Converted by EDGARwiz UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
þ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended May 31, 2012.
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from
_to
.
Commission file number: 000-52784
ABAKAN INC.
(Exact name of registrant as specified in its charter)
Nevada
98-0507522
(State or other jurisdiction of
(I.R.S. Employer
incorporation or organization)
Identification No.)
2665 S. Bayshore Drive, Suite 450, Miami, Florida 33133
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code: (786) 206-5368
Securities registered under Section 12(b) of the Act: None.
Securities registered under Section 12(g) of the Act: common stock (title of class), $0.0001 par value.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes o No þ
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 þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every
Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter)
during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes þ No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not
contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ
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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule
12b-2 of the Exchange Act. Smaller reporting company þ
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No þ
The aggregate market value of the registrant’s common stock, $0.0001 par value (the only class of voting stock), held by non-
affiliates (38,755,445 shares) was $61,233,603 based on the average of the bid and ask price ($1.58) for the common stock on
September 11, 2012.
At September 11, 2012, the number of shares outstanding of the registrant’s common stock, $0.0001 par value (the only class of
voting stock), was 61,465,445.
1
TABLE OF CONTENTS
PART I
Item1.
Business
3
Item 1A. Risk Factors
24
Item 1B. Unresolved Staff Comments
28
Item 2.
Properties
28
Item 3.
Legal Proceedings
30
Item 4.
Mine Safety Disclosure
30
PART II
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of
31
Equity Securities
Item 6.
Selected Financial Data
36
Item 7.
Management's Discussion and Analysis of Financial Condition and Results of Operations
36
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
44
Item 8.
Financial Statements and Supplementary Data
44
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
45
Item 9A.
Controls and Procedures
45
Item 9B. Other Information
46
PART III
Item 10.
Directors, Executive Officers, and Corporate Governance
47
Item 11.
Executive Compensation
55
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
59
Item 13.
Certain Relationships and Related Transactions, and Director Independence
60
Item 14.
Principal Accountant Fees and Services
61
PART IV
Item 15.
Exhibits, Financial Statement Schedules
62
Signatures
63
2
As used herein the terms “Company,” “we,” “our,” and “us” refer to Abakan Inc. unless context
indicates otherwise.
ITEM 1.
BUSINESS
Corporate History
The Company was incorporated in the State of Nevada on June 27, 2006 under the name “Your Digital
Memories Inc.”
Waste to Energy Group Inc., a wholly-owned subsidiary of the Company, was incorporated in the state
of Nevada on August 13, 2008. Waste to Energy Group Inc., and the Company entered into an
Agreement and Plan of Merger on August 14, 2008. The board of directors of Waste to Energy Group
Inc. and that of the Company deemed it advisable in the best interests of their respective shareholders
that Waste to Energy Inc. be merged into the Company with the Company being the surviving entity as
“Waste to Energy Group Inc.”
Abakan Inc., a wholly-owned subsidiary of the Company, was incorporated in the state of Nevada on
November 6, 2009. Abakan Inc. and the Company entered into an Agreement and Plan of Merger on
November 6, 2009. The board of directors of Abakan Inc. and that of the Company deemed it advisable
in the best interests of their respective shareholders that Abakan Inc. be merged into the Company with
the Company being the surviving entity as “Abakan Inc.”
We are a development stage company.
Our corporate office is located at 2665 S. Bayshore Drive, Suite 450, Miami, Florida, 33133 and our
telephone number is (786) 206-5368. Our registered agent is EastBiz.com, Inc., located at 5348 Vegas
Drive, Las Vegas, Nevada, 89108, and their telephone number is (702) 871-8678.
Our common stock is quoted on the OTCQB electronic quotation system under the symbol “ABKI”.
The Company
The Company intends to become a leader in the multi-billion dollar advanced coatings and metal
formulations markets by assembling controlling interests in a small number of next generation technology
firms. We expect to achieve this goal by investing in R&D firms and technology start-ups that have the
potential to substantially impact the surface engineering and energy management needs of Fortune 1000
companies and government entities. The Company is actively involved in supporting the R&D, market
development, and commercialization efforts of those entities in which it has invested. We have to date
acquired a 51% controlling interest in MesoCoat, Inc. (“MesoCoat”) and a 41% non-controlling interest
in Powdermet, Inc. (“Powdermet”). Since Powdermet owns 49% of MesoCoat, the Company’s interest in
Powdermet represents a 20% indirect interest in MesoCoat.
3
MesoCoat, Inc.
On December 11, 2009, the Company executed an Investment Agreement, dated December 9, 2009, with
MesoCoat and Powdermet in order to purchase 79,334 newly issued MesoCoat shares, equal to a fully
diluted 34% equity interest in MesoCoat for $1,400,030. Prior to the acquisition of the MesoCoat shares,
Powdermet was owned 52% by Andrew Sherman (the CEO and a director of both MesoCoat and
Powdermet who became a director of the Company on August 20, 2010), 41% by Kennametal, Inc. (an
unrelated company) and 7% by other unrelated parties.
On March 21, 2011, the Company purchased 596,813 shares of Powdermet from Kennametal equal to a
41% interest in Powdermet.
On July 11, 2011 the Company placed MesoCoat and Powdermet on notice of its intent to complete the
purchase of an additional equity interest in MesoCoat in accordance with the Investment Agreement. The
Company completed the purchase of 86,156 newly issued shares, equal to a fully diluted 17% equity
interest for $2,800,000 on July 13, 2011 thereby increasing its direct ownership of MesoCoat to a fully
diluted 51% interest.
The Company has to date acquired a 51% controlling interest in MesoCoat and a 41% non-controlling
interest in Powdermet. Since Powdermet owns 49% of MesoCoat, the Company’s interest in Powdermet
represents a 20.1% indirect interest in MesoCoat equal to a 71.1% combined interest in MesoCoat.
The Investment Agreement provided us with additional options to increase our equity interest in
MesoCoat, as follows:
• An option which entitled the Company to purchase an additional 24% equity interest in exchange
for $16,000,000. The exercise of this option would increase the Company’s direct holdings to a
fully diluted 75% of MesoCoat and entitle the Company’s management to appoint a fourth
member to MesoCoat’s five person board of directors (the Company currently has a right to
appoint three of MesoCoat’s directors, one of which must be independent).
• An option which entitles minority shareholders of MesoCoat, for a period of 12 months after the
exercise of the option detailed above, to cause the Company to pay an aggregate amount of
$14,600,000, payable in shares of the Company’s common stock or a combination of cash and
shares, in exchange for all remaining outstanding shares of MesoCoat.
MesoCoat’s Business
MesoCoat is an Ohio based materials science company intent on becoming a technology leader in metal
protection and repair based on its metal coating and metal cladding technologies designed to address
specific industry needs related to conventional oil and gas, oil sands, mining, aerospace, defense,
infrastructure, and shipbuilding. The company was originally formed as a wholly owned subsidiary of
Powdermet, known as Powdermet Coating Technologies, Inc., to focus on the further development and
commercialization of Powdermet’s nanocomposite coatings technologies. The company was renamed as
MesoCoat in March of 2008. Thereafter, in July of 2008, the coatings and cladding assets of Powdermet
were conveyed to MesoCoat through an asset transfer, an IP license, and a technology transfer and
manufacturing support agreement.
4
MesoCoat has exclusively licensed and developed a proprietary metal cladding application process as
well as advanced nano-composite coating materials that combine corrosion and wear resistant alloys, and
nano-engineered cermet materials with proprietary high-speed application systems. The result is
protective cladding applications that will be offered on a competitive basis with existing market solutions.
The coating materials unite high strength, hardness, fracture toughness, and a low coefficient of friction
into one product structure. MesoCoat’s products are currently undergoing extensive testing by the U.S.
Air Force, U.S. Navy and Marine Corp, oil field service companies, and original equipment
manufacturers (OEMs).
CermaCladTM cladding applications are nearing commercialization and commercial sales of PComP TM, a
cermet-metallic composite powder for thermal spray applications have commenced.
CermaClad™
CermaClad™ is a premier metallurgically bonded clad carbon steel solution optimized to manage the
risks and consequences of wear and corrosion damage and the failure of large assets including oil and gas
risers and flowlines, refinery/chemical processing towers and transfer lines, power plant heat exchanger
tubes, ships, and bridges. In corrosive environments, including seawater, road salt, mining slurry transport
lines, unprocessed oil containing water and carbon dioxide, chemical processing and transportation
equipment, metals production, and other large industrial applications, asset owners and operators either
need to continually maintain and replace major assets, or fabricate these assets using expensive, corrosion
resistant alloy (CRA) materials, which substantially run up costs. CermaClad™ offers a competing,
lower cost solution allowing the owner or operator to clad their carbon steel with a corrosion resistant
alloy coating at typically less than ½ the cost of using solid CRA. Cladding solutions such as
CermaClad™ can save up to 80% of the cost of using solid alloys, while providing equivalent
maintenance free corrosion lifetimes equal to the life of the asset. Clad metals are widely used in oil and
gas exploration and production, marine transportation, mining, petrochemical processing and refining,
nuclear, paper and pulp, desalination, and power generation industries. Each industry sector has slightly
different needs and requirements. For instance, to meet growing global energy demands, oil companies
continue to extend their offshore drilling efforts into deeper seas. The higher temperatures and corrosivity
(carbon dioxide and hydrogen sulfide content) of these deeper reserves eliminate plastics and other
competing material solutions from consideration, resulting in a significantly increased use of corrosion
resistant alloys - and lower-cost clad pipe alternatives.
CermaClad™ is MesoCoat’s proprietary cladding process which utilizes a high density infrared fusion
heat source – an arc lamp – to melt, fuse, and metallurgically bond (make inseparable) metals, corrosion
resistant alloys and/or cermets onto metal substrates such as plate, pipe, or large components. Using this
process, products like risers and flowlines can be protected against harsh operating environments with
great efficiency and speed compared to competing weld overlay products. Today, clad steel is a
specialized segment of the steel industry where it is projected that demand will outstrip supply in the next
few years. The CermaClad™ process and equipment offers the lowest capital cost per unit production,
and is scalable to large volumes with low to modest capital investment and plant requirements.
The competitive advantages of CermaClad™ over current competing technologies and products are:
• CermaClad™ and other clad overlays can be produced at a 50-80% lower cost than alternative
solid alloy products.
5
• CermaClad™ produces a metallurgically bonded overlay, reducing the risk of catastrophic failure
and the buckling of mechanically lined pipes such as those supplied by industry leader Butting in
its BuBi bimetallic pipe.
• CermaClad™ can be applied to seamless pipe, or after pipe welding, eliminating 90% of special
metal welds which are difficult, expensive, and also a common source of early failure.
• CermaClad™ application technology occurs with a 30-40cm wide infrared “torch” compared to
less than 1 cm wide for laser or inert gas welding torches, resulting in application rates over an
order of magnitude faster than current weld overlay technologies.
• Due to its high productivity compared to traditional weld overlay, and the elimination of the need
for deformation processing (steel mill) of bulk metals, CermaClad™ capital and start-up costs are
two to ten times lower than competing technologies.
• Compared to weld overlay, CermaClad™ produces a smooth overlay that is virtually free of base
metal dilution, improving inspectability and corrosion resistance. This characteristic enables the
use of thinner, even lower cost cladding alternatives in many applications. Smooth surfaces also
decrease flow resistance, enabling reduced friction losses in pipeline applications.
The CermaClad™ product line in development today is as follows:
• CermaClad™ CR (Corrosion Resistant Alloys). Product line that offers a lower cost alternative to
solid nickel and stainless steel alloys for oil and gas, pulp and paper, and chemical process
industry vessels, pipes, flowlines, risers, jumpers, valves, and components.
• CermaClad™ WR (Wear Resistant). Product line of metal matrix composite and nanocomposite
wear resistant materials to extend life of steel structures such as hydrotransport slurry lines, pump
components, valve components, spools, T’s, and elbows for mining, mineral processing, and oil
sands/heavy oil production.
• CermaClad™ HT (High Temperature). Product line of high temperature claddings for heat
exchanger tubing, boiler, and other energy production components offering greater compositional
control (higher performance) and lower cost than solid alloys or traditional weld overlays.
• CermaClad™ LT (Low Thickness). Exploits the unique high purity capabilities of the
CermaClad™ process to provide thin (less than 0.5mm) claddings for providing 50-200 year
corrosion free life in atmospheric and seawater corrosion environments and applicable to marine
structures, fuel and cargo tanks, bridges, architectural steel, and transportation structures.
PComP™
PComP™ is a series of nanocomposite cermet coatings that are used to impart wear and corrosion
resistance, and to restore dimensions, of metal components. PComP™ competes against chrome and
nickel plating, and tungsten carbide in the multibillion dollar inorganic metal finishing market.
