,990
Potentially dilutive securities		7,203,615		6,205,240

Stock Based Compensation

h.

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

Stock based compensation expense for the three months ended August 31, 2015 and 2014 was $0 and $1,000,000, respectively. The expense was included in selling and general and administrative expenses. See Note 6a.

Use of Estimates

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

Inventory

j. Inventory - Inventory, which will consist solely of finished goods of AES, is valued at the lower of cost on a first-in, first-out basis or market.   Inventory consists of the following at August 31, 2015 and May 31, 2015.

	August 31, 2015		May 31, 2015
		(unaudited)
Finished goods	$	278,276	$	147,605
Work-in-process (unbilled labor and consulting)		65,228		9,100
	$	343,504	$	156,705

Research and Development

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

Foreign Currency Transactions

l. Foreign Currency Transactions – The Company accounts for foreign currency translation pursuant to ASC 830. The functional currency of the Company is the United States dollar. Under ASC 830, all assets and liabilities denominated in foreign currencies are translated into United States dollars using the current exchange rate at the end of each fiscal period. Revenues and expenses are translated using the average exchange rates prevailing throughout the respective periods. All transaction gains and losses from the measurement of monetary balance sheet items denominated in foreign currencies are reflected in the statement of operations as gain (loss) on foreign currency transactions.

New Accounting Pronouncements

m

New Accounting Pronouncements –

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers.” The amendments in ASU 2014-09 affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards (e.g., insurance contracts or lease contracts). This ASU will supersede the revenue recognition requirements in ASC 605, “Revenue Recognition,” and most industry-specific guidance, and creates an ASC 606, “Revenue from Contracts with Customers.” The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principle, an entity should apply the following steps: Step 1: Identify the contract(s) with a customer. Step 2: Identify the performance obligations in the contract. Step 3: Determine the transaction price. Step 4: Allocate the transaction price to the performance obligations in the contract. Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation. ASU 2014-09 was scheduled to be effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early application is not permitted. In August 2015, the FASB issued ASU 2015-14, “Revenue from Contracts with Customers (Topic 606): Deferral of Effective Date” (“ASU 2015-14”) which defers the effective date of ASU 2014-09 by one year. ASU 2014-09 is now effective for annual reporting periods after December 15, 2017 including interim periods within that reporting period.  Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. The Company is currently evaluating the effects of adopting ASU 2014-09 on its consolidated financial statements for fiscal 2016 and fiscal 2015 but the adoption is not expected to have a significant impact on the Company’s consolidated financial statements for fiscal 2014 as the Company did not recognize revenues for such year. In June 2014, ASU 2014-12, “Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period” (“ASU No. 2014-12”) was issued.  ASU No. 2014-12 requires that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. An entity should recognize compensation cost in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the periods for which the requisite service has already been rendered. If the performance target becomes probable of being achieved before the end of the requisite service period, the remaining unrecognized compensation cost should be recognized prospectively over the remaining requisite service period. The total amount of compensation cost recognized during and after the requisite service period should reflect the number of awards that are expected to vest and should be adjusted to reflect those awards that ultimately vest. ASU 2014-12 becomes effective for interim and annual periods beginning on or after December 15, 2015. Early adoption is permitted.  The Company is currently evaluating the effects of adopting ASU 2014-12 on its consolidated financial statements but the adoption is not expected to have a significant impact on the Company’s consolidated financial statements.

In June 2014, ASU 2014-15, “Presentation of Financial Statements – Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern” (“ASU No. 2014-15”) was issued.  Before the issuance of ASU 2014-15, there was no guidance in U.S. GAAP about management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern or to provide related footnote disclosures. This guidance is expected to reduce the diversity in the timing and content of footnote disclosures. ASU 2014-15 requires management to assess an entity’s ability to continue as a going concern by incorporating and expanding upon certain principles that are currently in U.S. auditing standards as specified in the guidance. ASU 2014-15 becomes effective for the annual period ending after December 15, 2016 and for annual and interim periods thereafter. Early adoption is permitted. The Company is currently evaluating the effects of adopting ASU 2014-15 on its consolidated financial statements but the adoption is not expected to have a significant impact on the Company’s consolidated financial statements.

