UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
x | QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE QUARTERLY PERIOD ENDED: November 30, 2016
¨ | 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 x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer ¨ |
Accelerated filer ¨ |
Non-accelerated filer ¨ (Do not check if a smaller reporting company) |
Smaller reporting company x |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
The number of the registrant’s shares of common stock outstanding as of January 17, 2017 was 13,843,167.
ARKADOS GROUP, INC.
Quarterly Report on Form 10-Q
Quarter Ended November 30, 2016
TABLE OF CONTENTS
2 |
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 Reports on Form 10-K for the years ended May 31, 2016 and May 31, 2015 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 November 30, 2016.
3 |
Page | |
Item 1. Financial Statements | |
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS | |
Condensed Consolidated Balance Sheets as of November 30, 2016 (unaudited) and May 31, 2016 |
F - 2 |
F - 3 | |
F - 4 | |
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS | F - 5 to F - 17 |
F-1 |
ARKADOS GROUP, INC AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
November 30, 2016 | May 31, 2016 | |||||||
(Unaudited) | ||||||||
ASSETS | ||||||||
Current Assets: | ||||||||
Cash | $ | 211,265 | $ | 56,172 | ||||
Accounts receivable | 21,621 | 192,100 | ||||||
Inventory | 81,036 | 120,410 | ||||||
Prepaid expenses and other current assets | 78,197 | 187,935 | ||||||
Total Current Assets | 392,119 | 556,617 | ||||||
Property and equipment, net | 7,115 | 7,642 | ||||||
Intangible assets, net | 10,000 | - | ||||||
Security deposit | 20,384 | 20,384 | ||||||
Total Assets | $ | 429,618 | $ | 584,643 | ||||
LIABILITIES AND STOCKHOLDERS' DEFICIENCY | ||||||||
Current Liabilities: | ||||||||
Accounts payable and accrued expenses | $ | 1,060,327 | $ | 1,022,382 | ||||
Deferred revenue | 274,100 | 260,637 | ||||||
Accrued income tax | 63,082 | 63,082 | ||||||
Debt subject to equity being issued | 456,930 | 456,930 | ||||||
Convertible debentures, net of debt discount | 68,576 | 40,000 | ||||||
Notes payable | 445,832 | 295,832 | ||||||
Total Current Liabilities | 2,368,847 | 2,138,863 | ||||||
Long-term convertible debt, net of debt discount | 18,456 | - | ||||||
Total Liabilities | 2,387,303 | 2,138,863 | ||||||
Commitments and contingencies | - | - | ||||||
Stockholders' Deficiency: | ||||||||
Convertible preferred stock, $.0001 par value; 5,000,000 shares authorized, zero shares outstanding | - | - | ||||||
Common stock, $.0001 par value; 600,000,000 shares authorized; 13,843,167 and 13,373,167 shares issued and outstanding, respectively | 1,384 | 1,337 | ||||||
Additional paid-in capital | 42,037,995 | 41,645,382 | ||||||
Accumulated deficit | (43,997,064 | ) | (43,200,939 | ) | ||||
Total Stockholders' Deficiency | (1,957,685 | ) | (1,554,220 | ) | ||||
Total Liabilities and Stockholders' Deficiency | $ | 429,618 | $ | 584,643 |
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
F-2 |
ARKADOS GROUP, INC AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
For the three months ended | For the six months ended | |||||||||||||||
November 30, 2016 | November 30, 2015 | November 30, 2016 | November 30, 2015 | |||||||||||||
Sales | $ | 389,676 | $ | 815,219 | $ | 814,163 | $ | 922,055 | ||||||||
Cost of sales | 258,756 | 534,989 | 638,765 | 534,989 | ||||||||||||
Gross Profit | 130,920 | 280,230 | 175,398 | 387,066 | ||||||||||||
Operating Expenses: | ||||||||||||||||
Selling and general and administrative | 593,446 | 781,063 | 906,387 | 1,310,255 | ||||||||||||
Research and development | 41,410 | 185,778 | 50,270 | 284,207 | ||||||||||||
Total Operating Expenses | 634,856 | 966,841 | 956,657 | 1,594,462 | ||||||||||||
Loss From Operations | (503,936 | ) | (686,611 | ) | (781,259 | ) | (1,207,396 | ) | ||||||||
Other Income (Expenses): | ||||||||||||||||
Interest expense | (11,072 | ) | (8,044 | ) | (20,723 | ) | (15,458 | ) | ||||||||
Gain on settlement of liability | 17,648 | - | 17,648 | - | ||||||||||||
Foreign currency transaction loss | - | (569 | ) | - | (1,131 | ) | ||||||||||
Total Other Expense | (6,576 | ) | (8,613 | ) | (3,075 | ) | (16,589 | ) | ||||||||
Loss Before Provision for Income Taxes | (497,360 | ) | (695,224 | ) | (784,334 | ) | (1,223,985 | ) | ||||||||
Provision for income taxes | (11,791 | ) | - | (11,791 | ) | - | ||||||||||
Net Loss | $ | (509,151 | ) | $ | (695,224 | ) | $ | (796,125 | ) | $ | (1,223,985 | ) | ||||
Loss per Common Share - Basic and Diluted | $ | (0.04 | ) | $ | (0.06 | ) | $ | (0.06 | ) | $ | (0.10 | ) | ||||
Weighted Average Shares Outstanding - Basic and Diluted | 13,728,834 | 12,081,500 | 13,549,046 | 11,942,374 |
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
F-3 |
ARKADOS GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the six months ended | ||||||||
November 30, 2016 | November 30, 2015 | |||||||
Cash Flows From Operating Activities: | ||||||||
Net loss | $ | (796,125 | ) | $ | (1,223,985 | ) | ||
Adjustments to reconcile net loss to | ||||||||
net cash used in operating activities: | ||||||||
Gain on settlement of liability | (17,648) | - | ||||||
Stock based compensation | - | 293,122 | ||||||
Issuance of warrants for services | - | 158,399 | ||||||
Depreciation | 527 | 264 | ||||||
Amortization of debt discount | 7,692 | - | ||||||
Issuance of common stock for services | 268,000 | - | ||||||
Changes in operating assets and liabilities: | ||||||||
Accounts receivable | 170,479 | (1,498 | ) | |||||
Inventory | 39,374 | (137,431 | ) | |||||
Prepaid expenses and other current assets | 109,738 | (8,307 | ) | |||||
Security deposits | - | (18,510 | ) | |||||
Accounts payable and accrued expenses | 55,592 | 305,126 | ||||||
Deferred revenue | 13,463 | (70,753 | ) | |||||
Net Cash Used In Operating Activities | (148,907 | ) | (703,573 | ) | ||||
Cash Flows From Investing Activities: | ||||||||
Purchases of property and equipment | - | (8,432 | ) | |||||
Purchases of software | (10,000 | ) | - | |||||
Net Cash Used In Investing Activities | (10,000 | ) | (8,432 | ) | ||||
Cash Flows From Financing Activities: | ||||||||
Proceeds from sales of common stock | - | 503,000 | ||||||
Proceeds from short-term note | 150,000 | - | ||||||
Proceeds from convertible debt issuance | 164,000 | - | ||||||
Net Cash Provided By Financing Activities | 314,000 | 503,000 | ||||||
Net Increase (Decrease) In Cash | 155,093 | (209,005 | ) | |||||
Cash - Beginning of period | 56,172 | 234,994 | ||||||
Cash - End of period | $ | 211,265 | $ | 25,989 | ||||
Supplemental Cash Flow Information: | ||||||||
Non Cash Investing and Financing Activities | ||||||||
Common stock issued for accrued stock based compensation | $ | - | $ | 250,833 | ||||
Stock options issued for accrued stock based compensation | $ | - | $ | 1,622,778 | ||||
Original issue discount in connection with convertible debt issued | $ | 18,500 | $ | - | ||||
Deferred finance costs in connection with convertible debt issued | $ | 6,000 | $ | - | ||||
Debt discount in connection with restricted shares issued with convertible debt | $ | 50,130 | $ | - | ||||
Beneficial conversion feature in connection with convertible debt issued | $ | 74,530 | $ | - | ||||
Cash paid for: | ||||||||
Interest | $ | - | $ | - | ||||
Income taxes | $ | - | $ | - |
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
F-4 |
ARKADOS GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED NOVEMBER 30, 2016 and 2015
1. | DESCRIPTION OF BUSINESS |
Arkados Group, Inc. (the “Parent”) conducts business activities principally through its two 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”). Settlements reached in connection with the Asset Sale and the fulfillment of obligations in connection therewith, have been substantially completed.
Following the Asset Sale, the Company shifted its focus towards the following businesses:
Arkados - Software and hardware design and development of solutions that enable machine to machine communications for the Internet of Things (“IoT”). Arkados’ solutions are primarily focused on industrial and commercial applications such as building automation, energy management and predictive maintenance and are uniquely designed to drive a wide variety of full-featured, cutting edge solutions.
AES - Energy conservation services for commercial and industrial facilities owners and managers. AES’ services include implementing energy conservation measures such as LED lighting retrofits, oil to natural gas boiler conversions, co-generation system installation and solar PV system installations. In addition, AES sells technology solutions designed by Arkados, Inc. and others that serve to improve the effectiveness of the measures and increases return on investment for the customer.
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.
The accompanying condensed consolidated financial statements as of November 30, 2016 (unaudited) and May 31, 2016 and for the three and six months ended November 30, 2016 and 2015 (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, 2016 as disclosed in our annual report on Form 10-K for that year. The results of the three and six months ended November 30, 2016 (unaudited) are not necessarily indicative of the results to be expected for the pending full year ending May 31, 2017.
2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
a. | Basis of Presentation - 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 $44 million since inception, including a net loss of $796,125 for the six months ended November 30, 2016. Additionally, the Company still had both working capital and stockholders’ deficiencies at November 30, 2016 and May 31, 2016 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 unaudited condensed consolidated financial statements do not include any adjustments that might be necessary should the Company be unable to continue as a going concern. |
The Company’s plan, through potential acquisitions and the continued promotion of its services to existing and potential customers, is to generate sufficient revenues to cover our anticipated expenses. The Company is currently exploring several options to meet its short-term cash requirements, including an equity raise or loan funding from third parties. Although no assurances can be given as to the Company’s ability to deliver on its revenue plans, or that unforeseen expenses may arise, the management of the Company believes that the revenue to be generated from operations together with potential bridge note funding, additional issuances of equity or other potential financing will provide the necessary funding for the Company to continue as a going concern.
F-5 |
b. | Principles of Consolidation - The consolidated financial statements include the accounts of the Parent, and its wholly-owned subsidiaries, which include AES and Arkados. Intercompany accounts and transactions have been eliminated in consolidation. |
c. | Revenue Recognition - |
Arkados
The Company enters into arrangements with end users for items which may include software license fees, services, maintenance and royalties 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.
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.
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. Sales of products are recognized when the products are shipped and the customer takes risk of ownership and assumes the risk of loss. Royalty income is recognized as it is earned and recorded when reported by the customer.
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 and 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 November 30, 2016 and May 31, 2016. |
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 November 30, 2016 and May 31, 2016, 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 ASC 820, "Fair Value Measurements and Disclosures," 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. |
F-6 |
The three levels of the fair value hierarchy defined by ASC 820 are as follows:
Level 1 – Quoted prices are available in active markets for identical assets or liabilities as of the reporting date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis. Level 1 primarily consists of financial instruments such as exchange-traded derivatives, marketable securities and listed equities.
Level 2 – Pricing inputs are other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reported date. Level 2 includes those financial instruments that are valued using models or other valuation methodologies. These models are primarily industry-standard models that consider various assumptions, including quoted forward prices for commodities, time value, volatility factors and current market and contractual prices for the underlying instruments, as well as other relevant economic measures. Substantially all of these assumptions are observable in the marketplace throughout the full term of the instrument, can be derived from observable data or are supported by observable levels at which transactions are executed in the marketplace. Instruments in this category generally include non-exchange-traded derivatives such as commodity swaps, interest rate swaps, options and collars.
Level 3 – Pricing inputs include significant inputs that are generally less observable from objective sources. These inputs may be used with internally developed methodologies that result in management’s best estimate of fair value.
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 and six months ended | ||||||||
November 30, | ||||||||
2016 | 2015 | |||||||
Convertible notes | 265,401 | 117,078 | ||||||
Stock options | 5,112,500 | 3,012,500 | ||||||
Warrants | 5,078,153 | 5,059,320 | ||||||
Potentially dilutive securities | 10,456,054 | 8,188,898 |
h. | Stock Based Compensation - In computing the impact, the fair value of each option and/or warrant is estimated on the date of grant based on the Black-Scholes options-pricing model utilizing certain assumptions for a risk-free interest rate; volatility; and expected remaining lives of the awards. The assumptions used in calculating the fair value of share-based payment awards represent management’s best estimates, but these estimates involve inherent uncertainties and the application of management judgment. As a result, if factors change and the Company uses different assumptions, the Company’s stock-based compensation expense could be materially different in the future. In addition, the Company is required to estimate the expected forfeiture rate and only recognize expense for those shares expected to vest. In estimating the Company’s forfeiture rate, the Company analyzed its historical forfeiture rate, the remaining lives of unvested options, and the amount of vested options as a percentage of total options outstanding. If the Company’s actual forfeiture rate is materially different from its estimate, or if the Company reevaluates the forfeiture rate in the future, the stock-based compensation expense could be significantly different from what we have recorded in the current period. During the three and six months ended November 30, 2016, 400,000 shares of the Company’s common stock were issued for consulting services amounting to $268,000 in stock based compensation. There were no additional issuances of warrants or options during the three and six months ended November 30, 2016. |
F-7 |
Stock based compensation expense was $451,521 for the three months ended November 30, 2015 and $451,521 for the six months ended November 30, 2015. |
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. |
We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of the financial statements. Significant estimates include the allowance for doubtful accounts, the useful life of plant and equipment and intangible assets, deferred tax asset and valuation allowance, and assumptions used in Black-Scholes-Merton, or BSM, valuation methods, such as expected volatility, risk-free interest rate, and expected dividend rate.
j. | Inventory - Inventory, which consists of finished goods and work-in-process (“WIP”) of AES, is valued at the lower of cost on a first-in, first-out basis or market. Inventory consists of the following at November 30, 2016 and May 31, 2016. |
November 30, | May 31, | |||||||
2016 | 2016 | |||||||
(unaudited) | ||||||||
Finished goods | $ | 60,012 | $ | 60,012 | ||||
Work-in-process (unbilled labor and consulting) | 21,024 | 60,398 | ||||||
$ | 81,036 | $ | 120,410 |
k. | Property and Equipment – Property and equipment is recorded at cost. Depreciation is computed using straight-line and accelerated methods over the estimated useful lives of the related assets. Expenditures that enhance the useful lives of the assets are capitalized and depreciated. Maintenance and repairs are expensed as incurred. When properties are retired or otherwise disposed of, related costs and related accumulated depreciation are removed from the accounts. |
l. | Research and Development –All research and development costs are expensed as incurred. |
m. | 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. |
n. | Deferred Financing Costs-Costs incurred in connection with obtaining financing are deferred and amortized on a straight-line basis over the term of the related loan. |
o. | Convertible Instruments- The Company evaluates and accounts for conversion options embedded in its convertible instruments in accordance with accounting standards for “Accounting for Derivative Instruments and Hedging Activities.” |
Accounting standards generally provides three criteria that, if met, require companies to bifurcate conversion options from their host instruments and account for them as free standing derivative financial instruments. These three criteria include circumstances in which (a) the economic characteristics and risks of the embedded derivative instrument are not clearly and closely related to the economic characteristics and risks of the host contract, (b) the hybrid instrument that embodies both the embedded derivative instrument and the host contract is not re-measured at fair value under otherwise applicable generally accepted accounting principles with changes in fair value reported in earnings as they occur, and (c) a separate instrument with the same terms as the embedded derivative instrument would be considered a derivative instrument. Professional standards also provide an exception to this rule when the host instrument is deemed to be conventional as defined under professional standards as “The Meaning of Conventional Convertible Debt Instrument.”
F-8 |
The Company accounts for convertible instruments (when it has determined that the embedded conversion options should not be bifurcated from their host instruments) in accordance with professional standards when “Accounting for Convertible Securities with Beneficial Conversion Features,” as those professional standards pertain to “Certain Convertible Instruments.” Accordingly, the Company records, when necessary, discounts to convertible notes for the intrinsic value of conversion options embedded in debt instruments based upon the differences between the fair value of the underlying common stock at the commitment date of the note transaction and the effective conversion price embedded in the note. Original issue discounts (“OID”) under these arrangements are amortized over the term of the related debt to their earliest date of redemption. The Company also records when necessary deemed dividends for the intrinsic value of conversion options embedded in preferred shares based upon the differences between the fair value of the underlying common stock at the commitment date of the note transaction and the effective conversion price embedded in the note.
ASC 815-40 provides that, among other things, generally, if an event is not within the entity’s control could or require net cash settlement, then the contract shall be classified as an asset or a liability.
p. | Reclassifications - Certain reclassifications have been made to conform the prior period data to the current presentations. The Company has reclassified a $40,000 note payable to Convertible debt. This reclassification had no impact on reported results of operations. |
q. | Recent Accounting Pronouncements - |
In January 2017, the Financial Accounting Standards Board (“FASB”) issued an Accounting Standards Update (“ASU”) 2017-01, “Business Combinations (Topic 805) Clarifying the Definition of a Business”. The amendments in this Update is to clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill, and consolidation. The guidance is effective for annual periods beginning after December 15, 2017, including interim periods within those periods. The Company is currently evaluating the impact of adopting this guidance.
In November 2016, the FASB issued ASU 2016-18, “Statement of Cash Flows (Topic 230) Restricted Cash”. The new guidance requires that the reconciliation of the beginning-of-period and end-of-period amounts shown in the statement of cash flows include restricted cash and restricted cash equivalents. If restricted cash is presented separately from cash and cash equivalents on the balance sheet, companies will be required to reconcile the amounts presented on the statement of cash flows to the amounts on the balance sheet. Companies will also need to disclose information about the nature of the restrictions. The guidance is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The Company is currently evaluating the impact of adopting this guidance.
In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230) Classification of Certain Cash Receipts and Cash Payments”. The new guidance is intended to reduce diversity in practice in how certain transactions are classified in the statement of cash flows. ASU 2016-15 is effective for the Company beginning in the first quarter of fiscal 2019. Early adoption is permitted, provided that all of the amendments are adopted in the same period. The guidance requires application using a retrospective transition method. The Company is currently evaluating the impact of adopting this guidance.
In April 2016, the FASB issued ASU 2016 – 10 “Revenue from Contract with Customers: identifying Performance Obligations and Licensing”. The amendments in this Update clarify the two following aspects (a) contracts with customers to transfer goods and services in exchange for consideration and (b) determining whether an entity’s promise to grant a license provides a customer with either a right to use the entity’s intellectual property (which is satisfied at a point in time) or a right to access the entity’s intellectual property (which is satisfied over time). The amendments in this Update are intended to reduce the degree of judgement necessary to comply with Topic 606. This guidance has no effective date as yet. The Company is currently evaluating the impact of adopting this guidance.
F-9 |
In March 2016, the FASB issued authoritative guidance regarding the accounting for share-based payment transactions, including income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The guidance is to be applied for annual periods beginning after December 15, 2016 and interim periods within those annual periods, and early adoption is permitted. The guidance requires companies to apply the requirements retrospectively, modified retrospectively, or prospectively depending on the amendment(s) applied. The Company is currently evaluating the impact of adopting this guidance.
In February 2016, the FASB issued ASU 2016-02, “Leases” (Topic 842). This guidance will be effective for public entities for fiscal years beginning after December 15, 2018 including the interim periods within those fiscal years. Early application is permitted. Under the new provisions, all lessees will report a right-of-use asset and a liability for the obligation to make payments for all leases with the exception of those leases with a term of 12 months or less. All other leases will fall into one of two categories: (i) Financing leases, similar to capital leases, which will require the recognition of an asset and liability, measured at the present value of the lease payments and (ii) Operating leases which will require the recognition of an asset and liability measured at the present value of the lease payments. Lessor accounting remains substantially unchanged with the exception that no leases entered into after the effective date will be classified as leveraged leases. For sale leaseback transactions, the sale will only be recognized if the criteria in the new revenue recognition standard are met. The Company is currently evaluating the impact of adopting this guidance.
In January 2016, the FASB issued ASU 2016-01, which amends the guidance relating to the classification and measurement of financial instruments. Changes to the current guidance primarily affect the accounting for equity investments, financial liabilities under the fair value option, and the presentation and disclosure requirements for financial instruments. In addition, the ASU clarifies guidance related to the valuation allowance assessment when recognizing deferred tax assets resulting from unrealized losses on available-for-sale debt securities. The new standard is effective for fiscal years and interim periods beginning after December 15, 2017, and upon adoption, an entity should apply the amendments by means of a cumulative-effect adjustment to the balance sheet at the beginning of the first reporting period in which the guidance is effective. Early adoption is not permitted except for the provision to record fair value changes for financial liabilities under the fair value option resulting from instrument-specific credit risk in other comprehensive income. The Company is currently evaluating the impact of adopting this guidance.
In August 2015, the FASB issued ASU 2015-14, “Revenue From Contracts With Customers (Topic 606)”. The amendments in this ASU defer the effective date of ASU 2014-09 “Revenue From Contracts With Customers (Topic 606)”. Public business entities should apply the guidance in ASU 2014-09 to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. The Company is still evaluating the impact of adopting this guidance.
All newly issued but not yet effective accounting pronouncements have been deemed to be not applicable or immaterial to the Company.
F-10 |
3. | ASSET SALE AND DEBT SUBJECT TO EQUITY BEING ISSUED |
In December 2010, the Company entered into an agreement to sell substantially all of the assets (the “Asset Sale”) to STMicroelectronics, Inc. (“ST US”), a subsidiary of STMicroelectronics N.V. (“ST”). 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. The Company is negotiating with its remaining unsecured debt holders to compromise, extend the due date or convert outstanding debt into equity. Debt holders who have agreed to settle through 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.
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 November 30, 2016 and May 31, 2016.
As of November 30, 2016 and May 31, 2016, there remained $456,930 of debts that have been settled with debt holders who have agreed to accept equity for their remaining debt.
4. | ACCOUNTS PAYABLE AND ACCRUED EXPENSES |
As of November 30, 2016 and May 31, 2016, accounts payable and accrued expenses consist of the following amounts:
November 30, | May 31, | |||||||
2016 | 2016 | |||||||
(Unaudited) | ||||||||
Accounts payable | $ | 814,018 | $ | 782,654 | ||||
Accrued interest payable | 136,758 | 116,035 | ||||||
Accrued payroll | 11,612 | 28,320 | ||||||
Accrued other | 97,939 | 95,373 | ||||||
$ | 1,060,327 | $ | 1,022,382 |
F-11 |
5. | NOTES PAYABLE, |
Notes Payable
Notes payable transactions include the following:
FY 2016 (Year Ended May 31, 2016) Transactions:
In January 2016, the Company executed a promissory note for a loan in the principal amount of $60,000. The promissory note bears interest at 6% per year, compounded quarterly, and matures on January 15, 2017. The proceeds from this promissory note were used to partially repay two convertible notes as discussed below. In January 2017, the Company and holder amended this promissory note to extend the maturity date to March 31, 2017.
On January 8, 2016, the Company entered into an Exchange Agreement with the noteholders of the certain 6% convertible notes (“Convertible Notes”) that were in default. On January 15, 2016, the Company applied the proceeds of the new promissory note together with the issuance of 50,000 shares of the Company’s common stock, to the payment of two outstanding Convertible Notes that were in default having the aggregate outstanding principal amount of $130,000. In exchange for the payment and the shares, the holders of the outstanding Convertible Notes surrendered their notes, and the Company issued a new 6% Convertible Note to them in the original principal amount of $40,000 (“Reissued Note”). The Reissued Note bears interest at the rate of 6% per year, compounded quarterly, and matured on December 31, 2016. In January 2017, the Company agreed to extend the maturity date of the Reissued Note to March 31, 2017. At any time during the term of the Reissued Note, the holders have the right to convert any unpaid portion of the Reissued Note and accrued interest into shares of common stock at an original conversion price of $1.20 per share. The Company has evaluated the conversion terms and determined that a beneficial conversion feature is not applicable for this exchange transaction. The holders further agreed that their extension of the maturity of the outstanding Convertible Notes had been effective from October 31, 2015 until January 15, 2016.
On March 31, 2016 and May 6, 2016, the Company executed promissory notes for loans, each in the amount of $10,000. The promissory notes bear interest at 6% per year, compounded quarterly. Both notes matured on June 30, 2016. The proceeds from the promissory notes were used to partially repay two Convertible Notes as discussed above. In January 2017, the Company executed an amendment to the promissory notes to extend the maturity date to March 31, 2017. The holders further agreed that their extension of the maturity of the outstanding promissory notes had been effective from June 30, 2016 until January 15, 2017.
FY 2017 (Year Ended May 31, 2017):
In August 2016 the Company issued a promissory note in the amount of $150,000 with a maturity date in January 2017. The loan bears interest at 10% per annum compounded quarterly. In January 2017, the Company and holder amended this promissory note to extend the maturity date to March 31, 2017.
On October 28, 2016 the Company issued a convertible promissory note for an aggregate principal amount of $38,500 (which includes an Original Issue Discount (“OID”) of $3,500) with a maturity date of January 30, 2017. The debenture is convertible only upon default after January 30, 2017 at a conversion price of 65% of the average of the three lowest traded prices occurring during the 25 consecutive trading days immediately preceding the applicable conversion date. As additional consideration, the Company issued 20,000 shares of common stock upon execution of this agreement. Accordingly the Company recorded debt discount of $11,793 related to the restricted shares issued, and an original issue discount of $3,500. The debt discount and OID is amortized on a straight line basis over the term of the loan and amounted to $5,369 as of November 30, 2016. Net discount and net loan balance amounted to $9,924 and $28,576 respectively, as of November 30, 2016 and is recorded in convertible debentures.
Long term convertible debenture:
On November 11, 2016 the Company entered into a Securities Purchase Agreement whereas, the buyer wishes to purchase from the Company securities consisting of the Company’s Convertible Debentures due three years from issuance for an aggregate principal amount of up to $500,000 (which includes an aggregate purchase price of $450,000 and 10% Original Issue Discount (“OID”) of $50,000). The Debentures are to be issued in three tranches. On November 11, 2016 the Company issued the first of three debentures amounting to$150,000 of principal, consisting of $135,000 in proceeds and $15,000 OID. The debenture is convertible at a conversion price of $0.65 up to 150 days after the issuance date and if no event of default. If an Event of Default has occurred, or 150 days after the Issuance Date, the conversion price is the lesser of (a) $0.65 or (b) Sixty Five percent (65%) of the lowest closing bid price of the Common Stock for the twenty (20) Trading Days immediately preceding the date of the date of conversion of the debentures. Accounting for derivatives will be evaluated after 150 days of issuance or upon default, if applicable where at that point the conversion price becomes variable. As additional consideration, the Company issued 50,000 shares of common stock upon execution of this agreement. In relation to this transaction the Company also incurred deferred financed costs totaling $6,000 for legal fees and commitment fees. Accordingly the Company recorded debt discount of $38,337 related to the restricted shares issued, a debt discount of $74,530 related to the beneficial conversion feature, an original issue discount of $15,000 and deferred finance cost of $6,000. As of November 30, 2016, total straight line amortization for these transactions amounted to $2,323 which resulted in a net discount of $131,544 and a net loan balance of $18,456 classified as long term debt.
6. | STOCKHOLDERS’ DEFICIENCY |
FY 2016 (Year Ended May 31, 2016):
a. | 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. |
b. | For the period June 1, 2015 through May 31, 2016, 838,334 shares of common stock have been subscribed for under the PPO and the Company received proceeds of $503,000. These shares were issued in July and August 2015. |
c. | On January 8, 2016 the Company issued 50,000 shares as part of a debt conversion and refinance whereby $130,000 of note principle and accrued interest of $11,332 were extinguished and a new note of $100,000 was issued. |
d. | On February 23, 2016, we entered into a consulting agreement with. LPF Communications under which LPF Communications is to provide certain investor relations services for a period of up to six months. We have agreed to pay for the services by issuing two tranches of 150,000 shares of our Common Stock each, with the second tranche becoming issuable only if we do not terminate the consulting agreement on or prior to June 8, 2016. Pursuant to the agreement, we issued the first tranche of 150,000 shares to the consultant on April 8, 2016. |
F-12 |
e. | On April 22, 2016, the Company issued 675,000 shares of common stock to its key employees, including 500,000 shares to its chairman/chief executive officer, for services rendered to the Company in fiscal 2016. The shares were valued at $0.51 per share. The value of the shares totaling $344,250 was charged as stock compensation in fiscal 2016. |
f. | On April 28, 2016, the Company entered into an asset purchase agreement pursuant to which the Company purchased intangible assets valued at $249,113 in exchange for 166,667 shares of the Company's common stock and a warrant to purchase 166,667 shares of the Company's common stock at $2.00 per share. As a result of management's evaluation, the intangible asset was deemed impaired and thus fully written off to selling, general and administrative expense of the income statement. |
FY 2017 (Year Ended May 31, 2017):
a. | On October 13, 2016, the Company issued 400,000 shares of its common stock for consulting services to two consulting firms. The shares were valued at $0.67 at the time resulting in $268,000 in stock based compensation. |
b. | On October 28, 2016, the Company issued 20,000 shares of its common stock as part of a promissory note entered into with an investor (see Note 5). |
c. | On November 11, 2016, the Company issued 50,000 shares of its common stock as part of a promissory note entered into with an investor (see Note 5). |
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
The Company issued options to purchase an aggregate of 4,100,000 shares of the Company’s common stock in the year ended May 31, 2016, 2,100,000 of which were granted outside of the 2004 Stock Option and Restricted Stock Plan (the “2004 Plan”). There were no options granted during the three or six months ended November 30, 2016.
Compensation based stock option activity for qualified and unqualified stock options are summarized as follows:
Weighted | ||||||||
Average | ||||||||
Shares | Exercise Price | |||||||
Outstanding at May 31, 2015 | 1,012,500 | $ | 1.20 | |||||
Granted | 4,100,000 | 0.94 | ||||||
Exercised | - | - | ||||||
Expired or cancelled | - | - | ||||||
Outstanding at May 31, 2016 | 5,112,500 | $ | 0.99 | |||||
Granted | - | - | ||||||
Exercised | - | - | ||||||
Expired or cancelled | - | - | ||||||
Outstanding at November 30, 2016 | 5,112,500 | $ | 0.99 |
F-13 |
The compensation expense attributed to the issuance of the options will be recognized as they vested/earned. These stock options 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 to purchase shares of the Company's common stock including those attributed to debt issuances are summarized as follows:
Weighted | ||||||||
Average | ||||||||
Shares | Exercise Price | |||||||
Outstanding at May 31, 2015 | 3,937,986 | $ | 1.45 | |||||
Granted | 1,288,001 | 1.78 | ||||||
Exercised | - | - | ||||||
Expired or cancelled | - | - | ||||||
Outstanding at May 31, 2016 | 5,225,987 | $ | 1.53 | |||||
Granted | - | - | ||||||
Exercised | - | - | ||||||
Expired or cancelled | (147,833 | ) | 3.43 | |||||
Outstanding at November 30, 2016 | 5,078,153 | $ | 1.48 |
Issuances of warrants to purchase shares of the Company's common stock were as follows:
FY 2016 (Year Ended May 31, 2016):
a | As discussed in Note 8, in addition to common stock, the Company also issued warrants to purchase 833,334 shares of the Company's common stock under the PPO. |
b | In November 2015, a warrant to purchase 250,000 shares of the Company's common stock at $1.00 per share was issued to a vendor as a bonus payment for services rendered in connection with a software development agreement. The warrant issued was valued using the Black Scholes option pricing model under the following assumptions: stock price $ 1.00; strike price $ 1.00; expected volatility 87.54%; risk free interest rate 1.21%; dividend rate 0%; and expected term 3years. The value of the warrant totaling $139,928 was charged as research and development. |
c | In November 2015, a warrant to purchase 33,000 shares of the Company's common stock at $1.00 per share was issued to a consultant for services rendered under a consulting contract. The warrant issued was valued using the Black Scholes option pricing model under the following assumptions: stock price $ 1.00; strike price $1.00; expected volatility 87.54%; risk free interest rate 1.21%; dividend rate 0%; and expected term 3years. The value of the warrant totaling $18,471 was charged as consulting. See Note 11. |
d | On April 28, 2016, the Company entered into an asset purchase agreement pursuant to which the Company purchased intangible assets in exchange for 166,667 shares of the Company's common stock and a warrant to purchase 166,667 shares of the Company's common stock at $2.00 per share. The warrant issued was valued using the Black Scholes option pricing model under the following assumptions: stock price $ 0.75; strike price $2.00; expected volatility 293%; risk free interest rate .93%; dividend rate 0%; and expected term 3years. The value of the warrant totaling $124,000 was included in the cost of the intangible which was fully impaired as of May 31, 2016. |
F-14 |
FY 2017 (Year Ended May 31, 2017):
There were no warrants granted during the three or six months ended November 30, 2016.