Competing materials like hexavalent chrome, carbides and tungsten carbide cobalt have become major
headaches for industrial producers in the metal finishing industry since these materials are on the EPA’s
hazardous materials watch list and are legally banned in several countries. Industry currently spends
billions annually on these hazardous materials, and MesoCoat’s customers can gain a competitive
advantage while mitigating environmental liabilities by adopting green products and processes such as
PComP™ thermal spray coatings into their product offerings. While businesses grapple with the need to
transition away from these harmful products, MesoCoat has developed a performance leading solution
platform which has shown order of magnitude improvements in head to head wear and corrosion
performance testing.
6
PComP™, named for its particulate composite powders, is one of the few economically viable industry
replacement solutions for hard chrome and carbides due to the product line’s advanced corrosion, friction,
wear and thermal barrier properties.
MesoCoat scientists have developed and patented a family of corrosion resistant coating solutions that
combine extreme wear resistance, fracture toughness (resiliency), and a low friction coefficient all in one
product. In conventional materials science toughness normally decreases as hardness and wear resistance
increase. By combining nano-level structure control and advanced ductile phase toughening materials
science, MesoCoat has developed a patented coating structure that can be both very tough and very wear
resistant. Equally important, the hardness of a wear coating normally limits the ease with which it can be
machined. The unique nanostructural design of the PComP™ coating solutions results in a coatings that
can be machined through a finish grinder much faster than a product with a traditional carbide coating.
The speed of coating application and final machining results in higher productivity and lower costs in
metal finishing operations.
The unique nano-structure of the PComP™ coatings also result in friction properties approaching those of
diamond-like carbon films and solid lubricants, but with the ability to be used structurally and applied to
large components at a fraction of the cost of coatings such as diamond-like carbon. The low friction
reduces wear, and improved energy efficiency and life in sliding components such as drilling rotors,
plungers, mandrels, ball and gate valves, and metal processing equipment.
The PComP™ product line is currently positioned to compete with two dominant product alternatives:
hard chrome plating and tungsten carbide thermal spray coatings. The PComP™ family of nanocomposite
coatings consists of five products, all of which have shown, in testing by third parties, to provide better
wear, corrosion and mechanical properties at a lower life cycle cost than most of today’s alternatives.
The PComP™ product platform, combined with the CermaClad™ large area weld overlay technologies
provide a high degree of product differentiation and a sustainable competitive advantage in the $10 billion
inorganic metal finishing markets, which include OEM components and the maintenance, repair, and
overhaul of industrial assets and machinery in the “components and coatings” segment of MesoCoat’s
business (as opposed to the clad steel business lines discussed under the CermaClad™ product line
above).
MesoCoat is selling these products through different channels appropriate to the specific market. The
majority of commercial sector accounts will have access to these advanced coatings and coating processes
by buying coating application services from MesoCoat. This is generally a regional business. Large
OEM’s and Government agencies like the U.S. Air Force would procure raw powders and apply them for
their specific products under license as they are vertically integrated to do their own thermal spray and
coating applications using dedicated maintenance and repair depots. Recently, several defence
organizations have been given congressional mandates to make better use of their existing equipment
(planes, helicopters, jets, tanks and other armoured vehicles, etc.) as budgets for the purchase of new
equipment will be limited over the next few years. MesoCoat’s low-cost, long-life coating materials
should appeal to government buyers striving to meet budgetary restrictions. Finally, to achieve more
rapid penetration of a territorial (geographic) market for coating services, MesoCoat is actively qualifying
licensed application partners in certain territories (Houston, Alberta, and Los Angeles as three examples)
to provide services in territories it is not currently able to service. This strategy will lead eventually to
acquisition or market entry into these markets, while supporting economies of scale for the powder
production needed to meet product cost targets.
7
The competitive advantages of PComP™ for each of its initial target markets are as follows:
• Wear and corrosion resistance and dimensional restoration
• PComP™ T-HT (High Toughness) is a titanium carbon-nitride based high corrosion/wear
resistant, low friction high velocity oxygen fuel (HVOF) coating that competes with hard
chrome and diamond like carbone PVD (physical vapor deposition) alternatives for
hydraulic cylinders, piston rings, bearings, rotating shafts, and valve components where
low stick-slip, corrosion, and modest wear resistance are required. PComP™ provides
both wear and corrosion resistance (unlike chrome), and significantly reduces
environmental safety and health liabilities. Furthermore, in many applications, thermal
spray coatings such as PComP™ provide life multiples over chrome (80 times in cylinder
liner application in testing reported by Caterpiller). Lower coefficient of friction protects
seals from premature wear and reduces energy consumption in rotating components
through lower friction losses, and the lower coating stresses and higher toughness enable
thicker coatings to be applied than chrome or other alternatives, meaning component life
can be extended through enabling additional repair cycles. PComP™ T-HT has
significantly higher build-up rates than that of carbides, and grinding and finishing can be
done faster and cheaper with conventional grinding techniques compared to the
expensive diamond finishing process used for competing carbide coatings.
• PComP™ T-HH (High Hardness) is a higher wear resistance, cobalt based version of
PComP™ T-HT coating for hard chrome replacement in environments that need better
wear resistance but have less severe corrosion requirements. PComP™ T-HH also
provides good corrosion resistance in non-water environments and its low coefficient of
friction and lack of coarse by-products also protects seals and mating surfaces from
premature wear.
• PComP™ S is a silicon-nitride based hard chrome replacement solution for aerospace
applications that exhibits high toughness, wear resistance and displays increased
spallation resistance. PComP™ S also has the lowest density of any chrome alternative,
enabling significant fuel savings to be realized in transportation markets.
• PComP™W is MesoCoat’s “nano-engineered” tungsten carbide coating solution that
offers industry leading toughness and wear resistance for thermal spray coatings, making
it better for critical high wear applications such as gate valves and downhole drilling
tools. PComP™ W replaces conventional tungsten carbide cobalt in the thermal spray
industry and provides increased wear resistance, design allowable (stress levels), and
reduced friction in abrasive wear applications, with higher toughness and impact
resistance than ceramic alternatives such as alumina-titania. PComP™W is also
significantly more robust and lower cost than competing detonation gun and alternate
coatings, achieving excellent results with much higher throughput and lower operating
cost equipment such as standard HVOF guns.
8
• Metals processing equipment
• PComP-MB™ is a metal boride coating designed for use in molten metal processing.
PComP-MB™ has completed laboratory testing showing greater than two and one half
times the life of the state of the art molybdenum boride coatings in galvanizing lines, and
ten times the resistance of conventional WC coatings to molten metal erosion and wear.
PComP-MB™ is preparing for market launch in the $60 million zinc pot roll and bearing
coatings market, while also of interest to the diecasting, paper and pulp, and other related
industries
• Thermal barrier coatings
• ZComP™ is MesoCoat’s nanocomposite thermal barrier coatings that offer 50% lower
thermal conductivity, with improved toughness and cyclic thermal life compared to
conventionally structured thermal barrier coatings in the $500 million thermal barrier
coatings market. MesoCoat is actively forming partnerships to introduce these
performance-leading materials into the turbine engine market, working with both the U.S.
Department of Defense as well as supply chain partners in the turbine industry.
Stage of Development
None of MesoCoat’s materials are currently produced on a full-scale commercial production basis even
though some materials have been produced on a small scale. Even though some of the materials are in
limited release, certain of MesoCoat’s materials are expected to be ready for commercial market entry and
production within the next twelve months. The following table indicates our estimated timeline for the
commercial introduction of those products that are most imminent:
PRODUCT
COMMERCIAL TIMELINE
TIME (MONTHS)
PComP™ T
Initial Partner Sales
Current
PComP™ W
Initial Partner Sales
Current
PComP™MB
Market Entry
6
PComP™ Coating Services
Market Entry
3
CermaClad™ CR
Market Entry
6
CermaClad™ CR
Full Scale Production
16-18
CermaClad™ WR
Market Entry
9
CermaClad™ WR
Full Scale Production
18-20
9
License agreement with Powdermet, Inc.
On July 22, 2008, MesoCoat entered into a license agreement with Powdermet. The agreement gives
MesoCoat a royalty-free, exclusive, perpetual license to PComP™ intellectual property, certain
equipment, and contracts and business lists, including seven supporting patents, the trademark, and
supporting confidential and trade secret information, including formulations, processes, customer lists and
contracts, for all Powdermet technologies in the field of wear and corrosion resistant coatings. MesoCoat
was at the time of licensing a wholly owned subsidiary of Powdermet, and Powdermet currently retains a
49% ownership position in MesoCoat. The agreement also includes Powdermet’s commitment to provide
manufacturing expertise and technical capabilities supporting PcomP™ powders on a priority basis.
Powdermet retains the exclusive manufacturing rights for the first 50 tons of PComP™ powders through
July 1, 2013. The license agreement will end upon the last to expire valid claim of licensed patents, unless
terminated earlier within the terms of the agreement.
MesoCoat's exclusivity agreement with Mattson Technology, Inc.
Mattson Technology, Inc. (“Mattson”) is the developer and manufacturer of the Vortek™ high power
plasma arc lamps, and is a high energy plasma arc lamp developer. The principal provisions of an
exclusivity agreement dated April 7, 2011 between MesoCoat and Mattson Technology, Inc. are as
follows:
• Mattson has provided the exclusive right and license to MesoCoat to use the high intensity Vortek
lamp in MesoCoat’s products in the wear reducing and corrosion resistant coatings, claddings and
related surface treatments market.
• The exclusivity period runs to the end of 2017 and is conditional on an escalating minimum
number of 5 lamps being ordered on an annual basis starting in 2012.
• In return for these rights MesoCoat will pay to Mattson a fee of $2 million in five equal
instalments starting from the date of the successful performance of the first unit.
• Included in this agreement is a sliding scale price discount based upon the number of units to be
ordered each year.
• A supply agreement between the two parties is currently being negotiated to fully complete some
of the detailed commercial points of this relationship.
MesoCoat’s exclusive patent license agreement with UT-Battelle LLC.
MesoCoat has obtained a two stage, exclusive license from UT-Battelle, LLC to utilize two patents in its
processes to develop products for wear and corrosion applications. The initial non-commercial exclusive
license was entered into on September 22, 2009, which enabled MesoCoat to conduct development work
to prove out the technology within the field of use. The second stage of the agreement comprises a
commercial exclusive licence, executed on March 7, 2011, permits MesoCoat to conduct commercial
sales utilizing the licensed process and technology. The license is valid through the expiration of the last
patent in 2024 and required that MesoCoat invest in additional research and development of both the
technology and the market for products that stem from the technology by committing to a certain level of
personnel hours and $350,000 in expenditures which conditions have been met.
10
Stage I and II license fees of $50,000 have been paid against the agreement and a royalty of $15,000 or
2.5% of revenues generated in the United States that utilize the technology, minus allowable costs as
defined by contract, whichever is greater, are due March 31 on an annual basis beginning after the first
commercial sale. For the first calendar year after the achievement of a certain milestone and the following
two calendar years during the term of the agreement, MesoCoat is obligated to pay a minimum annual
royalty payment of $10,000, $15,000 and $20,000 respectively. A royalty payment of $10,000 has been
made pursuant to this agreement through May 31, 2012.
Cooperation agreement with Petroleo Brasileiro S.A
MesoCoat entered into a cooperation agreement dated January 7, 2011, with Petroleo Brasileiro S.A
(“Petrobras”) for the purpose of carrying out development work and conducting validation tests in
connection with applying the CermaClad™ process to coating the internal surfaces of pipes for use in the
oil and gas industry. The term of the cooperative agreement was initially for 18 months during which
time MesoCoat, with the assistance of Petrobras, carried out development work and a series of tests
divided into two phases with the prospect of a third phase. Phase I was designed to verify that the
CermaClad™ process and the resultant materials for compliance with industry standards and acceptability
for clad pipe use in order to modify the existing system for the internal coating of pipes. Phase II was
designed to develop a prototyping facility that could coat the inner surface of a 10 inch diameter pipe and
verify that the CermaClad™ process was suitable for application to line pipe in accordance with current
industry standards. The prospective third phase would be designed to finalize the design and construction
of a coating facility in Brazil with the capacity for producing cladding on the interior diameter of pipes
and tubes with section lengths of at least 12 meters.
The immediate objective of the cooperation agreement, subject to obtaining successful results, in each of
Phase I and II, is that the materials and processes tested result in American Petroleum Institute (API) and
Det Norte Veritas (DNV) approval for the CermaClad™ process. API and DNV approvals would,
assuming the completion of a suitable manufacturing facility as anticipated by the prospective third
phase, permit MesoCoat market entry into the oil and gas industry and cause full scale production
activities.
MesoCoat has successfully completing Phase I of the cooperation agreement by demonstrating that the
CermaClad™ process is capable of producing pipe products that meet API 5LD -Specifications for CRA
clad steel pipe on flat coupons. Phase II seeks to demonstrate the suitability of the CermaClad™ process
for producing a superior pipe product by meeting or exceeding the requirements of API-5LD and DNV
OS-F-101 submarine pipeline systems which achievement would verify the manufacturing process and
exhibit the risk reduction assurances required to fulfill Petrobras’ requirements for clad pipe.