In January 2015, the FASB issued ASU 2015-01, “Income Statement - Extraordinary and Unusual Items (Subtopic 225-20): Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items” (“ASU 2015-01”). ASU 2015-01 eliminates the concept of an extraordinary item from accounting principles generally accepted in the United States of America. As a result, an entity will no longer be required to segregate extraordinary items from the results of ordinary operations, to separately present an extraordinary item on its income statement, net of tax, after income from continuing operations or to disclose income taxes and earnings-per-share data applicable to an extraordinary item. However, ASU 2015-01 will still retain the presentation and disclosure guidance for items that are unusual in nature and occur infrequently. ASU 2015-01 becomes effective for interim and annual periods beginning on or after December 15, 2015. Early adoption is permitted.  The Company is currently evaluating the effects of adopting ASU 2015-01 on its consolidated financial statements but the adoption is not expected to have a significant impact on the Company’s consolidated financial statements.

In April 2015, the FASB issued ASU 2015-03, “Interest – Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs” (“ASU 2015-03”) as part of its initiative to reduce complexity in accounting standards (the Simplification Initiative). The Board received feedback that having different balance sheet presentation requirements for debt issuance costs and debt discount and premium creates unnecessary complexity. Recognizing debt issuance costs as a deferred charge (that is, an asset) also is different from the guidance in International Financial Reporting Standards, which requires that transaction costs be deducted from the carrying value of the financial liability and not recorded as separate assets. Additionally, the requirement to recognize debt issuance costs as deferred charges conflicts with the guidance in FASB Concepts Statement No. 6, “Elements of Financial Statements,” which states that debt issuance costs are similar to debt discounts and in effect reduce the proceeds of borrowing, thereby increasing the effective interest rate. FASB Concepts Statement No. 6 further states that debt issuance costs cannot be an asset because they provide no future economic benefit. To simplify presentation of debt issuance costs, the amendments in this Update require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this Update. For public business entities, the amendments in this Update are effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. The Company will evaluate the effects of adopting ASU 2015-03 if and when it is deemed to be applicable.

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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Tables)

3 Months Ended

Aug. 31, 2015

Accounting Policies [Abstract]

Schedule of antidilutive securities excluded from computation of earnings per share

The following table summarizes the securities that were excluded from the diluted per share calculation because the effect of including these potential shares was antidilutive even though the exercise price could be less than the average market price of the common shares.

	Three Months ended August 31,
	2015		2014
Convertible notes		114,795		2,000,000
Stock options		2,312,500		1,181,250
Warrants		4,776,320		3,023,990
Potentially dilutive securities		7,203,615		6,205,240

Schedule of inventory

Inventory consists of the following at August 31, 2015 and May 31, 2015.

	August 31, 2015		May 31, 2015
		(unaudited)
Finished goods	$	278,276	$	147,605
Work-in-process (unbilled labor and consulting)		65,228		9,100
	$	343,504	$	156,705

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ACCRUED EXPENSES AND OTHER LIABILITIES (Tables)

3 Months Ended

Aug. 31, 2015

Payables and Accruals [Abstract]

Schedule of accounts payable and accrued expenses

As of August 31, 2015 and May 31, 2015, accounts payable and accrued expenses consist of the following amounts: 

	August 31, 2015		May 31, 2015
	(Unaudited)
Accounts payable	$	700,742	$	463,911
Accrued board of director fees (see Notes 6i and 7A)		—		1,873,611
Accrued interest payable		105,492		98,078
Accrued payroll		51,187		54,882
Accrued other		74,303		164,650
	$	931,724	$	2,665,132

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STOCK-BASED COMPENSATION (Tables)

3 Months Ended

Aug. 31, 2015

Disclosure of Compensation Related Costs, Share-based Payments [Abstract]

Schedule of stock option activity for qualified and unqualified stock options

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

				Weighted
				Average
	Shares			Exercise Price
Outstanding at June 1, 2014		1,247,917		$	1.53
Granted		—			—
Exercised		—			—
Expired or cancelled		(235,417	)		2.95
Outstanding at May 31, 2015		1,012,500			1.20
Granted		1,300,000			0.60
Exercised		—			—
Expired or cancelled		—			—
Outstanding at August 31, 2015		2,312,500		$	0.86

Schedule of options outstanding and exercisable

The following table summarizes information about options outstanding and exercisable at August 31, 2015:

	Options Outstanding and Exercisable
	Number Outstanding		Weighted- Average Remaining Life In Years		Weighted- Average Exercise Price		Number Exercisable
Range of exercise prices:
$0.60		1,300,000		2.82	$	0.60		1,300,000
$1.20		1,012,500		8.64		1.20		1,012,500
		2,312,500		5.37	$	0.86		2,312,500

Schedule of issuance of warrants

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

			Weighted
			Average
	Shares		Exercise Price
Outstanding at June 1, 2014		2,401,043	$	1.34
Granted		1,536,943		1.63
Exercised		—		—
Expired or cancelled		—		—
Outstanding at May 31, 2015		3,937,986		1.45
Granted		838,334		2.00
Exercised		—		—
Expired or cancelled		—		—
Outstanding at August 31, 2015		4,776,320	$	1.55

Schedule of warrants outstanding and exercisable

The following table summarizes information about warrants outstanding and exercisable at August 31, 2015:

	Outstanding and exercisable
	Number Outstanding		Weighted- average remaining life in years		Weighted- Average Exercise Price		Number Exercisable
Range of exercise prices:
$1.20		3,004,656		4.14	$	1.20		3,004,656
$2.00		1,671,664		2.99		2.00		1,671,664
$3.00 to $6.00		100,000		1.48		4.50		100,000
		4,776,320		3.13	$	1.55		4,776,320

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CONCENTRATIONS OF CREDIT RISK (Tables)

3 Months Ended

Aug. 31, 2015

Risks and Uncertainties [Abstract]

Schedule of major customers

Major customers for the three months ended August 31, 2015 and 2014 are set forth in the table below. 

	Three Months Ended August 31,
	2015			2014
Customer 1		60	%		100	%
Customer 2		40	%		—

Schedule of accounts receivable

Major accounts receivable as of August 31, 2015 and May 31, 2015 are set forth in the table below. 

	August 31, 2015			May 31, 2015
	(unaudited)
Customer 1		63	%		39	%
Customer 2		29	%		29	%
Customer 3		8	%		28	%

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BUSINESS SEGMENT INFORMATION (Tables)

3 Months Ended

Aug. 31, 2015

Segment Reporting [Abstract]

Schedule of operating results for the business segment

Operating results for the business segments of the Company were as follows: 

	Arkados			AES			Consolidated
Three Months Ended August 31, 2015
Revenues	$	106,836		$	—		$	106,836
Loss from operations		(257,737	)		(263,048	)		(520,785	)
Three Months Ended August 31, 2014
Revenues	$	40,000		$	—		$	40,000
Loss from operations		(1,199,366	)		—			(1,199,366	)
Total assets for the business segments of the Company were as follows:
August 31, 2015 (unaudited)	$	282,300		$	444,968		$	727,268
May 31, 2015		283,154			254,772			537,926

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DESCRIPTION OF BUSINESS (Details Narrative) - Number		3 Months Ended
	Mar. 18, 2015	Aug. 31, 2015
Accounting Policies [Abstract]
Number of subsidiaries		2
Description of reverse stock split	1-for-30

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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Details Narrative) - USD ($)

3 Months Ended

137 Months Ended

Aug. 31, 2015

Aug. 31, 2014

Aug. 31, 2015

Accounting Policies [Abstract]

Net income (loss)

$ (528,761)

$ (1,315,030)

$ 40,600,000

Stock based compensation expense

$ 0

$ 1,000,000

Method used

Black-Scholes options-pricing model

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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Details) - shares	3 Months Ended
	Aug. 31, 2015	Aug. 31, 2014
Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items]
Potentially dilutive securities	7,203,615	6,205,240
Convertible notes [Member]
Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items]
Potentially dilutive securities	114,795	2,000,000
Stock options [Member]
Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items]
Potentially dilutive securities	2,312,500	1,181,250
Warrant [Member]
Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items]
Potentially dilutive securities	4,776,320	3,023,990

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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Details 1) - USD ($)	Aug. 31, 2015	May. 31, 2015
Accounting Policies [Abstract]
Finished goods	$ 278,276	$ 147,605
Work-in-process (unbilled labor and consulting)	65,228	9,100
Inventory, net	$ 343,504	$ 156,705