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 |
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 $8,764 and $14,793 for the three and six months ended November 30, 2016, respectively. Revenue recognized under the Master Agreement amounted to $52,000 and $118,000 for the three and six months ended November 30, 2015, respectively.
Agreement – License of Meter Collar and Bridge Programmable Logic
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 $0 for both the three and six months ended November 30, 2016 and $65,000 and $107,000 for the three and six months ended November 30, 2015, respectively.
In March 2015, the Company entered into a one-year agreement, with automatic one year renewals until terminated by either party with sixty (60) days’ notice, with Tatung to provide services in the area of business development and as a representative to sell its products. Tatung will pay a monthly retainer fee for this service. Revenue recognized under this agreement was $0 and $60,000 for the three and six months ended November 30, 2016, respectively.
9. | COMMITMENTS |
Leases
Effective October 1, 2014 as amended on January 15, 2015, the Company entered a lease for its office space at a total monthly rental of $1,874. The lease expired on January 15, 2016. The Company renewed this lease until January 15, 2017 at a monthly rental of $2,034. In January 2017, the Company renewed this lease until January 15, 2018, with an option to renew for one additional year upon its expiration.
F-15 |
Our AES subsidiary leases offices in Jericho, New York. The facility is approximately 1,850 square feet, occupied pursuant to a lease that commenced on August 1, 2015 and expires September 30, 2018. The average annual rent over the term of the lease is approximately $57,300. This amount does not include taxes for the premises.
Rent expense for all locations including occupancy costs for the three months ended November 30, 2016 and 2015 was $20,929 and 21,445, respectively. Rent expense for all locations including occupancy costs for the six months ended November 30, 2016 and 2015 was $43,706 and 32,211, respectively.
Consulting Agreements
On September 15, 2016, the Company entered into two consulting agreements with two consultants, pursuant to which the Company agreed to issue 200,000 shares of common stock to each consultant in exchange for certain consulting services.
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
Two customers accounted for 86% and 62% of net sales for the three months ended November 30, 2016 and 2015, respectively, as set forth below:
Three months ended November 30, | ||||||||
2016 | 2015 | |||||||
Customer 1 | 74 | % | 36 | % | ||||
Customer 2 | 12 | % | 26 | % |
Two customers accounted for 83% and 54% of net sales for the six months ended November 30, 2016 and 2015 respectively, as set forth below:
Six months ended November 30, | ||||||||
2016 | 2015 | |||||||
Customer 1 | 59 | % | 31 | % | ||||
Customer 2 | 24 | % | 23 | % |
F-16 |
Accounts Receivable
Two customers accounted for 100% of the accounts receivable as of November 30, 2016, as set forth below:
November 30, 2016 | May 31, 2016 | |||||||
(Unaudited) | ||||||||
Customer 1 | 52 | % | 83 | % | ||||
Customer 2 | 48 | % | 11 | % |
11. | RELATED PARTY TRANSACTIONS |
There were no related party transactions during the period.
12. | BUSINESS SEGMENT INFORMATION |
As of November 30, 2016, the Company had two operating segments, Arkados and Arkados Energy Solutions (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
Information about segments is as follows:
Arkados | AES | Consolidated | ||||||||||
Three months ended November 30, 2016 | ||||||||||||
Revenues | $ | 12,064 | $ | 377,612 | $ | 389,676 | ||||||
Income (loss) from operations | $ | (511,010 | ) | $ | 27,074 | $ | (503,936 | ) | ||||
Three months ended November 30, 2015 | ||||||||||||
Revenues | $ | 175,457 | $ | 639,762 | $ | 815,219 | ||||||
Loss from operations | $ | (254,067 | ) | $ | (432,544 | ) | $ | (686,611 | ) | |||
Six months ended November 30, 2016 | ||||||||||||
Revenues | $ | 88,947 | $ | 725,216 | $ | 814,163 | ||||||
Loss from operations | $ | (615,458 | ) | $ | (165,803 | ) | $ | (781,261 | ) | |||
Six months ended November 30, 2015 | ||||||||||||
Revenues | $ | 282,293 | $ | 639,762 | $ | 922,055 | ||||||
Loss from operations | $ | (511,804 | ) | $ | (695,592 | ) | $ | (1,207,396 | ) | |||
Total assets | ||||||||||||
November 30, 2016 | $ | 174,997 | $ | 254,621 | $ | 429,618 | ||||||
May 31, 2016 | $ | 236,797 | $ | 347,846 | $ | 584,643 |
13. | SUBSEQUENT EVENTS |
On December 31, 2016, the Company entered into a settlement agreement with one of its vendors, pursuant to which the Company agreed to issue the vendor an aggregate of 33,596 shares of its common stock in exchange for the cancellation of its outstanding invoice of $20,158 for services rendered.
On December 13, 2016 the Company entered into a one year consulting agreement for financial advice. As compensation for services the Company will issue 50,000 shares of restricted common stock upon execution of the agreement.
On January 2017, the Company executed multiple amendments to extend the maturity date of certain promissory notes with an aggregate principal amount of $270,000, to March 31, 2017. The Company also entered into an agreement to extend its lease for its office space for an additional year.
On January 19, 2017, the Company entered into a settlement agreement with one of its former service providers, pursuant to which the Company agreed to issue the service provider an aggregate of 175,000 shares of its common stock in exchange for the cancellation of its outstanding invoice of $94,617.00 for services rendered.
F-17 |
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, system integrator and services business focused on developing unique, cutting-edge solutions that enable machine to machine communications with specific applications for Smart Lighting, Smart Factory and Smart Building. Additionally, we work with commercial property owners and managers to optimize energy efficiency in their facilities through various energy conservation measure, such as LED lighting retrofits, oil-to-natural gas boiler conversions, solar PV system installations and co-generation system installation. Ultimately, we utilize our technology solutions to deliver full featured products that help our customers to maximize their return on investment and reduce their energy consumption.
We remain engaged in the process of seeking settlements with certain of our unsecured creditors from the periods prior to the sale of certain of our assets to STMicroelectronics in December 2010 (the "Asset Sale").
We have executed several agreements that have enabled us to provide the services contemplated in the industrial automation industry. Although we have begun to generate revenue from operations of our Arkados, Inc. subsidiary, this revenue is not sufficient to meet our monthly operating expenses and we remain dependent on outside sources of financing to fund our operations. There is no assurance that we will be able to secure any amount of investment for this or any other purpose. If we are unable to obtain financing, we may be forced to limit or cease our operations.
We effected a reverse 1-for-30 split of our common stock (‘‘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., a Delaware corporation (“Arkados”) and Arkados Energy Solutions, LLC (“AES”), a Delaware limited liability company. Arkados, Inc. and AES combine to create opportunities 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.
4 |
Following the Asset Sale, the Company shifted its focus towards development of a universal platform that provides software solutions for Internet of Things applications primarily in the areas of energy management, health care, smart industrial machines and smart factory.
RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED NOVEMBER 30, 2016 AND 2015.
For the Three Months Ended November 30, 2016 | ||||||||||||
Arkados | AES | Total | ||||||||||
Revenue | $ | 12,064 | $ | 377,612 | $ | 389,676 | ||||||
Cost of Sales | - | 258,756 | 258,756 | |||||||||
Gross Profit | 12,064 | 118,856 | 130,920 | |||||||||
Gross Profit Percentage | 100 | % | 31 | % | 34 | % | ||||||
Operating Expenses | 523,074 | 111,782 | 634,856 | |||||||||
Operating Income (Loss) | (511,010 | ) | 7,074 | (503,936 | ) | |||||||
Other income (expenses) | 6,576 | - | 6,576 | |||||||||
Income (loss) before benefit from income taxes | $ | (504,434 | ) | $ | 7,074 | $ | (497,360 | ) |
For the Three Months Ended November 30, 2015 | ||||||||||||
Arkados | AES | Total | ||||||||||
Revenue | $ | 175,457 | $ | 639,762 | $ | 815,219 | ||||||
Cost of Sales | 3,000 | 531,989 | 534,989 | |||||||||
Gross Profit | 172,457 | 107,773 | 280,230 | |||||||||
Gross Profit Percentage | 98 | % | 0 | % | 34 | % | ||||||
Operating Expenses | 426,524 | 540,317 | 966,841 | |||||||||
Operating Income (Loss) | (254,067 | ) | (432,544 | ) | (686,611 | ) | ||||||
Other income (expenses) | (8,613 | ) | - | (8,613 | ) | |||||||
Income (loss) before benefit from income taxes | $ | (262,680 | ) | $ | (432,544 | ) | $ | (695,224 | ) |
Variance | ||||||||||||
Arkados | AES | Total | ||||||||||
Revenue | $ | (163,393 | ) | $ | (262,150 | ) | $ | (425,543 | ) | |||
Cost of Sales | (3,000 | ) | (273,233 | ) | (276,233 | ) | ||||||
Gross Profit | (160,393 | ) | 11,083 | (149,310 | ) | |||||||
Gross Profit Percentage | 2 | % | 31 | % | -1 | % | ||||||
Operating Expenses | 96,550 | (428,535 | ) | (331,985 | ) | |||||||
Operating Income (Loss) | (256,943 | ) | 439,618 | 182,675 | ||||||||
Other income (expenses) | 15,189 | - | 15,189 | |||||||||
Income (loss) before benefit from income taxes | $ | (241,754 | ) | $ | 439,618 | $ | 197,864 |
5 |
For the Six Months Ended November 30, 2016 | ||||||||||||
Arkados | AES | Total | ||||||||||
Revenue | $ | 88,947 | $ | 725,216 | $ | 814,163 | ||||||
Cost of Sales | - | 638,765 | 638,765 | |||||||||
Gross Profit | 88,947 | 86,451 | 175,398 | |||||||||
Gross Profit Percentage | 100 | % | 12 | % | 22 | % | ||||||
Operating Expenses | 704,405 | 252,252 | 956,657 | |||||||||
Operating Income (Loss) | (615,458 | ) | (165,801 | ) | (781,259 | ) | ||||||
Other income (expenses) | (3,075 | ) | - | (3,075 | ) | |||||||
Income (loss) before benefit from income taxes | $ | (618,533 | ) | $ | (165,801 | ) | $ | (784,334 | ) |
For the Six Months Ended November 30, 2015 | ||||||||||||
Arkados | AES | Total | ||||||||||
Revenue | $ | 282,293 | $ | 639,762 | $ | 922,055 | ||||||
Cost of Sales | 3,000 | 531,989 | 534,989 | |||||||||
Gross Profit | 279,293 | 107,773 | 387,066 | |||||||||
Gross Profit Percentage | 99 | % | 17 | % | 42 | % | ||||||
Operating Expenses | 791,097 | 803,365 | 1,594,462 | |||||||||
Operating Income (Loss) | (511,804 | ) | (695,592 | ) | (1,207,396 | ) | ||||||
Other income (expenses) | (16,589 | ) | (16,589 | ) | ||||||||
Income (loss) before benefit from income taxes | $ | (528,393 | ) | $ | (695,592 | ) | $ | (1,223,985 | ) |
Variance | ||||||||||||
Arkados | AES | Total | ||||||||||
Revenue | $ | (193,346 | ) | $ | 85,454 | $ | (107,892 | ) | ||||
Cost of Sales | (3,000 | ) | 106,776 | 103,776 | ||||||||
Gross Profit | (190,346 | ) | (21,322 | ) | (211,668 | ) | ||||||
Gross Profit Percentage | 1 | % | 12 | % | -20 | % | ||||||
Operating Expenses | (86,692 | ) | (551,113 | ) | (637,805 | ) | ||||||
Operating Income (Loss) | (103,654 | ) | 529,790 | 443,785 | ||||||||
Other income (expenses) | 13,514 | - | 13,514 | |||||||||
Income (loss) before benefit from income taxes | $ | (90,140 | ) | $ | 529,791 | $ | 439,651 |
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Revenue for the three and six months ended November 30, 2016 decreased by $425,543 and $107,892, respectively, mainly due to decreased revenue recognized from our AES segment. This revenue is derived mainly from the installation of LED lighting retrofit services.
Gross profit for the three and six months ended November 30, 2016 decreased by $149,310 and $211,668, respectively, mainly due to reduced recognized revenue in our AES segment and reduced sales in the Arkados segment.
We are highly dependent on a small number of customers. For the three months ended November 31, 2016, two customers accounted for 86% of our revenue. For the three months ended November 30, 2015, two customers accounted for 62% of our revenue.
For the six months ended November 30, 2016 and 2015, two customers accounted for 83% and 54% of our revenue, respectively.
The complete loss of or significant reduction in business from, or a material adverse change in the financial condition of any of our customers could cause a material and adverse change in our revenues and operating results.
As of November 30, 2016, two customers held 100% of our accounts receivable. Two customers held 94% of our accounts receivable as of May 31, 2016.
Loss from operations for the three and six months ended November 30, 2016 decreased by $182,675 and $426,137, respectively over the same period in 2015, mainly due to increased cost of sales margins and reduced operating expenses in our AES segment.
Interest expense on our existing debt for the three months ended November 30, 2016 and 2015 was $11,072 and $8,044, respectively.
Interest expense on our existing debt for the six months ended November 30, 2016 and 2015 was $20,723 and $15,458, respectively.
Liquidity and Capital Resources
Our principal source of operating capital has been provided in by the private placement of convertible debt securities. We do not have any significant sources of revenue or recurring profits from our operations. We may be unable to raise additional working capital through sales of our equity and debt securities. Through November 30, 2016, we have depended, in substantial part, upon loans from investors evidenced by convertible notes, and there are no assurances that investors will make any additional loans to us, in which case we may not be able to continue as a going concern.
As of November 30, 2016, we had cash of $211,265 as compared to $56,172 as of May 31, 2016.
Operating Activities
Operating activities used $148,907 in cash for the six months ended November 30, 2016, compared to $703,573 for the six months ended November 30, 2015. The decrease in cash was primarily attributable to funding our operations for the period.
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Investing Activities
For the six months ended November 30, 2016, $10,000 net cash was used in investing activities for the purchase of software. For the six months ended November 30, 2015, net cash used in investing activities was $8,432 to purchase office furniture.
Financing Activities
For the six months ended November 30, 2016, net cash provided by financing activities was $314,000, compared to $503,000 for the six months ended November 30, 2015. The Company received proceeds of $150,000 for a short-term note due January 15, 2017 and $164,000 from two convertible debt issuances due November 2019 and January 2017.
Critical Accounting Policies
Our consolidated financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the United States of America, or U.S. GAAP. Our significant accounting policies are described in Note 2 to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended May 31, 2016. The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses as well as the disclosure of contingent assets and liabilities. Critical accounting policies are those that require application of management’s most subjective or complex judgments, often as a result of matters that are inherently uncertain and may change in subsequent periods. Our critical accounting policies are limited to equity based transactions or convertible debt instruments. Management bases its estimates and judgments on historical experience and other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. For additional discussion of our critical accounting policies, see our Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended May 31, 2016.
Off Balance Sheet Arrangements
We do not have any off balance sheet arrangements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Not applicable.
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 of 1934, as amended (“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 November 30, 2016.
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Section 15d-15(f) of the Exchange Act) for our Company. Our sole officer and director, who is chief executive officer and is also acting in the capacity of principal accounting officer, conducted an evaluation of the design and operation of our internal control over financial reporting as of the end of the period covered by this report, based on the criteria set forth in the Internal Control- Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. As a result of this evaluation, we concluded that our financial reporting controls and procedures were not effective for the period ended November 30, 2016. 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. Our chief executive officer is currently seeking to retain a full-time chief financial officer and to put in place additional compensating levels of controls to provide for greater segregation of duties. As of the date of this quarterly report, however, we have not employed a separate chief financial officer, and the chief executive officer continues to act as our principal accounting officer.
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There has been no significant change in our internal control over financial reporting 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.
There has been no material change in any of the matters set forth in Item 3 of our Annual Report on Form 10-K for the fiscal year ended May 31, 2016 and no new litigation commenced since the filing of our most recent Annual Report on Form 10-K that would be required to be disclosed in response to this Item.
In addition to the other information set forth in this Quarterly Report on Form 10-Q, 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, 2016 which could materially affect our business, financial condition or future results. There have been no other material changes during the fiscal quarter ended November 30, 2016 to the risk factors discussed in the periodic reports noted above that have not already been disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended May 31, 2016.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
On October 13, 2016, the Company issued 400,000 shares of its Common Stock for consulting services to two consulting firms. The shares were valued at $0.67 at the time resulting in $268,000 in stock based compensation. The issuances of shares of our Common Stock to the consultants was exempt from the registration requirements of the Securities Act under Section 4(a)(2) thereof as a transaction not involving a public offering. The certificate that evidences the shares of our Common Stock that we have issued to the consultants bears a legend restricting its transferability.
On October 28, 2016, the Company issued a convertible promissory note for an aggregate principal amount of $38,500 (which includes an Original Issue Discount (“OID”) of $3,500) with a maturity date of January 30, 2017. The debenture is convertible only upon default after January 30, 2017 at a conversion price of 65% of the average of the three lowest traded prices occurring during the 25 consecutive trading days immediately preceding the applicable conversion date. As additional consideration, the Company issued 20,000 shares of Common Stock upon to the investor was exempt from the registration requirements of the Securities Act under Section 4(a)(2) thereof as a transaction not involving a public offering. The certificate that evidences the shares of our Common Stock that we have issued to the investor bears a legend restricting its transferability.
On November 11, 2016, the Company entered into a Securities Purchase Agreement whereas, the buyer wishes to purchase from the Company securities consisting of the Company's Convertible Debentures due three years from issuance for an aggregate principal amount of up to $500,000 (which includes an aggregate purchase price of $450,000 and OID of $50,000) (the "Debenture"). On November 11, 2016 the Company issued the first of three debenture tranches amounting to $150,000 of principal, consisting of $135,000 in proceeds and $15,000 OID. The Debenture is convertible at a conversion price of $0.65 up to 150 days after the issuance date and if no event of default occurs. If an event of default has occurred, or 150 days after the issuance date, the conversion price is the lesser of (a) $0.65 or (b) sixty five percent (65%) of the lowest closing bid price of the Company's Common Stock for the 20 consecutive trading days immediately preceding the date of the date of conversion of the Debentures. As additional consideration, the Company issued 50,000 shares of its Common Stock upon execution of this agreement. The issuances of the Debenture and shares of our Common Stock to the investor was exempt from the registration requirements of the Securities Act under Section 4(a)(2) thereof as a transaction not involving a public offering. The certificate that evidences the shares of our Common Stock that we have issued to the investor bears a legend restricting its transferability.
Item 3. Defaults Upon Senior Securities.
None.
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Item 4. Mine Safety Disclosures.
Not applicable.
None.
(a) Exhibits.
4.1 | Form of Convertible Note due January 30, 2017. |
4.2 | Amendment to Convertible Promissory Note Number 2016-1. |
4.3 | Form of Amendment to Certain Promissory Notes to be due March 31, 2017. |
10.1 | Securities Purchase Agreement by and between the Company and a certain accredited investor dated October 28, 2016. |
10.2 | Securities Purchase Agreement by and between the Company and a certain accredited investor dated November 11, 2016. |
31.1 | Certification of Chief Executive Officer/Principal Accounting Officer of Periodic Report pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 - Rule 13a-14a and Rule 15d-14a. |
32.1 | Certificate of Chief Executive Officer/Principal Accounting Officer of Periodic Report pursuant to 18 U.S.C. Section 1350. |
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 |
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In accordance with the requirements of the Securities Exchange Act, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
ARKADOS GROUP, INC. | ||
Dated: January 23, 2017 | ||
By: | /s/ Terrence DeFranco | |
Terrence DeFranco | ||
President and Chief Executive Officer, | ||
Principal Accounting Officer |
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Exhibit 4.1
NEITHER THIS NOTE NOR THE SECURITIES INTO WHICH THIS NOTE IS CONVERTIBLE HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE. THESE SECURITIES HAVE BEEN SOLD IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS.
Arkados Group, Inc.
Convertible Promissory Note
Issuance Date: October 28, 2016 | Original Principal Amount: | $38,500 |
Note No. AKDS-1 | Consideration Paid at Close: | $35,000 |
FOR VALUE RECEIVED, Arkados Group, Inc., a Delaware corporation with a par value of $0.0001 per common share (“Par Value”) (the “Company”), hereby promises to pay to the order of Lucas Hoppel or registered assigns (the “Holder”) the amount set out above as the Original Principal Amount (as reduced pursuant to the terms hereof pursuant to redemption, conversion or otherwise, the “Principal”) when due, whether upon the Maturity Date (as defined below), acceleration, redemption or otherwise (in each case in accordance with the terms hereof) and to pay interest (“Interest”) on any outstanding Principal at the applicable Interest Rate from the date set out above as the Issuance Date (the “Issuance Date”) until the same becomes due and payable, upon the Maturity Date or acceleration, conversion, redemption or otherwise (in each case in accordance with the terms hereof).
The Original Principal Amount is $38,500 (thirty-eight thousand five hundred) plus accrued and unpaid interest and any other fees. The Consideration is $35,000 (thirty-five thousand) payable by wire transfer (there exists a $3,500 original issue discount (the “OID”)). The Holder shall pay $35,000 of Consideration upon closing of this Note.
(1) GENERAL TERMS
(a) Payment of Principal. The “Maturity Date” shall be January 30th, 2017, as may be extended at the option of the Holder in the event that, and for so long as, an Event of Default (as defined below) shall not have occurred and be continuing on the Maturity Date (as may be extended pursuant to this Section 1) or any event shall not have occurred and be continuing on the Maturity Date (as may be extended pursuant to this Section 1) that with the passage of time and the failure to cure would result in an Event of Default.
(b) Interest. A one-time interest charge of eight percent (8%) (“Interest Rate”) shall be applied on the Issuance Date to the Original Principal Amount. Interest hereunder shall be paid on the Maturity Date (or sooner as provided herein) to the Holder or its assignee in whose name this Note is registered on the records of the Company regarding registration and transfers of Notes in cash or converted into Common Stock at the Conversion Price provided the Equity Conditions are satisfied.
(c) Security. This Note shall not be secured by any collateral or any assets pledged to the Holder
(2) EVENTS OF DEFAULT.
(a) An “Event of Default”, wherever used herein, means any one of the following events (whatever the reason and whether it shall be voluntary or involuntary or effected by operation of law or pursuant to any judgment, decree or order of any court, or any order, rule or regulation of any administrative or governmental body):
(i) The Company’s failure to pay to the Holder any amount of Principal, Interest, or other amounts when and as due under this Note (including, without limitation, the Company’s failure to pay any redemption payments or amounts hereunder);
(ii) A Conversion Failure as defined in section 3(b)(ii)
(iii) The Company or any subsidiary of the Company shall commence, or there shall be commenced against the Company or any subsidiary of the Company under any applicable bankruptcy or insolvency laws as now or hereafter in effect or any successor thereto, or the Company or any subsidiary of the Company commences any other proceeding under any reorganization, arrangement, adjustment of debt, relief of debtors, dissolution, insolvency or liquidation or similar law of any jurisdiction whether now or hereafter in effect relating to the Company or any subsidiary of the Company or there is commenced against the Company or any subsidiary of the Company any such bankruptcy, insolvency or other proceeding which remains undismissed for a period of 61 days; or the Company or any subsidiary of the Company is adjudicated insolvent or bankrupt; or any order of relief or other order approving any such case or proceeding is entered; or the Company or any subsidiary of the Company suffers any appointment of any custodian, private or court appointed receiver or the like for it or any substantial part of its property which continues undischarged or unstayed for a period of sixty one (61) days; or the Company or any subsidiary of the Company makes a general assignment for the benefit of creditors; or the Company or any subsidiary of the Company shall fail to pay, or shall state that it is unable to pay, or shall be unable to pay, its debts generally as they become due; or the Company or any subsidiary of the Company shall call a meeting of its creditors with a view to arranging a composition, adjustment or restructuring of its debts; or the Company or any subsidiary of the Company shall by any act or failure to act expressly indicate its consent to, approval of or acquiescence in any of the foregoing; or any corporate or other action is taken by the Company or any subsidiary of the Company for the purpose of effecting any of the foregoing;
(iv) The Company or any subsidiary of the Company shall default in any of its obligations under any other Note or any mortgage, credit agreement or other facility, indenture agreement, factoring agreement or other instrument under which there may be issued, or by which there may be secured or evidenced any indebtedness for borrowed money or money due under any long term leasing or factoring arrangement of the Company or any subsidiary of the Company in an amount exceeding $100,000, whether such indebtedness now exists or shall hereafter be created; and
(v) The Common Stock is suspended or delisted for trading on the Over the Counter OTCQB Venture Marketplace or OTCPink Open Marketplace (the “Primary Market”).
(vi) The Company loses its status as “DTC Eligible.”
(vii) The Company shall become late or delinquent in its filing requirements as a fully-reporting issuer registered with the Securities & Exchange Commission.
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(viii) The Company shall fail to reserve and keep available out of its authorized Common Stock a number of shares equal to at least 3 (three) times the full number of shares of Common Stock issuable upon conversion of all outstanding amounts under this Note.
(b) Upon the occurrence of any Event of Default, the Outstanding Balance shall immediately increase to 140% of the Outstanding Balance immediately prior to the occurrence of the Event of Default (the “Default Effect”) and a daily penalty of $500 (five hundred) will accrue until the default is remedied. The Default Effect shall automatically apply upon the occurrence of an Event of Default without the need for any party to give any notice or take any other action.
(3) CONVERSION OF NOTE. This Note shall be convertible into shares of the Company’s Common Stock, on the terms and conditions set forth in this Section 3.
(a) Conversion Right. Upon the event of a default, subject to the provisions of Section 3(c), at any time or times on or after the Issuance Date, the Holder shall have the right but not the obligation to convert any portion of the outstanding and unpaid Conversion Amount (as defined below) into fully paid and nonassessable shares of Common Stock in accordance with Section 3(b), at the Conversion Price (as defined below). The number of shares of Common Stock issuable upon conversion of any Conversion Amount pursuant to this Section 3(a) shall be equal to the quotient of dividing the Conversion Amount by the Conversion Price. The Company shall not issue any fraction of a share of Common Stock upon any conversion. If the issuance would result in the issuance of a fraction of a share of Common Stock, the Company shall round such fraction of a share of Common Stock up to the nearest whole share. The Company shall pay any and all transfer agent fees, legal fees, costs and any other fees or costs that may be incurred or charged in connection with the issuance of shares of the Company’s Common Stock to the Holder arising out of or relating to the conversion of this Note.
(i) “Conversion Amount” means the portion of the Original Principal Amount and Interest to be converted, plus any penalties, redeemed or otherwise with respect to which this determination is being made.
(ii) “Conversion Price” shall equal 65% of the average of the three lowest traded prices occurring during the twenty-five (25) consecutive Trading Days immediately preceding the applicable Conversion Date on which the Holder elects to convert all or part of this Note, subject to adjustment as provided in this Note.
(b) Mechanics of Conversion.
(i) Optional Conversion. To convert any Conversion Amount into shares of Common Stock on any date (a “Conversion Date”), the Holder shall (A) transmit by email, facsimile (or otherwise deliver), for receipt on or prior to 11:59 p.m., New York, NY Time, on such date, a copy of an executed notice of conversion in the form attached hereto as Exhibit A (the “Conversion Notice”) to the Company. On or before the third Business Day following the date of receipt of a Conversion Notice (the “Share Delivery Date”), the Company shall (A) if legends are not required to be placed on certificates of Common Stock pursuant to the then existing provisions of Rule 144 of the Securities Act of 1933 (“Rule 144”) and provided that the Transfer Agent is participating in the Depository Trust Company’s (“DTC”) Fast Automated Securities Transfer Program, credit such aggregate number of shares of Common Stock to which the Holder shall be entitled to the Holder’s or its designee’s balance account with DTC through its Deposit Withdrawal Agent Commission system or (B) if the Transfer Agent is not participating in the DTC Fast Automated Securities Transfer Program, issue and deliver to the address as specified in the Conversion Notice, a certificate, registered in the name of the Holder or its designee, for the number of shares of Common Stock to which the Holder shall be entitled which certificates shall not bear any restrictive legends unless required pursuant the Rule 144. If this Note is physically surrendered for conversion and the outstanding Principal of this Note is greater than the Principal portion of the Conversion Amount being converted, then the Company shall, upon request of the Holder, as soon as practicable and in no event later than three (3) Business Days after receipt of this Note and at its own expense, issue and deliver to the holder a new Note representing the outstanding Principal not converted. The Person or Persons entitled to receive the shares of Common Stock issuable upon a conversion of this Note shall be treated for all purposes as the record holder or holders of such shares of Common Stock upon the transmission of a Conversion Notice.
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(ii) Company’s Failure to Timely Convert. If within two (2) Trading Days after the Company’s receipt of the facsimile or email copy of a Conversion Notice the Company shall fail to issue and deliver to Holder via “DWAC/FAST” electronic transfer the number of shares of Common Stock to which the Holder is entitled upon such holder’s conversion of any Conversion Amount (a “Conversion Failure”), the Original Principal Amount of the Note shall increase by $2,000 per day until the Company issues and delivers a certificate to the Holder or credit the Holder’s balance account with DTC for the number of shares of Common Stock to which the Holder is entitled upon such holder’s conversion of any Conversion Amount (under Holder’s and Company’s expectation that any damages will tack back to the Issuance Date). Company will not be subject to any penalties once its transfer agent processes the shares to the DWAC system. If the Company fails to deliver shares in accordance with the timeframe stated in this Section, resulting in a Conversion Failure, the Holder, at any time prior to selling all of those shares, may rescind any portion, in whole or in part, of that particular conversion attributable to the unsold shares and have the rescinded conversion amount returned to the Outstanding Balance with the rescinded conversion shares returned to the Company (under Holder’s and Company’s expectations that any returned conversion amounts will tack back to the original date of the Note).
(iii) DWAC/FAST Eligibility. If the Company fails for any reason to deliver to the Holder the Shares by DWAC/FAST electronic transfer (such as by delivering a physical stock certificate), or if there is a Conversion Failure as defined in Section 3(b)(ii), and if the Holder incurs a Market Price Loss, then at any time subsequent to incurring the loss the Holder may provide the Company written notice indicating the amounts payable to the Holder in respect of the Market Price Loss and the Company must make the Holder whole by either of the following options at Holder’s election:
Market Price Loss = [(High trade price for the period between the day of conversion and the day the shares clear in the Holder’s brokerage account) x (Number of shares receivable from the conversion)] – [(Net Sales price realized by Holder) x (Number of shares receivable from the conversion)].