Phase II has caused MesoCoat and its partners, including Mattson, to redesign and manufacture a
miniaturized CermaClad™ fusing system that is able to operate inside an 8” diameter pipe that is
integrated into a pipe manipulation and coating control system. The completion of Phase II still requires
MesoCoat to verify the parameters for CRA material deposition and produce short pipe prototypes that
meet the verified parameters. Due to the challenges associated with manipulating a complex design at
very high temperatures within a confined fume-laden environment MesoCoat’s process development,
debugging and coating system integration efforts took more time than originally anticipated. A four
month extension to the project timeline was requested of Petrobras and approved. Phase II is now
expected to be successfully completed by the end of October, with the tool mechanism operating
successfully for extended periods of time while producing acceptable coatings.
11
Additional cooperative efforts with Petrobras are envisioned as a means to reduce product insertion risk
and qualify MesoCoat as a supplier for Petrobras project needs, including collaboration in the areas of
quality assurance, secondary operations, process improvement, product production and cost reduction.
Powdermet Inc.
On March 21, 2011, the Company fulfilled the terms of a Stock Purchase Agreement with Kennametal
Inc., dated June 28, 2010, as amended on September 7, 2010 and replaced on March 25, 2011 by an
Accord and Satisfaction Agreement, to complete the purchase of Kennametal’s 596,813 shares of
Powdermet equal to a 41% interest for $1,650,000.
Powdermet’s Business
Powdermet was formed in 1996 and has since developed a product platform of advanced materials
solutions derived from nano-engineered particle agglomerate technology and derived hierarchically
structured materials. These advanced materials include energy absorbing ultra-lightweight syntactic- and
nano-composite metals in addition to the PComP™ nanocomposite cermets exclusively licensed to
MesoCoat. The business has historically financed itself through corporate engineering consulting fees,
government contracts and grants (over 90), and recently through partnerships with prime contractors and
systems integrators. Powdermet now expects to transition from an engineered nano-powder R&D
laboratory and toll powder manufacturer into a commercial sector company.
While MesoCoat’s product focus is on developing advanced cermets to address corrosion and wear
coating needs, Powdermet’s product differentiation is based on its ability to build advanced nano-
structured metal formulations to address energy efficiency, reduction in hazardous materials, and life
cycle cost reduction. Powdermet’s technologies are particularly useful in crash and ballistic energy
management markets since they offer weight reduction and the ability to dissipate substantially more
impact energy than the aluminum alloys and foamed metals currently available.
Powdermet has four materials solution families under development:
• SComP™ - A family of syntactic metal composites known for their light weight properties and
ability to absorb more impact energy than any other known material. SComP™ can provide
weight savings over aluminum and magnesium alloys without magnesium’s corrosion and wear
limitations, reducing structural weight by 10-30% in targeted aerospace, consumer electronics,
and transportation applications.
• MComP™ - A family of hierarchically structured, rare earth free, nanocomposite metal and metal
matrix composites that provide higher strength and temperature capability compared to traditional
aluminium and magnesium allows. MComP™ is designed to be a market replacement for
beryllium, aluminum and magnesium in structural applications, without relying on scare and
expensive rare earths to produce high strength and thermal stability. Targeted applications include
aerospace and defense and transportation market segments, as well as electrical transmission and
distribution.
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• EnComP™ - A diverse family of nano-engineered particle based solutions for energy
storage. Current developments include record setting energy density nanoparticle filled films for
capacitors, structured nanocomposite anode and cathode materials for thermal and lithium ion
batteries, and inflatable hydrogen storage media capable of energizing power fuel cells down to -
34C.
• SynFoam™ - A family of structural, thermally insulating syntactic ceramic composites
combining strength, high temperature functionality and low thermal conductivity into one
multifunctional material. Applications include rocket propulsion and re-entry vehicle systems,
and structural insulation for high temperature energy production and use including flowlines and
heat treatment furnaces.
Powdermet’s two developmental products closest to commercialization are SynFoam™ and EnComP™.
Powdermet also produces custom-engineered powders and nanopowders, provides advanced materials
contract research and development services, and derives significant revenues from tolls and contract
development and manufacturing services.
AMP Distributors Inc.
AMP Distributors Inc. (“AMP”) was formed by the Company in June of 2011 as a Cayman Island
company for the primary purpose of negotiating, executing and administrating international sales of
MesoCoat's products. AMP will also be tasked with acquiring equipment and coating materials for
Company’s international transactions. The company has appointed a managing director with over 15
years of experience in the offshore financial services industry and retained Kariola Limited, a consultancy
organization, to assist it with technical advice and entry into the Far East markets.
Future Acquisition Targets
The Company utilizes multiple resources to identify future acquisition targets in addition to a professional
network of senior management and relationships with national laboratories, such as the Oak Ridge
National Laboratory .We also use the methods below to search for innovative technologies and
companies, which could lead us to additional acquisitions:
• Patent Search – We conduct bi-monthly searches for provisional patents and published patents on
the U.S. Patent and Trademark Office and World Intellectual Property Organization patent
websites to keep a track on any new patents published or licensed by our competitors and
partners, and also any new patents filed/published by universities and early stage companies that
might be of interest to us.
• Conferences, Events, and Tradeshows – Teams from the Company, MesoCoat, and Powdermet
attend close to 50 technology conferences, tradeshows, and events every year. We have found
these to be an excellent resource for learning about new technologies, especially since these
events center on our interests and expertise as well as that of potential acquisitions.
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• Universities – We are on the mailing list of several universities that focus on research in
nanotechnology, advanced materials, surface engineering, and advanced processing. These
universities send us regular updates on the technologies currently in development, as well as any
new patents or products that culminate from the research work. In addition to interacting with
universities’ tech transfer departments, we are in regular contact with professors that manage
research projects in our areas of interest who are certain that their technology has high potential
but their universities’ patent offices have insufficient budgets.
• Press Releases – Our most recent press releases have begun to generate external interest in our
firms and operations. As such, outside parties proactively engage us in a dialogue about their
technology and/or company.
• LinkedIn – We are active participants in several LinkedIn groups related to new technologies,
venture capital, angel investors, and early stage capital. We regularly evaluate new technologies
in the surface engineering arena that are posted on various LinkedIn groups and then continue
further discussion with them.
Every future opportunity will be evaluated based on several investment criteria. Prospective companies
must have individual market solutions intended to solve critical industry problems and have the potential
to generate at least a $100 million in revenue within five years of investment. Most companies that are
ultimately included in the Company’s investments will have more than one market solution. We are
therefore restricted to firms that have established R&D programs, with a preference for firms that have
solutions in final stages of R&D or in pilot-scale production. The Company is directing its attention to
owners that are willing to accept a multi-phased investment option while guaranteeing operational
control. We plan to support these technology-centric R&D opportunities and investments with our own
corporate strategy, market development, licensing and contracted support.
Industry Overview
External Environment: Corrosion
The U.S. Department of Commerce monitors a large number of industry sectors that face problems with
corrosion, which is a growing issue faced by companies worldwide. Metallic corrosion is the degradation
that results from interaction of metals with various environments such as air, water, naturally occurring
bacteria, chemical products and pollutants. Steel accounts for almost all of the world’s metal consumption
and therefore an astoundingly high percentage of corrosion issues involve steel products and by-products.
These issues affect many sectors of the worldwide economy.
Although worldwide corrosion studies began in earnest in the 1970s, there has never been a standardized
way for countries to measure corrosion costs. As a result, estimates of economic damage are difficult to
compare. What is clear, however, is that the impact of corrosion is serious and severe. As a result of
corrosion, manufacturers and users of metallic products incur a wide range of costs, including:
• painting, coating and other methods of surface preparation;
• utilizing more expensive corrosion resistant materials;
• downtime costs;
• larger spare parts inventories; and
• increased maintenance.
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There are also related costs that may be less obvious. For instance, some of the nation’s energy demand is
generated by firms fixing metallic degradation problems. Studies have shown that this increased energy
demand would be avoidable if corrosion was addressed at the preventable stage. Some of this demand
could be reduced through the economical, best-practice application of available corrosion control
technology.
External Environment: Wear
Corrosion is not the only concern of engineers and material scientists. In most industries, the deterioration
of surfaces is also a huge problem. Wear is often distinct from corrosion and describes the deterioration of
parts or machinery due to use. The effects of wear can generally be repaired. However, it is also usually
very expensive. Prevention and wear protection is the most economical way to offset the high costs
associated with component repair or replacement. To accomplish this, hard-face coatings are applied to
problematic wear surfaces for the purpose of reducing wear and/or the loss of material through abrasion,
cavitation, compaction, corrosion, erosion, impact, metal-to-metal, and oxidation. Some companies focus
on the prevention side of the business (applying coatings to prevent wear) while others focus on the repair
side of the business (reforming metal or applying coatings to fix metal substrate problems).
In order to properly select a coating alloy for a specific requirement, it is necessary to understand what
has caused the surface deterioration. The various types of wear can be categorized and defined as follows:
• Abrasion is the wearing of surfaces by rubbing, grinding, or other types of friction that usually
occurs due to metal-to metal contact. It is a scraping, grinding wear that rubs away metal surfaces
and can be caused by the scouring action of sand, gravel, slag, earth, and other gritty material.
• Cavitation wear results from turbulent flow of liquids that carry small suspended abrasive
particles.
• Compression is a deformation type of wear caused by heavy static loads or by slowly increasing
pressure on metal surfaces. Compression wear causes metal to move and lose dimensional
accuracy.
• Corrosion wear is the gradual deterioration of unprotected metal surfaces, caused by the effects
of the atmosphere, acids, gases, alkalies, etc. This type of wear creates pits and perforations and
may eventually dissolve metal parts.
• Erosion is the wearing away or destruction of metals and other materials by the abrasive action of
water, steam, slurries which carry abrasive materials. Pump parts are subject to this type of wear.
• Impact wear is the striking or slamming contact of one object against another and this type of
wear causes a battering, pounding type of wear that breaks, splits, and deforms metal surfaces.
• Metal–to-Metal wear is a seizing and/or galling type of wear that rips and tears out portions of
metal surfaces. It is often caused by metal parts seizing together because of lack of lubrication. It
usually occurs when the metals moving together are of the same hardness. Frictional heat
promotes this type of wear.
• Oxidation is a type of wear causing flaking or crumbling layers of metal surfaces when
unprotected metal is exposed to a combination of heat, air and moisture. Rust is an example of
oxidation.
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Generally, the initial coating selected to protect a product against wear is also the same product applied to
correct the problem once the product is worn. However, at that time, engineers can determine whether
some of the characteristics they set for the initial preventative coating have withstood the environment or
other pressures initially assumed in the product’s design. If it is determined that the initial coating
selection was not adequate, material scientists can change the application parameters of the prior coating
material (like amount or width of coating material applied) or select a new coating material that has new
properties. For instance once the type of wear is identified, a material engineer might determine that a
new coating material with better lubricity and other characteristics is needed for repair.
Presently there is no governmental standardized method to classify or specify degrees of wear. Nor is
there a central agency that collects market data on the cost of wear-based issues, primarily because firms
account for repair costs differently. Each industry sector has its own means of evaluation and approach to
repair, based on the type of part that needs repair, the urgency of that repair, the availability of a coating
solution and the cost associated with downtime. In general, companies already have plans in place on how
to fix a part once it goes down. However, if an unexpected problem occurs, firms utilize the expertise of
experienced materials engineers that have worked with numerous coating suppliers to evaluate a solution.
Sometimes this evaluation is done by reviewing vendor data only (suppliers typically provide complete
data product information worksheets which detail product properties, testing specifications, best
applications methods and conditions). If self-review is insufficient, consultants and vendors are flown it to
help assist companies in their material selection or solution repair needs. Those solutions then go through
review to determine their merit and cost benefit. Sometimes, parts cannot be repaired and new ones are
required.
Competition
The companies in which the Company has invested can expect to face intense competition within their
respective market segments upon product commercialization. The industrial coatings industry is highly
fragmented by companies with competing technologies each seeking to develop a standard for the
industry. Industrial coatings research and development has been ongoing for some time and several firms
are perceived as the industry leaders.
MesoCoat
A handful of large companies cater to this market segment – JSW Steel Co. controls the clad plate market
with majority of the market share, Butting GmbH and Cladtek International Pty Ltd. are the largest
players in the mechanically clad pipe market, whereas ProClad Group is the majority player in the
metallurgically clad pipe market. Most of these large companies participating in the cladding market have
very similar technologies and control the market mostly on their scale of production (availability),
relationships, and price.