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SALE OF LICENSE AND IP AGREEMENTS (Details Narrative) - USD ($)	1 Months Ended	3 Months Ended
	Dec. 31, 2010	Aug. 31, 2015
Proceeds from sale of intangible assets	$ 7,000,000
Proceeds from sale of other assets	4,000,000
Settlement of outstanding secured debt		$ 20,000,000
Workers compensation liability		1,400,000
Employee-related liabilities		5,200,000
Proceeds from license fee received	$ 7,000,000
Payments to employees		1,429,949
Settlement Agreements [Member]
Settlement amounts owed		30,000,000
Extinguishment of debt		10,862,241
Payments for restructuring		3,862,241
Unsecured debt		2,100,000
Settlement Agreements [Member] | Notes Payable [Member]
Extinguishment of debt		818,768
Settlement Agreements [Member] | Equity [Member]
Extinguishment of debt		$ 5,259,926

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ACCRUED EXPENSES AND OTHER LIABILITIES (Details Narrative) - USD ($)		1 Months Ended	3 Months Ended
	Sep. 10, 2013	Sep. 30, 2014	Aug. 31, 2015	May. 31, 2015
Accounts payable, current			$ 700,742	$ 463,911
Other nonoperating income			124,793
Unsecured Creditor (Settlement Agreement and General Release ) [Member]
Number of shares issued upon conversion	23,776,513	792,550
Accounts payable, current			$ 0	$ 0

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ACCRUED EXPENSES AND OTHER LIABILITIES (Details) - USD ($)	Aug. 31, 2015	May. 31, 2015
Payables and Accruals [Abstract]
Accounts payable	$ 700,742	$ 463,911
Accrued board of director fees (see Notes 6i and 7A)		1,873,611
Accrued interest payable	$ 105,492	98,078
Accrued payroll	51,187	54,882
Accrued other	74,303	164,650
Accounts payable and accrued expenses	$ 931,724	$ 2,655,132

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NOTES PAYABLE, RELATED PARTY PAYABLES, DEBT SUBJECT TO EQUITY BEING ISSUED (Details Narrative) - USD ($)	1 Months Ended		12 Months Ended
	Jun. 30, 2011	Dec. 31, 2010	May. 31, 2015	May. 31, 2014	Aug. 31, 2015	May. 31, 2012	May. 31, 2010
Notes payable, net of debt discounts			$ 345,832		$ 345,832
Notes Payable [Member]
Accrued interest			0		0
Proceeds from debt			200,000	$ 400,000
Notes payable, net of debt discounts			345,832	939,894	$ 345,832
Debt discount				$ 309,263
Refinanced related party payables			$ 130,000
STMicroelectronics, Inc [Member] | Notes Payable & Convertible Debentures [Member]
Convertible debt						$ 688,768	$ 17,269,689
Accrued interest							$ 3,671,137
Repayment of debt	$ 3,526,523	$ 5,570,059

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NOTES PAYABLE, RELATED PARTY PAYABLES, DEBT SUBJECT TO EQUITY BEING ISSUED (Details Narrative 1)			1 Months Ended
	Apr. 01, 2015 USD ($) Number	Apr. 01, 2015 USD ($) Number	Apr. 30, 2015 USD ($) Number	Mar. 16, 2015 $ / shares	Sep. 30, 2014 USD ($)	May. 02, 2013 USD ($) $ / shares	Apr. 22, 2013 USD ($) $ / shares	Dec. 31, 2012 USD ($) $ / shares	Nov. 30, 2012 USD ($) $ / shares
Principal amount					$ 502,408
6% Convertible Note Due 2015-01-15 [Member]
Principal amount									$ 180,000
Conversion price (in dollars per shares) | $ / shares									$ 0.30
Fair value of debt beneficial conversion feature									$ 180,000
Number of shares issued for conversion | Number	687,921
Debt beneficial conversion feature	$ 26,377
12% Convertible Note Due 2015-01-31 [Member]
Principal amount								$ 20,000
Conversion price (in dollars per shares) | $ / shares								$ 0.30
Fair value of debt beneficial conversion feature								$ 20,000
Number of shares issued for conversion | Number		76,373
Debt beneficial conversion feature		$ 2,912
6% Two Convertible Note Due 2015-04-30 [Member]
Principal amount							$ 40,000
Conversion price (in dollars per shares) | $ / shares				$ 0.30			$ 0.60
Fair value of debt beneficial conversion feature							$ 40,000
Number of shares issued for conversion | Number		298,111
Debt beneficial conversion feature		$ 9,433
6% Convertible Note Due 2015-04-30 [Member]
Principal amount							$ 120,000
Conversion price (in dollars per shares) | $ / shares				0.30			$ 0.60
Fair value of debt beneficial conversion feature							$ 120,000
Number of shares issued for conversion | Number		447,167
Debt beneficial conversion feature		$ 14,150
6% Convertible Note Due 2015-04-30 [Member]
Principal amount						$ 200,000
Conversion price (in dollars per shares) | $ / shares				$ 0.30		$ 0.60
Fair value of debt beneficial conversion feature						$ 200,000
Number of shares issued for conversion | Number			741,872
Debt beneficial conversion feature			$ 22,562