Option A – Pay Market Price Loss in Cash. The Company must pay the Market Price Loss by cash payment, and any such cash payment must be made by the third business day from the time of the Holder’s written notice to the Company.
Option B – Add Market Price Loss to Outstanding Balance. The Company must pay the Market Price Loss by adding the Market Price Loss to the Outstanding Balance (under Holder’s and the Company’s expectation that any Market Price Loss amounts will tack back to the Issuance Date).
In the case that conversion shares are not deliverable by DWAC/FAST electronic transfer an additional 10% discount to the Conversion Price will apply.
(iv) DTC Eligibility & Sub-Penny. If the Company fails to maintain its status as “DTC Eligible” for any reason, or, if the effective Conversion Price as calculated in Section 3(a)(ii) is less than $0.01 at any time (regardless of whether or not a Conversion Notice has been submitted to the Company), the Principal Amount of the Note shall increase by ten thousand dollars ($10,000) (under Holder’s and Company’s expectation that any Principal Amount increase will tack back to the Issuance Date). In addition, the Conversion Price shall be permanently redefined to equal the lesser of (a) $0.01 or (b) 50% of the lowest trade occurring during the twenty five (25) consecutive Trading Days immediately preceding the applicable Conversion Date on which the Holder elects to convert all or part of this Note, subject to adjustment as provided in this Note.
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(v) Par Value True-Up. In the event that the Conversion Price is less than Par Value on the Conversion Date, the Holder may elect to submit a Conversion Notice (attached hereto as Exhibit A) with a conversion price equal to the Company’s Par Value. In addition, upon written notice from the Holder in the form attached hereto as Exhibit B (the “True-Up Notice”), the Holder may require the Company, at the Holder’s election, to either (A) issue and deliver to the Holder a number of shares of Common Stock as equals (X) the Conversion Amount divided by 60% of the lowest trade occurring during the twenty five (25) consecutive Trading Days immediately preceding the applicable Conversion Date, less (Y) the Conversion Amount divided by the Par Value (Any additional shares of Common Stock issuable pursuant to this Section 3(b)(v) shall be referred to herein as “True-Up Shares”), or (B) add to the Outstanding Balance a dollar amount equal to the number of True-Up Shares (as calculated above) multiplied by the high trade price on the Conversion Date (Any dollar amount added to the Outstanding Balance pursuant to this Section 3(b)(v) shall be referred to herein as the “True-Up Balance”) (under Holder’s and the Company’s expectation that any True-Up Balance amounts will tack back to the Issuance Date).
(vi) Book-Entry. Notwithstanding anything to the contrary set forth herein, upon conversion of any portion of this Note in accordance with the terms hereof, the Holder shall not be required to physically surrender this Note to the Company unless (A) the full Conversion Amount represented by this Note is being converted or (B) the Holder has provided the Company with prior written notice (which notice may be included in a Conversion Notice) requesting reissuance of this Note upon physical surrender of this Note. The Holder and the Company shall maintain records showing the Principal and Interest converted and the dates of such conversions or shall use such other method, reasonably satisfactory to the Holder and the Company, so as not to require physical surrender of this Note upon conversion.
(c) Limitations on Conversions or Trading.
(i) Beneficial Ownership. The Company shall not effect any conversions of this Note and the Holder shall not have the right to convert any portion of this Note or receive shares of Common Stock as payment of interest hereunder to the extent that after giving effect to such conversion or receipt of such interest payment, the Holder, together with any affiliate thereof, would beneficially own (as determined in accordance with Section 13(d) of the Exchange Act and the rules promulgated thereunder) in excess of 4.99% of the number of shares of Common Stock outstanding immediately after giving effect to such conversion or receipt of shares as payment of interest. Since the Holder will not be obligated to report to the Company the number of shares of Common Stock it may hold at the time of a conversion hereunder, unless the conversion at issue would result in the issuance of shares of Common Stock in excess of 4.99% of the then outstanding shares of Common Stock without regard to any other shares which may be beneficially owned by the Holder or an affiliate thereof, the Holder shall have the authority and obligation to determine whether the restriction contained in this Section will limit any particular conversion hereunder and to the extent that the Holder determines that the limitation contained in this Section applies, the determination of which portion of the principal amount of this Note is convertible shall be the responsibility and obligation of the Holder. If the Holder has delivered a Conversion Notice for a principal amount of this Note that, without regard to any other shares that the Holder or its affiliates may beneficially own, would result in the issuance in excess of the permitted amount hereunder, the Company shall notify the Holder of this fact and shall honor the conversion for the maximum principal amount permitted to be converted on such Conversion Date in accordance with Section 3(a) and, any principal amount tendered for conversion in excess of the permitted amount hereunder shall remain outstanding under this Note. In the event that the Market Capitalization of the Company falls below $2,500,000, the term “4.99%” above shall be permanently replaced with “9.99%”. “Market Capitalization” shall be defined as the product of (a) the closing price of the Common Stock of the Common stock multiplied by (b) the number of shares of Common Stock outstanding as reported on the Company’s most recently filed Form 10-K or Form 10-Q. The provisions of this Section may be waived by Holder upon not less than 65 days prior written notification to the Company.
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(ii) Capitalization. So long as this as this Note is outstanding, upon written request of the Holder, the Company shall furnish to the Holder the then-current number of common shares issued and outstanding, the then-current number of common shares authorized, and the then-current number of shares reserved for third parties.
(d) Other Provisions.
(i) Share Reservation. The Company shall at all times reserve and keep available out of its authorized Common Stock a number of shares equal to at least 3 (three) times the full number of shares of Common Stock issuable upon conversion of all outstanding amounts under this Note; and within 3 (three) Business Days following the receipt by the Company of a Holder’s notice that such minimum number of shares of Common Stock is not so reserved, the Company shall promptly reserve a sufficient number of shares of Common Stock to comply with such requirement. The Company will at all times reserve at least 1,250,000 shares of Common Stock for conversion.
(ii) Prepayment. At any time prior to the Maturity Date, the Company shall have the option to pre-pay the entire remaining outstanding principal amount of this Note in cash, provided that (i) the Company shall pay the Holder 100% of the Outstanding Balance and (ii) the Holder may still convert this Note pursuant to the terms hereof at all times until such prepayment amount has been received in full.
(iii) Terms of Future Financings. So long as this Note is outstanding, upon any issuance by the Company or any of its subsidiaries of any security with any term more favorable to the holder of such security or with a term in favor of the holder of such security that was not similarly provided to the Holder in this Note, then the Company shall notify the Holder of such additional or more favorable term and such term, at Holder’s option, shall become a part of the transaction documents with the Holder. The types of terms contained in another security that may be more favorable to the holder of such security include, but are not limited to, terms addressing conversion discounts, conversion lookback periods, interest rates, original issue discounts, stock sale price, private placement price per share, and warrant coverage.
(iv) All calculations under this Section 3 shall be rounded up to the nearest $0.00001 or whole share.
(v) Nothing herein shall limit a Holder’s right to pursue actual damages or declare an Event of Default pursuant to Section 2 herein for the Company’s failure to deliver certificates representing shares of Common Stock upon conversion within the period specified herein and such Holder shall have the right to pursue all remedies available to it at law or in equity including, without limitation, a decree of specific performance and/or injunctive relief, in each case without the need to post a bond or provide other security. The exercise of any such rights shall not prohibit the Holder from seeking to enforce damages pursuant to any other Section hereof or under applicable law.
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(4) SECTION 3(A)(9) OR 3(A)(10) TRANSACTION. So long as this Note is outstanding, the Company shall not enter into any transaction or arrangement structured in accordance with, based upon, or related or pursuant to, in whole or in part, either Section 3(a)(9) of the Securities Act (a “3(a)(9) Transaction”) or Section 3(a)(10) of the Securities Act (a “3(a)(10) Transaction”). In the event that the Company does enter into, or makes any issuance of Common Stock related to a 3(a)(9) Transaction or a 3(a)(10) Transaction while this note is outstanding, a liquidated damages charge of 25% of the outstanding principal balance of this Note, but not less than $25,000, will be assessed and will become immediately due and payable to the Holder at its election in the form of cash payment or addition to the balance of this Note.
(5) PIGGYBACK REGISTRATION RIGHTS. The Company shall include on the next registration statement the Company files with SEC (or on the subsequent registration statement if such registration statement is withdrawn) all shares issuable upon conversion of this Note. Failure to do so will result in liquidated damages of 25% of the outstanding principal balance of this Note, but not less than $25,000, being immediately due and payable to the Holder at its election in the form of cash payment or addition to the balance of this Note.
(6) REISSUANCE OF THIS NOTE.
(a) Assignability. The Company may not assign this Note. This Note will be binding upon the Company and its successors and will inure to the benefit of the Holder and its successors and assigns and may be assigned by the Holder to anyone of its choosing without Company’s approval.
(b) Lost, Stolen or Mutilated Note. Upon receipt by the Company of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of this Note, and, in the case of loss, theft or destruction, of any indemnification undertaking by the Holder to the Company in customary form and, in the case of mutilation, upon surrender and cancellation of this Note, the Company shall execute and deliver to the Holder a new Note representing the outstanding Principal.
(7) NOTICES. Any notices, consents, waivers or other communications required or permitted to be given under the terms hereof must be in writing and will be deemed to have been delivered: (i) upon receipt, when delivered personally; (ii) upon receipt, when sent by facsimile (provided confirmation of transmission is mechanically or electronically generated and kept on file by the sending party) (iii) upon receipt, when sent by email; or (iv) one (1) Trading Day after deposit with a nationally recognized overnight delivery service, in each case properly addressed to the party to receive the same. The addresses and facsimile numbers for such communications shall be those set forth in the communications and documents that each party has provided the other immediately preceding the issuance of this Note or at such other address and/or facsimile number and/or to the attention of such other person as the recipient party has specified by written notice given to each other party three (3) Business Days prior to the effectiveness of such change. Written confirmation of receipt (i) given by the recipient of such notice, consent, waiver or other communication, (ii) mechanically or electronically generated by the sender’s facsimile machine containing the time, date, recipient facsimile number and an image of the first page of such transmission or (iii) provided by a nationally recognized overnight delivery service, shall be rebuttable evidence of personal service, receipt by facsimile or receipt from a nationally recognized overnight delivery service in accordance with clause (i), (ii) or (iii) above, respectively.
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The addresses for such communications shall be:
If to the Company, to:
Arkados Group, Inc. |
Terrence DeFranco |
211 Warren Street, Suite 320 |
Newark, NJ 07103 |
Attn: |
Email: |
If to the Holder:
Lucas Hoppel
Phone: 858-232-5110
Email: Luke@LukeHoppel.com
(8) APPLICABLE LAW AND VENUE. This Note shall be governed by and construed in accordance with the laws of the State of Nevada, without giving effect to conflicts of laws thereof. Any action brought by either party against the other concerning the transactions contemplated by this Agreement shall be brought only in the state courts of California or in the federal courts located in the city of San Diego, in the State of California. Both parties and the individuals signing this Agreement agree to submit to the jurisdiction of such courts.
(9) WAIVER. Any waiver by the Holder of a breach of any provision of this Note shall not operate as or be construed to be a waiver of any other breach of such provision or of any breach of any other provision of this Note. The failure of the Holder to insist upon strict adherence to any term of this Note on one or more occasions shall not be considered a waiver or deprive that party of the right thereafter to insist upon strict adherence to that term or any other term of this Note. Any waiver must be in writing.
(10) LIQUIDATED DAMAGES. Holder and Company agree that in the event Company fails to comply with any of the terms or provisions of this Note, Holder’s damages would be uncertain and difficult (if not impossible) to accurately estimate because of the parties’ inability to predict future interest rates, future share prices, future trading volumes and other relevant factors. Accordingly, Holder and Company agree that any fees, balance adjustments, default interest or other charges assessed under this Note are not penalties but instead are intended by the parties to be, and shall be deemed, liquidated damages (under Holder’s and Company’s expectations that any such liquidated damages will tack back to the Closing Date for purposes of determining the holding period under Rule 144).
[Signature Page Follows]
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IN WITNESS WHEREOF, the Company has caused this Convertible Note to be duly executed by a duly authorized officer as of the date set forth above.
COMPANY: | ||
Arkados Group, Inc. | ||
By: | /s/ Terrence DeFranco | |
Name: | Terrence DeFranco | |
Title: | Chief Executive Officer | |
HOLDER: | ||
Lucas Hoppel | ||
By: | /s/ Lucas Hoppel |
[Signature Page to Convertible Note No. AKDS-1]
EXHIBIT A
CONVERSION NOTICE
[Company Contact, Position]
Spiral Toys, Inc.
[Company Address]
[Contact Email Address}
The undersigned hereby elects to convert a portion of the $________ Convertible Note _______ issued to Lucas Hoppel on ____________ into Shares of Common Stock of ____________ according to the conditions set forth in such Note as of the date written below.
By accepting this notice of conversion, you are acknowledging that the number of shares to be delivered represents less than 10% (ten percent) of the common stock outstanding. If the number of shares to be delivered represents more than 9.99% of the common stock outstanding, this conversion notice shall immediately automatically extinguish and debenture Holder must be immediately notified.
Date of Conversion: | ||
Conversion Amount: | ||
Conversion Price: | ||
Shares to be Delivered: |
Shares delivered in name of:
Lucas Hoppel
Signature: |
EXHIBIT B
TRUE-UP NOTICE
[Company Contact, Position]
Spiral Toys, Inc.
[Company Address]
[Contact Email Address}
The undersigned hereby gives notice to Spiral Toys, Inc., a ______ corporation (the “Company”), pursuant to that certain Note dated _______ ___, 20__ by and between the Company and the Holder (the “Note”), that the Holder elects to:
___ | Receive fully paid and non-assessable True-Up Shares pursuant to Section 3(b)(v) of the Note (such Additional Origination Shares shall be calculated as set forth below), or | |
___ | Add to the Outstanding Balance a dollar amount equal to the True-Up Amount (such True-Up Amount shall be calculated as set forth below). |
The number of True-Up Shares Holder is entitled to receive is calculated as follows:
Conversion Amount ($___) / ___% of the lowest trade occurring during the _________ (__) consecutive Trading Days immediately preceding the applicable Conversion Date ($_.__) - Conversion Amount ($___) divided by the Par Value ($_.__) =
____________ True-Up Shares
The amount of True-Up Balance to be added to the Outstanding Balance is calculated as follows:
Number of True-Up Shares (_____) * high trade price on the Conversion Date ($_.__)=
____________ True-Up Balance
Shares delivered in name of:
Lucas Hoppel
Signature: |
Exhibit 4.2
Arkados, INC.
AMENDMENT TO Convertible PROMISSORY NOTE Number 2016-1
THIS AMENDMENT TO CONVERTIBLE PROMISSORY NOTE NUMBER 2016-1 (this “Amendment”) is made and entered into as of January ___, 2017 (the “Effective Date”), by and between Arkados Group, Inc., a Delaware corporation (the “Company”), and William Carson (“Mr. Carson”) and Susan Carson (“Mrs. Carson”, collectively with Mr. Carson, the “Purchasers”).
RECITALS
A. The Company and Mr. Parson are parties to that certain Securities Purchase Amendment dated as of September 10, 2014 (the “Individual SPA”), pursuant to which Mr. Carson purchased, and the Company sold and issued to Mr. Carson its 6% Convertible Note No. 2014-3 dated September 10, 2014 (“Note 2014-3”) in the original principal amount of $65,000.
B. The Purchasers and the Company entered into that certain Securities Purchase Amendment, dated September 10, 2014 (the “Joint SPA,” and, together with the Individual SPA, the “SPAs” each an “SPA”), pursuant to which the Purchasers purchased, and the Company sold and issued to the Purchasers its 6% Convertible Note No. 2014-4 dated September 10, 2014 (“Note 2014-4,” and, together with Note 2014-3, collectively the “2014 Notes”) also in the original principal amount of $65,000.
C. The Purchasers and the Company entered into that certain Exchange Agreement dated as of January 8, 2016, pursuant to which, among other things, the Company and the Purchasers agreed to reduce the amount due under the Notes to $40,000 and to extend the ‘Maturity Date’ of the Notes to December 31, 2016 (the “Exchange Agreement”) by cancelling the 2014 Notes and issuing the Purchasers a 6% Convertible Note No. 2016-1 dated January 8, 2016 in the original principal amount of $40,000 (“Note 2016-1”).
D. Pursuant to Section 4.3 of Note 2016-1, Note 2016-1 may only be amended by an instrument in writing signed by the Company and the Purchasers.
E. The Company and Purchasers, in connection to their financial interest in the Company as the holder of an aggregate of 63,987 restricted shares of the Company’s common stock held in the name of the Purchasers or by Mr. Carson as an individual, hereby desires to amend certain terms of Note 2016-1 as set forth below.
AGREEMENT
In consideration of the foregoing recitals and the mutual promises and covenants contained herein, the parties, intending to be legally bound, hereby agree as follows:
1. Amendment to the Title of Note 2016-1. The third line of the title of Note 2016-1 shall be amended, restated and replaced in its entirety as follows:
“DUE MARCH 31, 2017”
2. Amendment to the First Sentence of the First Paragraph of Note 2016-1. The first sentence of the first paragraph of Note 2016-1 shall be amended, restated and replaced in its entirety as follows:
“Arkados Group, Inc., a Delaware corporation (the “Company”) with principal offices at 211 Warren Street, Suite 320, Newark, NJ 07103, for value received, hereby promises to pay the registered holder hereof (the “Holder”) the principal sum set forth above on March 31, 2017 (the “Maturity Date”), in such coin or currency of the United States of America as at the time of payment shall be the legal tender for the payment of public and private debts, and to pay interest, less any amounts required by law to be deducted or withheld, computed on the basis of a 365-day year, on the unpaid principal balance hereof from the date hereof (the “Original Issue Date”), at the rate of 6% per year, compounded quarterly, until such principal sum shall have become due and payable, or has been converted pursuant to Section 1.1, below.”
3. Waiver of Event of Default. If applicable, the Purchasers hereby waive any Event of Default (as defined under Note 2016-1) for the Company’s failure to observe or perform any other covenant, obligation, condition or agreement contained in the Purchaser’s Note 2016-1 or that certain SPA, pursuant to which the 2014 Note was originally issued, if such breach occurred prior to the date of this Amendment. For avoidance of doubt, Note 2016-1 shall continue to bear interest at the rate of 6% per year and not the Default Interest rate defined in Note 2016-1.
4. Reaffirmation. Except as expressly provided herein, the undersigned agree that all of the terms, covenants, conditions, restrictions and other provisions contained in Note 2016-1 shall remain in full force and effect.
5. Entire Agreement. This Amendment, together with the SPAs, Exchange Agreement and Note 2016-1, contains the entire agreement of the parties and supersedes any prior or contemporaneous written or oral agreements between them concerning the subject matter of this Amendment.
6. Counterparts. This Amendment may be executed in counterparts, each of which shall be an original and all of which, taken together, shall constitute a single instrument.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
IN WITNESS WHEREOF, the parties have caused this Amendment to be duly executed as of the date and year first above written.
COMPANY
Arkados Group, Inc.,
a Delaware corporation
By: | /s/ Terrence DeFranco |
Name: | Terrence DeFranco |
Title: | CEO |
IN WITNESS WHEREOF, the parties have caused this Amendment to be duly executed as of the date and year first above written
PURCHASERS
William Carson and Susan Carson
By: | /s/ William Carson |
William Carson | |
By: | /s/ Susan Carson |
Susan Carson |
Address: | |
Facsimile: | |
Email: |
Exhibit 4.3
Arkados, INC.
FIRST AMENDMENT TO PROMISSORY NOTE
THIS FIRST AMENDMENT TO PROMISSORY NOTE (this “Amendment”) is made and entered into as of January ___, 2017 (the “Effective Date”), by and between Arkados Group, Inc., a Delaware corporation (the “Company”), and __________ (the “Purchaser”).
RECITALS
A. The Company sold, and the Purchaser purchased, a promissory note in the aggregate principal amount of __________ from the Company reflected by its Promissory Note No. ________ dated _____________ (the “Note”).
B. Pursuant to Section 2.3 of the Note, the terms of the Note may be amended by an instrument in writing signed by the Company and the Purchaser.
C. The Company and Purchaser, in connection to its financial interest in the Company as the holder of __________ shares of the Company’s common stock, hereby desires to amend certain terms of the Note as set forth below.
AGREEMENT
In consideration of the foregoing recitals and the mutual promises and covenants contained herein, the parties, intending to be legally bound, hereby agree as follows:
1. Amendment to the Title of the Note. The third line of the title of Note shall be amended, restated and replaced in its entirety as follows:
“DUE MARCH 31, 2017”
2. Amendment to the First Sentence of the First Paragraph of the Note. The first sentence of the first paragraph of the Note shall be amended, restated and replaced in its entirety as follows:
“Arkados Group, Inc., a Delaware corporation (the “Company”) with principal offices at 211 Warren Street, Suite 320, Newark, NJ 07103, for value received, hereby promises to pay the registered holder hereof (the “Holder”) the principal sum set forth above on March 31, 2017 (the “Maturity Date”), in such coin or currency of the United States of America as at the time of payment shall be the legal tender for the payment of public and private debts, and to pay interest, less any amounts required by law to be deducted or withheld, computed on the basis of a 365-day year, on the unpaid principal balance hereof from the date hereof (the “Original Issue Date”), at the rate of 10% per year, compounded quarterly, until such principal sum shall have become due and payable.”
3. Waiver of Event of Default. If applicable, the Purchaser hereby waives any Event of Default (as defined under the Note) for the Company’s failure to observe or perform any other covenant, obligation, condition or agreement contained in the Purchaser’s Note if such breach occurred prior to the date of this Amendment. For avoidance of doubt, the Note shall continue to bear interest at the rate of 10% per year and not the Default Interest rate, as defined in the Note.
4. Reaffirmation. Except as expressly provided herein, the undersigned agree that all of the terms, covenants, conditions, restrictions and other provisions contained in the Note shall remain in full force and effect.
5. Entire Agreement. This Amendment, together with the Note, contains the entire agreement of the parties and supersedes any prior or contemporaneous written or oral agreements between them concerning the subject matter of this Amendment.
6. Counterparts. This Amendment may be executed in counterparts, each of which shall be an original and all of which, taken together, shall constitute a single instrument.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
IN WITNESS WHEREOF, the parties have caused this Amendment to be duly executed as of the date and year first above written.
COMPANY | ||
Arkados Group, Inc., | ||
a Delaware corporation | ||
By: | /s/ Terrence DeFranco | |
Name: | Terrence DeFranco | |
Title: | CEO |
IN WITNESS WHEREOF, the parties have caused this Amendment to be duly executed as of the date and year first above written
PURCHASER | ||
/s/ Noteholder | ||
[Name of Noteholder] | ||
Address: | ||
Facsimile: | ||
Email: |
Exhibit 10.1
SECURITIES PURCHASE AGREEMENT
This SECURITIES PURCHASE AGREEMENT (this “Agreement”), dated as of October 28, 2016, is entered into by and between Arkados Group, Inc., a Delaware corporation, (the “Company”), and Lucas Hoppel (the “Buyer”).
A. The Company and the Buyer are executing and delivering this Agreement in reliance upon the exemption from securities registration afforded by the rules and regulations as promulgated by the United States Securities and Exchange Commission (the “SEC”) under the Securities Act of 1933, as amended (the “1933 Act”).
B. Upon the terms and conditions stated in this Agreement, the Buyer desires to purchase and the Company desires to issue and sell, upon the terms and conditions set forth in this Agreement (i) a Convertible Promissory Note of the Company, in the form attached hereto as Exhibit A (the “Note”), in the original principal amount of $38,500.00 (the “Original Principal Amount”) (together with any note(s) issued in replacement thereof or as a dividend thereon or otherwise with respect thereto in accordance with the terms thereof, the “Note”) and (ii) twenty thousand (20,000) restricted common shares in the Company (“Inducement Shares”) to be delivered to Holder, via overnight courier, within 7 (seven) calendar days following the Closing Date. On the sixth month anniversary of this note, in the event the Companies shares price has declined the Company agrees to issue the Buyer additional shares such that the aggregate value of the Inducement Shares equal the aggregate value of the Inducement Shares as of the closing date.
NOW THEREFORE, the Company and the Buyer hereby agree as follows:
1. Purchase and Sale. On the Closing Date (as defined below), the Company shall issue and sell to the Buyer and the Buyer agrees to purchase from the Company (i) the Note in the original principal amount of $38,500, and (ii) the Inducement Shares.
1.1. Form of Payment. On the Closing Date, (i) the Buyer shall pay the purchase price of $35,000 (the “Purchase Price”) for the Securities to be issued and sold to it at the Closing (as defined below) by wire transfer of immediately available funds to a Company account designated by the Company, in accordance with the Company’s written wiring instructions, against delivery of the Securities, and (ii) the Company shall deliver such duly executed Securities on behalf of the Company, to the Buyer, against delivery of such Purchase Price.
1.2. Closing Date. The date and time of the issuance and sale of the Securities pursuant to this Agreement (the “Closing Date”) shall be on or about October 28, 2016, or such other mutually agreed upon time. The closing of the transactions contemplated by this Agreement (the Closing”) shall occur on the Closing Date at such location as may be agreed to by the parties.
1.3. Share Reservation. The Company shall at all times require its transfer agent to establish a reserve of shares of its authorized but unissued and unreserved Common Stock in the amount of 1,250,000 shares for purposes of exercise of the Warrant or conversion of the Note. The Company shall cause the Transfer Agent to agree that it will not reduce the reserve under any circumstances, unless such reduction is pre-approved in writing by the Buyer.
2. Buyer’s Investment Representations; Governing Law; Miscellaneous.
2.1 Buyer’s Investment Representations.
(a) This Agreement is made in reliance upon the Buyer’s representation to the Company, which by its acceptance hereof Buyer hereby confirms, that the Securities to be received by it will be acquired for investment for its own account, not as a nominee or agent, and not with a view to the sale or distribution of any part thereof, and that it has no present intention of selling, granting participation in, or otherwise distributing the same, but subject nevertheless to any requirement of law that the disposition of its property shall at all times be within its control.
(b) The Buyer understands that the Securities are not registered under the 1933 Act, on the basis that the sale provided for in this Agreement and the issuance of securities hereunder is exempt from registration under the 1933 Act pursuant to Section 4(a)(2) thereof, and that the Company’s reliance on such exemption is predicated on the Buyer’s representations set forth herein. The Buyer realizes that the basis for the exemption may not be present if, notwithstanding such representations, the Buyer has in mind merely acquiring shares of the Securities for a fixed or determinable period in the future, or for a market rise, or for sale if the market does not rise. The Buyer does not have any such intention.
(c) The Buyer understands that the Securities may not be sold, transferred, or otherwise disposed of without registration under the 1933 Act or an exemption therefrom, and that in the absence of an effective registration statement covering the Securities or an available exemption from registration under the 1933 Act, the Stock must be held indefinitely. In particular, the Buyer is aware that the Securities may not be sold pursuant to Rule 144 or Rule 701 promulgated under the 1933 Act unless all of the conditions of the applicable Rules are met. Among the conditions for use of Rule 144 is the availability of current information to the public about the Company. Such information is not now available, and the Company has no present plans to make such information available. The Buyer represents that, in the absence of an effective registration statement covering the Securities, it will sell, transfer, or otherwise dispose of the Securities only in a manner consistent with its representations set forth herein and then only in accordance with the provisions of Section 5(d) hereof.
(d) The Buyer agrees that in no event will it make a transfer or disposition of any of the Securities (other than pursuant to an effective registration statement under the 1933 Act), unless and until (i) the Buyer shall have notified the Company of the proposed disposition and shall have furnished the Company with a statement of the circumstances surrounding the disposition, and (ii) if requested by the Company, at the expense of the Buyer or transferee, the Buyer shall have furnished to the Company either (A) an opinion of counsel, reasonably satisfactory to the Company, to the effect that such transfer may be made without registration under the 1933 Act or (B) a “no action” letter from the Securities and Exchange Commission to the effect that the transfer of such securities without registration will not result in a recommendation by the staff of the Securities and Exchange Commission that action be taken with respect thereto. The Company will not require such a legal opinion or “no action” letter in any transaction in compliance with Rule 144.
(e) The Buyer represents and warrants to the Company that it is an “accredited investor” within the meaning of Securities and Exchange Commission Rule 501 of Regulation D, as presently in effect and, for the purpose of Section 25102(f) of the California Corporations Code, he or she is excluded from the count of “purchasers” pursuant to Rule 260.102.13 thereunder.
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2.2 Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Nevada without regard to principles of conflicts of laws. Any action brought by either party against the other concerning the transactions contemplated by this Agreement shall be brought only in the state courts of New York or in the federal courts located in New York, New York. The parties to this Agreement hereby irrevocably waive any objection to jurisdiction and venue of any action instituted hereunder and shall not assert any defense based on lack of jurisdiction or venue or based upon forum non conveniens. In the event that any provision of this Agreement or any other agreement delivered in connection herewith is invalid or unenforceable under any applicable statute or rule of law, then such provision shall be deemed inoperative to the extent that it may conflict therewith and shall be deemed modified to conform with such statute or rule of law. Any such provision which may prove invalid or unenforceable under any law shall not affect the validity or enforceability of any other provision of any agreement. Each party hereby irrevocably waives personal service of process and consents to process being served in any suit, action or proceeding in connection with this Agreement or any other Transaction Document by mailing a copy thereof via registered or certified mail or overnight delivery (with evidence of delivery) to such party at the address in effect for notices to it under this Agreement and agrees that such service shall constitute good and sufficient service of process and notice thereof. Nothing contained herein shall be deemed to limit in any way any right to serve process in any other manner permitted by law. THE COMPANY HEREBY IRREVOCABLY WAIVES ANY RIGHT IT MAY HAVE TO, AND AGREES NOT TO REQUEST, A JURY TRIAL FOR THE ADJUDICATION OF ANY DISPUTE HEREUNDER OR IN CONNECTION WITH OR ARISING OUT OF THIS AGREEMENT OR ANY TRANSACTION CONTEMPLATED HEREBY.
2.3 Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original but all of which shall constitute one and the same agreement and shall become effective when counterparts have been signed by each party and delivered to the other party.
2.4 Headings. The headings of this Agreement are for convenience of reference only and shall not form part of, or affect the interpretation of, this Agreement.
2.5 Severability. In the event that any provision of this Agreement is invalid or unenforceable under any applicable statute or rule of law, then such provision shall be deemed inoperative to the extent that it may conflict therewith and shall be deemed modified to conform with such statute or rule of law. Any provision hereof which may prove invalid or unenforceable under any law shall not affect the validity or enforceability of any other provision hereof.
2.6 Entire Agreement; Amendments. This Agreement and the instruments referenced herein contain the entire understanding of the parties with respect to the matters covered herein and therein and, except as specifically set forth herein or therein, neither the Company nor the Buyer makes any representation, warranty, covenant or undertaking with respect to such matters. No provision of this Agreement may be waived or amended other than by an instrument in writing signed by the Buyer.
2.7 Notices. Any notice required or permitted hereunder shall be given in writing (unless otherwise specified herein) and shall be deemed effectively given on the earliest of:
2.7.1 the date delivered, if delivered by personal delivery as against written receipt therefor or by e-mail to an executive officer, or by confirmed facsimile,
2.7.2 the fifth Trading Day after deposit, postage prepaid, in the United States Postal Service by registered or certified mail, or
2.7.3 the third Trading Day after mailing by domestic or international express courier, with delivery costs and fees prepaid, in each case, addressed to each of the other parties thereunto entitled at the following addresses (or at such other addresses as such party may designate by ten (10) calendar days’ advance written notice similarly given to each of the other parties hereto):
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If to the Company, to:
Arkados Group, Inc. | |
Terrence DeFranco | |
211 Warren Street, Suite 320 | |
Newark, NJ 07103 |
If to the Buyer:
Lucas Hoppel
Phone: 619-436-4924
Email: Luke@LukeHoppel.com
2.8 Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the parties and their successors and assigns. Notwithstanding anything to the contrary herein, the rights, interests or obligations of the Company hereunder may not be assigned, by operation of law or otherwise, in whole or in part, by the Company without the prior written consent of the Buyer, which consent may be withheld at the sole discretion of the Buyer; provided, however, that in the case of a merger, sale of substantially all of the Company’s assets or other corporate reorganization, the Buyer shall not unreasonably withhold, condition or delay such consent. This Agreement or any of the severable rights and obligations inuring to the benefit of or to be performed by Buyer hereunder may be assigned by Buyer to a third party, including its financing sources, in whole or in part, without the need to obtain the
Company’s consent thereto.