Several smaller companies spread across the globe are also involved in this market segment, like Arc
Energy Resources, IODS, High Energy Metals, and Kladarc, all of which offer weld overlay services for
the oil and gas industry which we believe generate less than $15 million in annual revenues. Other
examples include Matrix Wear Technologies, Cladtech Canada, Brospec LP, Almac, and Clearwater
Welding and Fabrication LP all of which offer weld overlay processes to those working in the Canadian
oil sands which we believe generate between $15-50 million in revenues. The higher revenues for the
Canadian weld overlay companies is primarily due to their presence in Canada where oil sands operations
require huge amounts of clad pipe and components, and the emphasis is on local shops and faster
turnaround times.
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CermaClad™ is being positioned as a lower overall risk option between the lower mechanical risk (but
low capacity, and higher corrosion risk) weld overlay products, and the higher mechanical (buckling) risk
of lined products. Market indicators evidence that the overall market for metallurgically bonded clad
products will grow dramatically if the price point for these types of products can be reduced and capacity
increased significantly. When offered on a commercial basis the CermaClad™ process is expected to
disrupt the traditional market for cladding products and compete from with an advantage over current
producers based on the following factors:
• Time and productivity
o Much faster than weld/laser cladding, more scaleable for production volume
o Capital investment significantly lower than mechanical cladding for similar capacity
o Ability to provide local content in scalable manner at reasonable capital investment levels
o Reduces lead times compared to current market, and provides high scalability for market
flexibility. Potentially enables distribution and customization of pipe for fast-turnaround
project needs
o CermaClad™ can be applied to very large pipes (above 18”), where lined pipe cannot
currently be produced, and where current weld overlay technology by comparison is
considered too slow and expensive.
• Performance risk
o True metallurgical bond, reduces potential for catastrophic failure.
o Smoother surface (high flow, easier inspection), reduces perceived risk by being easily
inspected
o Crack-free hard coatings to 10mm thickness enable performance multiples in hardfacing
o Better properties than weld overlay due to lower dilution or dissolution.
o Cermaclad™ enables the use of metallurgically bonded clad seamless pipe, eliminating 90%
or more of the welds compared to other product offerings.
• Cost
o Faster Application and high throughput lowers cost basis for metallurgically bonded clad
product
o Technology allows the application of thinner clad layers, potentially enabling dramatic cost
reduction at sustained margins
o High productivity and scalability can enable reduced lead times, reducing capital costs for
large projects.
PComP™ nanoenginered cermet products have relatively few competitors. Although there are a few
companies like Nanosteel, Integran, Inframat, Xtallic, and Modumetal that offer similar solutions; no
competitor has been able to engineer the properties that MesoCoat has built into its PComP™ product
line. The company has been able to manufacture a corrosion resistant product that has high strength,
hardness and fracture toughness. Toughness and hardness are normally inversely proportional
characteristics and no other company has been able to reverse the nature of these properties which is what
makes the PComP™ products unique in the market place. MesoCoat has also increased the ductility
factor in the PComP™ products so basically not only has PComP™ shown to provide a harder coating
surface, but the hard objects are able to bend more without breaking.
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In order to understand the type of market impact these materials could have if launched successfully, it is
important to note that PComP-W™, MesoCoat’s tungsten cobalt carbide replacement solution, exhibits
high deposition efficiency and at aVickers hardness similar to that of tungsten carbide while being
stronger than the conventional carbide coatings it is designed to replace. Good toughness tolerates more
flexing of the part than other HVOF WC coatings without the usual cracking of the coating. The structure
of the PComP™ coatings also allow for conventional grinding techniques, eliminating the expensive
diamond finishing process needed for conventional materials used in tungsten carbide and cobalt coating
solutions.
Powdermet
Powdermet has recently demonstrated considerable success in providing a record setting energy density
of over 10J/cc in its nanocomposite films for film-foil capacitors, and expects to be invited to bid on full
scale device development. Also in the ENComP™ product line, the company has received a long term
commercial production contract for its engineered materials used for well perforation devices.
Powdermet is receiving significant interest in its nanocomposite lithium anode and cathode production
capabilities, and has secured a defense contract to produce prototype nanocomposite silicon anode
materials for thermal batteries used in missile systems. Working with Purdue University and Michigan
State University, Powdermet is scaling up its reversible nanocomposite liquid hydrogen storage media
that has exhibited tremendous promise as a transportable, renewable source for hydrogen fuel cells.
Another product in Powdermet’s ENComP™ product line has completed the final stages of testing as an
obscurant for the Marine Corp with a higher smoke density than baseline red phosphorous though the
product still needs improved burn rates for qualification as an environmentally friendly smoke screen
product for combat troops.
Powdermet’s SComP™ solution addresses a large market need for crash energy management and reduced
weight for fuel economy and portability. Today’s engineered materials market offers nothing like
SComP™ and its closest competition would be engineered honeycomb structures and foamed metals,
neither of which have SComP™’s energy absorption capabilities, metal-like aesthetics and ease of use.
One of the largest benefits of these syntactic metal composites is their ability to absorb energy from
impacts and ballistic events through deformation. Powdermet is aware of one firm, APS, Inc., started by
a former employee, that offers a similar product. Powdermet’s current development focus for SComP™
products are on scalable processing to reduce costs necessary to enter larger, shorter sell cycle markets, as
well as product design and insertion into defense markets which have a long acceptance cycle. Market
competition may come from nanotube companies which are attempting to build energy absorption
features using this type of technology but without the same property characteristics as Powdermet’s
products, especially in the area of thermal resistance. SComP™ is expected to fare well when introduced
to the commercial market.
General Company Competitive Advantages
The following factors serve as keys to the Company’s success:
• Management – A well-balanced, experienced management team provides the Company and its
subsidiaries with the guidance and strategic direction to successfully gain market entry.
• Products – The Company’s products represent innovations in key, multi-billion dollar markets.
• Intellectual Property – The intellectual property of MesoCoat and Powdermet include exclusive
licensing rights to technologies that make market penetration effective and feasible.
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• Qualification and Testing – As U.S. government agencies and private sector entities qualify and
test MesoCoat’s and Powdermet’s products, significant barriers to entry are automatically created
for potential competitors.
• Fundraising - As a publicly traded entity, the Company gains financing from public equity
markets which provide more liquidity and easier access to capital in the fundraising process.
The Company has also constructed the following barriers for potential competitors:
• product development expertise in both MesoCoat and Powdermet;
• exclusive license for the high density fusion cladding process from Oak Ridge National
Laboratory;
• strong product pipeline that would be ready for market in the next 2-3 years;
• exclusive access to arc lamp technology developed by Mattson Technologies; and
• R&D innovation.
Based on the engineered composite powders developed by Powdermet, as well as the sponsorship and
engineering support of Petrobras, MesoCoat expects to successfully introduce its application services for
corrosion-resistant alloys and wear-resistant coatings in the coming year. Central to the MesoCoat coating
process is its use of Mattson’s arc lamp technology. Mattson’s lamp acts as a high intensity heat source
which replicates conditions at the surface of the sun, fusing the coating materials with a product’s surface
area to create a smoother finish. The arc lamp also covers a much larger surface area than competing laser
cladding technology, allowing coatings to be applied at a much faster rate. Finally, MesoCoat’s continued
investment in R&D is expected to improve its current technology and service offerings and spur further
innovation. MesoCoat is currently installing equipment for the production of 12.2 meter clad pipe, which
is the industry requirement.
MesoCoat does face its own barriers to entry in the coatings industry. The most immediate challenge
consists of achieving American Petroleum Institute certification for its CermaClad™ products. In order to
successfully sell to the oil and gas industry, MesoCoat’s coatings must receive official approval and
certification, a process that generally requires major oil and gas entities to qualify our products for use,
followed by qualification for specific projects. MesoCoat’s Cooperation Agreement with Petroleo
Brasileiro S.A. has demonstrated product suitability at the laboratory scale, and is in the final stages of a
prototype clad pipe product qualification. The construction of our Euclid, Ohio 12 meter pipe plant and
subsequent quality certification of the facility and its products represent the final steps towards entry of
this pioneering product in the oil and gas sector.
CermaClad™’s second major product line, CermaClad™WR wear-resistant coatings do not require any
certification or approval from any industry or government entity, allowing MesoCoat to enter markets
such as the oil sands development with minimal resistance once the product is perfected. Powdermet is
delivering final independent verification samples to an industry major in September, 2012, to be followed
by field testing prototypes for the high performance WC MMC (highest performance and cost) product
offering, and through a cooperative development agreement with Oak Ridge National Laboratory, we
continue to advance the industry’s highest performance/cost nanocomposite steel for large scale
applications. The barriers to entry in the coatings industry rely primarily on developing the best value
technology and protecting it through intellectual property measures and consistent research and
development.
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Marketability
The ultimate success of any product will depend on market acceptance in its many forms, including cost,
efficiency, convenience and application. The market for MesoCoat’s prospective products is potentially
enormous and will require the Company to apply a significant portion of its focus on how to best initiate
market introductions and into which segments. The commercial possibilities for those products currently
under development at Powdermet are no less expansive and will likewise require that significant
resources are dedicated to an effective marketing strategy as commercialization draws near.
MesoCoat Overview
A tremendous need exists today to find better corrosion protection and wear prevention technologies to
replace many of the limited life, high cost coating and alloy materials currently used to solve operational
problems in industrial and infrastructure applications. The Company’s two business models include clad
steel products that compete with special alloys and high alloy steels, and component manufacturing and
remanufacturing (inorganic metal finishing) for extending the life and restoring dimensions of
components including steel rolls, valves, shafts, rotors, plungers, mandrels, wheel hubs, etc.
The inorganic metal finishing industry currently is one of the largest industrial users of hazardous and
carcinogenic chemicals, and produces hundreds of millions of gallons of contaminated wastewater and
toxic by-products annually. Hazardous metals such as lead, cadmium, chromium, and to a lesser extent,
cobalt, tungsten carbide, and volatile organic compounds used to strip rust and repair large steel structures
are being phased out or subjected to increasingly strict environmental regulations, creating opportunities
for innovation. U.S. companies annually spend billions of dollars on coatings and surface treatments
made from hazardous materials. Private companies and government defence agencies often use harmful
products like chrome because these solutions have been the lowest cost, most available corrosion and
wear resistant products available for the last 50 years. However, private and public users are now
recognizing the environmental problems these materials cause and the potential safety issues for those
who come in contact with these materials. Many companies would stop using these hazardous materials
if a cost effective substitute product could be brought to market. Legally, users may soon have no choice
but to desist from using hazardous materials as the EPA and other international environmental
organizations are moving to ban their use.
Manufacturers are now modifying their product’s bill of materials list and seeking substitute coating
products with similar or better corrosion and wear resistant properties in advance of impending legal
changes. Many are turning to next generation coatings made from alternative technologies like
nanotechnology-based materials to accomplish their goals. Innovative companies, such as MesoCoat, that
can develop non-toxic and longer life coating alternatives that have equal or superior corrosion and wear
protection capability at equal or lower cost relative to today’s solutions stand to reap significant financial
rewards in the next several decades.
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CermaClad™
The Company’s two flagship products are PComP™ nanocomposite coatings, and CermaClad™ high
speed cladding technology. MesoCoat’s market entry plans for Cermaclad™ are to clad the interior
diameter of 12.2 meter oil and gas pipes with corrosion resistance alloys, and initially Alloy 625 using
high productivity CermaClad™ application technology. In this market, MesoCoat is qualifying
Cermaclad™ 625 to current industry standards, working with Petrobras to ensure industry acceptance of
qualification data as the path to market acceptance. Due to the large order size for clad pipes, ranging
from $2-200 million per project, successful introduction of CermaClad™ CRA clad pipes would result in
an immediate market success.
Management has made sizeable investments in redesigning and miniaturizing the technology to commit to
this initial market solution. The internationally acclaimed engineering firm, Mattson Technology, has
delivered a new inside diameter HDIR lamp head which has now been successfully operating for several
months as integrated into a Cermaclad™ pipe coating system. MesoCoat has completed initial product
demonstration milestones, and the tool is being used to clad prototype 2-meter pipes for final acceptance,
which is anticipated by November, 2012. MesoCoat will soon complete the construction of a new 11,000
sq ft facility, has received initial equipment, and is awaiting delivery and installation of pipe handling
robots and support equipment in its second fiscal quarter. The end result is that MesoCoat expects to be
able to accomplish high speed cladding of pipe diameter interiors in sizes ranging from 8 to 36 inches for
lengths up to 40 feet by the middle of next year. Completion of the production facility and achieving
product quality certifications enable MesoCoat to market launch and begin product sales to the oil and gas
industry.
MesoCoat is positioning its CermaClad™ market solution at approximately 20% below the market price
of today’s metallurgically bonded CRA clad materials, positioning the product in between metallurgically
bonded and mechanically lined pipe, but with product production capacities eventually competing with
today’s mechanically lined and solid alloy pipe capability. The ability to decrease below the market price
of current offerings is due primarily to the speed and productivity of the process, combined with the low
capital investment relative to competing technologies. Allowing for a 20% discount, MesoCoat still
expects a gross profit margin of approximately 40% on this product line. MesoCoat’s expansion within
the market will be tied to its ability to attract growth capital for project financing to undertake global
expansion, or attracting appropriate joint venture partners to build fabrication plants to serve global
demand. Given the projected profitability of such plants and the anticipated short payback period
anticipated, management foresees no problem attracting interested market partners. The Company’s
management is interested in marketing CermaClad™ in certain geographical locations.