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NOTES PAYABLE, RELATED PARTY PAYABLES, DEBT SUBJECT TO EQUITY BEING ISSUED (Details Narrative 2)	Apr. 01, 2015 USD ($) Number	Mar. 16, 2015 $ / shares	Sep. 30, 2014 USD ($)	Nov. 12, 2013 USD ($) $ / shares	Oct. 28, 2013 USD ($) $ / shares
Principal amount			$ 502,408
6% Convertible Note Due 2015-10-31 [Member]
Number of shares issued for conversion | Number	722,066
Debt beneficial conversion feature	$ 16,620
Principal amount				$ 200,000
Conversion price (in dollars per shares) | $ / shares		$ 0.30		$ 1.20
Fair value of debt beneficial conversion feature				$ 100,000
6% Convertible Note Due 2015-10-31 [Member]
Number of shares issued for conversion | Number	723,706
Debt beneficial conversion feature	$ 17,112
Principal amount					$ 200,000
Conversion price (in dollars per shares) | $ / shares		$ 0.30			$ 1.20
Fair value of debt beneficial conversion feature					$ 7,500

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NOTES PAYABLE, RELATED PARTY PAYABLES, DEBT SUBJECT TO EQUITY BEING ISSUED (Details Narrative 3)		12 Months Ended
	Apr. 01, 2015 USD ($) Number	May. 31, 2015 USD ($)	May. 31, 2012 USD ($)	Aug. 31, 2015 USD ($)	Mar. 16, 2015 $ / shares	Sep. 30, 2014 USD ($)	Sep. 10, 2014 USD ($) $ / shares	Aug. 12, 2014 USD ($) $ / shares	Aug. 11, 2014 USD ($) $ / shares
Principal amount						$ 502,408
Notes payable, net of debt discounts		$ 345,832		$ 345,832
Gain on extinguishment of debt			$ 482,784
6% Convertible Note Due 2015-10-31 [Member]
Principal amount									$ 100,000
Conversion price (in dollars per shares) | $ / shares					$ 0.30				$ 0.60
Fair value of debt beneficial conversion feature									$ 35,500
Number of shares issued for conversion | Number	345,360
Debt beneficial conversion feature	$ 3,608
6% Convertible Note Due 2015-10-31 [Member]
Principal amount								$ 100,000
Conversion price (in dollars per shares) | $ / shares								$ 0.60
Fair value of debt beneficial conversion feature								$ 35,500
Number of shares issued for conversion | Number	345,303
Debt beneficial conversion feature	$ 3,591
6% Two Convertible Note Due 2015-10-31 [Member]
Principal amount							$ 65,000
Conversion price (in dollars per shares) | $ / shares							$ 1.20
Notes payable, net of debt discounts							$ 174,071
Gain on extinguishment of debt		$ 44,071

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NOTES PAYABLE, RELATED PARTY PAYABLES, DEBT SUBJECT TO EQUITY BEING ISSUED (Details Narrative 4) - USD ($)			1 Months Ended	3 Months Ended	12 Months Ended
	Apr. 01, 2015	Jan. 06, 2013	Sep. 30, 2014	Aug. 31, 2015	May. 31, 2015	May. 31, 2012
Gain on extinguishment of debt						$ 482,784
Number of warrants called (in shares)			418,669
Number of shares issued for conversion				456,930	456,930
Bridge Note [Member]
Debt outstanding	$ 207,753		$ 466,000
Number of share issued during the period (in shares)	256,486		648,381
Unsecured Debt [Member]
Debt outstanding					$ 502,408
Number of share issued during the period (in shares)					418,669
STMicroelectronics, Inc [Member]
Due to related party				$ 179,000	$ 179,000
Andreas Typaldos (Separation and Release Agreement) [Member]
Payment of related party debt		$ 15,920
Number of share issued during the period (in shares)		469,132	469,132
Proceeds from related party debt		$ 19,000
Various Former Employees [Member] | Warrant [Member]
Due to related party					$ 747,535
Number of warrants called (in shares)					622,947
Warranr exercise price (in dollars per shares)					$ 1.20