2.9 Third Party Beneficiaries. This Agreement is intended for the benefit of the parties hereto and their respective permitted successors and assigns, and is not for the benefit of, nor may any provision hereof be enforced by, any other person.
2.10 Survival. The representations and warranties of the Company and the agreements and covenants set forth in this Agreement shall survive the Closing hereunder notwithstanding any due diligence investigation conducted by or on behalf of the Buyer. The Company agrees to indemnify and hold harmless the Buyer and all its officers, directors, employees, attorneys, and agents for loss or damage arising as a result of or related to any breach or alleged breach by the Company of any of its representations, warranties and covenants set forth in this Agreement or any of its covenants and obligations under this Agreement, including advancement of expenses as they are incurred.
2.11 No Strict Construction. The language used in this Agreement will be deemed to be the language chosen by the parties to express their mutual intent, and no rules of strict construction will be applied against any party.
2.12 Remedies. The Company acknowledges that a breach by it of its obligations hereunder will cause irreparable harm to the Buyer by vitiating the intent and purpose of the transaction contemplated hereby. Accordingly, the Company acknowledges that the remedy at law for a breach of its obligations under this Agreement will be inadequate and agrees, in the event of a breach or threatened breach by the Company of the provisions of this Agreement, that the Buyer shall be entitled, in addition to all other available remedies at law or in equity, and in addition to the penalties assessable herein, to an injunction or injunctions restraining, preventing or curing any breach of this Agreement and to enforce specifically the terms and provisions hereof, without the necessity of showing economic loss and without any bond or other security being required.
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2.13 Buyer’s Rights and Remedies Cumulative. All rights, remedies, and powers conferred in this Agreement and the Transaction Documents on the Buyer are cumulative and not exclusive of any other rights or remedies, and shall be in addition to every other right, power, and remedy that the Buyer may have, whether specifically granted in this Agreement or any other Transaction Document, or existing at law, in equity, or by statute; and any and all such rights and remedies may be exercised from time to time and as often and in such order as the Buyer may deem expedient.
2.14 Ownership Limitation. If at any time after the Closing, the Buyer shall or would receive shares of Common Stock in payment of interest or principal under Note, upon exercise of the Warrant, so that the Buyer would, together with other shares of Common Stock held by it or its Affiliates, own or beneficially own by virtue of such action or receipt of additional shares of Common Stock a number of shares exceeding 9.99% of the number of shares of Common Stock outstanding on such date (the “Maximum Percentage”), the Company shall not be obligated and shall not issue to the Buyer shares of Common Stock which would exceed the Maximum Percentage, but only until such time as the Maximum Percentage would no longer be exceeded by any such receipt of shares of Common Stock by the Buyer. The foregoing limitations are enforceable, unconditional and non-waivable and shall apply to all Affiliates and assigns of the Buyer.
Attorneys’ Fees and Cost of Collection. In the event of any action at law or in equity to enforce or interpret the terms of this Agreement or any of the other Transaction Documents, the parties agree that the party who is awarded the most money shall be deemed the prevailing party for all purposes and shall therefore be entitled to an additional award of the full amount of the attorneys’ fees and expenses paid by such prevailing party in connection with the litigation and/or dispute without reduction or apportionment based upon the individual claims or defenses giving rise to the fees and expenses. Nothing herein shall restrict or impair a court’s power to award fees and expenses for frivolous or bad faith pleading.
[Remainder of page intentionally left blank; signature page to follow]
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SUBSCRIPTION AMOUNT:
Original Principal Amount of Note: | $ | 38,500.00 | ||
Purchase Price: | $ | 35,000.00 |
IN WITNESS WHEREOF, the undersigned Buyer and the Company have caused this Agreement to be duly executed as of the date first above written.
THE COMPANY:
Arkados Group, Inc.
By: | /s/ Mr. Terrence DeFranco | |
Mr. Terrence DeFranco | ||
Chief Executive Officer |
THE BUYER:
Lucas Hoppel
By: | /s/ Lucas Hoppel |
EXHIBIT A
NOTE
EXHIBIT B
WARRANT
Exhibit 10.2
SECURITIES PURCHASE AGREEMENT
THIS SECURITIES PURCHASE AGREEMENT (the “Agreement”), dated as of November 8, 2016, is entered into by and between ARKADOS GROUP, INC., a Delaware corporation, (the “Company”) and Peak One Opportunity Fund, L.P., a Delaware limited partnership (the “Buyer”).
WITNESSETH:
WHEREAS, the Company and the Buyer are executing and delivering this Agreement in accordance with and in reliance upon the exemption from securities registration afforded, inter alia, by Rule 506 under Regulation D (“Regulation D”) as promulgated by the United States Securities and Exchange Commission (the “SEC”) under the Securities Act of 1933, as amended (the “1933 Act”), and/or Section 4(2) of the 1933 Act; and
WHEREAS, the Buyer wishes to purchase from the Company, and the Company wishes to sell the Buyer, upon the terms and subject to the conditions of this Agreement, securities consisting of the Company’s Convertible Debentures due three years from the respective dates of issuance (the “Debentures”), each of which are in the form of Exhibit A hereto, which will be convertible into shares of the Company’s common stock, par value $0.0001 per share (the “Common Stock”), in the aggregate principal amount of up to Five Hundred Thousand and 00/100 Dollars ($500,000.00), for an aggregate Purchase Price of up to Four Hundred Fifty Thousand and 00/100 Dollars ($450,000.00), all upon the terms and subject to the conditions of this Agreement, the Debentures, and other related documents;
NOW THEREFORE, in consideration of the premises and the mutual covenants contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows:
1. DEFINITIONS; AGREEMENT TO PURCHASE.
a. Certain Definitions. As used herein, each of the following terms has the meaning set forth below, unless the context otherwise requires:
(i) “Affiliate” means, with respect to a specific Person referred to in the relevant provision, another Person who or which controls or is controlled by or is under common control with such specified Person.
(ii) “Certificates” means certificates representing the Conversion Shares issuable hereunder, each duly executed on behalf of the Company and issued hereunder.
(iii) “Closing Date” means the date on which one of the three (3) Closings are held, which are the Signing Closing Date, the Second Closing Date and the Third Closing Date.
(iv) [Reserved]
(v) “Commitment Fee” shall have the meaning ascribed to such term in Section 12(a).
(vi) “Common Stock” shall have the meaning ascribed to such term in the Recitals.
(vii) “Conversion Amount” shall mean the Conversion Amount as defined in the Debentures, provided, however that for purposes of the foregoing calculation, the full indebtedness under the Debentures shall be deemed immediately convertible, notwithstanding the 4.99% limitation on ownership set forth in the Debentures.
(viii) “Conversion Price” means the Conversion Price as defined in the Debentures.
(ix) “Conversion Shares” means the shares of Common Stock issuable upon conversion of the Debentures.
(x) “DWAC Operational” means that the Common Stock is eligible for clearing through the Depository Trust Company (“DTC”) via the DTC’s Deposit Withdrawal Agent Commission or “DWAC” system and active and in good standing for DWAC issuance by the Transfer Agent (as defined herein).
(xi) “Dollars” or “$” means United States Dollars.
(xii) “Exchange Act” means the Securities Exchange Act of 1934, as amended.
(xiii) “Investments” means Peak One Investments, LLC, the general partner of the Buyer.
(xiv) “Irrevocable Resolutions” has the meaning set forth in Section 8(i).
(xv) “Market Price of the Common Stock” means (x) the closing bid price of the Common Stock for the period indicated in the relevant provision hereof (unless a different relevant period is specified in the relevant provision), as reported by Bloomberg, LP or, if not so reported, as reported on the OTCQB, OTCQX or OTC Pink or (y) if the Common Stock is listed on a stock exchange, the closing price on such exchange, as reported by Bloomberg LP.
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(xvi) “Material Adverse Effect” means a material adverse effect on the business, operations or condition (financial or otherwise) or results of operation of the Company and its Subsidiaries taken as a whole, in the reasonable commercial discretion of the Buyer, irrespective of any finding of fault, magnitude of liability (or lack of financial liability). Without limiting the generality of the foregoing, the occurrence of any of the following, in the reasonable commercial discretion of the Buyer, shall be considered a Material Adverse Effect: (i) any final money, judgment, writ or warrant of attachment, or similar process (including an arbitral determination) in excess of Fifty Thousand Dollars ($50,000) shall be entered or filed against the Company or any of its Subsidiaries (including, in any event, products liability claims against the Company or its Subsidiaries), (ii) the suspension or withdrawal of any governmental authority or permit pertaining to a material amount of the Company’s or any Subsidiary’s products or services, (iii) the loss of any material insurance coverage (including, in any case, comprehensive general liability coverage, products liability coverage or directors and officers coverage, in each case in effect at the time of execution and delivery of this Agreement), (iv) an action by a regulatory agency or governmental body affecting the Common Stock (including, without limitation, (1) the commencement of any regulatory investigation of which the Company is aware, the suspension of trading of the Common Stock by the Financial Industry Regulation Authority (“FINRA”), the SEC, the OTC Bulletin Board (“OTCBB”) or the OTC Markets Group, Inc., the failure of the Common Stock to be DTC eligible or the placing of the Common Stock on the DTC “chill list” or (2) the engaging in any market manipulation or other unlawful or improper trading or other activity by any Affiliate), (v) the Company’s independent registered accountants shall resign under circumstances where a disagreement exists between the Company and its independent registered accountants, (vi) the Company shall fail to timely file any disclosure document as required by applicable federal or state securities laws and regulations or by the rules and regulations of any exchange, trading market or quotation system to which the Company or the Common Stock is subject, or (vii) the Chief Executive Officer of the Company or any other key full-time officer or director of the Company, shall, for any reason (including, without limitation, termination, resignation, retirement, death or disability) cease to act on behalf of the Company in the same role and to the same extent as his or her involvement as of the date of execution and delivery of this Agreement.
(xvii) “Person” means any living person or any entity, such as, but not necessarily limited to, a corporation, partnership or trust.
(xviii) “Purchase Price” means the price that the Buyer pays for the Debentures at each respective Closing, which are the Signing Purchase Price, the Second Purchase Price and the Third Closing Price, as the case may be.
(xix) “Registrable Securities” shall mean the Conversion Shares, the Restricted Stock issued to Investments pursuant to Section 12(a) and, to the extent applicable, and any other shares of capital stock or other securities of the Company or any successor to the Company that are issued upon exchange of Conversion Shares and/or such Restricted Stock.
(xx) “Registration Statement” shall mean a registration statement on Form S-1 (or any successor thereto) filed or contemplated to be filed by the Company with the SEC under the Securities Act.
(xxi) “Restricted Stock” shall mean shares of Common Stock which are not freely trading shares when issued.
(xxii) “Securities” means the Debentures and the Shares.
(xxiii) “Shares” means the Conversion Shares.
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(xxiv) “Second Closing Date” shall have the meaning ascribed to such term in Section 6(b).
(xxv) “Second Debenture” means the second of the three (3) Debentures, in the principal amount of One Hundred Seventy Five Thousand and 00/100 Dollars ($175,000.00), which is issued by the Company to the Buyer on the Second Closing Date.
(xxvi) “Second Purchase Price” shall be One Hundred Fifty Seven Thousand Five Hundred and 00/100 Dollars ($157,500.00)
(xxvii) “Signing Closing Date” shall have the meaning ascribed to such term in Section 6(a).
(xxviii) “Signing Debenture” means the first of the three (3) Debentures, in the principal amount of One Hundred Fifty Thousand and 00/100 Dollars ($150,000.00), to be issued by the Company to the Buyer on the Signing Closing Date.
(xxix) “Signing Purchase Price” shall be One Hundred Thirty Five Thousand and 00/100 Dollars ($135,000.00).
(xxx) “Subsidiary” shall have the meaning ascribed to such term in Section 3(b).
(xxxi) “Third Closing Date” shall have the meaning ascribed to such term in Section 6(c).
(xxxii) “Third Debenture” means the third of the three (3) Debentures, in the principal amount of One Hundred Seventy Five Thousand and 00/100 Dollars ($175,000.00), which is issued by the Company to the Buyer on the Third Closing Date.
(xxxiii) “Third Purchase Price” shall be One Hundred Fifty Seven Thousand Five Hundred and 00/100 Dollars ($157,500.00).
(xxxiv) “Transaction Documents” means, collectively, this Agreement, the Debentures, the Transfer Agent Instruction Letter, the Irrevocable Resolutions and the other agreements, documents and instruments contemplated hereby or thereby.
(xxxv) “Transfer Agent” shall have the meaning ascribed to such term in Section 4(a).
(xxxvi) “Transfer Agent Instruction Letter” shall have the meaning ascribed to such term in Section 5(a).
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b. Purchase and Sale of Debentures.
(i) The Buyer agrees to purchase from the Company, and the Company agrees to sell to the Buyer, the Debentures on the terms and conditions set forth below in this Agreement and the other Transaction Documents.
(ii) Subject to the terms and conditions of this Agreement and the other Transaction Documents, the Buyer will purchase the Debentures at certain closings (each, a “Closing”) to be held on certain respective Closing Dates.
c. [Reserved]
(i) [Reserved]
(ii) [Reserved]
2. BUYER’S REPRESENTATIONS, WARRANTIES, ETC.
The Buyer represents and warrants to, and covenants and agrees with, the Company as follows:
a. Investment Purpose. Without limiting the Buyer’s right to sell the Shares pursuant to a Registration Statement, Buyer is purchasing the Debentures, and will be acquiring the Conversion Shares, for its own account for investment only and not with a view towards the public sale or distribution thereof and not with a view to or for sale in connection with any distribution thereof.
b. Accredited Investor Status. Buyer is (i) an “accredited investor” as that term is defined in Rule 501 of the General Rules and Regulations under the 1933 Act by reason of Rule 501(a)(3), (ii) experienced in making investments of the kind described in this Agreement and the related documents, (iii) able, by reason of the business and financial experience of its officers (if an entity) and professional advisors (who are not affiliated with or compensated in any way by the Company or any of its affiliates or selling agents), to protect its own interests in connection with the transactions described in this Agreement, and the related documents, and (iv) able to afford the entire loss of its investment in the Securities.
c. Subsequent Offers and Sales. All subsequent offers and sales of the Securities by the Buyer shall be made pursuant to registration of the Shares under the 1933 Act or pursuant to an exemption from registration and compliance with applicable states’ securities laws.
d. Reliance on Exemptions. Buyer understands that the Securities are being offered and sold to it in reliance on specific exemptions from the registration requirements of United States federal and state securities laws and that the Company is relying upon the truth and accuracy of, and the Buyer’s compliance with, the representations, warranties, agreements, acknowledgments and understandings of the Buyer set forth herein in order to determine the availability of such exemptions and the eligibility of the Buyer to acquire the Securities.
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e. Information. Buyer and its advisors have been furnished with all materials relating to the business, finances and operations of the Company and materials relating to the offer and sale of the Securities which have been requested by the Buyer. Buyer and its advisors have been afforded the opportunity to ask questions of the Company and have received complete and satisfactory answers to any such inquiries. Without limiting the generality of the foregoing, Buyer has also had the opportunity to obtain and to review the Company’s Annual Report on Form 10-K for the fiscal year ended May 31, 2016, and Quarterly Report on Form 10-Q for the fiscal quarter ended August 31, 2016 (collectively, the “SEC Documents”).
f. Investment Risk. Buyer understands that its investment in the securities constitutes high risk investment, its investment in the Securities involves a high degree of risk, including the risk of loss of the Buyer’s entire investment.
g. Governmental Review. Buyer understands that no United States federal or state agency or any other government or governmental agency has passed on or made any recommendation or endorsement of the Securities.
h. Organization; Authorization. Buyer is duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization. This Agreement and the other Transaction Documents have been duly and validly authorized, executed and delivered on behalf of the Buyer and create a valid and binding agreement of the Buyer enforceable in accordance with its terms, subject as to enforceability to general principles of equity and to bankruptcy, insolvency, moratorium and other similar laws affecting the enforcement of creditors’ rights generally.
i. Residency. The state in which any offer to sell Securities hereunder was made to or accepted by the Buyer is the state shown as the Buyer’s address contained herein, and Buyer is a resident of such state only.
3. COMPANY REPRESENTATIONS AND WARRANTIES, ETC.
The Company represents and warrants to the Buyer that:
a. Concerning the Debentures and the Shares. There are no preemptive rights of any stockholder of the Company to acquire the Debentures or the Shares.
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b. Organization; Subsidiaries; Reporting Company Status. Attached hereto as Schedule 3(b) is an organizational chart describing all of the Company’s wholly-owned and majority-owned subsidiaries (the “Subsidiaries”) and other Affiliates, including the relationships among the Company and such Subsidiaries, including as to each Subsidiary its jurisdiction of organization and the percentage of ownership held by the Company, and the parent company of the Subsidiary, including the percentage of ownership of the Company held by it. The Company and each Subsidiary is a corporation or other form of businesses entity duly organized, validly existing and in good standing under the laws its respective jurisdiction of organization, and each of them has the requisite corporate or other power to own its properties and to carry on its business as now being conducted. The Company and each Subsidiary is duly qualified as a foreign corporation or other entity to do business and is in good standing in each jurisdiction where the nature of the business conducted or property owned by it makes such qualification necessary, other than those jurisdictions in which the failure to so qualify would not have a Material Adverse Effect. The Common Stock is listed and traded on the OTC Pink Market of the OTC Markets Group, Inc. (trading symbol: AKDS). The Company has received no notice, either oral or written, from FINRA, the SEC, or any other organization, with respect to the continued eligibility of the Common Stock for such listing, and the Company has maintained all requirements for the continuation of such listing. The Company is an operating company in that, among other things (A) it primarily engages, wholly or substantially, directly or indirectly through a majority owned Subsidiary or Subsidiaries, in the production or sale, or the research or development, of a product or service other than the investment of capital, (B) it is not an individual or sole proprietorship, (C) it is not an entity with no specific business plan or purpose and its business plan is not to engage in a merger or acquisition with an unidentified company or companies or other entity or person, and (D) it intends to use the proceeds from the sale of the Debentures solely for the operation of the Company’s business and uses other than personal, family, or household purposes.
c. Authorized Shares. Schedule 3(c) sets forth all capital stock and derivative securities of the Company that are authorized for issuance and that are issued and outstanding. All issued and outstanding shares of Common Stock have been duly authorized and validly issued and are fully paid and nonassessable. The Company has sufficient authorized and unissued shares of Common Stock as may be necessary to effect the issuance of the Shares, assuming the prior issuance and exercise, exchange or conversion, as the case may be, of all derivative securities authorized, as indicated in Schedule 3(c). The Shares have been duly authorized and, when issued upon conversion of, or as interest on, the Debentures, the Shares will be duly and validly issued, fully paid and non-assessable and will not subject the holder thereof to personal liability by reason of being such holder. At all times, the Company shall keep available and reserved for issuance to the holders of the Debentures shares of Common Stock duly authorized for issuance against the Debentures.
d. Authorization. This Agreement, the issuance of the Debentures (including without limitation the incurrence of indebtedness thereunder), the issuance of the Conversion Shares under the Debentures, and the other transactions contemplated by the Transaction Documents, have been duly, validly and irrevocably authorized by the Company, and this Agreement has been duly executed and delivered by the Company. The Company’s board of directors, in the exercise of its fiduciary duties, has irrevocably approved the entry into and performance of the Transaction Documents, including, without limitation the sale of the Debentures and the issuance of Conversion Shares, based upon a reasonable inquiry concerning the Company’s financing objectives and financial situation. Each of the Transaction Documents, when executed and delivered by the Company, are and will be, valid, legal and binding agreements of the Company, enforceable in accordance with their respective terms, subject as to enforceability to general principles of equity and to bankruptcy, insolvency, moratorium, and other similar laws affecting the enforcement of creditors’ rights generally.
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e. Non-contravention. The execution and delivery of the Transaction Documents, the issuance of the Securities and the consummation by the Company of the other transactions contemplated by this Agreement and the Debentures (including without limitation the incurrence of indebtedness thereunder) do not and will not conflict with or result in a breach by the Company of any of the terms or provisions of, or constitute a default under (i) the articles of incorporation or by-laws of the Company, each as currently in effect, (ii) any indenture, mortgage, deed of trust, or other material agreement or instrument to which the Company is a party or by which it or any of its properties or assets are bound, including any listing agreement for the Common Stock, except as herein set forth or an event which results in the creation of any lien, charge or encumbrance upon any assets of the Company or the triggering of any anti-dilution rights, rights of first refusal or first offer on the part of holders of the Company’s securities, (iii) to its knowledge, any existing applicable law, rule, or regulation or any applicable decree, judgment, or order of any court, United States federal or state regulatory body, administrative agency, or other governmental body having jurisdiction over the Company or any of its properties or assets, or (iv) the Company’s listing agreement for its Common Stock (if applicable).
f. Approvals. No authorization, approval or consent of any court, governmental body, regulatory agency, self-regulatory organization, or stock exchange or market or the stockholders of the Company is required to be obtained by the Company for the entering into and performing this Agreement and the other Transaction Documents (including without limitation the issuance and sale of the Securities to the Buyer as contemplated by this Agreement) except such authorizations, approvals and consents that have been obtained, or such authorizations, approvals and consents, the failure of which to obtain would not have a Material Adverse Effect.
g. SEC Filings; Rule 144 Status. None of the SEC Documents contained, at the time they were filed, any untrue statement of a material fact or omitted to state any material fact required to be stated therein or necessary to make the statements made therein in light of the circumstances under which they were made, not misleading. The Company timely filed all requisite forms, reports and exhibits thereto with the SEC as required. The Company is not aware of any event occurring on or prior to the execution and delivery of this Agreement that would require the filing of, or with respect to which the Company intends to file, a Form 8-K after such time. The Company satisfies the requirements of Rule 144(i)(2), and the Company shall continue to satisfy all applicable requirements of Rule 144 (or any successor thereto) for so long as any Securities are outstanding and not registered pursuant to an effective registration statement filed with the SEC.
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h. Absence of Certain Changes. Since August 31, 2016, when viewed from the perspective of the Company and its Subsidiaries taken as a whole, there has been no material adverse change and no material adverse development in the business, properties, operations, condition (financial or otherwise), or results of operations of the Company and its Subsidiaries (including, without limitation, a change or development which constitutes, or with the passage of time is reasonably likely to become, a Material Adverse Effect), except as disclosed in the SEC Documents. Since August 31, 2016, except as provided in the SEC Documents, the Company has not (i) incurred or become subject to any material liabilities (absolute or contingent) except liabilities incurred in the ordinary course of business consistent with past practices; (ii) discharged or satisfied any material lien or encumbrance or paid any material obligation or liability (absolute or contingent), other than current liabilities paid in the ordinary course of business consistent with past practices; (iii) declared or made any payment or distribution of cash or other property to stockholders with respect to its capital stock, or purchased or redeemed, or made any agreements to purchase or redeem, any shares of its capital stock; (iv) sold, assigned or transferred any other tangible assets, or canceled any debts or claims, except in the ordinary course of business consistent with past practices; (v) suffered any substantial losses or waived any rights of material value, whether or not in the ordinary course of business, or suffered the loss of any material amount of existing business; (vi) made any changes in employee compensation, except in the ordinary course of business consistent with past practices; or (vii) experienced any material problems with labor or management in connection with the terms and conditions of their employment.
i. Full Disclosure. There is no fact known to the Company (other than general economic conditions known to the public generally or as disclosed in the SEC Documents) that has not been disclosed in writing to the Buyer that (i) would reasonably be expected to have a Material Adverse Effect, (ii) would reasonably be expected to materially and adversely affect the ability of the Company to perform its obligations pursuant to the Transaction Documents, or (iii) would reasonably be expected to materially and adversely affect the value of the rights granted to the Buyer in the Transaction Documents.
j. Absence of Litigation. Except as described in the SEC Documents, there is no action, suit, proceeding, inquiry or investigation before or by any court, public board or body pending or, to the knowledge of the Company, threatened against or affecting the Company, wherein an unfavorable decision, ruling or finding would have a Material Adverse Effect or which would adversely affect the validity or enforceability of, or the authority or ability of the Company to perform its obligations under, any of the Transaction Documents. The Company is not a party to or subject to the provisions of, any order, writ, injunction, judgment or decree of any court or government agency or instrumentality which could reasonably be expected to have a Material Adverse Effect.
k. Absence of Liens. The Company’s assets are not encumbered by any liens or mortgages except as described in the SEC Documents.
l. Absence of Events of Default. No event of default (or its equivalent term), as defined in the respective agreement, indenture, mortgage, deed of trust or other instrument, to which the Company is a party, and no event which, with the giving of notice or the passage of time or both, would become an event of default (or its equivalent term) (as so defined in such document), has occurred and is continuing, which would have a Material Adverse Effect.
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m. No Undisclosed Liabilities or Events. The Company has no liabilities or obligations other than those disclosed in the SEC Documents or those incurred in the ordinary course of the Company’s business since August 31, 2016, and which individually or in the aggregate, do not or would not have a Material Adverse Effect. No event or circumstances has occurred or exists with respect to the Company or its properties, business, condition (financial or otherwise), or results of operations, which, under applicable law, rule or regulation, requires public disclosure or announcement prior to the date hereof by the Company but which has not been so publicly announced or disclosed. There are no proposals currently under consideration or currently anticipated to be under consideration by the Board of Directors or the executive officers of the Company which proposal would (x) change the articles of incorporation, by-laws or any other charter document of the Company, each as currently in effect, with or without shareholder approval, which change would reduce or otherwise adversely affect the rights and powers of the shareholders of the Common Stock or (y) materially or substantially change the business, assets or capital of the Company.
n. No Integrated Offering. Neither the Company nor any of its affiliates nor any Person acting on its or their behalf has, directly or indirectly, at any time during the six month period immediately prior to the date of this Agreement made any offer or sales of any security or solicited any offers to buy any security under circumstances that would eliminate the availability of the exemption from registration under Rule 506 of Regulation D in connection with the offer and sale of the Securities as contemplated hereby.
o. Dilution. The number of Shares issuable upon conversion of the Debentures may increase substantially in certain circumstances, including, but not necessarily limited to, the circumstance wherein the Market Price of the Common Stock declines prior to the conversion of the Debentures. The Company’s executive officers and directors have studied and fully understand the nature of the securities being sold hereby and recognize that they have a potential dilutive effect and further that the conversion of the Debentures and/or sale of the Conversion Shares may have an adverse effect on the Market Price of the Common Stock. The Board of Directors of the Company has concluded, in its good faith business judgment that such issuance is in the best interests of the Company. The Company specifically acknowledges that its obligation to issue the Conversion Shares upon conversion of the Debentures is binding upon the Company and enforceable regardless of the dilution such issuance may have on the ownership %s of other shareholders of the Company.
p. Regulatory Permits. The Company has all such permits, easements, consents, licenses, franchises and other governmental and regulatory authorizations from all appropriate federal, state, local or other public authorities (“Permits”) as are necessary to own and lease its properties and conduct its businesses in all material respects in the manner described in the SEC Documents and as currently being conducted. All such Permits are in full force and effect and the Company has fulfilled and performed all of its material obligations with respect to such Permits, and no event has occurred that allows, or after notice or lapse of time would allow, revocation or termination thereof or will result in any other material impairment of the rights of the holder of any such Permit, subject in each case to such qualification as may be disclosed in the SEC Documents. Such Permits contain no restrictions that would materially impair the ability of the Company to conduct businesses in the manner consistent with its past practices. The Company has not received notice or otherwise has knowledge of any proceeding or action relating to the revocation or modification of any such Permit.
q. Residency. The state in which any offer to sell Securities hereunder was made or accepted by the Seller is the state shown as the Seller’s address contained herein, and Seller is a resident of such state only.
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r. Hazardous Materials. The Company is in compliance with all applicable Environmental Laws in all respects except where the failure to comply does not have and could not reasonably be expected to have a Material Adverse Effect. For purposes of the foregoing:
“Environmental Laws” means, collectively, the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, the Superfund Amendments and Reauthorization Act of 1986, the Resource Conservation and Recovery Act, the Toxic Substances Control Act, as amended, the Clean Air Act, as amended, the Clean Water Act, as amended, any other “Superfund” or “Superlien” law or any other applicable federal, state or local statute, law, ordinance, code, rule, regulation, order or decree regulating, relating to, or imposing liability or standards of conduct concerning, the environment or any Hazardous Material.
“Hazardous Material” means and includes any hazardous, toxic or dangerous waste, substance or material, the generation, handling, storage, disposal, treatment or emission of which is subject to any Environmental Law.
s. Independent Public Accountants. The Company’s auditor, BDO USA, LLP, is an independent registered public accounting firm with respect to the Company, as required by the 1933 Act, the Exchange Act and the rules and regulations promulgated thereunder.
t. Internal Accounting Controls. The Company maintains a system of internal accounting controls sufficient to provide reasonable assurances that (1) transactions are executed in accordance with management’s general or specific authorization; (2) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain accountability for assets; (3) access to assets is permitted only in accordance with management’s general or specific authorization; and (4) the recorded accountability for assets is compared with existing assets at reasonable intervals and appropriate action is taken with respect to any differences.
u. Brokers. No Person (other than the Buyer and its principals, employees and agents) is entitled to receive any consideration from the Company or the Buyer arising from any finder’s agreement, brokerage agreement or other agreement to which the Company is a party.
v. DWAC Operational; DRS. The Company shall, within ten (10) business days from the date of this Agreement, apply through its Transfer Agent to become DWAC Operational and eligible for DRS
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4. CERTAIN COVENANTS AND ACKNOWLEDGMENTS.
a. Transfer Restrictions. The parties acknowledge and agree that (1) the Debentures have not been registered under the provisions of the 1933 Act and the Shares have not been registered under the 1933 Act, and may not be transferred unless (A) subsequently registered thereunder or (B) the Securities to be sold or transferred may be sold or transferred pursuant to an exemption from such registration; (2) any sale of the Securities made in reliance on Rule 144 promulgated under the 1933 Act (“Rule 144”) may be made only in accordance with the terms of Rule 144 and further, if Rule 144 is not applicable, any resale of such Securities under circumstances in which the seller, or the Person through whom the sale is made, may be deemed to be an underwriter, as that term is used in the 1933 Act, may require compliance with some other exemption under the 1933 Act or the rules and regulations of the SEC thereunder, (3) at the request of the Buyer, the Company shall, from time to time, within two (2) business days of such request, at the sole cost and expense of the Company, either (i) deliver to its transfer agent and registrar for the Common Stock (the “Transfer Agent”) a written letter instructing and authorizing the Transfer Agent to process transfers of the Shares at such time as the Buyer has held the Securities for the minimum holding period permitted under Rule 144, subject to the Buyer’s providing to the Transfer Agent certain customary representations contemporaneously with any requested transfer, or (ii) at the Buyer’s option or if the Transfer Agent requires further confirmation of the availability of an exemption from registration, furnish to the Buyer an opinion of the Company’s counsel in favor of the Buyer (and, at the request of the Buyer, any agent of the Buyer, including but not limited to the Buyer’s broker or clearing firm) and the Transfer Agent, reasonably satisfactory in form, scope and substance to the Buyer and the Transfer Agent, to the effect that a contemporaneously requested transfer of shares does not require registration under the 1933 Act, pursuant to the 1933 Act, Rule 144 or other regulations promulgated under the 1933 Act and (4) neither the Company nor any other Person is under any obligation to register the Securities (other than pursuant to this Agreement) under the 1933 Act or to comply with the terms and conditions of any exemption thereunder.
b. Restrictive Legend. The Buyer acknowledges and agrees that the Debentures, and, until such time as the Shares have been registered under the 1933 Act as contemplated hereby and sold in accordance with an effective Registration Statement, certificates and other instruments representing any of the Securities shall bear a restrictive legend in substantially the following form (and a stop-transfer order may be placed against transfer of any such Securities):
THIS SECURITY HAS NOT BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS AS EVIDENCED BY A LEGAL OPINION OF COUNSEL TO THE TRANSFEROR TO SUCH EFFECT, THE SUBSTANCE OF WHICH SHALL BE REASONABLY ACCEPTABLE TO THE COMPANY.