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PComP™
MesoCoat has been working with major fortune 100 clients like Boeing, Caterpillar, B.F. Goodrich, and
several OEM's from the oil and gas industry for product insertion into their product lines. In addition to
these large clients which have long sell cycles (2-5 years not atypical), MesoCoat has worked through
certified application partners in Alberta, Los Angeles, and Houston to capture short cycle sales and gain
initial market share. MesoCoat has signed a long term production agreement in Alberta, and is in
advanced field testing with partners in Houston. With the robust pipeline of major OEM’s well
underway, MesoCoat is now entering the short cycle “job shop” application services (coatings) market in
the Midwest, and preparing to launch is PComP™MB (metal boride) nanocomposite coatings for the
metals processing industry. The company has recently added regional sales forces in western Canada and
the Midwest to drive coating application service sales beginning next quarter. Application services will
be sold on a “per square inch” basis and pricing will be reflective of market pressures and the volume of
work received from each commercial customer. Pricing variables will be taken into consideration for each
application service order.
MesoCoat’s forecast for PComP™ growth is conservative due to the initial emphasis placed on sales of
the CermaClad™ product line, and the long sell cycle of major multimillion accounts. Nevertheless,
management’s forecast could be understated if sales adoption times to large OEM’s and military
maintenance and repair organizations exceed expectations. The military spends billions each year to
address wear and corrosion issues associated with new and used equipment. The U.S. Department of
Defense has widely publicized that in the future its budgets will be focused on sustaining current
platforms rather than developing or producing new ones. Based on input received from government
agencies, MesoCoat expects that it will be able to offer ideal environmentally friendly anti-corrosion/wear
resistant material solutions needed today to sustain current platforms.
Patents, Trademarks, Licenses, Franchises, Concessions, Royalty Agreements and Labor Contracts
The Company has no patents, trademarks, licenses, franchises, concessions, royalty agreements or labor
contracts other than those held by MesoCoat and Powdermet.
MesoCoat's patents include: one non-exclusively licensed patent which remains in place until February
21, 2016; six exclusively licensed patents from Powdermet, the earliest of which expires May 30, 2020
(see dates below); two exclusively licensed patents from Oak Ridge National Laboratory, which expire on
March 15, 2019 and July 30, 2024; and three pending U.S. Patents and two pending global patents, all of
which expire in 2030 or after.
Powdermet's patents include: six U.S. Patents, which have expiry dates of May 30, 2020, December 7,
2020, July 12, 2022, August 22, 2022, April 6, 2025 and June 23, 2026; and an exclusively licensed
patent from Ultramet Inc., which expires on February 21, 2016. Powdermet also has trademarks and
licenses which it will use to protect its assets as necessary.
Patents in general remain in place 20 years from application and 17 years from issuance.
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Governmental and Environmental Regulation
The Company is subject to local, state and national taxation. Additionally, the Company’s operations are
subject to a variety of national, federal, state and local laws, rules and regulations relating to, among other
things, worker safety and the use, storage, discharge and disposal of environmentally sensitive materials.
We believe that the Company is in full compliance will all laws, rules, regulations and requirements that
affect its business.
We believe that MesoCoat and Powdermet are in full compliance with the Resource Conservation
Recovery Act, the key legislation dealing with hazardous waste generation, management and disposal.
Nonetheless, under some of the laws regulating the use, storage, discharge and disposal of
environmentally sensitive materials, an owner or lessee of real estate may be liable for the costs of
removal or remediation of certain hazardous or toxic substances located on or in, or emanating from, such
property, as well as related costs of investigation and property damage. Laws of this nature often impose
liability without regard to whether the owner or lessee knew of, or was responsible for, the presence of
hazardous or toxic substances.
We further believe that MesoCoat and Powdermet are in compliance in all material respects with all laws,
rules, regulations and requirements that affect their respective businesses and that such compliance does
not impose a material impediment on either entities ability to conduct business.
Climate Change Legislation and Greenhouse Gas Regulation
A majority of the climate change related studies over the past couple decades have indicated that
emissions of certain gases contribute to warming of the Earth’s atmosphere. In response to these studies,
many nations have agreed to limit emissions of “greenhouse gases” or “GHGs” pursuant to the United
Nations Framework Convention on Climate Change, and the “Kyoto Protocol.” Although the United
States did not adopt the Kyoto Protocol, several states have adopted legislation and regulations to reduce
emissions of greenhouse gases.
The United States Supreme Court ruled, in Massachusetts, et al. v. EPA, that the EPA abused its
discretion under the Clean Air Act by refusing to regulate carbon dioxide emissions from mobile sources.
As a result of the Supreme Court decision the EPA issued a finding that serves as the foundation under
the Clean Air Act to issue other rules that would result in federal greenhouse gas regulations and
emissions limits under the Clean Air Act, even without Congressional action. Finally, acts of Congress,
the decisions of lower courts, large numbers of states, and foreign governments could widely affect
climate change regulation. Greenhouse gas legislation and regulation could have a material adverse effect
on our business, financial condition, and results of operations.
Research and Development
The Company is focused on the research and development of those entities in which it holds an interest.
MesoCoat and Powdermet have a history of working on critical R&D projects for the private and public
sector over a broad range of research fields, with further work extending into peripheral areas. MesoCoat
and Powdermet have adopted this approach because they believe that excellent products can be created
when a backdrop of diversified sciences and technologies exist. From this broad range, their respective
R&D staffs work closely with sales and operations management teams to establish priorities and
effectively manage individual projects.
23
Grants to MesoCoat from the Federal Government, Departments of Energy and Commerce totaled
$1,895,230 and $1,765,924 for the years ended May 31, 2012 and 2011, respectively. Grants to MesoCoat
from State Governments were $71,447 and $82,852 for the years ended May 31, 2012 and 2011,
respectively. MesoCoat revenues from end users of $1,170,752 and $486,164 were realized for the years
ended May 31, 2012 and 2011, respectively.
Currently, MesoCoat and Powdermet are working on several critical and high risk-high reward R&D
projects primarily funded by the federal government, state government and end users. MesoCoat’s
PComP™ and Powdermet’s SComP™ product lines that are the end product of federally funded R&D.
Employees
As of September 11, 2012 the Company has five Directors, five Advisors, one bookkeeper, one
administrative assistant and five contracted consultants. We use additional consultants, attorneys, and
accountants as necessary to assist in the development of our business.
As of September 11, 2012 MesoCoat had 24 employees.
As of September 11, 2012 Powdermet had 26 employees.
ITEM 1A.
RISK FACTORS
The Company’s operations and securities are subject to a number of risks. Below we have identified and
discussed the material risks that we are likely to face. Should any of the following risks occur, they will
adversely affect our business, financial condition, and/or results of operations as well as the future trading
price and/or the value of our securities.
The Company has a history of significant operating losses and such losses may continue in the future.
The Company incurred net losses of $6,322,365 for the period from June 27, 2006 (inception) to May 31,
2012. Since we have been without significant revenue since inception and currently have no revenue
producing operations outside of that produced by MesoCoat, historical losses may continue into the
future.
The Company’s success is dependent on its ability to assist MesoCoat and Powdermet to commercialize
proprietary technologies to the point of generating sufficient revenues to sustain and expand operations.
The Company’s near term future operation is dependent on its ability to assist MesoCoat and Powdermet
in the commercial application of proprietary technologies to produce sufficient revenue to sustain and
expand operations. The same successful efforts criteria will be required for any additional targets that are
acquired by the Company. The success of these endeavours will require that sufficient funding be
available to the Company to assist in the development of its investments. Currently, the Company’s
financial resources are limited, which limitation may slow the pace at which proprietary technologies can
be commercialized and deter the prospect of additional acquisitions. Should we be unable to improve our
financial condition through debt or equity offerings, our ability to successfully advance our business plan
will be severely limited.
24
We face significant commercialization risks related to technological businesses.
The industries in which MesoCoat and Powdermet operate and plan to operate are characterized by the
continual search for higher performance at lower cost. Our growth and future financial performance will
depend on the ability of MesoCoat and Powdermet to develop and market products that keep pace with
technological developments and evolving industry requirements. Further, the research and development
involved in commercializing products requires significant investment and innovation to keep pace with
technological developments. Should we be unable to keep pace with outside technological developments,
respond adequately to technological developments or experience significant delays in product
development, our products might become obsolete. Should these risks overcome our ability to keep pace
there is a significant likelihood that our ability to successfully advance our business will be severely
limited.
The coatings industry is likely to undergo technological change so our products and processes could
become obsolete at any time.
Evolving technology, updated industry standards, and frequent new product and process introductions are
likely to characterize the coatings industry going forward so our products or processes could become
obsolete at any time. Competitors could develop products or processes similar to or better than our own,
finish development of new technologies in advance of our research and development, or be more
successful at marketing new products or processes, any of which factors may hurt our prospects for
success.
Market acceptance of the products and processes produced by MesoCoat and Powdermet is critical to our
growth.
We expect to generate revenue from the development and sale of products and processes produced by
MesoCoat and Powdermet. Market acceptance of those products is therefore critical to our growth. If our
customers do not accept or purchase those products or processes produced by MesoCoat and Powdermet,
then our revenue, cash flow and operating results will be negatively impacted.
The Company competes with larger and better financed corporations.
Competition within the industrial coatings industry and other high technology industries is intense. While
the Company’s products are distinguished by next-generation innovations that are more sophisticated and
cost effective than many competitive products currently in the market place, a number of entities and new
competitors may enter the market in the future. Some of our existing and potential competitors have
longer operating histories, greater name recognition, larger customer bases and significantly greater
financial, technical and marketing resources than we do, including well known multi-national
corporations. Accordingly, our products could become obsolete at any time. Competitors could develop
products similar to or better than our own, finish development of new technologies in advance of the
Company’s research and development, or be more successful at marketing new products, any of which
factors may hurt our prospects for success.
25
General economic conditions will affect our operations.
Changes in the general domestic and international climate may adversely affect the financial performance
of the Company, MesoCoat and Powdermet. Factors that may contribute to a change in the general
economic climate include industrial disputes, interest rates, inflation, international currency fluctuations
and political and social reform. Further, the delayed revival of the global economy is not conducive to
rapid growth, particularly of technology companies with newly commercialized products.
MesoCoat and Powdermet rely upon patents and other intellectual property.
MesoCoat and Powdermet rely on a combination of patent applications, trade secrets, trademarks,
copyrights and licenses, together with non-disclosure and confidentiality agreements, to establish and
protect proprietary rights to technologies they develop. Should either of MesoCoat or Powdermet be
unable to adequately protect their intellectual property rights or become subject to a claim of
infringement, their businesses and that of the Company may be materially adversely affected.
MesoCoat and Powdermet expect to prepare patent applications in accordance with their respective
worldwide intellectual property strategies on acquiring new technologies. However, neither they nor the
Company can be certain that any patents will be issued with respect to future patents pending or future
patent applications. Further, neither they nor the Company know whether any future patents will be
upheld as valid, proven enforceable against alleged infringers or be effective in preventing the
development of competitive patents. The Company believes that MesoCoat and Powderment have each
implemented a sophisticated internal intellectual property management system to promote effective
identification and protection of their products and know-how in connection with the technologies they
have developed and may develop in the future
We may not be able to effectively manage our growth.
We expect considerable future growth in our business. Such growth will come from the addition of new
plants, the increase in global personnel, and the commercialization of new products. Additionally, our
products should have an impact on the cladding industry; as companies learn that they can receive
materials with a short lead time at a higher quality and lower price, market demand should grow,
expanding the overall market itself. To achieve growth in an efficient and timely manner, we will have to
maintain strict controls over our internal management, technical, accounting, marketing, and research and
development departments. We believe that we have retained sufficient quality personnel to manage our
anticipated future growth though we are still striving to improve financial accounting oversight to ensure
that adequate reporting and control systems in place. Should we be unable to successfully manage our
anticipated future growth by adherence to these strictures, costs may increase, growth could be impaired
and our ability to keep pace with technological advances may be impaired which failures could result in a
loss of future customers.
Environmental laws and other governmental legislation may affect our business.
Should the technologies which each of MesoCoat and Abakan have under development not comply with
applicable environmental laws the Company’s business and financial results could be seriously harmed.
Furthermore, changes in legislation and governmental policy could also negatively impact us. Although
we are currently unaware of any introduced or proposed bills, or policy, that might cause us to make
specific changes to our operations, no assurance can be given that if new legislation is passed we will be
able to make the changes to comport our technologies with future regulatory requirements.
26
The Company and those subsidiaries in which it holds an interest may face liability claims on future
products.