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STOCKHOLDERS' DEFICIENCY (Details Narrative) - USD ($)						1 Months Ended				2 Months Ended	3 Months Ended
	Apr. 01, 2015	Mar. 18, 2015	Mar. 15, 2015	Sep. 10, 2013	Jan. 06, 2013	Jun. 25, 2015	Feb. 19, 2015	Sep. 30, 2014	Jul. 16, 2014	May. 31, 2015	Aug. 31, 2015
Stockholders' equity, reverse stock split		1-for-30
Number of warrants called								418,669
Principal amount								$ 502,408
Shares issued, price per share						$ 1.75
Value of shares issued for stock compensation						$ 250,833
Terrence DeFranco [Member]
Number of share issued during the period (in shares)						108,333
Mark Gelnaw [Member]
Number of share issued during the period (in shares)						35,000
Andreas Typaldos (Separation and Release Agreement) [Member]
Number of share issued during the period (in shares)					469,132			469,132
Unsecured Creditor (Settlement Agreement and General Release ) [Member]
Number of warrants called	256,486							648,381
Principal amount	$ 207,754							$ 466,000
Unsecured Creditor (Settlement Agreement and General Release ) [Member]
Accounts payable	1,200,000							$ 550,000
Number of shares issued upon conversion				23,776,513				792,550
Unsecured Creditor (Settlement Agreement and General Release ) [Member] | Promissory Note [Member]
Debt beneficial conversion feature								$ 310,977
Unsecured Creditor (Settlement Agreement and General Release ) [Member] | Third Bridge Note [Member]
Debt beneficial conversion feature	$ 116,364
Number of shares issued upon conversion	4,387,879
Consulting Agreement [Member]
Sale of stock, price per share (in dollars per share)									$ 1.50
Stock issued during period, shares, issued for services									666,667
Consulting Agreement Four [Member]
Stock issued during period, shares							50,000
Shares issued, price per share							$ 1.20
Private Placement [Member]
Sale of stock, number of shares issued in transaction			2,500,000
Sale of stock, price per share (in dollars per share)			$ 2.00
Sale of stock, consideration received on transaction			$ 1,500,000
Units issued											166,666
Value of shares issued during the period										$ 500,000
Number of share issued during the period (in shares)										833,330	838,334
Proceeds from issuance of private placement (in dollars)											$ 503,000
Private Placement [Member] | Warrant [Member]
Warrant term											3 years

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STOCK-BASED COMPENSATION (Details Narrative) - USD ($)

3 Months Ended

12 Months Ended

Jun. 25, 2015

Aug. 31, 2015

May. 31, 2016

May. 31, 2015

Method used

Black-Scholes options-pricing model

Warrant [Member]

Number of gross warrant granted

622,947

Method used

Black-Scholes option pricing model

Warrant [Member] | Consulting Contract [Member]

Number of gross warrant granted

80,666

Strike price (in dollars per share)

$ 1.20

Expected volatility

100.00%

Risk-free interest rate

1.50%

Dividend rate

0.00%

Expected term

3 years

Warrant [Member] | Consulting Contract [Member] | Maximum [Member]

Stock price (in dollars per share)

$ 1.87

Warrant [Member] | Consulting Contract [Member] | Minimum [Member]

Stock price (in dollars per share)

$ 0.46

Warrant [Member] | Private Placement [Member]

Number of gross warrant granted

838,334

833,330

Chief Executive Officer And Former Director [Member]

Number of gross option granted

1,300,000

Vesting period

3 years

Stock based compensation

$ 1,622,778

Method used

Black-Scholes option pricing model

Stock price (in dollars per share)

$ 1.75

Strike price (in dollars per share)

$ 0.6

Expected volatility

91.35%

Risk-free interest rate

0.73%

Dividend rate

0.00%

Expected term

1 year 6 months

Chief Executive Officer [Member]