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c. Piggy-Back Registration Rights. From and after the Signing Closing Date and until eighteen (18) months after the Signing Closing Date, if the Company contemplates making an offering of Common Stock (or other equity securities convertible into or exchangeable for Common Stock) registered for sale under the Securities Act or proposes to file a Registration Statement covering any of its securities, the Company shall at each such time give prompt written notice to Investments and Buyer of its intention to do so and of the registration rights granted under this Agreement. Upon the written request of Investments and/or Buyer made within thirty (30) days after the receipt of any such notice (which request shall specify the Registrable Securities intended to be disposed of by Investments and/or Buyer and the intended method of disposition thereof), the Company shall, at its sole cost and expense, use its best efforts to effect the registration of all Registrable Securities which the Company has been so requested to register by Investments and/or Buyer, to the extent requisite to permit the disposition (in accordance with the intended methods of disposition) of the Registrable Securities by Investments and/or Buyer, by inclusion of such Registrable Securities in the Registration Statement which covers the securities which the Company proposes to register; provided, that if the Company is unable to register the full amount of Registrable Securities in an “at the market offering” under SEC rules and regulations due to the high percentage of the Company’s Common Stock the Registrable Securities represents (giving effect to all other securities being registered in the Registration Statement), then the Company may reduce, on a pro rata basis, the amount of Registrable Securities subject to the Registration Statement to a lesser amount which equals the maximum number of Registrable Securities that the Company is permitted to register in an “at the market offering”; and provided, further, that if, at any time after giving written notice of its intention to register any Registrable Securities and prior to the effective date of the Registration Statement filed in connection with such registration, the Company shall determine for any reason either not to register or to delay registration of such Registrable Securities, the Company may, at its election, give written notice of such determination to Investments and/or the Buyer and, thereupon, (i) in the case of a determination not to register, the Company shall be relieved of its obligation to register any Registrable Securities in connection with such registration (but not from its obligation to pay the expenses of registration in connection therewith), and (ii) in the case of a determination to delay registering such Registrable Securities, shall be permitted to delay registering any Registrable Securities, for the same period as the delay in registering such other securities. If Buyer shall have transferred all or part of its Registrable Securities, then for purposes of this Section, the term “Buyer” shall reference Buyer and/or such transferee(s).
d. Securities Filings. The Company undertakes and agrees to make all necessary filings (including, without limitation, a Form D) in connection with the sale of the Securities to the Buyer required under any United States laws and regulations applicable to the Company (including without limitation state “blue sky” laws), or by any domestic securities exchange or trading market, and to provide a copy thereof to the Buyer promptly after such filing.
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e. Reporting Status; Public Trading Market; DTC Eligibility. So long as the Buyer and/or Investments beneficially own any Securities, (i) the Company shall timely file, prior to or on the date when due, all reports that would be required to be filed with the SEC pursuant to Section 13 or 15(d) of the Exchange Act if the Company had securities registered under Section 12(b) or 12(g) of the Exchange Act; (ii) the Company shall not be operated as, or report, to the SEC or any other Person, that the Company is a “shell company” or indicate to the contrary to the SEC or any other Person; (iii) the Company shall take all other action under its control necessary to ensure the availability of Rule 144 under the 1933 Act for the sale of Shares by the Buyer at the earliest possible date; and (iv) the Company shall at all times while any Securities are outstanding maintain its engagement of an independent registered public accounting firm. Except as otherwise set forth in Transaction Documents, the Company shall take all action under its control necessary to obtain and to continue the listing and trading of its Common Stock (including, without limitation, all Registrable Securities) on the OTC Markets, Inc. (“OTCM”) on the OTC Pink (“OTCP”), OTCQB (“OTCQB”), or OTCQX (“OTCQX”), and will comply in all material respects with the Company’s reporting, filing and other obligations under the by-laws or rules of the Financial Industry Regulatory Authority (“FINRA”). If, so long as the Buyer and/or Investments beneficially own any of the Securities, the Company receives any written notice from the OTCM, FINRA, or the SEC with respect to either any alleged deficiency in the Company’s compliance with applicable rules and regulations (including without limitation any comments from the SEC on any of the Company’s documents filed (or the failure to have made any such filing) under the 1933 Act or the Exchange Act) (each, a “Regulatory Notice”), then the Company shall promptly, and in any event within two (2) business days, provide copies of the Regulatory Notice to the Buyer, and shall promptly, and in any event within five (5) business days of receipt of the Regulatory Notice (a “Regulatory Response”), respond in writing to the OTCM, FIRNA and/or SEC (as the case may be), setting forth the Company’s explanation and/or response to the issues raised in the Regulatory Notice, with a view towards maintaining and/or regaining full compliance with the applicable rules and regulations of the OTCM, FIRNA and/or SEC and maintaining or regaining good standing of the Company with the OTCM, FINRA and/or SEC, as the case may be, the intent being to ensure that the Company maintain its reporting company status with the SEC and that its Common Stock be and remain available for trading on the OTCP, OTCQB, or OTCQX. Further, at all times while any Securities are outstanding, the Common Stock shall be DWAC Operational, and the Common Stock shall not be subject to any DTC “chill” designation or similar restriction on the clearing of the Common Stock through DTC.
f. Use of Proceeds. The Company shall use the proceeds from the sale of the Debentures for working capital purposes only subject to customary restrictions. Absent the prior written approval of a majority of the principal amount of the Debentures then outstanding, the Company shall not use any portion of the proceeds of the sale of the Debentures to (i) repay any indebtedness or other obligation of the Company incurred prior to the date of this Agreement outside the normal course of business, (ii) pay any dividends or redemption amount on any of the Company’s equity or equity equivalents, (iii) pay any amounts, whether on account of debt obligations of the Company or otherwise, except for compensation, to any officer, director or other related party of the Company or (iv) pay deferred compensation or any compensation to any of the directors or officers of the Company in excess of the rate or amount paid or accrued during the fiscal year ended May, 2016 (as base compensation and excluding any discretionary amounts), other than modest increases consistent with prior practice that are approved by the Company’s Board of Directors.
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g. Available Shares. Commencing on the date of execution and delivery of this Agreement, the Company shall have and maintain authorized and reserved for issuance, free from preemptive rights, that number of shares equal to Seven Hundred percent (700%) of the number of shares of Common Stock (1) issuable based upon the conversion of the then-outstanding Debentures (including accrued interest thereon) as may be required to satisfy the conversion rights of the Buyer pursuant to the terms and conditions of the Debenture Debenture (without giving effect to the 4.99% limitation on ownership as set forth in the Debentures), provided, however that for purposes of the foregoing calculation, the full indebtedness under the Debentures shall be deemed immediately convertible and (2) issuable to the Buyer on future Closing Dates, based upon the lowest closing bid price per share of the Common Stock on the date before the most recent Closing Date (as reported by Bloomberg LP). The Company shall monitor its compliance with the foregoing requirements on an ongoing basis. If at any time the Company does not have available an amount of authorized and non-issued Shares required to be reserved pursuant to this Section, then the Company shall, without notice or demand by the Buyer, call within thirty (30) days of such occurrence and hold within sixty (60) days of such occurrence a special meeting of shareholders, for the sole purpose of increasing the number of shares authorized. Management of the Company shall recommend to shareholders to vote in favor of increasing the number of Common Stock authorized at the meeting. Members of the Company’s management shall also vote all of their own shares in favor of increasing the number of Common Stock authorized at the meeting. If the increase in authorized shares is approved by the stockholders at the meeting, the Company shall implement the increase in authorized shares within one (1) business day following approval at such meeting. Alternatively, to the extent permitted by applicable law, in lieu of calling and holding a meeting as described above, the Company may, within thirty (30) days of the date when the Company does not have available an amount of authorized and non-issued Shares required to be reserved as described above, procure the written consent of stockholders to increase the number of shares authorized, and provide the stockholders with notice thereof as may be required under applicable law (including without limitation Section 14(c) of the Exchange Act and Regulation 14C thereunder). Upon obtaining stockholder approval as aforesaid, the Company shall cause the appropriate increase in its authorized shares of Common Stock within one (1) business day (or as soon thereafter as permitted by applicable law). Company’s failure to comply with these provisions will be an Event of Default (as defined in the Debentures).
h. Reimbursement. If (i) Buyer and/or Investments becomes a party defendant in any capacity in any action or proceeding brought by any stockholder of the Company, in connection with or as a result of the consummation of the transactions contemplated by the Transaction Documents, or if the Buyer and/or Investments is impleaded in any such action, proceeding or investigation by any Person, or (ii) the Buyer and/or Investments, other than by reason of its own gross negligence, willful misconduct or breach of law (as adjudicated by a court of law having proper jurisdiction and such adjudication is not subject to appeal), becomes a party defendant in any capacity in any action or proceeding brought by the SEC against or involving the Company or in connection with or as a result of the consummation of the transactions contemplated by the Transaction Documents, or if the Buyer or Investments is impleaded in any such action, proceeding or investigation by any Person, then in any such case, the Company shall promptly reimburse the Buyer and/or Investments for its or their reasonable legal and other expenses (including the cost of any investigation and preparation) incurred in connection therewith. The reimbursement obligations of the Company under this paragraph shall be in addition to any liability which the Company may otherwise have, shall extend upon the same terms and conditions to any affiliates of the Buyer and/or Investments who are actually named in such action, proceeding or investigation, and partners, directors, agents, employees and controlling Persons (if any), as the case may be, of the Buyer, Investments and any such Affiliate, and shall be binding upon and inure to the benefit of any successors, assigns, heirs and personal representatives of the Company, the Buyer, Investments and any such Affiliate and any such Person. Except as otherwise set forth in the Transaction Documents, the Company also agrees that neither any Buyer, Investments nor any such Affiliate, partners, directors, agents, employees or controlling Persons shall have any liability to the Company or any Person asserting claims on behalf of or in right of the Company in connection with or as a result of the consummation of the Transaction Documents.
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i. The Company shall provide the Transfer Agent and/or the Buyer, Investments or their respective brokerage and/or clearing firm with all relevant legal opinions and other documentation requested by the Buyer or Investments in connection with the issuance of the Conversion Shares or the Restricted Stock, or the sale thereof, to confirm the share issuance(s) such that the Conversion Shares and/or Restricted Stock may be deposited with the applicable brokerage and/or clearing firm.
j. No Payments to Affiliates or Related Parties. So long as any of the Debentures remain outstanding, if the Debentures are in default, the Company shall not, absent the prior written consent of the holders of all Debentures then outstanding, make any payments to any of the Company’s or the Subsidiaries’ respective affiliates or related parties, including without limitation payments or prepayments of principal or interest accrued on any indebtedness or obligation in favor of affiliates or related parties. Notwithstanding anything to the contrary contained herein, the provisions of this Section 4(j) shall not apply to payments to the Subsidiaries, or other businesses in which affiliates have an interest, made in the ordinary course of business and consistent with past practice as disclosed in the SEC Documents.
k. Notice of Material Adverse Effect. The Company shall notify the Buyer (and any subsequent holder of the Debentures), as soon as practicable and in no event later than three (3) business days of the Company’s knowledge of any Material Adverse Effect on the Company. For purposes of the foregoing, “knowledge” means the earlier of the Company’s actual knowledge or the Company’s constructive knowledge upon due inquiry.
l. Public Disclosure. Except to the extent required by applicable law, absent the Buyer’s prior written consent, the Company shall not reference the name of the Buyer in any press release, securities disclosure, business plan, marketing or funding proposal.
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m. Nature of Transaction; Savings Clause. It is the parties’ express understanding and agreement that the transactions contemplated by the Transaction Documents constitute an investment and not a loan. If nonetheless such transactions are deemed to be a loan (as adjudicated by a court of law having proper jurisdiction and such adjudication is not subject to appeal), the Company shall not be obligated or required to pay interest at a rate that could subject Buyer to either civil or criminal liability as a result of such rate exceeding the maximum rate that the Buyer is permitted to charge under applicable law, and the Company’s obligations under the Transaction Documents shall not be void or voidable on the basis of the Buyer’s lack of any license or registration as a lender with any governmental authority. It is expressly understood and agreed by the parties that neither the amounts payable pursuant to Section 12, any redemption premium, remedy upon an Event of Default (as defined in the Debentures) or any Acceleration Amount (as defined in the Debentures), original issue discount nor any investment returns of the Buyer on the sale of the Debentures or the sale of any Conversion Shares (whether unrealized or realized) shall be construed as interest. If, by the terms of the Debentures, any other Transaction Document or any other instrument, Buyer is at any time required or obligated to pay interest at a rate exceeding such maximum rate, interest payable under the Debenture and/or such other Transaction Documents or other instrument shall be computed (or recomputed) at such maximum rate, and the portion of all prior interest payments (if any) exceeding such maximum shall be applied to payment of the outstanding principal of the Debentures.
5. TRANSFER AGENT INSTRUCTIONS.
a. Transfer Agent Instruction Letter. On or before the Signing Closing Date, the Company shall irrevocably instruct its Transfer Agent in writing using the letter substantially in the form of Exhibit B annexed hereto, with only such modifications as the Buyer agrees to, executed by the Company, the Buyer and the Transfer Agent (the “Transfer Agent Instruction Letter”), to (i) reserve that number of shares of Common Stock as is required under Section 4(g) hereof, and (ii) issue Common Stock from time to time upon conversion of the Debentures in such amounts as specified from time to time by the Buyer to the Transfer Agent in a Notice of Conversion, in such denominations to be specified by the Buyer in connection with each conversion of the Debentures. The Transfer Agent shall not be restricted from issuing shares from only the allotment reserved hereunder for the Conversion Amount (as defined in the Debentures), but instead may, to the extent necessary to satisfy the amount of shares issuable upon conversion, issue shares above and beyond the amount reserved on account of the Conversion Amount, without any additional instructions or authorization from the Company, and the Company shall not provide the Transfer Agent with any instructions or documentation contrary to the foregoing. As of the date of this Agreement, the Transfer Agent is VStock Transfer, LLC. The Company shall at all times while any Debentures are outstanding engage a Transfer Agent which is a party to the Transfer Agent Instruction Letter. If for any reason the Company’s Transfer Agent is not a signatory of the Transfer Agent Instruction Letter while any Debentures or Restricted Stock are outstanding and held by the Buyer and/or Investments, then such Transfer Agent shall nonetheless be deemed bound by the Transfer Agent Instruction Letter, and the Company shall neither (i) permit the Transfer Agent to disclaim, disregard or refuse to abide by the Transfer Agent’s obligations, terms and agreements set forth in the Transfer Agent Instruction Letter, nor (ii) issue any instructions to the Transfer Agent contrary to the obligations, terms and agreements set forth in the Transfer Agent Instruction Letter . The Company shall not terminate the Transfer Agent or otherwise change Transfer Agents without at least fifteen (15) days prior written notice to the Buyer and with the Buyer’s prior written consent to such change, which the Buyer may grant or withhold in its sole discretion. The Company shall continuously monitor its compliance with the share reservation requirements and, if and to the extent necessary to increase the number of reserved shares to remain and be at least Seven Hundred percent (700%) of the Conversion Amount to account for any decrease in the Market Price of the Common Stock, the Company shall immediately (and in any event within two (2) business days) notify the Transfer Agent in writing of the reservation of such additional shares, provided that in the event that the number of shares reserved for conversion of the Debentures is less than Seven Hundred percent (700%) of the Conversion Amount, the Buyer may also directly instruct the Transfer Agent to increase the reserved shares as necessary to satisfy the minimum reserved share requirement, and the Transfer Agent shall act accordingly, provided, further, that the Company shall within two (2) business days provide any written confirmation, assent or documentation thereof as the Transfer Agent may request to act upon a share increase instruction delivered by the Buyer. The Company shall provide the Buyer with a copy of all written instructions to the Company’s Transfer Agent with respect to the reservation of shares simultaneously with the issuance of such instructions to the Transfer Agent. The Company covenants that no instruction other than such instructions referred to in this Section 5 and stop transfer instructions to give effect to Section 4(a) hereof prior to registration and sale of the Conversion Shares under the 1933 Act will be given by the Company to the Transfer Agent and that the Conversion Shares shall otherwise be freely transferable on the books and records of the Company as and to the extent provided in this Agreement and applicable law. If the Buyer provides the Company and/or the Transfer Agent with an opinion of counsel reasonably satisfactory to the Company that registration of a resale by the Buyer of any of the Securities in accordance with clause (1)(B) of Section 4(a) of this Agreement is not required under the 1933 Act, the Company shall (except as provided in clause (2) of Section 4(a) of this Agreement) permit the de-legending or transfer of the Securities and, in the case of the Conversion Shares, instruct the Company’s Transfer Agent to issue one or more certificates for Common Stock without legend in such name and in such denominations as specified by the Buyer.
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b. Conversion. (i) The Company shall permit the Buyer to exercise the right to convert the Debentures by faxing, emailing or delivering overnight an executed and completed Notice of Conversion to the Company or the Transfer Agent. If so requested by the Buyer or the Transfer Agent, the Company shall within one (1) business day respond with its endorsement so as to confirm the outstanding principal amount of any Debenture submitted for conversion or shall reconcile any difference with the Buyer promptly after receiving such Notice of Conversion.
(ii) The term “Conversion Date” means, with respect to any conversion elected by the holder of the Debentures, the date specified in the Notice of Conversion, provided the copy of the Notice of Conversion is given either via mail or facsimile to or otherwise delivered to the Transfer Agent and/or the Company in accordance with the provisions hereof so that it is received by the Transfer Agent and/or the Company on or before such specified date.
(iii) The Company shall deliver (or will cause the Transfer Agent to deliver) the Conversion Shares issuable upon conversion as follows: (1) if the Company is then DWAC Operational, via DWAC, (2) if the Common Stock is then eligible for the Depository Trust Company’s Direct Registration System (“DRS”), if so requested by the Buyer, or (3) if the Company is not then DWAC Operational or the Common Stock is not then eligible for DRS, in certificated form, to the Buyer at the address specified in the Notice of Conversion (which may be the Buyer’s address for notices as contemplated by Section 10 hereof or a different address) via express courier, in each case within two (2) business days (the “Delivery Date”) after (A) the business day on which the Company or the Transfer Agent has received the Notice of Conversion (by facsimile, email or other delivery) or (B) the date on which payment of interest and principal on the Debentures, which the Company has elected to pay by the issuance of Common Stock, as contemplated by the Debentures, was due, as the case may be.
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c. Failure to Timely Issue Conversion Shares or De-Legended Shares. The Company’s failure to issue and deliver Conversion Shares to the Buyer (either by DWAC, DRS or in certificated form, as required by Section 5(b)) on or before the Delivery Date shall be considered an Event of Default, which shall entitle the Buyer to certain remedies set forth in the Debentures and provided by applicable law. Similarly, the Company’s failure to issue and deliver Common Stock in unrestricted form without a restrictive legend when required under the Transaction Documents shall entitle the Buyer to damages for the diminution in value (if any) of the relevant shares between the date delivery was due versus the date ultimately delivered in unrestricted form. The Company acknowledges that its failure to timely honor a Notice of Conversion (or the occurrence of any other Event of Default) shall cause definable financial hardship on the Buyer(s) and that the remedies set forth herein and in the Debentures are reasonable and appropriate.
d. Duties of Company; Authorization. The Company shall inform the Transfer Agent of the reservation of shares contemplated by Section 4(g) and this Section 5, and shall keep current in its payment obligations to the Transfer Agent such that the Transfer Agent will continue to process share transfers and the initial issuance of shares of Common Stock upon the conversion of Debentures. The Company hereby authorizes and agrees to authorize the Transfer Agent to correspond and otherwise communicate with the Buyer or their representatives in connection with the foregoing and other matters related to the Common Stock. Further, the Company hereby authorizes the Buyer or its representative to provide instructions to the Transfer Agent that are consistent with the foregoing and instructs the Transfer Agent to honor any such instructions. Should the Company fail for any reason to keep current in its payment obligations to the Transfer Agent, the Buyer and/or Investments may pay such amounts as are necessary to compensate the Transfer Agent for performing its duties with respect to share reservation, issuance of Conversion Shares and/or de-legending certificates representing Restricted Stock, and all amounts so paid shall be promptly reimbursed by the Company. If not so reimbursed within thirty (30) days, such amounts shall, at the option of the Buyer and without prior notice to or consent of the Company, be added to the principal amount due under the Debenture(s) held by the Buyer, whereupon interest will begin to accrue on such amounts at the rate specified in the Debentures.
e. Effect of Bankruptcy. The Buyer shall be entitled to exercise its conversion privilege with respect to the Debentures notwithstanding the commencement of any case under 11 U.S.C. §101 et seq. (the “Bankruptcy Code”). In the event the Company is a debtor under the Bankruptcy Code, the Company hereby waives, to the fullest extent permitted, any rights to relief it may have under 11 U.S.C. §362 in respect of the Buyer’s conversion privilege. The Company hereby waives, to the fullest extent permitted, any rights to relief it may have under 11 U.S.C. §362 in respect of the conversion of the Debentures. The Company agrees, without cost or expense to the Buyer, to take or to consent to any and all action necessary to effectuate relief under 11 U.S.C. §362.
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6. CLOSINGS.
a. Signing Closing. Promptly upon the execution and delivery of this Agreement, the Signing Debenture, and all conditions in Sections 7 and 8 herein are met (the “Signing Closing Date”), (A) the Company shall deliver to the Buyer the following: (i) the Signing Debenture; (ii) the Transfer Agent Instruction Letter; (iii) duly executed counterparts of the Transaction Documents; and (iv) an officer’s certificate of the Company confirming the accuracy of the Company’s representations and warranties contained herein, and (B) the Buyer shall deliver to the Company the following: (i) the Signing Purchase Price and (ii) duly executed counterparts of the Transaction Documents (as applicable). The Company shall immediately pay the fees due under Section 12 of this Agreement upon receipt of the Signing Purchase Price if Buyer does not withhold such amounts from the Signing Purchase Price pursuant to Section 12.
b. Second Closing. At any time sixty one (61) to ninety (90) days following the Signing Closing Date, subject to the mutual agreement of the Buyer and the Company, for the “Second Closing Date” and subject to satisfaction of the conditions set forth in Sections 7 and 8, (A) the Company shall deliver to the Buyer the following: (i) the Second Debenture; (ii) an amendment to the Transfer Agent Instruction Letter instructing the Transfer Agent to reserve that number of shares of Common Stock as is required under Section 4(g) hereof, if necessary; and (iii) an officer’s certificate of the Company confirming, as of the Second Closing Date, the accuracy of the Company’s representations and warranties contained herein and updating Schedules 3(b), 3(c) and 3(k) as of the Second Closing Date, and (B) the Buyer shall deliver to the Company the Second Purchase Price.
c. Third Closing. At any time sixty one (61) to ninety (90) days following the Second Closing Date, subject to the mutual agreement of the Buyer and the Company, for the “Third Closing Date” and subject to satisfaction of the conditions set forth in Sections 7 and 8, (A) the Company shall deliver to the Buyer the following: (i) the Third Debenture; (ii) an amendment to the Transfer Agent Instruction Letter instructing the Transfer Agent to reserve that number of shares of Common Stock as is required under Section 4(g) hereof, if necessary; and (iii) an officer’s certificate of the Company confirming, as of the Third Closing Date, the accuracy of the Company’s representations and warranties contained herein and updating Schedules 3(b), 3(c) and 3(k) as of the Third Closing Date, and (B) the Buyer shall deliver to the Company the Third Purchase Price.
d. Location and Time of Closings. Each Closing shall be deemed to occur on the related Closing Date at the office of the Buyer’s counsel and shall take place no later than 5:00 P.M., New York time, on such day or such other time as is mutually agreed upon by the Company and the Buyer.
7. CONDITIONS TO THE COMPANY’S OBLIGATION TO SELL.
The Company’s obligation to sell the Debentures to the Buyer pursuant to this Agreement on each Closing Date is conditioned upon:
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a. Purchase Price. Delivery to the Company of good funds as payment in full of the respective Purchase Price for the Debentures at each Closing in accordance with this Agreement;
b. Representations and Warranties; Covenants. The accuracy on the Closing Date of the representations and warranties of the Buyer contained in this Agreement, each as if made on such date, and the performance by the Buyer on or before such date of all covenants and agreements of the Buyer required to be performed on or before such date; and
c. Laws and Regulations; Consents and Approvals. There shall not be in effect any law, rule or regulation prohibiting or restricting the transactions contemplated hereby, or requiring any consent or approval which shall not have been obtained.
8. CONDITIONS TO THE BUYER’S OBLIGATION TO PURCHASE.
The Buyer’s obligation to purchase the Debentures at each Closing is conditioned upon:
a. Transaction Documents. The execution and delivery of this Agreement by the Company;
b. Debenture(s). Delivery by the Company to the Buyer of the Debentures to be purchased in accordance with this Agreement;
c. Section 4(2) Exemption. The Debentures and the Conversion Shares shall be exempt from registration under the Securities Act of 1933 (as amended), pursuant to Section 4(2) thereof;
d. DWAC Status. The Common Stock shall be DWAC Operational;
e. Representations and Warranties; Covenants. The accuracy in all material respects on the Closing Date of the representations and warranties of the Company contained in this Agreement, each as if made on such date, and the performance by the Company on or before such date of all covenants and agreements of the Company required to be performed on or before such date;
f. Good-faith Opinion. It should be Buyer’s reasonable belief that (i) no Event of Default under the terms of any outstanding indebtedness of the Company shall have occurred or would likely occur with the passage of time and (ii) no material adverse change in the financial condition or business operations of the Company shall have occurred;
g. Legal Proceedings. There shall be no litigation, criminal or civil, regulatory impairment or other legal and/or administrative proceedings challenging or seeking to limit the Company’s ability to issue the Securities or the Common Stock;
h. [Reserved];
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i. Corporate Resolutions. Delivery by the Company to the Buyer a copy of resolutions of the Company’s board of directors, approving and authorizing the execution, delivery and performance of the Transaction Documents and the transactions contemplated thereby in the form attached hereto as Exhibit C (the “Irrevocable Resolutions”);
j. Officer’s Certificate. Delivery by the Company to the Buyer of a certificate of the Chief Executive Officer of the Company in the form attached hereto as Exhibit D;
k. Search Results. Delivery by the Company to the Buyer of copies of UCC search reports, issued by the Secretary of State of the state of incorporation of the Company and each Subsidiary, dated such a date as is reasonably acceptable to Buyer, listing all effective financing statements which name the Company or Subsidiary (as applicable), under its present name and any previous names, as debtor, together with copies of such financing statements;
l. Certificate of Good Standing. Delivery by the Company to the Buyer of a copy of a certificate of good standing with respect to the Company, issued by the Secretary of State of the state of incorporation of the Company, dated such a date as is reasonably acceptable to Buyer, evidencing the good standing thereof;
m. Laws and Regulations; Consents and Approvals. There shall not be in effect any law, rule or regulation prohibiting or restricting the transactions contemplated hereby, or requiring any consent or approval which shall not have been obtained; and
n. Adverse Changes. From and after the date hereof to and including each Closing Date, (i) the trading of the Common Stock shall not have been suspended by the SEC, FINRA, or any other governmental or self-regulatory organization, and trading in securities generally on OTCM shall not have been suspended or limited, nor shall minimum prices been established for securities traded on the OTCM; (ii) there shall not have occurred any outbreak or escalation of hostilities involving the United States or any material adverse change in any financial market that in either case in the reasonable judgment of the Buyer makes it impracticable or inadvisable to purchase the Debentures.
9. GOVERNING LAW; MISCELLANEOUS.
a. MANDATORY FORUM SELECTION. Any dispute arising under, relating to, or in connection with the Agreement or related to any matter which is the subject of or incidental to the Agreement (whether or not such claim is based upon breach of contract or tort) shall be subject to the exclusive jurisdiction and venue of the state and/or federal courts located in MIAMI-DADE County, Florida. This provision is intended to be a “mandatory” forum selection clause and governed by and interpreted consistentLY with Florida law.
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b. Governing Law. Except in the case of the Mandatory Forum Selection clause above, this Agreement shall be delivered and accepted in and shall be deemed to be contracts made under and governed by the internal laws of the State of Nevada, and for all purposes shall be construed in accordance with the laws of the State of Nevada, without giving effect to the choice of law provisions. To the extent determined by the applicable court described above, the Company shall reimburse the Buyer for any reasonable legal fees and disbursements incurred by the Buyer in enforcement of or protection of any of its rights under any of the Transaction Documents.
c. Waivers. Failure of any party to exercise any right or remedy under this Agreement or otherwise, or delay by a party in exercising such right or remedy, shall not operate as a waiver thereof.
d. Successors and Assigns. This Agreement shall inure to the benefit of and be binding upon the successors and assigns of each of the parties hereto.
e. Construction. All pronouns and any variations thereof refer to the masculine, feminine or neuter, singular or plural, as the context may require.
f. Facsimiles; E-mails. A facsimile or email transmission of this signed Agreement or a Notice of Conversion under the Debentures shall be legal and binding on all parties hereto. Such electronic signatures shall be the equivalent of original signatures.
g. Counterparts. This Agreement may be signed in one or more counterparts, each of which shall be deemed an original.
h. Headings. The headings of this Agreement are for convenience of reference and shall not form part of, or affect the interpretation of, this Agreement.
i. Enforceability. If any provision of this Agreement shall be invalid or unenforceable in any jurisdiction, such invalidity or unenforceability shall not affect the validity or enforceability of the remainder of this Agreement or the validity or enforceability of this Agreement in any other jurisdiction.
j. Amendment. This Agreement may be amended only by the written consent of a majority in interest of the holders of the Debentures and an instrument in writing signed by the Company.
k. Entire Agreement. This Agreement, together with the other Transaction Documents, supersedes all prior agreements and understandings among the parties hereto with respect to the subject matter hereof.
l. No Strict Construction. This Agreement shall be construed as if both Parties had equal say in its drafting, and thus shall not be construed against the drafter.
m. Further Assurances. Each party shall do and perform, or cause to be done and performed, all such further acts and things, and shall execute and deliver all such other agreements, certificates, instruments and documents, as the other party may reasonably request in order to carry out the intent and accomplish the purposes of this Agreement and the consummation of the transactions contemplated hereby.
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10. NOTICES.