Although MesoCoat and Powdermet intend to implement exhaustive testing programs to identify
potential material defects in technology they develop, any undetected defects could harm their reputation
and that of the Company, diminish their customer base, shrink revenues and expose themselves and us to
product liability claims. Any imposition of liability that is not covered by insurance or is in excess of
insurance coverage could have a material adverse effect on our business, results of operations and
financial condition.
The market for our stock is limited and our stock price may be volatile.
The market for our common stock has been limited due to low trading volume and the small number of
brokerage firms acting as market makers. Due to the limitations of our market and the volatility in the
market price of our stock, investors may face difficulties in selling shares at attractive prices when they
want to sell. The average daily trading volume for our stock has varied significantly from week to week
and from month to month, and the trading volume often varies widely from day to day.
Our common stock is currently deemed to be “penny stock”, which makes it more difficult for investors
to sell their shares.
Our common stock is subject to the “penny stock” rules adopted under section 15(g) of the Exchange Act.
The penny stock rules apply to companies whose common stock is not listed on the NASDAQ Stock
Market or other national securities exchange and trades at less than $5.00 per share or that have tangible
net worth of less than $5,000,000 ($2,000,000 if the company has been operating for three or more years).
These rules require, among other things, that brokers who trade penny stock to persons other than
“established customers” complete certain documentation, make suitability inquiries of investors and
provide investors with certain information concerning trading in the security, including a risk disclosure
document and quote information under certain circumstances. Many brokers have decided not to trade
penny stocks because of the requirements of the penny stock rules and, as a result, the number of broker-
dealers willing to act as market makers in such securities is limited. If the Company remains subject to the
penny stock rules for any significant period, it could have an adverse effect on the market, if any, for the
Company’s securities. If the Company’s securities are subject to the penny stock rules, investors will find
it more difficult to dispose of the Company’s securities.
27
The elimination of monetary liability against the Company’s directors, officers and employees under
Nevada law and the existence of indemnification rights to the Company’s directors, officers and
employees may result in substantial expenditures by the Company and may discourage lawsuits against
the Company’s directors, officers and employees.
The Company’s articles of incorporation contains a specific provision that eliminates the liability of
directors for monetary damages to the Company and the Company’s stockholders; further, the Company
is prepared to give such indemnification to its directors and officers to the extent provided by Nevada law.
The Company may also have contractual indemnification obligations under its employment agreements
with its executive officers. The foregoing indemnification obligations could result in the Company
incurring substantial expenditures to cover the cost of settlement or damage awards against directors and
officers, which the Company may be unable to recoup. These provisions and resultant costs may also
discourage the Company from bringing a lawsuit against directors and officers for breaches of their
fiduciary duties and may similarly discourage the filing of derivative litigation by the Company’s
stockholders against the Company’s directors and officers even though such actions, if successful, might
otherwise benefit the Company and its stockholders.
ITEM 1B.
UNRESOLVED STAFF COMMENTS
Not applicable to smaller reporting companies.
ITEM 2.
PROPERTIES
The Company maintains 800 sq. ft. of executive office space at 2665 S. Bayshore Drive, Suite 450,
Miami, Florida, 33133 on a month to month basis at a cost of $2,280 a month paid to Prosper Financial,
Inc., a related party. The Company does not believe that it will need to maintain a larger office at any time
in the foreseeable future in order to carry out its operations.
Powdermet maintains 48,000 sq. ft. of research and development space located at 24112 Rockwell Drive,
Euclid, Ohio 44117. The cost of the lease is $13,500 per month, adjustable on an annual basis, paid to
Sherman Properties LLC., a related party and the term of the lease runs through October 31, 2020 with
the right to sub-lease the premises.
MesoCoat maintains 22,000 sq. feet of the research and development space located at 24112 Rockwell
Drive, Euclid, Ohio 44117 of that space leased by Powdermet on a sub-lease basis that runs through May
31, 2020. The cost of the sub-lease for MesoCoat is $6,700 paid to Powdermet per month.
MesoCoat is close to completing the building of a $6-million, 11,000 sq. ft. plant in Euclid, Ohio. The
plant will include a ‘CermaClad™’ production line that will manufacture up to 10,000 square meters per
year of corrosion and wear-resistant clad tubes, pipes and plates. The plant will also be equipped with a
thermal spray system to commercialize MesoCoat’s PComP™ family of products and qualify them for
use in the aerospace, oil and gas, mining, and chemical processing industries. Workers broke ground on
the plant on April 7, 2011. MesoCoat had expected to complete construction by February, 2012 but due to
financing and equipment delivery delays the completion of the facility is now expected to be the end of
October 2012. Installation and setup of production equipment will take a further three to four months,
with production commencing by the end of May, 2013.
The CermaClad™ portion of the plant will include:
28
• Blasting Automatic
• Big Application System
• Crane
• Lamphead
• Power Supply
• Longitudinal Conveyor
• Side Conveyor
• Rotation For Lamp
• Rotation For Precursor Application
• Rotation For Ndt
• Side Loader (Truck-Forklift)
• Compressor
• Electrical Installation
• Small Application Rotation System
• EC Thickness Gauge
• PMI (Positive Material Identification)
• Phase Array UT (Ultrasonic Test Lamination)
• Laser Mapping (Surface Porosity)
• Potential Hydro Testing
• Compress Air Equipment
• Pipe Manipulation Systems
• Material Feeding System
• Shielding Gas System
• Extraction System
• Safety Equipment & Fencing
• Security System
• Final Inspection and Packing Rack
The PComP™ portion of the plant will include:
• Robot
• Lathe
• Ventilation Makeup Air
• Dust Collector
• DJ Multicoat (Thermal Sprayer)
• Grit Blast
• Air Compressor
• Material Handling Base
• Material Handling Per Cube
• Ducting
• Met Laboratory
• Inspection Area
• Computer Phone
• Stripping Tank
• Small Grinder
• Large Grinder
• Misc Electric
• Misc Plumbing
29
ITEM 3.
LEGAL PROCEEDINGS
None.
ITEM 4.
MINE SAFETY DISCLOSURE
Not applicable.
30
PART II
ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED
STOCKHOLDER MATTERS, AND BUSINESS ISSUER PURCHASES OF
EQUITY SECURITIES
The Company’s common stock is quoted on the OTCQB electronic quotation system under the symbol
“ABKI”. These prices reflect inter-dealer prices without retail mark-up, mark-down, or commission, and
may not necessarily reflect actual transactions. The following table sets forth the high and low bid prices
for the common stock as reported for each quarterly period over the last two fiscal years.
High and Low Bid Prices
Year
Quarter Ended
High
Low
2012
May 31
$2.75
$1.00
2012
February 29
$1.25
$0.75
2011
November 30
$1.60
$0.95
2011
August 31
$1.65
$1.20
2011
May 31
$1.76
$0.70
2011
February 28
$1.25
$0.90
2010
November 30
$1.15
$0.40
2010
August 31
$1.08
$0.26
Reports to Security Holders
We are a reporting company pursuant to the Securities and Exchange Act of 1934. As such, we make
available our annual report which includes audited financial statements, and our quarterly reports which
include unaudited financial statements.
Capital Stock
The following is a summary of the material terms of the Company’s capital stock. This summary is
subject to and qualified by our articles of incorporation and bylaws.
Common Stock
As of September11, 2012, there were 464 shareholders of record holding a total of 61,465,445 shares of
fully paid and non-assessable common stock of the 2,500,000,000 shares of common stock, par value
$0.0001, authorized. The board of directors believes that the number of beneficial owners is greater than
the number of record holders because a portion of our outstanding common stock is held in broker “street
names” for the benefit of individual investors. The holders of the common stock are entitled to one vote
for each share held of record on all matters submitted to a vote of stockholders. Holders of the common
stock have no pre-emptive rights and no right to convert their common stock into any other securities.
There are no redemption or sinking fund provisions applicable to the common stock.
31
Preferred Stock
As of September 11, 2012, there were 50,000,000 shares of preferred stock, par value $0.0001 authorized
of which none were outstanding. The Company’s preferred stock may have such rights, preferences and
designations and may be issued in such series as determined by the board of directors.
Dividends
The Company has not declared any cash dividends since inception and does not anticipate paying any
dividends in the near future. The payment of dividends is within the discretion of the board of directors
and will depend on our earnings, capital requirements, financial condition, and other relevant factors.
There are no restrictions that currently limit the Company’s ability to pay dividends on its common stock
other than those generally imposed by applicable state law.
Warrants
As of September 11, 2012, there were 780,465 half-share warrants outstanding to purchase 390,233
shares of our common stock, at $1.50 per share with an expiration date of June 13, 2013, 80,000 half-
share warrants outstanding to purchase 40,000 shares of our common stock, at $1.50 per share with an
expiration date of July 15, 2013, 706,595 full-share warrants outstanding to purchase 706,595 shares of
our common stock, at $1.25 per share with an expiration date of February 20, 2014,600,000 full share
warrants outstanding to purchase 600,000 shares of our common stock, at $2.00 per share with an
expiration date of April 17, 2014 and 698,925 half-share warrants outstanding to purchase 349,463
shares of our common stock, at $2.00 per share with an expiration date of May 30, 2014.
Stock Options
As of September 11, 2012, there were 5,910,000 stock options outstanding to purchase shares of our
common stock, as follows:
• 2,000,000 options have an exercise price of $0.60 per shares, expire on December 11, 2019, and
vest in equal increments over three years beginning on December 11, 2010
• 300,000 options have an exercise price of $0.60 per shares, expire on December 11, 2019, and
vest in equal increments over three years beginning December 11, 2009.
• 100,000 options have an exercise price of $0.75 per share, expire on March 15, 2020, and vest
in equal increments over three years to beginning March 15, 2010.
• 50,000 options have an exercise price of $0.75 per share, expire on March 8, 2020, and vest in
equal increments over three years beginning March 8, 2010.
• 100,000 options have an exercise price of $0.75 per share, expire on March 15, 2020, and vest in
equal increments over three years beginning March 15, 2011.
• 400,000 options have an exercise price of $0.60 per share, expire on April 26, 2020, and vest in
equal increments over three years to beginning April 26, 2011.
• 250,000 options have an exercise price of $1.30 per share, expire on April 29, 2020, and vest in
equal increments over three years to beginning April 29, 2011.
• 150,000 options have an exercise price of $1.05 per share, expire on May 2, 2020, and vest in
equal increments over three years beginning May 2, 2011.
• 200,000 options have an exercise price of $0.65 per share, expire on August 20, 2020, and vest in
equal increments over three years to beginning August 20, 2011.
32
• 845,000 options have an exercise price of $0.65 per share, expire on October 19, 2020, and vest
in equal increments over three years beginning on October 19, 2011.
• 25,000 options have an exercise price of $1.01 per share, expire on November 17, 2020, and
vest in equal increments over three years beginning on November 17, 2011.
• 20,000 options have an exercise price of $1.05 per share, expire on March 16, 2021, and vest in
equal increments over three years beginning on March 16, 2012.
• 100,000 options have an exercise price of $1.05 per share, expire on April 13, 2021, and vest in
equal increments over three years beginning on April 13, 2012.
• 50,000 options have an exercise price of $1.02 per share, expire on May 13, 2021, and vest in
equal increments over three years beginning on May 13, 2012.
• 150,000 options have an exercise price of $1.05 per share, expire on May 2, 2021, and vest in
equal increments over three years beginning on May 2, 2012.
• 25,000 options have an exercise price of $1.25 per share, expire on August 15, 2021, and vest in
equal increments over three years beginning on January 25, 2012.
• 100,000 options have an exercise price of $1.20 per share, expire on October 24, 2016, and are
vested as of October 24, 2011.
• 100,000 options that have an exercise price of $1.00 per share, expire on January 2, 2022, and
vest in equal increments over three years beginning on January 2, 2013.
• 150,000 options that have an exercise price of $1.02 per share, expire on January 5, 2022, and
vest in equal increments over three years beginning on January 5, 2013.
• 70,000 options have an exercise price of $1.07 per share, expire on February 15, 2022, and vest
in equal increments over two periods being July 1, 2012 and January 1, 2013.
• 25,000 options have an exercise price of $1.07 per share, expire on February 15, 2022, and vest
in equal increments over two periods being February 6, 2012 and August 6, 2012.
• 50,000 options have an exercise price of $1.03 per share, expire on February 15, 2022, and vest
in equal increments over three years beginning on February 15, 2013
• 75,000 options have an exercise price of $2.30 per share, expire on June 12, 2022, and vest in
equal increments over three years beginning on June 12, 2012.
• 100,000 options have an exercise price of $2.30 per share, expire on June 12, 2022, and vest in
equal increments over three years beginning on June 1, 2013.
• 150,000 options have an exercise price of $2.30 per share, expire on June 15, 2022, and vest in
equal increments over three years beginning on September 15, 2012.