Number of gross option granted

1,000,000

Weighted average exercise price

$ 0.6

Vesting period

3 years

Former Director [Member]

Number of gross option granted

300,000

Weighted average exercise price

$ 0.6

Vesting period

3 years

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STOCK-BASED COMPENSATION (Details) - Employee Stock Option [Member] - $ / shares	3 Months Ended	12 Months Ended
	Aug. 31, 2015	May. 31, 2015
Share-based Compensation Arrangement by Share-based Payment Award, Options, Outstanding [Roll Forward]
Outstanding at Begining	1,012,500	1,247,917
Granted	1,300,000
Exercised
Expired or cancelled		(235,417)
Outstanding at end	2,312,500	1,012,500
Share-based Compensation Arrangement by Share-based Payment Award, Options, Outstanding, Weighted Average Exercise Price [RollForward]
Outstanding at Beginning	$ 1.20	$ 1.53
Granted	$ 0.60
Exercised
Expired or cancelled		$ 2.95
Outstanding at end	$ 0.86	$ 1.20

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STOCK-BASED COMPENSATION (Details 1)	3 Months Ended
	Aug. 31, 2015 $ / shares shares
Share-based Compensation, Shares Authorized under Stock Option Plans, Exercise Price Range [Line Items]
Shares outstanding	2,312,500
Weighted-average remaining life	5 years 4 months 13 days
Weighted-average exercise price (in dollars per share) | $ / shares	$ 0.86
Number exercisable	2,312,500
$1.20 [Member]
Share-based Compensation, Shares Authorized under Stock Option Plans, Exercise Price Range [Line Items]
Range of exercise prices (in dollars per share) | $ / shares	$ 1.20
Shares outstanding	1,012,500
Weighted-average remaining life	8 years 7 months 20 days
Weighted-average exercise price (in dollars per share) | $ / shares	$ 1.20
Number exercisable	1,012,500
$0.60 [Member]
Share-based Compensation, Shares Authorized under Stock Option Plans, Exercise Price Range [Line Items]
Range of exercise prices (in dollars per share) | $ / shares	$ 0.60
Shares outstanding	1,300,000
Weighted-average remaining life	2 years 9 months 25 days
Weighted-average exercise price (in dollars per share) | $ / shares	$ 0.60
Number exercisable	1,300,000

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STOCK-BASED COMPENSATION (Details 2) - Warrant [Member] - $ / shares	3 Months Ended	12 Months Ended
	Aug. 31, 2015	May. 31, 2015
Share-based Compensation Arrangement by Share-based Payment Award, Equity Instruments Other than Options, Nonvested, Number of Shares [Roll Forward]
Outstanding at Begining	3,937,986	2,401,043
Granted	838,334	1,536,943
Exercised
Expired or cancelled
Outstanding at end	4,776,320	3,937,986
Share-based Compensation Arrangement by Share-based Payment Award, Equity Instruments Other than Options, Nonvested, Weighted-Average Exercise Price [Roll Forward]
Outstanding at Begining	$ 1.45	$ 1.34
Granted	$ 2.00	$ 1.63
Exercised
Expired or cancelled
Outstanding at end	$ 1.55	$ 1.45

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STOCK-BASED COMPENSATION (Details 3) - Warrant [Member] - $ / shares	3 Months Ended
	Aug. 31, 2015	May. 31, 2015	May. 31, 2014
Shares outstanding	4,776,320	3,937,986	2,401,043
Weighted-average remaining life	3 years 1 month 17 days
Weighted-average exercise price (in dollars per share)	$ 1.55	$ 1.45	$ 1.34
Number exercisable	4,776,320
$1.20 [Member]
Exercise price range, upper range limit (in dollars per share)	$ 1.20
Shares outstanding	3,004,656
Weighted-average remaining life	4 years 1 month 20 days
Weighted-average exercise price (in dollars per share)	$ 1.20
Number exercisable	3,004,656
$2.00 [Member]
Exercise price range, upper range limit (in dollars per share)	$ 2.00
Shares outstanding	1,671,664
Weighted-average remaining life	2 years 11 months 26 days
Weighted-average exercise price (in dollars per share)	$ 2.00
Number exercisable	1,671,664
$3.00 to $6.00 [Member]
Exercise price range, lower range limit (in dollars per share)	$ 3.00
Exercise price range, upper range limit (in dollars per share)	$ 6.00
Shares outstanding	100,000
Weighted-average remaining life	1 year 5 months 23 days
Weighted-average exercise price (in dollars per share)	$ 4.50
Number exercisable	100,000