Any notice required or permitted hereunder shall be given in writing (unless otherwise specified herein) and shall be deemed effectively given on the earliest of:
a. the date delivered, if delivered by personal delivery as against written receipt therefor or by confirmed facsimile or email transmission,
b. the third (3rd) business day after deposit, postage prepaid, in the United States Postal Service by registered or certified mail, or
c. the first (1st) business day after deposit with a recognized courier service (e.g. FedEx, UPS, DHL, US Postal Service) for delivery by next-day express courier, with delivery costs and fees prepaid,
in each case, addressed to each of the other parties thereunto entitled at the following addresses (or at such other addresses as such party may designate by ten (10) days’ advance written notice similarly given to each of the other parties hereto):
COMPANY: |
Arkados Group, Inc. 211 Warren Street, Suite 320 Newark, NJ 07103 Attention: Terrence DeFranco, Chief Executive Officer Facsimile: ___________________ Email: tmdefranco@arkadosgroup.com
|
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With copies to (which shall not constitute notice):
LKP Global Law, LLP 1901 Avenue of the Stars, Suite 480 Los Angeles, CA 90067 Attention: ______________________ Email: _________________________
|
BUYER: |
Peak One Opportunity Fund, L.P. 333 South Hibiscus Drive Miami Beach, FL 33139 Attention: Jason Goldstein Email: jgoldstein@peakoneinvestments.com
|
With copies to (which shall not constitute notice):
| |
Legal & Compliance, LLC 330 Clematis Street, Suite 217 West Palm Beach, FL 33401 Attention: Laura Anthony, Esq. Email: LAnthony@LegalandCompliance.com |
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11. SURVIVAL OF REPRESENTATIONS AND WARRANTIES. The Company’s representations and warranties herein shall survive for so long as any Debentures are outstanding, and shall inure to the benefit of the Buyer, its successors and assigns.
12. FEES; EXPENSES.
a. Commitment Fee. The Company shall pay to Investments a non-accountable fee (the “Commitment Fee”) of (i) Three Thousand Five Hundred and 00/100 Dollars ($3,500.00) and (ii) Fifty Thousand (50,000) shares of Restricted Stock for Investments’ expenses and analysis performed in connection with the analysis of the Company and the propriety of the Buyer’s making the contemplated investment. The Commitment Fee shall be paid on the Signing Closing Date if Buyer does not withhold such amounts from the Signing Purchase Price pursuant to Section 12(c).
b. Legal Fees. The Company shall pay the legal fees of the Buyer’s counsel (the “Legal Fees”) in the amount of Two Thousand Five Hundred and 00/100 Dollars ($2,500.00). The foregoing legal fees shall be paid on the Signing Closing Date if Buyer does not withhold such amounts from the Signing Purchase Price pursuant to Section 12(c). The Company further agrees to pay in full the reasonable legal fees of the Buyer’s counsel incurred after the Signing Closing Date incurred in connection with the Transaction Documents (including addressing any purported breach(es) or default(s) by the Company, enforcement of the Company’s obligations or the exercise of the Buyer’s remedies thereunder).
c. Disbursements. In furtherance of the foregoing, the Company hereby authorizes the Buyer to deduct the cash portion of the Commitment Fee and the Legal Fees from the Signing Purchase Price and transmit same to the respective payee.
[Signature Page Follows]
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IN WITNESS WHEREOF, this Agreement has been duly executed by the Buyer and the Company as of the date first set forth above.
COMPANY: | ||
ARKADOS GROUP, INC. | ||
By: | /s/ Terrence DeFranco | |
Name: | Terrence DeFranco | |
Title: | Chief Executive Officer | |
BUYER: | ||
PEAK ONE OPPORTUNITY FUND, L.P. | ||
By: | Peak One Investments, LLC, | |
General Partner |
By: | /s/ Jason Goldstein | |
Name: | Jason Goldstein | |
Title: | Managing Member |
[Signature Page to Securities Purchase Agreement]
SCHEDULE 3(b)
COMPANY ORGANIZATION CHART
Subsidiary / Affiliate Name and Relationship |
Jurisdiction of Incorporation | Percentage of Ownership | ||
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SCHEDULE 3(c)
COMPANY CAPITALIZATION TABLE
COMMON STOCK AND COMMON STOCK EQUIVALENTS
ISSUED, OUTSTANDING AND RESERVED
DESCRIPTION | AMOUNT | |
Authorized Common Stock | ||
Authorized Capital Stock | ||
Authorized Common Stock | ||
Issued Common Stock | ||
Outstanding Common Stock | ||
Treasury Stock | ||
Authorized, but unissued | ||
Authorized Preferred Stock | ||
Issued Preferred Stock | ||
Reserved for Equity Incentive Plans | ||
Reserved for Convertible Debt | ||
Reserved for Options and Warrants | ||
Reserved for Other Purposes | ||
TOTAL COMMON STOCK AND COMMON STOCK EQUIVALENTS OUTSTANDING |
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EXHIBITS
Exhibit A | FORM OF DEBENTURE |
Exhibit B | FORM OF TRANSFER AGENT INSTRUCTION LETTER |
Exhibit C | FORM OF RESOLUTIONS OF THE BOARD OF DIRECTORS |
Exhibit D | FORM OF OFFICER’S CERTIFICATE |
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EXHIBIT A
FORM OF DEBENTURE
NEITHER THESE SECURITIES NOR THE SECURITIES ISSUABLE UPON CONVERSION HEREOF HAVE BEEN REGISTERED WITH THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE OR UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THE SECURITIES ARE RESTRICTED AND MAY NOT BE OFFERED, RESOLD, PLEDGED OR TRANSFERRED EXCEPT AS PERMITTED UNDER THE ACT PURSUANT TO REGISTRATION REQUIREMENTS THEREOF OR EXEMPTION THEREFROM.
ARKADOS GROUP, INC.
CONVERTIBLE DEBENTURE DUE ____________, 2019
Issuance Date: ____________, 2016 | Principal Amount: $____________ |
FOR VALUE RECEIVED, ARKADOS GROUP, INC., a corporation organized and existing under the laws of the State of Delaware) (the “Company”), hereby promises to pay to PEAK ONE OPPORTUNITY FUND, L.P., having its address at 333 South Hibiscus Drive, Miami Beach, FL 33139, or its assigns (the “Holder” and together with the other holders of Debentures issued pursuant to the Securities Purchase Agreement (as defined below), the “Holders”), the initial principal sum of ____________and 00/100 Dollars ($____________) (subject to adjustment as provided herein, the “Principal Amount”) on ____________, 2019 (the “Maturity Date”) [THIRD ANNIVERSARY OF DATE OF ISSUANCE]. The Company has the option to redeem this Debenture prior to the Maturity Date pursuant to Section 2(b). All unpaid principal due and payable on the Maturity Date shall be paid in the form of Common Stock of the Company, par value $0.0001 per share (“Common Stock”) pursuant to Section 3. The Holder has the option to cause any outstanding principal and accrued interest, if any, on this Debenture to be converted into Common Stock at any time prior to the Redemption Date (as defined below) or the Maturity Date pursuant to Section 2(a).
This Debenture is one of the Debentures referred to in the Securities Purchase Agreement (the “Securities Purchase Agreement”) dated as of November __, 2016, between the Company and the Holder. Capitalized terms used but not defined herein shall have the meanings set forth in the Securities Purchase Agreement. This Debenture is subject to the provisions of the Securities Purchase Agreement and further is subject to the following additional provisions:
1. This Debenture has been issued subject to investment representations of the original purchaser hereof and may be transferred or exchanged only in compliance with the Securities Act and other applicable state and foreign securities laws. The Holder may transfer or assign this Debenture (or any part thereof) without the prior consent of the Company, and the Company shall cooperate with any such transfer. In the event of any proposed transfer of this Debenture, the Company may require, prior to issuance of a new Debenture in the name of such other Person, that it receive reasonable transfer documentation including legal opinions that the issuance of the Debenture in such other name does not and will not cause a violation of the Securities Act or any applicable state or foreign securities laws or is exempt from the registration requirements of the Securities Act. Prior to due presentment for transfer of this Debenture to which the Company has consented, the Company and any agent of the Company may treat the Person in whose name this Debenture is duly registered on the Company's books and records of outstanding debt securities and obligations (“Debenture Register”) as the owner hereof for the purpose of receiving payment as herein provided and for all other purposes, whether or not this Debenture be overdue, and neither the Company nor any such agent shall be affected by notice to the contrary.
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2. Conversion at Holder’s Option; Redemption at Company’s Option.
a. The Holder is entitled to, at any time or from time to time, convert the Conversion Amount (as defined below) into Conversion Shares, at a conversion price for each share of Common Stock (the “Conversion Price”) equal to either: (i) if no Event of Default (as defined herein) has occurred and the date of conversion is prior to the date that is one hundred fifty (150) days after the Issuance Date, $0.65, or (ii) if an Event of Default has occurred or the date of conversion is on or after the date that is one hundred fifty (150) days after the Issuance Date, the lesser of (a) $0.65 or (b) Sixty Five percent (65%) of the lowest closing bid price (as reported by Bloomberg LP) of the Common Stock for the twenty (20) Trading Days immediately preceding the date of the date of conversion of the Debentures (provided, further, that if either the Company is not DWAC Operational at the time of conversion or the Common Stock is traded on the OTC Pink (“OTCP”) at the time of conversion, then Sixty Five percent (65%) shall automatically adjust to Sixty percent (60%) of the lowest closing bid price (as reported by Bloomberg LP) of the Common Stock for the twenty (20) Trading Days immediately preceding the date of conversion of the Debentures), subject in each case to equitable adjustments resulting from any stock splits, stock dividends, recapitalizations or similar events. The Company shall issue irrevocable instructions to its Transfer Agent regarding conversions such that the transfer agent shall be authorized and instructed to issue Conversion Shares upon its receipt of a Notice of Conversion without further approval or authorization from the Company. For purposes of this Debenture, the “Conversion Amount” shall mean the sum of (A) all or any portion of the outstanding Principal Amount of this Debenture, as designated by the Holder upon exercise of its right of conversion plus (B) any interest, pursuant to Section 10 or otherwise, that has accrued on the portion of the Principal Amount that has been designated for payment pursuant to (A).
Conversion shall be effectuated by delivering by facsimile, email or other delivery method to the Transfer Agent of the completed form of conversion notice attached hereto as Annex A (the “Notice of Conversion”), executed by the Holder of the Debenture evidencing such Holder's intention to convert this Debenture or a specified portion hereof. No fractional shares of Common Stock or scrip representing fractions of shares will be issued on conversion, but the number of shares issuable shall be rounded to the nearest whole share. The Holder may, at its election, deliver a Notice of Conversion to either the Company or the Transfer Agent. The date on which notice of conversion is given (the “Conversion Date”) shall be deemed to be the date on which the Company or the Transfer Agent, as the case may be, receives by fax, email or other means of delivery used by the Holder the Notice of Conversion (such receipt being evidenced by electronic confirmation of delivery by facsimile or email or confirmation of delivery by such other delivery method used by the Holder). Delivery of a Notice of Conversion to the Transfer Agent may be given by the Holder by facsimile at 212-828-8436, by email to Yoel@vstocktransfer.com or by delivery to the Transfer Agent at the address set forth in the Transfer Agent Instruction Letter (or such other contact facsimile number, email or street address as may be designated by the Transfer Agent to the Holder). Delivery of a Notice of Conversion to the Company shall be given by the Holder pursuant to the notice provisions set forth in Section 10 of the Agreement. The Conversion Shares must be delivered to the Holder within two (2) business days from the date of delivery of the Notice of Conversion to the Transfer Agent or Company, as the case may be. Conversion shares shall be delivered by DWAC so long as the Company is then DWAC Operational, unless the Holder expressly requests delivery in certificated form or the Conversion Shares are in the form of Restricted Stock and are required to bear a restrictive legended. Conversion Shares shall be deemed delivered (i) if delivered by DWAC, upon deposit into the Holder’s brokerage account, or (ii) if delivered in certificated form, upon the Holder’s actual receipt of the Conversion Shares in certificated form at the address specified by the Holder in the Notice of Conversion, as confirmed by written receipt.
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Notwithstanding the foregoing, unless the Holder delivers to the Company written notice at least sixty-one (61) days prior to the effective date of such notice that the provisions of this paragraph (the “Limitation on Ownership”) shall not apply to such Holder, in no event shall a holder of Debentures have the right to convert Debentures into, nor shall the Company issue to such Holder, shares of Common Stock to the extent that such conversion would result in the Holder and its affiliates together beneficially owning more than 4.99% of the then issued and outstanding shares of Common Stock. For purposes hereof, beneficial ownership shall be determined in accordance with Section 13(d) of the Exchange Act and Regulation 13D-G under the Exchange Act.
b. So long as no Event of Default (as defined in Section 10) shall have occurred and be continuing (whether such Event of Default has been declared by the Holder) (unless the Holder consents to such redemption notwithstanding such Event of Default, as described in clause (v), below), the Company may at its option call for redemption all or part of the Debentures, with the exception of any portion thereof which is the subject of a previously-delivered Notice of Conversion, prior to the Maturity Date, as follows:
(i) The Debentures called for redemption shall be redeemable by the Company, upon not more than two (2) days written notice, for an amount (the “Redemption Price”) equal to: (i) if the Redemption Date (as defined below) is one hundred twenty (120) days or less from the date of issuance of this Debenture, One Hundred percent (100%) of the sum of the Principal Amount so redeemed plus accrued interest, if any; (ii) if the Redemption Date is greater than or equal to one hundred twenty-one (121) days from the date of issuance of this Debenture and less than or equal to one hundred fifty (150) days from the date of issuance of this Debenture, One Hundred Fifteen percent (115%) of the sum of the Principal Amount so redeemed plus accrued interest, if any; (iii) if the Redemption Date is greater than or equal to one hundred fifty one (151) days from the date of issuance of this Debenture and less than or equal to one hundred eighty (180) days from the date of issuance of this Debenture, One Hundred Twenty percent (120%) of the sum of the Principal Amount so redeemed plus accrued interest, if any; and (iv) if either (1) the Debentures are in default but the Holder consents to the redemption notwithstanding such default or (2) the Redemption Date is greater than or equal to one hundred eighty one (181) days from the date of issuance of this Debenture, One Hundred Thirty percent (130%) of the sum of the Principal Amount so redeemed plus accrued interest, if any. The date upon which the Debentures are redeemed and paid shall be referred to as the “Redemption Date” (and, in the case of multiple redemptions of less than the entire outstanding Principal Amount, each such date shall be a Redemption Date with respect to the corresponding redemption).
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(ii) If fewer than all outstanding Debentures are to be redeemed and are held by different investors, then all Debentures shall be partially redeemed on a pro rata basis.
(iii) [Reserved]
(iv) On the Redemption Date, the Company shall cause the Holders whose Debentures have been presented for redemption to be issued payment of the Redemption Price. In the case of a partial redemption, the Company shall also issue new Debentures to the Holders for the Principal Amount remaining outstanding after the Redemption Date promptly after the Holders’ presentation of the Debentures called for redemption.
(v) To effect a redemption the Company shall provide a written notice to the Holder(s) not more than two (2) days prior to the Redemption Date (the “Redemption Notice”), setting forth the following:
1. | the Redemption Date; |
2. | the Redemption Price; |
3. | the aggregate Principal Amount of the Debentures being called for redemption; |
4. | a statement instructing the Holders to surrender their Debentures for redemption and payment of the Redemption Price, including the name and address of the Company or, if applicable, the paying agent of the Company, where Debentures are to be surrendered for redemption; |
5. | a statement advising the Holders that the Debentures (or, in the case of a partial redemption, that portion of the Principal Amount being called for redemption) as of the Redemption Date will cease to be convertible into Common Stock as of the Redemption Date; and |
6. | in the case of a partial redemption, a statement advising the Holders that after the Redemption Date a substitute Debenture will be issued by the Company after deduction the portion thereof called for redemption, at no cost to the Holder, if the Holder so requests. |
Notwithstanding the foregoing, in the event the Company issues a Redemption Notice but fails to fund the redemption on the Redemption Date, then such Redemption Notice shall be null and void, and (i) the Holder(s) shall be entitled to convert the Debentures previously the subject of the Redemption Notice, and (ii) the Company may not redeem such Debentures for at least thirty (30) days following the intended Redemption Date that was voided, and the Company shall be required to pay to the Holder(s) the Redemption Price simultaneously with the issuance of a Redemption Notice in connection with any subsequent redemption pursued by the Company.
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3. Unless demand has otherwise been made by the Holder in writing for payment in cash as provided hereunder, and so long as no Event of Default shall exist (whether or not notice thereof has been delivered by the Holder to the Company), any Debentures not previously tendered to the Company for conversion as of the Maturity Date shall be deemed to have been surrendered for conversion, without further action of any kind by the Company or any of its agents, employees or representatives, as of the Maturity Date at the Conversion Price applicable on the Maturity Date (“Mandatory Conversion”).
4. No provision of this Debenture shall alter or impair the obligation of the Company, which is absolute and unconditional to convert this Debenture into Common Stock, at the time, place, and rate herein prescribed. This Debenture is a direct obligation of the Company.
5. If the Company (a) merges or consolidates with another corporation or business entity and the Company is not the surviving entity or (b) sells or transfers all or substantially all of its assets to another Person and the holders of the Common Stock are entitled to receive stock, securities or property in respect of or in exchange for Common Stock, then as a condition of such merger, consolidation, sale or transfer, the Company and any such successor, purchaser or transferee will agree that this Debenture may thereafter be converted on the terms and subject to the conditions set forth above into the kind and amount of stock, securities or property receivable upon such merger, consolidation, sale or transfer by a holder of the number of shares of Common Stock into which this Debenture might have been converted immediately before such merger, consolidation, sale or transfer, subject to adjustments which shall be as nearly equivalent as may be practicable. In the event of any (i) proposed merger or consolidation where the Company is not the surviving entity or (ii) sale or transfer of all or substantially all of the assets of the Company (in either such case, a “Sale”), the Holder shall have the right to convert by delivering a Notice of Conversion to the Company within fifteen (15) days of receipt of notice of such Sale from the Company.
6. If, at any time while any portion of this Debenture remains outstanding, the Company effectuates a stock split or reverse stock split of its Common Stock or issues a dividend on its Common Stock consisting of shares of Common Stock or otherwise recapitalizes its Common Stock, the Conversion Price shall be equitably adjusted to reflect such action. By way of illustration, and not in limitation, of the foregoing (i) if the Company effectuates a 2:1 split of its Common Stock, thereafter, with respect to any conversion for which the Company issues the shares after the record date of such split, the Conversion Price shall be deemed to be one-half of what it had been calculated to be immediately prior to such split; (ii) if the Company effectuates a 1:10 reverse split of its Common Stock, thereafter, with respect to any conversion for which the Company issues the shares after the record date of such reverse split, the Conversion Price shall be deemed to be the amount of such Conversion Price calculated immediately prior to the record date multiplied by 10; and (iii) if the Company declares a stock dividend of one share of Common Stock for every 10 shares outstanding, thereafter, with respect to any conversion for which the Company issues the shares after the record date of such dividend, the Conversion Price shall be deemed to be the amount of such Conversion Price calculated immediately prior to such record date multiplied by a fraction, of which the numerator is the number of shares for which a dividend share will be issued and the denominator is such number of shares plus the dividend share(s) issuable or issued thereon.
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7. All payments contemplated hereby to be made “in cash” shall be made by wire transfer of immediately available funds in such coin or currency of the United States of America as at the time of payment is legal tender for payment of public and private debts. All payments of cash and each delivery of shares of Common Stock issuable to the Holder as contemplated hereby shall be made to the Holder to an account designated by the Holder to the Company and if the Holder has not designated any such accounts at the address last appearing on the Debenture Register of the Company as designated in writing by the Holder from time to time; except that the Holder may designate, by notice to the Company, a different delivery address for any one or more specific payments or deliveries.
8. The Holder of the Debenture, by acceptance hereof, agrees that this Debenture is being acquired for investment and that such Holder will not offer, sell or otherwise dispose of this Debenture or the Shares of Common Stock issuable upon conversion thereof except in compliance with the terms of the Securities Purchase Agreement and under circumstances which will not result in a violation of the Securities Act or any applicable state Blue Sky or foreign laws or similar laws relating to the sale of securities.
9. This Debenture shall be governed by and construed in accordance with the laws of the State of Nevada. Each of the parties consents to the exclusive jurisdiction and venue of the state and/or federal courts located in Miami-Dade County, Florida in connection with any dispute arising under this Agreement. This provision is intended to be a “mandatory” forum selection clause and governed by and interpreted consistent with Florida law (Nevada law governing all other, substantive matters). Each of the parties hereby consents to the exclusive jurisdiction and venue of any state or federal court having its situs in said county, and each waives any objection based on forum non conveniens. To the extent determined by such court, the Company shall reimburse the Holder for any reasonable legal fees and disbursements incurred by the Holder in enforcement of or protection of any of its rights under this Debenture or the Securities Purchase Agreement.
10. The following shall constitute an “Event of Default”:
a. The Company fails in the payment of principal or interest (to the extent that interest is imposed under this Section 10) on this Debenture as required to be paid in cash hereunder, and payment shall not have been made for a period of five (5) business days following the payment due date (as to which no further cure period shall apply); or
b. Any of the representations or warranties made by the Company herein, in the Securities Purchase Agreement or in any certificate or financial or other written statements heretofore or hereafter furnished by the Company to the Holder in connection with the issuance of this Debenture, shall be false or misleading (including without limitation by way of the misstatement of a material fact or the omission of a material fact) in any material respect at the time made (as to which no cure period shall apply); or
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c. The Company fails to remain listed on OTCP, OTCQB, or OTCQX, or a more senior stock exchange any time from the date hereof to the Maturity Date for a period in excess of five (5) Trading Days (as to which no further cure period shall apply); or
d. The Company (i) fails to timely file required SEC reports when due (including extensions), becomes, is deemed to be or asserts that it is a “shell company” at any time for purposes of the 1933 Act, and Rule 144 promulgated thereunder or otherwise takes any action, or refrains from taking any action, the result of which makes Rule 144 under the 1933 unavailable to the Holder for the sale of their Securities, (ii) fails to issue shares of Common Stock to the Holder or to cause its Transfer Agent to issue shares of Common Stock upon exercise by the Holder of the conversion rights of the Holder in accordance with the terms of this Debenture, (iii) fails to transfer or to cause its Transfer Agent to transfer any certificate for shares of Common Stock issued to the Holder upon conversion of this Debenture as and when required by this Debenture and such transfer is otherwise lawful, (iv) fails to remove any restrictive legend or to cause its Transfer Agent to transfer any certificate or any shares of Common Stock issued to the Holder upon conversion of this Debenture as and when required by the relevant Transaction Document(s) and such legend removal is otherwise lawful, or (v) the Company fails to perform or observe any of its obligations under the Section 5 of the Agreement or under the Transfer Agent Instruction Letter (no cure period shall apply in the case of clauses (i) through (v) above, inclusive); or
e. The Company fails to perform or observe, in any material respect (i) any other covenant, term, provision, condition, agreement or obligation set forth in the Debenture, (subject to a cure period of three (3) days other than in the case of a failure under Section 5 hereof, as to which no cure period shall apply), or (ii) any other covenant, term, provision, condition, agreement or obligation of the Company set forth in the Securities Purchase Agreement and such failure shall continue uncured for a period of either (1) three (3) days after the occurrence of the Company’s failure under Section 4(d), (e) (except as described in Section 10(c) hereof, as to which Section 10(c) hereof shall control), (f), (g) or (h) of the Securities Purchase Agreement, or (2) ten (10) days after the occurrence of the Company’s failure under any other provision of the Securities Purchase Agreement not otherwise specifically addressed in the Events of Default set forth in this Section 10; or
f. The Company shall (1) admit in writing its inability to pay its debts generally as they mature; (2) make an assignment for the benefit of creditors or commence proceedings for its dissolution; or (3) apply for or consent to the appointment of a trustee, liquidator or receiver for its or for a substantial part of its property or business (as to which no cure period shall apply); or
g. A trustee, liquidator or receiver shall be appointed for the Company or for a substantial part of its property or business without its consent and shall not be discharged within sixty (60) days after such appointment (as to which no cure period shall apply); or
h. Any governmental agency or any court of competent jurisdiction at the instance of any governmental agency shall assume custody or control of the whole or any substantial portion of the properties or assets of the Company and shall not be dismissed within sixty (60) days thereafter (as to which no cure period shall apply); or
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i. Any money judgment, writ or warrant of attachment, or similar process (including an arbitral determination), in excess of Fifty Thousand Dollars ($50,000) in the aggregate shall be entered or filed against the Company or any of its properties or other assets (as to which no cure period shall apply); or
j. The occurrence of a breach or an event of default under the terms of any indebtedness or financial instrument of the Company or any subsidiary (including but not limited to any Subsidiary) of the Company in an aggregate amount in excess of Fifty Thousand Dollars ($50,000) or more which is not waived by the creditors under such indebtedness (as to which no cure period shall apply); or
k. Bankruptcy, reorganization, insolvency or liquidation proceedings or other proceedings for relief under any bankruptcy law or any law for the relief of debtors shall be instituted by or against the Company and, if instituted against the Company, shall not be dismissed within sixty (60) days after such institution or the Company shall by any action or answer approve of, consent to, or acquiesce in any such proceedings or admit the material allegations of, or default in answering a petition filed in any such proceeding (as to which no further cure period shall apply); or
l. The issuance of an order, ruling, finding or similar adverse determination the SEC, the Secretary of State of the State of Nevada or Florida, the National Association of Securities Dealers, Inc. or any other securities regulatory body (whether in the United States, Canada or elsewhere) having proper jurisdiction that the Company and/or any of its past or present directors or officers have committed a material violation of applicable securities laws or regulations (as to which no cure period shall apply); or
m. The Company shall have its Common Stock suspended or delisted from a national securities exchange or an electronic quotation service such as the OTCP, OTCQB, or OTCQX for a period in excess of five (5) Trading Days (as to which no further cure period shall apply); or
n. Any of the following shall occur and be continuing: a breach or default by any party under (a) any agreement identified by the Company in its SEC filings as a material agreement or (b) any note or other form of indebtedness in favor of the Company representing indebtedness of at least Fifty Thousand Dollars ($50,000.00), irrespective of whether such breach or default was waived (as to which no cure period shall apply); or
o. Notice of a Material Adverse Effect is provided by the Company or the determination in good faith by the Holder that a Material Adverse Effect has occurred (as to which no cure period shall apply); or
p. The Company attempts to modify, amend, withdraw, rescind, disavow or repudiate any part of the Irrevocable Instructions (as to which no cure period shall apply).
q. Any attempt by the Company or its officers, directors, and/or affiliates to transmit, convey, disclose, or any actual transmittal, conveyance, or disclosure by the Company or its officers, directors, and/or affiliates of, material non-public information concerning the Company, to the Holder or its successors and assigns, which is not immediately cured by Company’s filing of a Form 8-K pursuant to Regulation FD on that same date.
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r. At any time while this Debenture is outstanding, the lowest traded price on the OTCP, OTCQB, or OTCQX, or other applicable principal trading market for the Common Stock, is equal to or less than $0.0001.
Then, or at any time thereafter, the Company shall immediately give written notice of the occurrence of such Event of Default to the Holders of all Debentures then outstanding, and in each and every such case, unless such Event of Default shall have been waived in writing by a majority in interest of the Holders of the Debentures (which waiver shall not be deemed to be a waiver of any subsequent default), then at the option of a majority in interest of the Holders and in the discretion of a majority in interest of the Holders, take any or all of the following actions: (i) pursue remedies against the Company in accordance with any of the Holder’s rights, (ii) increase the interest rate applicable to the Debentures to the lesser of eighteen percent (18%) per annum and the maximum interest rate allowable under applicable law, (iii) in the case of an Event of Default under Section 10(e)(ii)(1) based on the Company’s failure to be DWAC Operational, increase the Principal Amount to an amount equal to one hundred five percent (105%) of the then-outstanding Principal Amount, (iv) in the case of an Event of Default under Section 10(d)(i), increase the Principal Amount to an amount equal to one hundred ten percent (110%) of the then-outstanding Principal Amount, (v) in the case of an Event of Default under Section 10(d)(i) through (v), increase the Principal Amount of the relevant Holder’s Debenture by One Thousand Dollars and 00/100 ($1,000.00) for each day the related failure continues, (vi) in the case of an Event of Default under Section 10(d)(ii) through (v) arising from an untimely delivery to the Holder of Conversion Shares or shares of Common Stock in de-legended form, if the closing bid price of the Common Stock on the Trading Day immediately prior to the actual date of delivery of Conversion Shares or de-legended shares, as the case may be, is less than the closing bid price on the Trading Day immediately prior to the date when Conversion Shares or de-legended shares were required to be delivered, increase the Principal Amount of the relevant Holder’s Debenture by an amount per share equal to such difference, and (vii) following the expiration of the applicable grace period (if any), at the option and discretion of the Holder, accelerate the full indebtedness under this Debenture, in an amount equal to one hundred forty percent (140%) of the outstanding Principal Amount and accrued and unpaid interest (the “Acceleration Amount”), whereupon the Acceleration Amount shall be immediately due and payable, without presentment, demand, protest or notice of any kinds, all of which are hereby expressly waived, anything contained herein, in the Securities Purchase Agreement or in any other note or instruments to the contrary notwithstanding. In the case of an Event of Default under Section 10(d)(ii), the Holder may either (i) declare the Acceleration Amount to exclude the Conversion Amount that is the subject of the Event of Default, in which case the Acceleration Amount shall be based on the remaining Principal Amount and accrued interest (if any), in which case the Company shall continue to be obligated to issue the Conversion Shares, or (ii) declare the Acceleration Amount to include the Conversion Amount that is the subject of the Event of Default, in which case the Acceleration Amount shall be based on the full Principal Amount, including the Conversion Amount, and accrued interest (if any), whereupon the Notice of Conversion shall be deemed withdrawn. At its option, the Holder may elect to convert the Debenture pursuant to Section 2 notwithstanding the prior declaration of a default and acceleration, in the sole discretion of such Holder. A majority in interest of the Holders may immediately enforce any and all of the Holder's rights and remedies provided herein or any other rights or remedies afforded by applicable law. Notwithstanding the foregoing, in the case of a default under Section 10(d)(ii) through (iv), the Holder of the Debenture sought to be converted, transferred or de-legended, as the case may be, acting singly, shall have the sole and absolute discretion to increase the applicable interest rate on the Debentures held by such Holder and/or to accelerate the Debenture(s) held by such Holder. The Company expressly acknowledges and agrees that the Holder’s exercise of any or all of the remedies provided herein or under applicable law, including without limitation the increase(s) in the Principal Amount and the Acceleration Amount as may be declared in the case of a default, is reasonable and appropriate due to the inability to define the financial hardship that the Company’s default would impose on the Holders. To the extent that the Holder’s exercise of any of its remedies in the case of an Event of Default shall be construed to exceed the maximum interest rate allowable under applicable law, then such remedies shall be reduced to equal the maximum interest rate allowable under applicable law
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11. Nothing contained in this Debenture shall be construed as conferring upon the Holder the right to vote or to receive dividends or to consent or receive notice as a shareholder in respect of any meeting of shareholders or any rights whatsoever as a shareholder of the Company, unless and to the extent converted in accordance with the terms hereof.
12. This Debenture may be amended only by the written consent of the parties hereto. Notwithstanding the foregoing, the Principal Amount of this Debenture shall automatically be reduced by any and all Conversion Amounts (to the extent that the same relate to principal hereof). In the absence of manifest error, the outstanding Principal Amount of the Debenture on the Holder’s book and records shall be the correct amount.
13. In the event of any inconsistency between the provisions of this Debenture and the provisions of any other Transaction Document, the provisions of this Debenture shall prevail. Without limiting the generality of the foregoing, in the event the Transfer Agent is not required to transfer any Common Stock, issue Conversion Shares or de-legended shares of Restricted Stock pursuant to the Transfer Agent Instruction Letter, this shall not operate as an excuse, extension or waiver of the Company’s obligation to issue and deliver Conversion Shares or de-legended Restricted Stock.
14. The Company specifically acknowledges and agrees that in the event of a breach or threatened breach by the Company of any provision hereof or of any other Transaction Document, the Holder will be irreparably damaged, and that damages at law would be an inadequate remedy if this Debenture or such other Transaction Document were not specifically enforced. Therefore, in the event of a breach or threatened breach by the Company, the Holder shall be entitled, in addition to all other rights and remedies, to an injunction restraining such breach, without being required to show any actual damage or to post any bond or other security, and/or to a decree for a specific performance of the provisions of this Debenture and the other Transaction Documents.
15. No waivers or consents in regard to any provision of this Debenture may be given other than by an instrument in writing signed by the Holder.