• 50,000 options have an exercise price of $2.05 per share, expire on June 20, 2022, and vest in
equal increments over three years beginning on June 20, 2013.
• 75,000 options have an exercise price of $1.95 per share, expire on July 27, 2022, and vest in
equal increments over three years beginning on August 1, 2013.
• 150,000 options have an exercise price of $1.90 per share, expire on August 7, 2022, and vest in
equal increments over three years beginning on August 7, 2013.
Convertible Securities
As of September 11, 2012, the Company has two debt instruments convertible into the shares of its
common stock for an aggregate total of $2,700,000, bearing an interest rate of 5% per annum. The notes
are convertible at $1.00 per conversion unit, which consists of one share of our common stock and one-
half share warrant to purchase an additional share at $1.50 per share, with an expiration date of two years
following the conversion date. The maturity dates of these notes are two years from the date of issuance,
March 16, 2013, April 13, 2013, June 7, 2013 and July 14, 2013 respectively.
33
Securities Authorized for Issuance Under Equity Compensation Plans
The Company has not authorized any securities for issuance under any equity compensation plan.
Purchases of Equity Securities made by the Issuer and Affiliated Purchasers
The Company has not repurchased any shares of its common stock during the fiscal year ended May 31,
2012 or since that date through September 11, 2012.
Recent Sales of Unregistered Securities; Use of Proceeds from Registered Securities
On May 30, 2012 the board of directors of the Company authorized the issuance of 698,925 shares of its
common stock and 349,463 warrants to purchase 349,463 shares of our common stock at an exercise price
of $2.00 until May 30, 2014 to the following entities and individuals for $1.60 each, or an aggregate of
$1,118,280, in reliance upon the exemptions from registration provided by Section 4(2), Regulation D
and Regulation S of the Securities Act:
Name
Consideration
Basis
Shares
Warrants
Exemption
Dorothy D’Ewart
$25,000
Subscription
15,625
7,813
Reg D/Sec 4(2)
Douglas, D’Ewart
$50,080
Subscription
31,300
15,650
Reg. D/Sec 4(2)
Peter, D’Ewart
$25,000
Subscription
15,625
7,813
Reg D/Sec. 4(2)
Walter, Duerr
$19,200
Subscription
12,000
6,000
Reg D/Sec 4(2)
Steven R. Ferris
$13,500
Subscription
8,438
4,219
Reg. D/Sec 4(2)
Steven R. Ferris
$42,500
Services
26,562
13,281
Reg D/Sec 4(2)
Kevin M. Mc Donnell
$16,000
Subscription
10,000
5,000
Reg D/Sec. 4(2)
Orsa & Company
$16,000
Services
10,000
5,000
Reg D/Sec 4(2)
Jayne E. Price
$25,000
Subscription
15,625
7,813
Reg. D/Sec 4(2)
Gary Polestra
$320,000
Subscription 200,000
100,000
Reg D/Sec. 4(2)
Edward Steinback
$8,000
Services
5,000
2,500
Reg D/Sec 4(2)
Costas M. Takkas
$32,000
Services
20,000
10,000
Reg D/Sec 4(2)
Costas M. Takkas
$24,000
Subscription
15,000
7,500
Reg D/Sec 4(2
Joe Eberhard
$80,000
Subscription
50,000
25,000
Reg S/Sec 4(2)
Kosson Ventures Ltd.
$160,000
Subscription 100,000
50,000
Reg S/Sec. 4(2)
River Fish Holdings Ltd.
$190,000
Subscription 118,750
59,375
Reg S/Sec. 4(2)
Stratton SA
$72,000
Subscription
45,000
22,500
Reg S/Sec. 4(2)
The Company complied with the exemption requirements of Section 4(2) of the Securities Act based on
the following factors: (1) the issuances and grants were isolated private transactions by the Company
which did not involve a public offering; (2) the offerees have access to the kind of information which
registration would disclose; and (3) the offerees are financially sophisticated.
The Company complied with the requirements of Rule 506 of Regulation D of the Securities Act by: (i)
foregoing any general solicitation or advertising to market the securities; (ii) selling only to accredited
offerees; (iii) having not violated antifraud prohibitions with the information provided to the offerees; (iv)
being available to answer questions by the offerees; and (v) issuing restricted securities to the offerees.
34
The Company complied with the exemption requirements of Regulation S by having directed no offering
efforts in the United States, by offering common shares only to offerees who were outside the United
States at the time of the offering, and ensuring that the offerees to whom the common shares and warrants
were offered and authorized were non-U.S. offerees with addresses in foreign countries.
On March 31, 2012 the Company authorized the issuance of 600,000 restricted common shares and
600,000 share purchase warrants, each warrant convertible into an additional share at an exercise price of
$1.25 for a two year period from the date of issue, for cash and other valuable consideration of $600,000
in reliance upon the exemptions from registration provided by Section 4(2), Regulation D and Regulation
S of the Securities Act of 1933, as amended (“Securities Act”) as follows:
Name
Consideration
Basis
Shares
Warrants
Exemption
Stratton SA
$450,000
Subscription 450,000 450,000
Sec. 4(2)/Reg S
River Fish Holdings Ltd.
$100,000
Subscription 100,000 100,000
Sec. 4(2)/Reg S
Costas Takkas
$50,000
Services
50,000
50,000
Sec. 4(2)/Reg D
The Company complied with the exemption requirements of Section 4(2) of the Securities Act based on
the following factors: (1) the issuances were isolated private transactions by the Company which did not
involve a public offering; (2) the offerees had access to the kind of information which registration would
disclose; and (3) the offerees are financially sophisticated.
The Company complied with the requirements of Regulation D of the Securities Act by: (i) foregoing any
general solicitation or advertising to market the securities; (ii) offering only to accredited offerees; (iii)
having not violated antifraud prohibitions with the information provided to the offerees; (iv) being
available to answer questions by the offerees; and (v) providing restricted common shares and warrants to
the offeree.
The Company complied with the exemption requirements of Regulation S by having directed no offering
efforts in the United States, by offering common shares only to offerees who was outside the United
States at the time of the offering, and ensuring that the offerees to whom the restricted common shares
and warrants were offered and authorized were non-U.S. offerees with addresses in a foreign country.
On March 20, 2012 the Company authorized the issuance of 27,500 restricted common shares for services
rendered pursuant to the terms and conditions of their respective agreements in reliance upon the
exemptions from registration provided by Section 4(2), and Regulation D of the Securities Act as follows:
Name
Basis
Shares
Exemption
Financial Insights
Services
12,500
Sec. 4(2)/Reg D
Livingston Securities
Services
15,000
Sec. 4(2)/Reg D
The Company complied with the exemption requirements of Section 4(2) of the Securities Act based on
the following factors: (1) the issuances were isolated private transactions by the Company which did not
involve a public offering; (2) the offerees had access to the kind of information which registration would
disclose; and (3) the offerees are financially sophisticated.
35
The Company complied with the requirements of Regulation D of the Securities Act by: (i) foregoing any
general solicitation or advertising to market the securities; (ii) offering only to accredited offerees; (iii)
having not violated antifraud prohibitions with the information provided to the offerees; (iv) being
available to answer questions by the offerees; and (v) providing restricted common shares and warrants to
the offeree.
Trading Information
The Company’s common stock is currently approved for quotation under the symbol “ABKI”. The
information for our transfer agent is as follows:
Island Stock Transfer
100 Second Avenue South, Suite 300
St. Petersburg, Florida 33701
Tel: (727) 289-0010.
ITEM 6.
SELECTED FINANCIAL DATA
Not applicable.
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION
This Management’s Discussion and Analysis of Financial Condition and Results of Operations and other
parts of this current report contain forward-looking statements that involve risks and uncertainties.
Forward-looking statements can also be identified by words such as “anticipates,” “expects,” “believes,”
“plans,” “predicts,” and similar terms. Forward-looking statements are not guarantees of future
performance and our actual results may differ significantly from the results discussed in the forward-
looking statements. Factors that might cause such differences include but are not limited to those
discussed in the subsection entitled Forward-Looking Statements and Factors That May Affect Future
Results and Financial Condition below. The following discussion should be read in conjunction with our
financial statements and notes thereto included in this current report. Our fiscal year end is May 31.
Plan of Operation
MesoCoat’s plan of operation for the coming year is to position itself to succeed in commercialization
efforts focused on its CermaClad™ and PComP™ products. To achieve this success Abakan aims to:
• Establish overseas subsidiaries and plants while supporting their management teams.
• Gain market entry by creating awareness and establishing relationships with key investors.
• Increase its investment in MesoCoat and acquire a controlling interest in Powdermet by fiscal
year-end 2013.
• Target existing coating companies to qualify and use powders produced by MesoCoat and
Powdermet.
• Assist MesoCoat in achieving the following objectives:
o Becoming American Petroleum Institute (API) compliant for CermaClad™ corrosion and
wear resistant alloys products through a joint development agreement with Petrobras and
ongoing development work.
36
o Gaining another joint venture agreement with one or two other major oil corporations by
fourth quarter 2012.
o Completing construction of its first operating plant in Euclid, Ohio and begin producing
work samples for certification and approval by potential clients by the fourth quarter
2012, with work to be split 60%/40% between samples and commercial sales.
o Continuing a plan of constructing CermaClad™ and PComP™ operating plants in
strategic market locations (Houston, Alberta, Brazil and the Far East).
o Continuing the formation of strategic partnerships and a pipeline of potential clients for
the CermaClad™ and PComP™ product lines.
Growth Strategy
The Company intends to grow MesoCoat over the next five years by applying the expertise of its board of
directors and board of advisors to the expansion of operations on a global basis. Management will rely on
both project and investor financing to build new production facilities in emerging markets in a manner
dedicated to capturing market share and enhancing shareholder value.
The accomplishment of these objectives relies on either of two growth strategies: i) a conservative or
“organic” strategy that requires an additional $16,000,000 in financing and ii) a moderate strategy which
requires early market acceptance and an additional $45,000,000 to $50,000,000 in financing (dependent
on the level of cash flow achieved and the level of project debt financing secured). On realizing sufficient
financing, MesoCoat plans to launch between six and fifteen operating plants worldwide. Given the wide
range of the Company’s assumptions, the growth strategy depends largely upon the successful execution
of both marketing plans and plant openings for CermaClad™ and PComP™. Given our strategy of
targeting strategic global regions with multiple potential clients with multiple product lines, we believe
that it is feasible for us to meet our expectations. Nonetheless, the Company will carefully monitor the
risks associated with achieving the goals in each growth scenario to ensure that MesoCoat can meet client
expectations.
MesoCoat believes that its first offshore plant will be constructed on a “build to suit” basis in agreement
with a full service construction company, which arranges architectural designs, permits, and offers a
leasing or financing arrangement for the cost of the land and the building. The Company has also had
discussions with State Development Boards in several jurisdictions which have indicated interest in
attracting high technology companies like MesoCoat to their respective areas, with the possibility of
offering incentives such as grants and loan guarantees. Another key component of plant location lies in
strategic global positioning. We expect to construct production facilities in locations where we can
service multiple corporations in multiple industry sectors. We have identified Brazil as a region of focus
due to the significant oil and mining sectors in that country. West Africa is another part of the world that
would benefit significantly from the application of MesoCoat’s products since the oil industry in that
region has problems of corrosion and high pressure that are similar to those encountered in offshore
Brazilian oil fields. Locations in the Far East will offer additional opportunities for MesoCoat.
While the Company explores each opportunity it is aware of the inherent risks that often come with
operating in offshore markets. Risks might include those associated with politics, currency or even the
environment about which we will seek advice from experienced professionals in each offshore
jurisdiction. Further, we expect that recent additions to our board of directors and our board of advisors
will assist us in successfully navigating these prospective pitfalls based on years of experience within the
international arena.
37
Operational Logistics
CermaClad™, PComP™ SComP™, MComP™ and ENComP™ are platform technologies with extensive
product potential in multiple large market verticals. The Company and related operations will play a
major role in six distinct product segments of the value chain: raw materials/consumables, application
equipment, coating (cladding) services, casting, fabrication, and maintenance & repair of existing assets.
By playing a major role in these six segments of the value chain, the Company and its partners may prove
to be an influential player in defining market prices and trends in the structural composites, steel plate,
sheet, bar, and tubular products industries. Our vision is to form partnerships, and set up captive or
regional facilities with the power players in the target industry. Most of these large manufacturers have
project management and installation capabilities besides fabrication, and thus partnerships with these
companies would help us build one-stop-shops for customers, where the customers define the
specifications/requirements and we, and our value chain partners would take care of the steel fabrication,
coating/cladding operations, casting, assembly integration, and inspection activities. We intend to partner
with a major suppliers or end users within geographic regions. Depending on the amount of financing
available, we are considering three approaches to this market:
• High Capital Intensity: The Company will continue to self-finance and act as owner-operator.
• Medium Capital Intensity: The Company intends to enter into joint venture partnerships, with the
Company being the operator at 51% ownership and the partner at 49% ownership.