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LICENSE AGREEMENTS (Details Narrative) - USD ($)	3 Months Ended
	Aug. 31, 2015	Aug. 31, 2014
Master Agreement License of Process and Event Management System [Member]
License and services revenue	$ 66,000	$ 40,000
Percentage of fees for software services	10.00%
Agreement License of Meter Collar and Bridge Programmable Logic Controllers [Member]
License and services revenue	$ 42,500	$ 0

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COMMITMENTS (Details Narrative)		1 Months Ended			3 Months Ended
	May. 12, 2015 USD ($)	Feb. 19, 2015 USD ($) $ / shares shares	Sep. 30, 2014 USD ($)	Jul. 16, 2014 USD ($) shares	Aug. 31, 2015 USD ($) ft²	Jan. 15, 2015 USD ($)	Aug. 31, 2014 USD ($)	Jun. 25, 2015 $ / shares
Rental income, nonoperating						$ 1,874
Lease term						2 years
Rent expenses					$ 10,766		$ 5,004
Shares issued, price per share | $ / shares								$ 1.75
Consulting Agreement [Member]
Stock issued during period, shares, issued for services | shares				666,667
Revenue receipts threshold one				$ 500,000
Revenue receipts threshold two				2,000,000
Revenue receipts threshold three				$ 4,000,000
Consulting Agreement One [Member]
Common stock to be issued shares | shares				1,000,000
Consulting Agreement Four [Member]
Payments of stock issuance costs		$ 5,000
Addition consultancy fees		$ 5,000
Stock issued during period, shares | shares		50,000
Shares issued, price per share | $ / shares		$ 1.20
Proceeds from issuance or sale of equity		$ 500,000
Consulting Agreement Five [Member]
Payments of stock issuance costs	$ 3,000
Percentage of additional success fee	5.00%
AES [Member]
Rental income, nonoperating					$ 57,300
Area occupied pursuant to a lease | ft²					1,850
Terrence DeFranco [Member]
Rental income frequency of periodic payment			month-to-month
Rental income, nonoperating			$ 1,668

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CONCENTRATIONS OF CREDIT RISK (Details) - Number	3 Months Ended		12 Months Ended
	Aug. 31, 2015	Aug. 31, 2014	May. 31, 2015
Net Sales [Member]
Number of customers	2
Net Sales [Member] | Customer 1 [Member]
Concentration risk, percentage	60.00%	100.00%
Net Sales [Member] | Customer 2 [Member]
Concentration risk, percentage	40.00%
Accounts Receivable [Member]
Number of customers	3
Accounts Receivable [Member] | Customer 1 [Member]
Concentration risk, percentage	63.00%		39.00%
Accounts Receivable [Member] | Customer 2 [Member]
Concentration risk, percentage	29.00%		29.00%
Accounts Receivable [Member] | Customer 3 [Member]
Concentration risk, percentage	8.00%		28.00%

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RELATED PARTY TRANSACTIONS (Details Narrative) - USD ($)	Aug. 31, 2015	May. 31, 2015
Related Party Transaction [Line Items]
Consulting services classified as deferred revenue	$ 332,191	$ 267,291
Mark Gelnaw [Member]
Related Party Transaction [Line Items]
Consulting services classified as deferred revenue	$ 55,000

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BUSINESS SEGMENT INFORMATION (Details Narrative)	Aug. 31, 2015 Number
Segment Reporting [Abstract]
Number of operating segments	2

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BUSINESS SEGMENT INFORMATION (Details) - USD ($)	3 Months Ended
	Aug. 31, 2015	Aug. 31, 2014	May. 31, 2015
Segment Reporting Information [Line Items]
Revenues	$ 106,836	$ 40,000
Loss from operations	(520,785)	(1,199,366)
Total assets	727,268		$ 537,926
Arkados [Member]
Segment Reporting Information [Line Items]
Revenues	106,836	40,000
Loss from operations	(257,737)	$ (1,199,366)
Total assets	$ 282,300		283,154
AES [Member]
Segment Reporting Information [Line Items]
Revenues
Loss from operations	$ (263,048)
Total assets	$ 444,968		$ 254,772