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16. Each time, while this Debenture is outstanding, the Company enters into a Section 3(a)(9) transaction (including but not limited to the issuance of new promissory notes or debentures, or of a replacement promissory note or debenture), or Section 3(a)(10) transaction, in which any 3rd party has the right to convert monies owed to that 3rd party (or receive shares pursuant to a settlement or otherwise) at a discount to market greater than the Conversion Price in effect at that time (prior to all other applicable adjustments in this Debenture), then the Conversion Price shall be automatically adjusted to such greater discount percentage (prior to all applicable adjustments in this Debenture) until this Debenture is no longer outstanding. Each time, while this Debenture is outstanding, the Company enters into a Section 3(a)(9) transaction (including but not limited to the issuance of new promissory notes or debentures, or of a replacement promissory note or debenture), or Section 3(a)(10) transaction, in which any 3rd party has a look back period greater than the look back period in effect under this Debenture at that time (currently a twenty (20) Trading Day look back period as described in this Debenture applies), then the Holder’s look back period shall automatically be adjusted to such greater number of days until this Debenture is no longer outstanding. The Company shall give written notice to the Holder, with the adjusted Conversion Price and/or adjusted look back period (each adjustment that is applicable due to the triggering event), within one (1) business day of an event that requires any adjustment described in this section.
[Signature Page Follows]
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IN WITNESS WHEREOF, the Company has caused this Debenture to be duly executed by an officer thereunto duly authorized as of the date of issuance set forth above.
Arkados Group, Inc. | ||
By: | ||
Name: | Terrence DeFranco | |
Title: | Chief Executive Officer |
[Signature Page to Convertible Debenture]
EXHIBIT B
ARKADOS GROUP, INC.
IRREVOCABLE TRANSFER AGENT INSTRUCTION LETTER
November __, 2016
VStock Transfer, LLC
18 Lafayette Place
Woodmere, NY 11598
Re: Irrevocable Instructions for Peak One Opportunity Fund, LP
Ladies and Gentlemen:
ARKADOS GROUP, INC., a Delaware corporation (the "Company") and Peak One Opportunity Fund, L.P. (together with its successors and assigns, the "Investor") have entered into a Securities Purchase Agreement dated as of November __, 2016 (the "Agreement") providing for the issuance of the Convertible Debentures, convertible into the Company’s common stock, par value $0.0001 per share (“Common Stock”) in the principal amount of up to $500,000.00 (collectively, the "Debentures").
A copy of the form of the Debentures is attached hereto. The shares of Common Stock to be issued upon conversion of the Debentures are to be registered in the name(s) of the registered holder(s) of the Debentures submitted for conversion, or its assignees, as requested by the Investor.
VStock Transfer, LLC (“VStock Transfer,” the “Transfer Agent” or “you”) are hereby irrevocably authorized and instructed to reserve a sufficient number of shares of Common Stock of the Company to satisfy the Company’s share reservation requirement of 700% of the Debentures under the Agreement (initially, 4,375,000 shares of Common Stock which should be held in reserve for the Investor pursuant to the subject Debentures as of this date) for issuance upon conversion of any of the Debentures referenced herein in accordance with the terms thereof (without giving effect to the 4.99% limitation on ownership, each as set forth in the Debentures). The amount of Common Stock so reserved may be increased, from time to time, by written instructions of the Company or the Investor. The amount of Common Stock so reserved may not be decreased without the prior written consent of the Investor (unless such decrease in reserved shares is due to an issuance of reserved shares pursuant to the conversion of Debentures). You will adjust the number of reserved shares accordingly, within one (1) business day of receipt of any such instructions, so as long as there are sufficient available authorized shares.
The ability to convert the Debentures in a timely manner is a material obligation of the Company pursuant to the Debentures. Your firm is hereby irrevocably authorized and instructed to issue shares of Common Stock of the Company (without any restrictive legend) to the Investor at the request of the Investor without any further action or confirmation by the Company, in which case the issuance shall be deducted against the reserve or, if there are not enough shares held in reserve, from available authorized shares of the Company, either (i) electronically by crediting the account of the Investor’s broker with the Depository Trust Company through its Deposit Withdrawal Agent Commission system, provided that the Company has been made FAST/DRS eligible by DTCC (DWAC), or (ii) if requested by the Investor or if a legal opinion is not provided to the Transfer Agent as described below, in certificated form without any legend which would restrict the transfer of the shares, and you should remove all stop-transfer instructions relating to such shares: (A) upon your receipt from the Investor dated within two (2) business days from the date of the issuance or transfer request, of: (i) a notice of conversion ("Notice of Conversion") executed by the Investor; and (ii) an opinion of counsel of the Investor or the Company, in form, substance and scope customary for opinions of counsel in comparable transactions (and reasonably satisfactory to the Transfer Agent), to the effect that the shares of Common Stock of the Company issued to the Investor pursuant to the Notice of Conversion are not "restricted securities" as defined in Rule 144 and should be issued to the Investor without any restrictive legend; and (B) the number of shares to be issued is less than 4.99% of the total issued Common Stock of the Company. If an opinion from counsel is not provided, you are instructed and authorized to issue shares to the Investor as restricted and the associated certificate(s) should include the customary 144 restrictive legend. You will issue the Common Stock upon conversion within two (2) business days of receipt of a Conversion Notice and any other documents and information you reasonably request. The Transfer Agent must issue the shares of Common Stock to the Investor, pursuant to this agreement, despite any threatened or ongoing dispute between the Company and Investor, unless there is a valid court order prohibiting such issuance.
The Company affirms that it has by all appropriate corporate action irrevocably resolved to issue all required Common Stock to the investor and hereby requests that your firm act immediately, without delay and without the need for any action or confirmation by the Company with respect to the reservation of shares and the issuance of Common Stock pursuant to any Conversion Notices received from the Investor. You agree that the Company’s irrevocable resolutions and this irrevocable letter of instructions constitute sufficient documentation to evidence the Company’s authorization to complete the activities contemplated hereby and that no other Company documentation or confirmation shall be necessary or requested from the Company. The Company hereby irrevocably appoints the Investor as its attorney-in-fact for purposes of executing and delivering, in the Company’s name, any documentation or confirmation that the transfer agent may request in connection with the reservation of shares or the issuance of Common Stock upon conversion as contemplated hereby.
The Investor and the Company understand that VStock Transfer shall not be required to perform any issuances or transfers of shares if (a) the Company or request violates, or is in material violation of, any terms of the Transfer Agent Agreement, (b) such an issuance or transfer of shares is, in the opinion of the Transfer Agent’s legal counsel, as demonstrated by a written legal opinion addressed to the Company and the Investor, in violation of any state or federal securities law or regulation or (c) the issuance or transfer of shares is prohibited or stopped as required or directed by a valid court order. If the Company informs you that there is a court order stopping issuances, then the Company agrees to provide VStock Transfer with a copy of such court order immediately, and a legal opinion from counsel within three (3) business days addressing the matter and, once such court order and legal opinion are received, you will not be obligated to perform any issuances related to the Debentures and this agreement. If the Company has an outstanding balance of fees owed to VStock Transfer for any reason, the Investor understands VStock Transfer will not be obligated to issue Common Stock to the Investor unless the Company or Investor first pays all fees owed to VStock Transfer, provided that if the Investor pays the fees of VStock Transfer for the specific issuance of Common Stock to the Investor under a given Conversion Notice, then VStock Transfer will issue such shares notwithstanding any unpaid fees owed it by the Company for other purposes. The Company authorizes VStock Transfer to inform the Investor of the amount and nature of any outstanding transfer agency fee balances owed by the Company if the Investor requests such information.
You are hereby authorized and directed to promptly disclose to the Investor without any additional confirmation from the Company, after Investor’s request from time to time, the total number of shares of Common Stock issued and outstanding, the total number of shares of Common Stock in the float, and the total number of shares of Common Stock that are authorized but unissued and unreserved.
The Company shall indemnify you and your officers, directors, principals, partners, agents and representatives, and hold each of them harmless from and against any and all loss, liability, damage, claim or expense (including the reasonable fees and disbursements of its attorneys) incurred by or asserted against you or any of them arising out of or in connection the instructions set forth herein, the performance of your duties hereunder and otherwise in respect hereof, including the costs and expenses of defending yourself or themselves against any claim or liability hereunder, except that the Company shall not be liable hereunder as to matters in respect of which it is determined that you have acted with gross negligence or in bad faith. You shall have no liability to the Company in respect to any action taken or any failure to act in respect of this if such action was taken or omitted to be taken in good faith, and you shall be entitled to rely in this regard on the advice of counsel.
The Board of Directors of the Company has approved the foregoing (irrevocable instructions) and does hereby extend the Company’s irrevocable agreement to indemnify your firm and any successor transfer agent for all loss, liability or expense in carrying out the authority and direction herein contained on the terms herein set forth.
The Investor is intended to be, and is, a third party beneficiary hereof, and no amendment or modification to the instructions set forth herein may be made without the consent of the Investor. The Transfer Agent agrees that in the event of its resignation, then the Transfer Agent will provide at least fifteen (15) days prior written notice to the Company and the Investor. The Transfer Agent also agrees that if the Company requests the Transfer Agent provide records pertaining to the register of Common Stock to any third party in what the Transfer Agent has reason to believe is in contemplation of replacing the Transfer Agent with another party, then the Transfer Agent shall notify the Investor within two (2) business days of the Transfer Agent’s receipt of such request.
The Company agrees that in the event it seeks to replace the Transfer Agent, the Company shall provide at least fifteen (15) days prior written notice to the Transfer Agent and the Investor, and the Company shall propose to the Investor a suitable replacement transfer agent and obtain the Investor’s written consent to the replacement of the Transfer Agent at least ten (10) days prior to the proposed effective date of the transition to the replacement transfer agent. The Transfer Agent shall not transfer any records or documentation pertaining to the Common Stock to any purported successor transfer agent without the Investor’s prior written consent. Any replacement transfer agent (whether approved by the Investor or appointed by the Company without the Investor’ prior consent in breach of the foregoing provisions) shall automatically be bound by this Letter Agreement as if a party hereto, and any such replacement transfer agent shall confirm in writing to the Investor within two (2) business days that it is bound by the terms and conditions of these irrevocable instructions.
[Signature Page Follows]
Very truly yours,
ARKADOS GROUP, INC.
By: | ||
Name: | Terrence DeFranco | |
Title: | Chief Executive Officer |
Acknowledged and Agreed:
VSTOCK TRANSFER, LLC
By: | ||
Name: | ||
Title: |
PEAK ONE OPPORTUNITY FUND, L.P.
By: | Peak One Investments, LLC, | |||
its General Partner | ||||
By: | ||||
Name: | Jason Goldstein | |||
Title: | Managing Member |
EXHIBIT C
IRREVOCABLE CORPORATE RESOLUTIONS OF THE
BOARD OF DIRECTORS OF
ARKADOS GROUP, INC.
We, the undersigned, do hereby certify that at a meeting of the Board of Directors (the “Board”) of Arkados Group, Inc., a corporation incorporated under the laws of the State of Delaware (the “Corporation”), duly held on November __, 2016, at which said meeting no less than a majority of the directors were present and voting throughout, the following resolution, upon motions made, seconded and carried, was duly adopted and is now in full force and effect:
WHEREAS, the Board deems it in the best interests of the Corporation to enter into a Securities Purchase Agreement to be dated on or about November __, 2016 (the “Agreement”), by and between the Corporation and Peak One Opportunity Fund LP (the “Buyer”) in connection with the purchase and sale of certain Debentures of the Corporation, in the aggregate principal amount of up to Five Hundred Thousand and 00/100 Dollars ($500,000.00) (the “Debentures”), convertible into shares of common stock, par value $0.0001 per share, of the Corporation (the “Common Stock”), upon the terms and subject to the limitations and conditions set forth in the Agreement; and
WHEREAS, the Board deems it in the best interest of the Corporation to, pursuant to the Agreement, enter into an irrevocable letter agreement with VStock Transfer, LLC, the Corporation’s transfer agent (the “Transfer Agent”), with respect to the reserve of shares of Common Stock which may be issued to the Buyer upon conversion of the Debentures, the issuance of such shares of Common Stock in connection with a conversion of the Debentures, and the indemnification of the Transfer Agent for all loss, liability, or expense in carrying out the authority and direction contained in the irrevocable letter agreement (the “Letter Agreement”).
NOW, THEREFORE, BE IT:
RESOLVED, that the Corporation is hereby authorized and instructed to enter into and perform the Agreement (including, without limitation, the incurrence of indebtedness thereunder), the Debentures, the Letter Agreement, and all other related documents and, to the extent that any corporate action has been taken prior to the date hereof with respect to any matter which would be otherwise authorized pursuant hereto, such action is hereby ratified and confirmed in its entirety;
RESOLVED, that the Corporation is hereby irrevocably authorized and instructed to issue the Securities (as defined in the Agreement) and all Common Stock (including without limitation the issuance of 50,000 shares of Common Stock (the “Restricted Stock”) to Peak One Investments, LLC pursuant to the Agreement) issuable under the Agreement or upon conversion of the Debentures, when issued pursuant to the Transaction Documents (as defined in the Agreement), shall be fully-paid, validly issued, non-assessable shares of Common Stock of the Corporation;
RESOLVED, that the Corporation is hereby irrevocably authorized and instructed to: (i) reserve shares of Common Stock of the Corporation to be issued upon any conversion of the Debentures, (ii) issue such shares of Common Stock in connection with a conversion of the Debentures, upon issuance of a notice of conversion by the holder of the Debentures) without any further action or confirmation by the Corporation, (iii) indemnify the Transfer Agent for all loss, liability, or expense in carrying out the authority and direction contained in the Letter Agreement (iv) provide a power or attorney wherein it appoints the Investor as the Corporation’s attorney-in-fact for purposes of the transactions contemplated by the Letter Agreement.
RESOLVED, that any executive officer of the Corporation be, and hereby is, authorized, empowered and directed, from time to time, to take such additional action and to execute, certify and deliver to the transfer agent of the Corporation, as any appropriate or proper to implement the provisions of the foregoing resolutions; and
RESOLVED, that the foregoing resolutions are irrevocable and cannot be modified, repealed or rescinded without the prior written consent of the Buyer, any purported modification, repeal or rescission without the prior written consent of the Buyer being void, invalid, of no force or effect and unenforceable; and
The undersigned, do hereby certify that we are members of the Board, that the attached is a true and correct copy of resolutions duly adopted and ratified at a meeting of the Board duly convened and held in accordance with its by-laws and the laws of the Corporation’s state of incorporation, as transcribed by us from the minutes; and that the same have not in any way been modified, repealed or rescinded and are in full force and effect. The foregoing resolutions are irrevocable and cannot be modified, repealed or rescinded without the prior written consent of the Buyer.
[Signature Page Follows]
IN WITNESS WHEREOF, we have hereunto set our hands as Members of the Board of Directors of the Corporation.
Dated: November __, 2016
Name: | Terrence DeFranco | |
Title: | Director |
EXHIBIT D
OFFICER'S CERTIFICATE
The undersigned, Terrence DeFranco, Chief Executive Officer of Arkados Group, Inc., a Delaware corporation (the “Company”), in connection with the sale and issuance of those certain Debentures in the aggregate principal amount of up to Five Hundred Thousand and 00/100 Dollars ($500,000.00), in accordance with that certain Securities Purchase Agreement dated November __, 2016, by and between the Company and Peak One Opportunity Fund, L.P. (the “Purchase Agreement”), hereby certifies that:
1. I am the duly appointed Chief Executive Officer of the Company.
2. Attached hereto as Exhibit I is a true and complete copy of the Articles of Incorporation of the Company and all amendments thereto to the date hereof.
3. Attached hereto as Exhibit II is a true and complete copy of the Bylaws of the Company as in effect on the date hereof
4. Attached hereto as Exhibit III are resolutions dated November __, 2016, duly adopted by the Board of Directors of the Company, which resolutions have not been amended, modified or rescinded and remain on this date in full force and effect.
5. The representations and warranties made by the Company in the Purchase Agreement are true and correct in all material respects as of the date of this Officer’s Certificate. The capitalization of the Company described in the Purchase Agreement has not changed as of the date hereof.
6. As of the date hereof, the Company has satisfied and duly performed all of the conditions and obligations specified the Purchase Agreement to be satisfied on or prior to the Closing Date (as defined in the Purchase Agreement) or such conditions and obligations have been waived expressly in writing signed by the purchaser.
7. The Company has complied with or, if compliance prior to Closing (as defined in the Purchase Agreement) is not required, promptly following the Closing the Company shall comply with, the filing requirements in respect of this transaction under (a) Regulation D under the Securities Act of 1933, as amended (the “1933 Act”) (and applicable Blue Sky regulations) and (b) the Securities Exchange Act of 1934, as amended.
8. There has been no adverse change in the business, affairs, prospects, operations, properties, assets or condition of the Company since the date of the Company’s most recent financial statements filed with the SEC, other than losses and matters which would not, individually or in the aggregate, have a Material Adverse Effect (as defined in the Purchase Agreement).
9. The Company is qualified as a foreign corporation in all jurisdictions in which the Company owns or leases properties, or conducts any business except where failure of the Company to be so qualified would not have a Material Adverse Effect (as defined in the Purchase Agreement).
10. The Company is subject to the reporting requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, and is in compliance with all applicable filing requirements, and has filed all required reports during the previous twelve months.
11. To the best of my knowledge and belief, no officer, director, owner of ten percent (10%) or more of the common stock, or other affiliate of the Company has been convicted within the previous ten (10) years of any felony in connection with the purchase or sale of any security, nor been subject to a United States Postal Service false representation order within the past five (5) years.
12. The Company is an operating company, and is not a shell company. If the Company has previously been a shell company, it has since filed Form 10 information (supporting the claim that it is no longer a shell company), reported that it is no longer a shell company, filed all required reports for at least twelve consecutive months after the filing of the respective Form 10 information, and has therefore complied with Rule 144(i)(2).
13. The Company is a corporation organized under the laws of the state of Delaware and is in good standing therein.
[Signature Page Follows]
IN WITNESS WHEREOF, the undersigned has executed this Officer’s Certificate as of November __, 2016.
Name: | Terrence DeFranco | |
Title: | Chief Executive Officer |
EXHIBIT I
ARTICLES OF INCORPORATION
(see attached)
EXHIBIT II
BYLAWS
(see attached)
EXHIBIT III
RESOLUTIONS OF THE BOARD OF DIRECTORS
(see Exhibit C to Securities Purchase Agreement)
EXHIBIT 31.1
CERTIFICATION
I, Terrence DeFranco, certify that:
1. | I have reviewed this Quarterly Report on 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. | 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 our 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 our 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 our 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. | I have disclosed, based on our 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 persons performing the equivalent functions): |
a. | All significant deficiencies and material weaknesses in the design or operation of internal controls 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. |
Date: January 23, 2017 | By: | /s/ Terrence DeFranco | |
Terrence DeFranco | |||
Chief Executive Officer, Chief Financial Officer and Director |
EXHIBIT 32.1
CERTIFICATION
In connection with the Quarterly Report of Arkados Group, Inc. (the “Company”) on Form 10-Q for the quarter ended November 30, 2016, as filed with the Securities and Exchange Commission (the “Report”), I, Terrence DeFranco, Chief Executive Officer (Principal Executive Officer) and Chief Financial Officer of the Company, hereby certify as of the date hereof, solely for purposes of Title 18, Chapter 63, Section 1350 of the United States Code, that to the best of my knowledge:
(1) | The Report fully complies with the requirements of Section 13(a) or 15(d), as applicable, 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 results of operations of the Company at the dates and for the periods indicated. |
Date: January 23, 2017 | By: | /s/ Terrence DeFranco | |
Terrence DeFranco | |||
Chief Executive Officer, Chief Financial Officer and Director |
Document and Entity Information - shares |
6 Months Ended | |
---|---|---|
Nov. 30, 2016 |
Jan. 17, 2017 |
|
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 | Nov. 30, 2016 | |
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 | 13,843,167 | |
Document Fiscal Period Focus | Q2 | |
Document Fiscal Year Focus | 2017 |
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) (Parenthetical) - $ / shares |
Nov. 30, 2016 |
May 31, 2016 |
---|---|---|
Statement of Financial Position [Abstract] | ||
Convertible preferred stock, par value (in dollars per share) | $ 0.0001 | $ 0.0001 |
Convertible preferred stock, authorized | 5,000,000 | 5,000,000 |
Convertible preferred stock, outstanding | 0 | 0 |
Common stock, par value (in dollars per share) | $ 0.0001 | $ 0.0001 |
Common stock, authorized | 600,000,000 | 600,000,000 |
Common stock, issued | 13,843,167 | 13,373,167 |
Common stock, outstanding | 13,843,167 | 13,373,167 |
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) - USD ($) |
3 Months Ended | 6 Months Ended | ||
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Nov. 30, 2015 |
Nov. 30, 2016 |
Nov. 30, 2015 |
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Income Statement [Abstract] | ||||
Sales | $ 389,676 | $ 815,219 | $ 814,163 | $ 922,055 |
Cost of sales | 258,756 | 534,989 | 638,765 | 534,989 |
Gross Profit | 130,920 | 280,230 | 175,398 | 387,066 |
Operating Expenses: | ||||
Selling and general and administrative | 593,446 | 781,063 | 906,387 | 1,310,255 |
Research and development | 41,410 | 185,778 | 50,270 | 284,207 |
Total Operating Expenses | 634,856 | 966,841 | 956,657 | 1,594,462 |
Loss From Operations | (503,936) | (686,611) | (781,259) | (1,207,396) |
Other Income (Expenses): | ||||
Interest expense | (11,072) | (8,044) | (20,723) | (15,458) |
Gain on settlement of liability | 17,648 | 17,648 | ||
Foreign currency transaction loss | (569) | (1,131) | ||
Total Other Expense | (6,576) | (8,613) | (3,075) | (16,589) |
Loss Before Provision for Income Taxes | (497,360) | (695,224) | (784,334) | (1,223,985) |
Provision for income taxes | (11,791) | (11,791) | ||
Net Loss | $ (509,151) | $ (695,224) | $ (796,125) | $ (1,223,985) |
Loss per Common Share - Basic and Diluted (in dollars per share) | $ (0.04) | $ (0.06) | $ (0.06) | $ (0.10) |
Weighted Average Shares Outstanding - Basic and Diluted (in shares) | 13,728,834 | 12,081,500 | 13,549,046 | 11,942,374 |
DESCRIPTION OF BUSINESS |
6 Months Ended | |||
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Nov. 30, 2016 | ||||
Organization, Consolidation and Presentation of Financial Statements [Abstract] | ||||
DESCRIPTION OF BUSINESS |
Arkados Group, Inc. (the “Parent”) conducts business activities principally through its two 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”). Settlements reached in connection with the Asset Sale and the fulfillment of obligations in connection therewith, have been substantially completed.
Following the Asset Sale, the Company shifted its focus towards the following businesses:
Arkados - Software and hardware design and development of solutions that enable machine to machine communications for the Internet of Things (“IoT”). Arkados’ solutions are primarily focused on industrial and commercial applications such as building automation, energy management and predictive maintenance and are uniquely designed to drive a wide variety of full-featured, cutting edge solutions.
AES - Energy conservation services for commercial and industrial facilities owners and managers. AES’ services include implementing energy conservation measures such as LED lighting retrofits, oil to natural gas boiler conversions, co-generation system installation and solar PV system installations. In addition, AES sells technology solutions designed by Arkados, Inc. and others that serve to improve the effectiveness of the measures and increases return on investment for the customer.
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.
The accompanying condensed consolidated financial statements as of November 30, 2016 (unaudited) and May 31, 2016 and for the three and six months ended November 30, 2016 and 2015 (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, 2016 as disclosed in our annual report on Form 10-K for that year. The results of the three and six months ended November 30, 2016 (unaudited) are not necessarily indicative of the results to be expected for the pending full year ending May 31, 2017. |
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
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Accounting Policies [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
The Company’s plan, through potential acquisitions and the continued promotion of its services to existing and potential customers, is to generate sufficient revenues to cover our anticipated expenses. The Company is currently exploring several options to meet its short-term cash requirements, including an equity raise or loan funding from third parties. Although no assurances can be given as to the Company’s ability to deliver on its revenue plans, or that unforeseen expenses may arise, the management of the Company believes that the revenue to be generated from operations together with potential bridge note funding, additional issuances of equity or other potential financing will provide the necessary funding for the Company to continue as a going concern.
Arkados
The Company enters into arrangements with end users for items which may include software license fees, services, maintenance and royalties 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.
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.
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. Sales of products are recognized when the products are shipped and the customer takes risk of ownership and assumes the risk of loss. Royalty income is recognized as it is earned and recorded when reported by the customer.
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.
The three levels of the fair value hierarchy defined by ASC 820 are as follows:
Level 1 – Quoted prices are available in active markets for identical assets or liabilities as of the reporting date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis. Level 1 primarily consists of financial instruments such as exchange-traded derivatives, marketable securities and listed equities.
Level 2 – Pricing inputs are other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reported date. Level 2 includes those financial instruments that are valued using models or other valuation methodologies. These models are primarily industry-standard models that consider various assumptions, including quoted forward prices for commodities, time value, volatility factors and current market and contractual prices for the underlying instruments, as well as other relevant economic measures. Substantially all of these assumptions are observable in the marketplace throughout the full term of the instrument, can be derived from observable data or are supported by observable levels at which transactions are executed in the marketplace. Instruments in this category generally include non-exchange-traded derivatives such as commodity swaps, interest rate swaps, options and collars.
Level 3 – Pricing inputs include significant inputs that are generally less observable from objective sources. These inputs may be used with internally developed methodologies that result in management’s best estimate of fair value.
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.
We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of the financial statements. Significant estimates include the allowance for doubtful accounts, the useful life of plant and equipment and intangible assets, deferred tax asset and valuation allowance, and assumptions used in Black-Scholes-Merton, or BSM, valuation methods, such as expected volatility, risk-free interest rate, and expected dividend rate.
Accounting standards generally provides three criteria that, if met, require companies to bifurcate conversion options from their host instruments and account for them as free standing derivative financial instruments. These three criteria include circumstances in which (a) the economic characteristics and risks of the embedded derivative instrument are not clearly and closely related to the economic characteristics and risks of the host contract, (b) the hybrid instrument that embodies both the embedded derivative instrument and the host contract is not re-measured at fair value under otherwise applicable generally accepted accounting principles with changes in fair value reported in earnings as they occur, and (c) a separate instrument with the same terms as the embedded derivative instrument would be considered a derivative instrument. Professional standards also provide an exception to this rule when the host instrument is deemed to be conventional as defined under professional standards as “The Meaning of Conventional Convertible Debt Instrument.”
The Company accounts for convertible instruments (when it has determined that the embedded conversion options should not be bifurcated from their host instruments) in accordance with professional standards when “Accounting for Convertible Securities with Beneficial Conversion Features,” as those professional standards pertain to “Certain Convertible Instruments.” Accordingly, the Company records, when necessary, discounts to convertible notes for the intrinsic value of conversion options embedded in debt instruments based upon the differences between the fair value of the underlying common stock at the commitment date of the note transaction and the effective conversion price embedded in the note. Original issue discounts (“OID”) under these arrangements are amortized over the term of the related debt to their earliest date of redemption. The Company also records when necessary deemed dividends for the intrinsic value of conversion options embedded in preferred shares based upon the differences between the fair value of the underlying common stock at the commitment date of the note transaction and the effective conversion price embedded in the note.
ASC 815-40 provides that, among other things, generally, if an event is not within the entity’s control could or require net cash settlement, then the contract shall be classified as an asset or a liability.
In January 2017, the Financial Accounting Standards Board (“FASB”) issued an Accounting Standards Update (“ASU”) 2017-01, “Business Combinations (Topic 805) Clarifying the Definition of a Business”. The amendments in this Update is to clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill, and consolidation. The guidance is effective for annual periods beginning after December 15, 2017, including interim periods within those periods. The Company is currently evaluating the impact of adopting this guidance.
In November 2016, the FASB issued ASU 2016-18, “Statement of Cash Flows (Topic 230) Restricted Cash”. The new guidance requires that the reconciliation of the beginning-of-period and end-of-period amounts shown in the statement of cash flows include restricted cash and restricted cash equivalents. If restricted cash is presented separately from cash and cash equivalents on the balance sheet, companies will be required to reconcile the amounts presented on the statement of cash flows to the amounts on the balance sheet. Companies will also need to disclose information about the nature of the restrictions. The guidance is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The Company is currently evaluating the impact of adopting this guidance.
In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230) Classification of Certain Cash Receipts and Cash Payments”. The new guidance is intended to reduce diversity in practice in how certain transactions are classified in the statement of cash flows. ASU 2016-15 is effective for the Company beginning in the first quarter of fiscal 2019. Early adoption is permitted, provided that all of the amendments are adopted in the same period. The guidance requires application using a retrospective transition method. The Company is currently evaluating the impact of adopting this guidance.
In April 2016, the FASB issued ASU 2016 – 10 “Revenue from Contract with Customers: identifying Performance Obligations and Licensing”. The amendments in this Update clarify the two following aspects (a) contracts with customers to transfer goods and services in exchange for consideration and (b) determining whether an entity’s promise to grant a license provides a customer with either a right to use the entity’s intellectual property (which is satisfied at a point in time) or a right to access the entity’s intellectual property (which is satisfied over time). The amendments in this Update are intended to reduce the degree of judgement necessary to comply with Topic 606. This guidance has no effective date as yet. The Company is currently evaluating the impact of adopting this guidance.
In March 2016, the FASB issued authoritative guidance regarding the accounting for share-based payment transactions, including income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The guidance is to be applied for annual periods beginning after December 15, 2016 and interim periods within those annual periods, and early adoption is permitted. The guidance requires companies to apply the requirements retrospectively, modified retrospectively, or prospectively depending on the amendment(s) applied. The Company is currently evaluating the impact of adopting this guidance.
In February 2016, the FASB issued ASU 2016-02, “Leases” (Topic 842). This guidance will be effective for public entities for fiscal years beginning after December 15, 2018 including the interim periods within those fiscal years. Early application is permitted. Under the new provisions, all lessees will report a right-of-use asset and a liability for the obligation to make payments for all leases with the exception of those leases with a term of 12 months or less. All other leases will fall into one of two categories: (i) Financing leases, similar to capital leases, which will require the recognition of an asset and liability, measured at the present value of the lease payments and (ii) Operating leases which will require the recognition of an asset and liability measured at the present value of the lease payments. Lessor accounting remains substantially unchanged with the exception that no leases entered into after the effective date will be classified as leveraged leases. For sale leaseback transactions, the sale will only be recognized if the criteria in the new revenue recognition standard are met. The Company is currently evaluating the impact of adopting this guidance.
In January 2016, the FASB issued ASU 2016-01, which amends the guidance relating to the classification and measurement of financial instruments. Changes to the current guidance primarily affect the accounting for equity investments, financial liabilities under the fair value option, and the presentation and disclosure requirements for financial instruments. In addition, the ASU clarifies guidance related to the valuation allowance assessment when recognizing deferred tax assets resulting from unrealized losses on available-for-sale debt securities. The new standard is effective for fiscal years and interim periods beginning after December 15, 2017, and upon adoption, an entity should apply the amendments by means of a cumulative-effect adjustment to the balance sheet at the beginning of the first reporting period in which the guidance is effective. Early adoption is not permitted except for the provision to record fair value changes for financial liabilities under the fair value option resulting from instrument-specific credit risk in other comprehensive income. The Company is currently evaluating the impact of adopting this guidance.
In August 2015, the FASB issued ASU 2015-14, “Revenue From Contracts With Customers (Topic 606)”. The amendments in this ASU defer the effective date of ASU 2014-09 “Revenue From Contracts With Customers (Topic 606)”. Public business entities should apply the guidance in ASU 2014-09 to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. The Company is still evaluating the impact of adopting this guidance.
All newly issued but not yet effective accounting pronouncements have been deemed to be not applicable or immaterial to the Company. |
ASSET SALE AND DEBT SUBJECT TO EQUITY BEING ISSUED |
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Nov. 30, 2016 | |||
Goodwill and Intangible Assets Disclosure [Abstract] | |||
ASSET SALE AND DEBT SUBJECT TO EQUITY BEING ISSUED |
In December 2010, the Company entered into an agreement to sell substantially all of the assets (the “Asset Sale”) to STMicroelectronics, Inc. (“ST US”), a subsidiary of STMicroelectronics N.V. (“ST”). 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. The Company is negotiating with its remaining unsecured debt holders to compromise, extend the due date or convert outstanding debt into equity. Debt holders who have agreed to settle through 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.
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 November 30, 2016 and May 31, 2016.
As of November 30, 2016 and May 31, 2016, there remained $456,930 of debts that have been settled with debt holders who have agreed to accept equity for their remaining debt. |
ACCOUNTS PAYABLE AND ACCRUED EXPENSES |
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Payables and Accruals [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
ACCOUNTS PAYABLE AND ACCRUED EXPENSES |
As of November 30, 2016 and May 31, 2016, accounts payable and accrued expenses consist of the following amounts:
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NOTES PAYABLE |
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Nov. 30, 2016 | ||||
Debt Disclosure [Abstract] | ||||
NOTES PAYABLE |
Notes Payable
Notes payable transactions include the following:
FY 2016 (Year Ended May 31, 2016) Transactions:
In January 2016, the Company executed a promissory note for a loan in the principal amount of $60,000. The promissory note bears interest at 6% per year, compounded quarterly, and matures on January 15, 2017. The proceeds from this promissory note were used to partially repay two convertible notes as discussed below. In January 2017, the Company and holder amended this promissory note to extend the maturity date to March 31, 2017.
On January 8, 2016, the Company entered into an Exchange Agreement with the noteholders of the certain 6% convertible notes (“Convertible Notes”) that were in default. On January 15, 2016, the Company applied the proceeds of the new promissory note together with the issuance of 50,000 shares of the Company’s common stock, to the payment of two outstanding Convertible Notes that were in default having the aggregate outstanding principal amount of $130,000. In exchange for the payment and the shares, the holders of the outstanding Convertible Notes surrendered their notes, and the Company issued a new 6% Convertible Note to them in the original principal amount of $40,000 (“Reissued Note”). The Reissued Note bears interest at the rate of 6% per year, compounded quarterly, and matured on December 31, 2016. In January 2017, the Company agreed to extend the maturity date of the Reissued Note to March 31, 2017. At any time during the term of the Reissued Note, the holders have the right to convert any unpaid portion of the Reissued Note and accrued interest into shares of common stock at an original conversion price of $1.20 per share. The Company has evaluated the conversion terms and determined that a beneficial conversion feature is not applicable for this exchange transaction. The holders further agreed that their extension of the maturity of the outstanding Convertible Notes had been effective from October 31, 2015 until January 15, 2016.
On March 31, 2016 and May 6, 2016, the Company executed promissory notes for loans, each in the amount of $10,000. The promissory notes bear interest at 6% per year, compounded quarterly. Both notes matured on June 30, 2016. The proceeds from the promissory notes were used to partially repay two Convertible Notes as discussed above. In January 2017, the Company executed an amendment to the promissory notes to extend the maturity date to March 31, 2017. The holders further agreed that their extension of the maturity of the outstanding promissory notes had been effective from June 30, 2016 until January 15, 2017.
FY 2017 (Year Ended May 31, 2017):
In August 2016 the Company issued a promissory note in the amount of $150,000 with a maturity date in January 2017. The loan bears interest at 10% per annum compounded quarterly. In January 2017, the Company and holder amended this promissory note to extend the maturity date to March 31, 2017.
On October 28, 2016 the Company issued a convertible promissory note for an aggregate principal amount of $38,500 (which includes an Original Issue Discount (“OID”) of $3,500) with a maturity date of January 30, 2017. The debenture is convertible only upon default after January 30, 2017 at a conversion price of 65% of the average of the three lowest traded prices occurring during the 25 consecutive trading days immediately preceding the applicable conversion date. As additional consideration, the Company issued 20,000 shares of common stock upon execution of this agreement. Accordingly the Company recorded debt discount of $11,793 related to the restricted shares issued, and an original issue discount of $3,500. The debt discount and OID is amortized on a straight line basis over the term of the loan and amounted to $5,369 as of November 30, 2016. Net discount and net loan balance amounted to $9,924 and $28,576 respectively, as of November 30, 2016 and is recorded in convertible debentures.
Long term convertible debenture:
On November 11, 2016 the Company entered into a Securities Purchase Agreement whereas, the buyer wishes to purchase from the Company securities consisting of the Company’s Convertible Debentures due three years from issuance for an aggregate principal amount of up to $500,000 (which includes an aggregate purchase price of $450,000 and 10% Original Issue Discount (“OID”) of $50,000). The Debentures are to be issued in three tranches. On November 11, 2016 the Company issued the first of three debentures amounting to$150,000 of principal, consisting of $135,000 in proceeds and $15,000 OID. The debenture is convertible at a conversion price of $0.65 up to 150 days after the issuance date and if no event of default. If an Event of Default has occurred, or 150 days after the Issuance Date, the conversion price is the lesser of (a) $0.65 or (b) Sixty Five percent (65%) of the lowest closing bid price of the Common Stock for the twenty (20) Trading Days immediately preceding the date of the date of conversion of the debentures. Accounting for derivatives will be evaluated after 150 days of issuance or upon default, if applicable where at that point the conversion price becomes variable. As additional consideration, the Company issued 50,000 shares of common stock upon execution of this agreement. In relation to this transaction the Company also incurred deferred financed costs totaling $6,000 for legal fees and commitment fees. Accordingly the Company recorded debt discount of $38,337 related to the restricted shares issued, a debt discount of $74,530 related to the beneficial conversion feature, an original issue discount of $15,000 and deferred finance cost of $6,000. As of November 30, 2016, total straight line amortization for these transactions amounted to $2,323 which resulted in a net discount of $131,544 and a net loan balance of $18,456 classified as long term debt. |
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Equity [Abstract] | |||||||||||||||||||||||||||||||||||||||||||
STOCKHOLDERS' DEFICIENCY |
FY 2016 (Year Ended May 31, 2016):
FY 2017 (Year Ended May 31, 2017):
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STOCK-BASED COMPENSATION |
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Disclosure of Compensation Related Costs, Share-based Payments [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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
The Company issued options to purchase an aggregate of 4,100,000 shares of the Company’s common stock in the year ended May 31, 2016, 2,100,000 of which were granted outside of the 2004 Stock Option and Restricted Stock Plan (the “2004 Plan”). There were no options granted during the three or six months ended November 30, 2016.
Compensation based stock option activity for qualified and unqualified stock options are summarized as follows:
The compensation expense attributed to the issuance of the options will be recognized as they vested/earned. These stock options 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 to purchase shares of the Company's common stock including those attributed to debt issuances are summarized as follows:
Issuances of warrants to purchase shares of the Company's common stock were as follows:
FY 2016 (Year Ended May 31, 2016):
FY 2017 (Year Ended May 31, 2017):
There were no warrants granted during the three or six months ended November 30, 2016.
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. |
LICENSE AGREEMENTS |
6 Months Ended | |||
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Nov. 30, 2016 | ||||
License Agreements | ||||
LICENSE 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 $13,583 and $66,000 for the three months ended August 31, 2016 and 2015, respectively.
Agreement License of Meter Collar and Bridge Programmable Logic
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 $-0- and $42,500 for the three months ended August 31, 2016 and 2015, respectively.
In March 2015, the Company entered into a one-year agreement, with automatic one year renewals until terminated by either party with sixty (60) days notice, with Tatung to provide services in the area of business development and as a representative to sell its products. Tatung will pay a monthly retainer fee for this service. Revenue recognized under this agreement was approximately $60,000 for the three months ended August 31, 2016. |
COMMITMENTS |
6 Months Ended | |||
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Nov. 30, 2016 | ||||
Commitments and Contingencies Disclosure [Abstract] | ||||
COMMITMENTS |
Leases
Effective October 1, 2014 as amended on January 15, 2015, the Company entered a lease for its office space at a total monthly rental of $1,874. The lease expired on January 15, 2016. The Company renewed this lease until January 15, 2017 at a monthly rental of $2,034. In January 2017, the Company renewed this lease until January 15, 2018, with an option to renew for one additional year upon its expiration.
Our AES subsidiary leases offices in Jericho, New York. The facility is approximately 1,850 square feet, occupied pursuant to a lease that commenced on August 1, 2015 and expires September 30, 2018. The average annual rent over the term of the lease is approximately $57,300. This amount does not include taxes for the premises.
Rent expense for all locations including occupancy costs for the three months ended November 30, 2016 and 2015 was $20,929 and 21,445, respectively. Rent expense for all locations including occupancy costs for the six months ended November 30, 2016 and 2015 was $43,706 and 32,211, respectively.
Consulting Agreements
On September 15, 2016, the Company entered into two consulting agreements with two consultants, pursuant to which the Company agreed to issue 200,000 shares of common stock to each consultant in exchange for certain consulting services. |
CONCENTRATIONS OF CREDIT RISK |
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Risks and Uncertainties [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
CONCENTRATIONS OF CREDIT RISK |
Cash
The Company maintains principally all cash balances in two financial institutions which, at times, may exceed the amount insured by the Federal Deposit Insurance Corporation. The exposure to the Company is solely dependent upon daily bank balances and the respective strength of the financial institutions. The Company has not incurred any losses on these accounts.
Net Sales
Two customers accounted for 86% and 62% of net sales for the three months ended November 30, 2016 and 2015, respectively, as set forth below:
Two customers accounted for 83% and 54% of net sales for the six months ended November 30, 2016 and 2015 respectively, as set forth below:
Accounts Receivable
Two customers accounted for 100% of the accounts receivable as of November 30, 2016, as set forth below:
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RELATED PARTY TRANSACTIONS |
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Nov. 30, 2016 | ||||
Related Party Transactions [Abstract] | ||||
RELATED PARTY TRANSACTIONS |
There were no related party transactions during the period. |
BUSINESS SEGMENT INFORMATION |
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Segment Reporting [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
BUSINESS SEGMENT INFORMATION |
As of November 30, 2016, the Company had two operating segments, Arkados and Arkados Energy Solutions (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
Information about segments is as follows:
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SUBSEQUENT EVENTS |
6 Months Ended | |||
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Nov. 30, 2016 | ||||
Subsequent Events [Abstract] | ||||
SUBSEQUENT EVENTS |
On December 31, 2016, the Company entered into a settlement agreement with one of its vendors, pursuant to which the Company agreed to issue the vendor an aggregate of 33,596 shares of its common stock in exchange for the cancellation of its outstanding invoice of $20,158 for services rendered.
On December 13, 2016 the Company entered into a one year consulting agreement for financial advice. As compensation for services the Company will issue 50,000 shares of restricted common stock upon execution of the agreement.
On January 2017, the Company executed multiple amendments to extend the maturity date of certain promissory notes with an aggregate principal amount of $270,000, to March 31, 2017. The Company also entered into an agreement to extend its lease for its office space for an additional year.
On January 19, 2017, the Company entered into a settlement agreement with one of its former service providers, pursuant to which the Company agreed to issue the service provider an aggregate of 175,000 shares of its common stock in exchange for the cancellation of its outstanding invoice of $94,617.00 for services rendered. |
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Policies) |
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Accounting Policies [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Basis of Presentation |
The Company’s plan, through potential acquisitions and the continued promotion of its services to existing and potential customers, is to generate sufficient revenues to cover our anticipated expenses. The Company is currently exploring several options to meet its short-term cash requirements, including an equity raise or loan funding from third parties. Although no assurances can be given as to the Company’s ability to deliver on its revenue plans, or that unforeseen expenses may arise, the management of the Company believes that the revenue to be generated from operations together with potential bridge note funding, additional issuances of equity or other potential financing will provide the necessary funding for the Company to continue as a going concern. |
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Principles of Consolidation |
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Revenue Recognition |
Arkados
The Company enters into arrangements with end users for items which may include software license fees, services, maintenance and royalties 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.
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.
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. Sales of products are recognized when the products are shipped and the customer takes risk of ownership and assumes the risk of loss. Royalty income is recognized as it is earned and recorded when reported by the customer.
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. |
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Cash and Cash Equivalents |
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Accounts Receivable |
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Fair Value of Financial Instruments |
The three levels of the fair value hierarchy defined by ASC 820 are as follows:
Level 1 – Quoted prices are available in active markets for identical assets or liabilities as of the reporting date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis. Level 1 primarily consists of financial instruments such as exchange-traded derivatives, marketable securities and listed equities.
Level 2 – Pricing inputs are other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reported date. Level 2 includes those financial instruments that are valued using models or other valuation methodologies. These models are primarily industry-standard models that consider various assumptions, including quoted forward prices for commodities, time value, volatility factors and current market and contractual prices for the underlying instruments, as well as other relevant economic measures. Substantially all of these assumptions are observable in the marketplace throughout the full term of the instrument, can be derived from observable data or are supported by observable levels at which transactions are executed in the marketplace. Instruments in this category generally include non-exchange-traded derivatives such as commodity swaps, interest rate swaps, options and collars.
Level 3 – Pricing inputs include significant inputs that are generally less observable from objective sources. These inputs may be used with internally developed methodologies that result in management’s best estimate of fair value. |
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Earnings (Loss) Per Share ("EPS") |
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.
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Stock Based Compensation |
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Use of Estimates |
We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of the financial statements. Significant estimates include the allowance for doubtful accounts, the useful life of plant and equipment and intangible assets, deferred tax asset and valuation allowance, and assumptions used in Black-Scholes-Merton, or BSM, valuation methods, such as expected volatility, risk-free interest rate, and expected dividend rate. |
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Inventory |
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Property and Equipment |
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Research and Development |
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Foreign Currency Transactions |
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Deferred Financing Costs |
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Convertible Instruments |
Accounting standards generally provides three criteria that, if met, require companies to bifurcate conversion options from their host instruments and account for them as free standing derivative financial instruments. These three criteria include circumstances in which (a) the economic characteristics and risks of the embedded derivative instrument are not clearly and closely related to the economic characteristics and risks of the host contract, (b) the hybrid instrument that embodies both the embedded derivative instrument and the host contract is not re-measured at fair value under otherwise applicable generally accepted accounting principles with changes in fair value reported in earnings as they occur, and (c) a separate instrument with the same terms as the embedded derivative instrument would be considered a derivative instrument. Professional standards also provide an exception to this rule when the host instrument is deemed to be conventional as defined under professional standards as “The Meaning of Conventional Convertible Debt Instrument.”
The Company accounts for convertible instruments (when it has determined that the embedded conversion options should not be bifurcated from their host instruments) in accordance with professional standards when “Accounting for Convertible Securities with Beneficial Conversion Features,” as those professional standards pertain to “Certain Convertible Instruments.” Accordingly, the Company records, when necessary, discounts to convertible notes for the intrinsic value of conversion options embedded in debt instruments based upon the differences between the fair value of the underlying common stock at the commitment date of the note transaction and the effective conversion price embedded in the note. Original issue discounts (“OID”) under these arrangements are amortized over the term of the related debt to their earliest date of redemption. The Company also records when necessary deemed dividends for the intrinsic value of conversion options embedded in preferred shares based upon the differences between the fair value of the underlying common stock at the commitment date of the note transaction and the effective conversion price embedded in the note.
ASC 815-40 provides that, among other things, generally, if an event is not within the entity’s control could or require net cash settlement, then the contract shall be classified as an asset or a liability. |
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Reclassifications | Reclassifications - Certain reclassifications have been made to conform the prior period data to the current presentations. The Company has reclassified a $40,000 note payable to Convertible debt. This reclassification had no impact on reported results of operations. |
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Recent Accounting Pronouncements |
In January 2017, the Financial Accounting Standards Board (“FASB”) issued an Accounting Standards Update (“ASU”) 2017-01, “Business Combinations (Topic 805) Clarifying the Definition of a Business”. The amendments in this Update is to clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill, and consolidation. The guidance is effective for annual periods beginning after December 15, 2017, including interim periods within those periods. The Company is currently evaluating the impact of adopting this guidance.
In November 2016, the FASB issued ASU 2016-18, “Statement of Cash Flows (Topic 230) Restricted Cash”. The new guidance requires that the reconciliation of the beginning-of-period and end-of-period amounts shown in the statement of cash flows include restricted cash and restricted cash equivalents. If restricted cash is presented separately from cash and cash equivalents on the balance sheet, companies will be required to reconcile the amounts presented on the statement of cash flows to the amounts on the balance sheet. Companies will also need to disclose information about the nature of the restrictions. The guidance is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The Company is currently evaluating the impact of adopting this guidance.
In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230) Classification of Certain Cash Receipts and Cash Payments”. The new guidance is intended to reduce diversity in practice in how certain transactions are classified in the statement of cash flows. ASU 2016-15 is effective for the Company beginning in the first quarter of fiscal 2019. Early adoption is permitted, provided that all of the amendments are adopted in the same period. The guidance requires application using a retrospective transition method. The Company is currently evaluating the impact of adopting this guidance.
In April 2016, the FASB issued ASU 2016 – 10 “Revenue from Contract with Customers: identifying Performance Obligations and Licensing”. The amendments in this Update clarify the two following aspects (a) contracts with customers to transfer goods and services in exchange for consideration and (b) determining whether an entity’s promise to grant a license provides a customer with either a right to use the entity’s intellectual property (which is satisfied at a point in time) or a right to access the entity’s intellectual property (which is satisfied over time). The amendments in this Update are intended to reduce the degree of judgement necessary to comply with Topic 606. This guidance has no effective date as yet. The Company is currently evaluating the impact of adopting this guidance.
In March 2016, the FASB issued authoritative guidance regarding the accounting for share-based payment transactions, including income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The guidance is to be applied for annual periods beginning after December 15, 2016 and interim periods within those annual periods, and early adoption is permitted. The guidance requires companies to apply the requirements retrospectively, modified retrospectively, or prospectively depending on the amendment(s) applied. The Company is currently evaluating the impact of adopting this guidance.
In February 2016, the FASB issued ASU 2016-02, “Leases” (Topic 842). This guidance will be effective for public entities for fiscal years beginning after December 15, 2018 including the interim periods within those fiscal years. Early application is permitted. Under the new provisions, all lessees will report a right-of-use asset and a liability for the obligation to make payments for all leases with the exception of those leases with a term of 12 months or less. All other leases will fall into one of two categories: (i) Financing leases, similar to capital leases, which will require the recognition of an asset and liability, measured at the present value of the lease payments and (ii) Operating leases which will require the recognition of an asset and liability measured at the present value of the lease payments. Lessor accounting remains substantially unchanged with the exception that no leases entered into after the effective date will be classified as leveraged leases. For sale leaseback transactions, the sale will only be recognized if the criteria in the new revenue recognition standard are met. The Company is currently evaluating the impact of adopting this guidance.
In January 2016, the FASB issued ASU 2016-01, which amends the guidance relating to the classification and measurement of financial instruments. Changes to the current guidance primarily affect the accounting for equity investments, financial liabilities under the fair value option, and the presentation and disclosure requirements for financial instruments. In addition, the ASU clarifies guidance related to the valuation allowance assessment when recognizing deferred tax assets resulting from unrealized losses on available-for-sale debt securities. The new standard is effective for fiscal years and interim periods beginning after December 15, 2017, and upon adoption, an entity should apply the amendments by means of a cumulative-effect adjustment to the balance sheet at the beginning of the first reporting period in which the guidance is effective. Early adoption is not permitted except for the provision to record fair value changes for financial liabilities under the fair value option resulting from instrument-specific credit risk in other comprehensive income. The Company is currently evaluating the impact of adopting this guidance.
In August 2015, the FASB issued ASU 2015-14, “Revenue From Contracts With Customers (Topic 606)”. The amendments in this ASU defer the effective date of ASU 2014-09 “Revenue From Contracts With Customers (Topic 606)”. Public business entities should apply the guidance in ASU 2014-09 to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. The Company is still evaluating the impact of adopting this guidance.
All newly issued but not yet effective accounting pronouncements have been deemed to be not applicable or immaterial to the Company. |
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Tables) |
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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.
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Schedule of inventory |
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ACCOUNTS PAYABLE AND ACCRUED EXPENSES (Tables) |
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Schedule of accounts payable and accrued expenses |
As of November 30, 2016 and May 31, 2016, accounts payable and accrued expenses consist of the following amounts:
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STOCK-BASED COMPENSATION (Tables) |
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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:
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Schedule of warrants |
The issuance of warrants to purchase shares of the Company's common stock including those attributed to debt issuances are summarized as follows:
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CONCENTRATIONS OF CREDIT RISK (Tables) |
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Risks and Uncertainties [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Schedule of net sales |
Two customers accounted for 86% and 62% of net sales for the three months ended November 30, 2016 and 2015, respectively, as set forth below:
Two customers accounted for 83% and 54% of net sales for the six months ended November 30, 2016 and 2015 respectively, as set forth below:
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Schedule of accounts receivable |
Two customers accounted for 100% of the accounts receivable as of November 30, 2016, as set forth below:
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BUSINESS SEGMENT INFORMATION (Tables) |
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Segment Reporting [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Schedule of operating results for the business segment | Information about segments is as follows:
|
DESCRIPTION OF BUSINESS (Details Narrative) - Number |
6 Months Ended | |
---|---|---|
Mar. 18, 2015 |
Nov. 30, 2016 |
|
Organization, Consolidation and Presentation of Financial Statements [Abstract] | ||
Number of subsidiaries | 2 | |
Description of reverse stock split | 1-for-30 |
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Details) - shares |
3 Months Ended | 6 Months Ended | ||
---|---|---|---|---|
Nov. 30, 2016 |
Nov. 30, 2015 |
Nov. 30, 2016 |
Nov. 30, 2015 |
|
Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items] | ||||
Potentially dilutive securities | 10,456,054 | 8,188,989 | 10,456,054 | 8,188,989 |
Convertible Notes [Member] | ||||
Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items] | ||||
Potentially dilutive securities | 265,401 | 117,078 | 265,401 | 117,078 |
Stock Option [Member] | ||||
Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items] | ||||
Potentially dilutive securities | 5,112,500 | 3,012,500 | 5,112,500 | 3,012,500 |
Warrant [Member] | ||||
Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items] | ||||
Potentially dilutive securities | 5,078,153 | 5,059,320 | 5,078,153 | 5,059,320 |
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Details 1) - USD ($) |
Nov. 30, 2016 |
May 31, 2016 |
---|---|---|
Accounting Policies [Abstract] | ||
Finished goods | $ 60,012 | $ 60,012 |
Work-in-process (unbilled labor and consulting) | 21,024 | 60,398 |
Inventory, net | $ 81,036 | $ 120,410 |
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Details Narrative) - USD ($) |
3 Months Ended | 6 Months Ended | 152 Months Ended | ||
---|---|---|---|---|---|
Nov. 30, 2016 |
Nov. 30, 2015 |
Nov. 30, 2016 |
Nov. 30, 2015 |
Nov. 30, 2016 |
|
Accounting Policies [Abstract] | |||||
Net loss | $ (509,151) | $ (695,224) | $ (796,125) | $ (1,223,985) | $ (44,000,000) |
Stock based compensation expense | $ 451,521 | $ 451,521 | |||
Number of common stock issued | 400,000 | 400,000 | |||
Issuance of common stock for services | $ 268,000 | $ 268,000 | |||
Reclassified as note payable to convertible debt | $ 40,000 |
ASSET SALE AND DEBT SUBJECT TO EQUITY BEING ISSUED (Details Narrative) - USD ($) |
Nov. 30, 2016 |
May 31, 2016 |
---|---|---|
Debt outstanding | $ 456,930 | $ 456,930 |
STMicroelectronics, Inc [Member] | ||
Due to related party | $ 179,000 | $ 179,000 |
ACCOUNTS PAYABLE AND ACCRUED EXPENSES (Details) - USD ($) |
Nov. 30, 2016 |
May 31, 2016 |
---|---|---|
Payables and Accruals [Abstract] | ||
Accounts payable | $ 814,018 | $ 782,654 |
Accrued interest payable | 136,758 | 116,035 |
Accrued payroll | 11,612 | 28,320 |
Accrued other | 97,939 | 95,373 |
Accounts payable and accrued expenses | $ 1,060,327 | $ 1,022,382 |
STOCK-BASED COMPENSATION (Details) - Employee Stock Option [Member] - $ / shares |
6 Months Ended | 12 Months Ended |
---|---|---|
Nov. 30, 2016 |
May 31, 2016 |
|
Share-based Compensation Arrangement by Share-based Payment Award, Options, Outstanding [Roll Forward] | ||
Outstanding at beginning | 5,112,500 | 1,012,500 |
Granted | 4,100,000 | |
Exercised | ||
Expired or cancelled | ||
Outstanding at ending | 5,112,500 | 5,112,500 |
Share-based Compensation Arrangement by Share-based Payment Award, Options, Outstanding, Weighted Average Exercise Price [Roll Forward] | ||
Outstanding at beginning | $ 0.99 | $ 1.20 |
Granted | 0.94 | |
Exercised | ||
Expired or cancelled | ||
Outstanding at ending | $ 0.99 | $ 0.99 |
STOCK-BASED COMPENSATION (Details 1) - Warrant [Member] - $ / shares |
6 Months Ended | 12 Months Ended |
---|---|---|
Nov. 30, 2016 |
May 31, 2016 |
|
Class of Warrant or Right, Number of Warrants [Roll Forward] | ||
Outstanding, beginning | 5,225,987 | 3,937,986 |
Granted | 1,288,001 | |
Exercised | ||
Expired or cancelled | (147,833) | |
Outstanding, ending | 5,078,153 | 5,225,987 |
Class of Warrant or Right, Weighted Average Exercise Price of Warrants or Rights [Roll Forward] | ||
Outstanding, beginning | $ 1.53 | $ 1.45 |
Granted | 1.78 | |
Exercised | ||
Expired or cancelled | 3.43 | |
Outstanding, ending | $ 1.48 | $ 1.53 |
LICENSE AGREEMENTS (Details Narrative) - Tatung Corporation ("Tatung") [Member] - USD ($) |
3 Months Ended | 6 Months Ended | ||
---|---|---|---|---|
Nov. 30, 2016 |
Nov. 30, 2015 |
Nov. 30, 2016 |
Nov. 30, 2015 |
|
Master Agreement License Of Process And Event Management System [Member] | ||||
License and services revenue | $ 8,764 | $ 52,000 | $ 14,793 | $ 118,000 |
Percentage of fees for software services | 10.00% | |||
Agreement License Of Meter Collar And Bridge Programmable Logic Controllers [Member] | ||||
License and services revenue | 0 | $ 65,000 | $ 0 | $ 107,000 |
Agreement To Provide Service In Area Of Business Development [Member] | ||||
License and services revenue | $ 0 | $ 60,000 |
COMMITMENTS (Details Narrative) |
3 Months Ended | 6 Months Ended | |||||
---|---|---|---|---|---|---|---|
Oct. 13, 2016
shares
|
Sep. 15, 2016
shares
|
Nov. 30, 2016
USD ($)
ft²
shares
|
Nov. 30, 2015
USD ($)
|
Jan. 15, 2015
USD ($)
|
Nov. 30, 2016
USD ($)
ft²
shares
|
Nov. 30, 2015
USD ($)
|
|
Monthly rental income, nonoperating | $ | $ 1,874 | $ 2,034 | |||||
Lease term | 2 years | ||||||
Rent expenses | $ | $ 20,929 | $ 21,445 | $ 43,706 | $ 32,211 | |||
Number of shares issued upon services | shares | 400,000 | 400,000 | |||||
Two Consultants [Member] | |||||||
Number of shares issued upon services | shares | 400,000 | ||||||
Two Consulting Agreement [Member] | Two Consultants [Member] | |||||||
Number of shares issued upon services | shares | 200,000 | ||||||
AES [Member] | |||||||
Monthly rental income, nonoperating | $ | $ 57,300 | ||||||
Area occupied pursuant to a lease | ft² | 1,850 | 1,850 |
CONCENTRATIONS OF CREDIT RISK (Details ) |
3 Months Ended | 6 Months Ended | 12 Months Ended | ||
---|---|---|---|---|---|
Nov. 30, 2016 |
Nov. 30, 2015 |
Nov. 30, 2016 |
Nov. 30, 2015 |
May 31, 2016 |
|
Net Sales [Member] | |||||
Concentration risk, percentage | 86.00% | 62.00% | 83.00% | 54.00% | |
Net Sales [Member] | Customer 1 [Member] | |||||
Concentration risk, percentage | 74.00% | 36.00% | 59.00% | 31.00% | |
Net Sales [Member] | Customer 2 [Member] | |||||
Concentration risk, percentage | 12.00% | 26.00% | 24.00% | 23.00% | |
Accounts Receivable [Member] | |||||
Concentration risk, percentage | 100.00% | ||||
Accounts Receivable [Member] | Customer 1 [Member] | |||||
Concentration risk, percentage | 52.00% | 83.00% | |||
Accounts Receivable [Member] | Customer 2 [Member] | |||||
Concentration risk, percentage | 48.00% | 11.00% |
BUSINESS SEGMENT INFORMATION (Details) - USD ($) |
3 Months Ended | 6 Months Ended | |||
---|---|---|---|---|---|
Nov. 30, 2016 |
Nov. 30, 2015 |
Nov. 30, 2016 |
Nov. 30, 2015 |
May 31, 2016 |
|
Revenues | $ 389,676 | $ 815,219 | $ 814,163 | $ 922,055 | |
Income (loss) from operations | (503,936) | (686,611) | (781,259) | (1,207,396) | |
Total assets | 429,618 | 429,618 | $ 584,643 | ||
Arkados [Member] | |||||
Revenues | 12,064 | 175,457 | 88,947 | 282,293 | |
Income (loss) from operations | (511,010) | (254,067) | (615,458) | (511,804) | |
Total assets | 174,997 | 174,997 | 236,797 | ||
AES [Member] | |||||
Revenues | 377,612 | 639,762 | 725,216 | 639,762 | |
Income (loss) from operations | 27,074 | $ (432,544) | (165,803) | $ (695,592) | |
Total assets | $ 254,621 | $ 254,621 | $ 347,846 |
BUSINESS SEGMENT INFORMATION (Details Narrative) |
6 Months Ended |
---|---|
Nov. 30, 2016
Number
| |
Segment Reporting [Abstract] | |
Number of operating segments | 2 |
SUBSEQUENT EVENTS (Details Narrative) - USD ($) |
1 Months Ended | 3 Months Ended | 6 Months Ended | ||||
---|---|---|---|---|---|---|---|
Jan. 19, 2017 |
Dec. 31, 2016 |
Dec. 13, 2016 |
Jan. 31, 2017 |
Nov. 30, 2016 |
Nov. 30, 2016 |
Jan. 08, 2016 |
|
Principal amount | $ 130,000 | ||||||
Number of shares issued for services | 400,000 | 400,000 | |||||
Subsequent Event [Member] | Settlement Agreement [Member] | Restricted Stock [Member] | |||||||
Number of shares issued for services | 50,000 | ||||||
Subsequent Event [Member] | Settlement Agreement [Member] | Former Service Providers [Member] | |||||||
Number of shares issued for services | 175,000 | ||||||
Cancellation of outstanding invoice | $ 94,617 | ||||||
Subsequent Event [Member] | Settlement Agreement [Member] | Vendors [Member] | |||||||
Number of shares issued for services | 33,596 | ||||||
Cancellation of outstanding invoice | $ 20,158 | ||||||
Subsequent Event [Member] | New Promissory Note [Member] | |||||||
Principal amount | $ 270,000 | ||||||
Maturity date | Mar. 31, 2017 |
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