• Low Capital Intensity: The Company expects to enter into joint ventures with supply chain
partners which would act as operators and financiers with 51% ownership while the Company
would act as the technology supplier with 49% ownership. Within these arrangements we do not
intend to be a licensor but rather participate in the operations and service end of the businesses.
Additional Funding
MesoCoat will require additional funding over the next twelve months to fulfill its business plan. Not all
of the funding sought is currently available though MesoCoat expects to receive additional funding from
the Company on the prospective exercise of the second option under the Investment Agreement. Should
MesoCoat be unable to secure additional financing from outside sources or the Company, MesoCoat will
most likely be unable to meet its milestones and may need to scale back operations. Any shortfall in
minimum funding will adversely affect MesoCoat’s ability to expand or even continue operations.
Results of Operations
During the year ended May 31, 2012:
• We increased our interest in MesoCoat to 51% on a fully diluted basis.
• We focused our efforts on our interest on the continued development of MesoCoat and its
products.
• We strengthened our management team with industry experts.
• We prepared corporate governance charters.
• We completed debt and equity financing in the amount of $3,239,975.
• We commenced negotiations with prospective joint venture partners in regions, such as Russia,
in which we do not intend to operate on our own.
• We commenced negotiations with prospective joint venture partners in respect to technological
applications that we do not intend to develop on our own.
38
During the year ended May 31, 2012, the Company assisted MesoCoat with the following developments:
• Redefining its marketing strategy.
• Hiring new senior management.
• Improving its branding.
• Beginning communication with several new potential joint commercialization partners.
• Working with Petrobras on fulfilling the terms of the Cooperation Agreement.
• Accelerating R&D schedules by negotiating favorable engineering contracts with third parties.
• Breaking ground on a new 11,000 sq. ft. manufacturing plant in Euclid, Ohio; full-scale
production from the plant is expected to begin during the first half of 2013; the plant will be able
to coat 20,000 square meters of steel pipe with CermaClad™ per year and will be able to
fabricate PComP™ products for application in the aerospace, oil and gas, mining and chemical
processing industries.
• Developing relationships with technology incubators like the Houston Technology Center and
other industry/trade associations.
• Entering into an Assignment Agreement to transfer a distribution agreement granted to
Polythermics, LLC to the Company providing it with the exclusive right to distribute MesoCoat’s
products intended for application specific to the oil and gas pipeline industry.
• Completing the initial milestones of the Cooperation Agreement with Petrobras to develop and
qualify the CermaClad™ process for the application of CRA (corrosion resistant alloys) to the
internal and external surfaces of pipes using proprietary High Density InfraRed (HDIR) lamp
technology; Petrobras is a leading integrated oil and gas company headquartered in Rio de
Janiero, Brazil, and is the largest company in Latin America.
• Continuing a collaborative effort with the University of Akron (“UA”) to develop and accelerate
commercialization of advanced inorganic coatings directed at reducing the nation’s $300 billion
corrosion problem; UA’s Corrosion and Reliability Engineering (CAREs) program and MesoCoat
will perform development, testing and risk reduction of advanced inorganic coatings; MesoCoat
will provide development engineers and technicians to supervise and train students and new staff
to apply CermaClad™ to various metal surfaces.
• Receiving, along with UA, a $2 million award from Ohio Third Frontier (OTF) under the
Advanced Energy Program (AEP) to accelerate the commercial demonstration of CermaClad™; a
portion of the award will be used to construct a new powder coating and high speed cladding
facility at UA, which will be used for advanced coating development; the facility and researchers
at UA will assist MesoCoat with research and development tasks, freeing up resources at
MesoCoat to focus on deploying coating solutions and serving commercial customers.
• Securing a $1 million low interest loan from the State of Ohio to partially fund the construction of
the new 11,000 sq. ft. CermaClad™ clad piping manufacturing plant in Euclid.
• Securing a long term supply contract for PComP™ nanocomposite tungsten carbide thermal
spray coating materials with a large industrial pump manufacturer in Canada.
Management has also spent significant time developing an extensive deal sourcing network, including top
international university materials sciences laboratories, government sponsored laboratories, industry
brokers, lawyers and materials sciences’ association executives, as well enlarging its advisory board with
specific technology skills.
39
Net Losses
For the period from June 27, 2006 (inception) until May 31, 2012, the Company incurred net losses of
$6,322,365. Net losses for the year ending May 31, 2012 were $1,119,249 as compared to net losses of
$3,184,984 for the year ending May 31, 2011. The decrease in net losses over the comparative annual
periods can be primarily attributed to the realization of an unrecognized gain on the acquisition of
MesoCoat of $1,764,345 and a gain of $988,533 as a result of our equity interest in Powdermet. We do
not expect to transition to net profits in the near term as increases in revenue and gross profit are outpaced
by increases in operational expenses associated most significantly with increases in general and
administrative expenses, professional fees, payroll expenses, research and development costs and
depreciation and amortization of existing assets. Although management is constantly evaluating the
Company’s business to ensure operating efficiencies, any expectation of net profit going forward will
require further commercialization of products to market. We expect to continue to operate at a loss
through fiscal 2013.
Operating Expenses
For the period from inception until May 31, 2012, the Company incurred operating expenses of
$9,901,809. Operating expenses for the year ended May 31, 2012 were $5,413,032 as compared to
$2,679,969 for the year ended May 31, 2011. The increase in operating expenses over the comparative
periods can be primarily attributed to increases in general and administrative expenses which increased to
$625,301 for the year ended May 31, 2012 from $163,562 for the year ended May 31, 2011, consulting
costs which increased to $928,449 for the year ended May 31, 2012 from $533,876 for the year ended
May 31, 2011, increases in payroll and benefits expense which increased to $741,436 for the year ended
May 31, 2012 from $190,608 for the year ended May 31, 2011, depreciation and amortization for the year
ended May 31, 2012 to $302,858 from $5,790 for the year ended May 31, 2011, research in development
from $0 for the year ended May 31, 2011 to $737,316 for the year ended May 31, 2012 and stock option
expense which increased to $1,311,032 for the year ended May 31, 2012 from $964,439 for the year
ended May 31, 2011.
We expect that operating expenses will continue to increase as the Company’s aggressive growth strategy
over the next five years will require significant increases in personnel and facilities along with significant
research and development to ensure that our products nearing commercialization are brought to market as
quickly and as effectively as possible.
Income Tax Expense (Benefit)
The Company may have a prospective income tax benefit resulting from a net operating loss carry-
forward and start up costs that will offset any future operating profit.
Impact of Inflation
The Company believes that inflation has not had a material effect on operations for the period from June
27, 2006 (inception) to May 31, 2012.
40
Capital Expenditures
The Company has not spent any significant amounts on capital expenditures for the period from June 27,
2006 (inception) to May 31, 2012 except for those amounts spent on plant, property and equipment in the
construction of the manufacturing facility in Euclid, Ohio, which amount was $1,312,832 as of May 31,
2012.
Liquidity and Capital Resources
The Company has been in the development stage since inception, and has experienced significant changes
in liquidity, capital resources, and stockholders’ equity.
As of May 31, 2012 the Company current assets of $1,070,054 consisting of cash, accounts receivable, a
note receivable from a related party and prepaid expenses, and total assets of $15,192,030 consisting of
current assets, investments in property, plant and equipment, patents and licenses, an assignment
agreement, its investment in Powdermet and goodwill.
As of May 31, 2012 the Company had current liabilities of $3,508,908, consisting of accounts payable,
accounts payable to related parties, capital leases, loans payable and accruals, and accrued liabilities, and
total liabilities of $4,727,361 consisting of current liabilities, loans payable net of discounts and the non-
current portion of capital leases.
The Company had stockholders’ equity of $10,464,669 and a working capital deficit of $2,438,854 at
May 31, 2012.
For the period from inception until May 31, 2012, the Company’s net cash used in development stage
activities was $2,959,135. Net cash used in development stage activities for the period ending May 31,
2012 were $1,319,285 as compared to $912,198 for the year ended May 31, 2011. Net cash used in
development stage activities in the current period can be attributed primarily to a number of items that are
book expense items which do not affect the total amount relative to actual cash used including
depreciation, amortization of discount on debt, and stock option expense offset by equity in investee
profit, and the unrealized gain on the MesoCoat acquisition. Actual cash items used, that are not income
statement related items, include changes in accounts receivable, accrued liabilities, accrued interest on
loans payable, gain on the sale of a capital asset and prepaid expenses. We expect to continue to generate
negative cash flow in operating activities until such time as net losses transition to net income.
For the period from inception until May 31, 2012, the Company’s net cash used in investing activities was
$5,805,395. Net cash used in investing activities for the year ending May 31, 2012, was $391,509 as
compared to $3,804,394 for the year ending May 31, 2011. Net cash used in investing activities in the
current period can be primarily attributed to the purchase of property, plant and equipment, investments in
MesoCoat and capitalized patents and licenses offset by proceeds from the sale of capital assets and net
cash assumed in the acquisition of MesoCoat. We expect to continue to generate negative cash flow in
investing activities as we increase our investment in MesoCoat and in property, plant and equipment.
41
For the period from inception until May 31, 2012, the Company’s net cash provided by financing
activities was $9,624,096. Net cash provided by financing activities for the year ending May 31, 2012 was
$2,570,360 as compared to $4,676,028 for the year ending May 31, 2011. Net cash flow provided by
financing activities in the current period is attributable to proceeds from the sale of common stock and
loans payable offset by payments on loans payable. We expect to continue to generate positive cash flow
from financing activities as the Company seeks new rounds of financing to build its business.
Our current assets are insufficient to meet our current obligations or to satisfy our cash needs over the
next twelve months and as such the Company will require debt or equity financing. We had no
commitments or arrangements for financing at May 31, 2012 though we are pursuing a number of
prospective sources that include shareholder loans, the sale of equity, the procurement of long term debt
or the settlement of additional debt for equity. We face certain financial obstacles to attracting new
financing due to our historical and current record of net losses and working capital deficits. Therefore,
despite our efforts we can provide no assurance that we will be able to obtain the financing required to
meet our stated objectives or even to continue as a going concern.
The Company does not expect to pay cash dividends in the foreseeable future.
The Company has a defined stock option plan and contractual commitments with all of its officers and
directors.
The Company has no current plans for any significant purchase or sale of any plant or equipment except
in connection with the completion of the manufacturing facility under construction in Euclid, Ohio.
MesoCoat has obtained verbal commitments for future capital expenditures from the Company and
Powdermet to fund any shortfalls (including plant and equipment) in the construction of the Euclid
facility should it not be able to raise funds in the normal course of business. Further, MesoCoat has
secured a $1,000,000 loan from the Ohio Third Frontier program that can be drawn down at any time in
connection with the new manufacturing facility should such action be necessary to complete the building.
The Company has no current plans to make any changes in the number of employees.
Off Balance Sheet Arrangements
As of May 31, 2012, the Company had no off-balance sheet arrangements that have or are reasonably
likely to have a current or future effect on our financial condition, changes in financial condition,
revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources that is
material to stockholders.
Going Concern
The Company’s auditors have expressed an opinion as to its ability to continue as a going concern as a
result of net losses of $6,322,365 and a working capital deficit of $2,438,854 as of May 31, 2012. Our
ability to continue as a going concern is dependent on realizing net income from operations, gains on
investment, obtaining funding from outside sources or realizing some combination of these objectives.
Management’s plan to address the Company’s ability to continue as a going concern includes: (i)
obtaining funding from the private placement of debt or equity; (ii) net income from operations; (iii)
realizing a gain from its investment in Powdermet; (iv) converting debt to equity; and (v) obtaining loans
and grants from financial or government institutions. Management believes that it will be able to obtain
funding to allow the Company to remain a going concern through the methods discussed above, though
there can be no assurances that such methods will prove successful.
42
Forward Looking Statements and Factors That May Affect Future Results and Financial Condition
The statements contained in the section titled Results of Operations and Description of Business, with the
exception of historical facts, are forward looking statements. We are ineligible to rely on the safe-harbor
provision of the Private Litigation Reform Act of 1995 for forward looking statements made in this
current report. Forward looking statements reflect our current expectations and beliefs regarding our
future results of operations, performance, and achievements. These statements are subject to risks and
uncertainties and are based upon assumptions and beliefs that may or may not materialize. These
statements include, but are not limited to, statements concerning:
• our anticipated financial performance;
• uncertainties related to the commercialization of proprietary technologies held by entities in which
we have an investment interest;
• our ability to generate revenue from operations or gains on investments;
• our ability to raise additional capital to fund cash requirements for operations;
• the volatility of the stock market; and
• general economic conditions.
We wish to caution readers that our operating results are subject to various risks and uncertainties that
could cause our actual results to differ materially from those discussed or anticipated including the factors
set forth in the section entitled Risk Factors included elsewhere in this report. We also wish to advise
readers not to place any undue reliance on the forward looking statements contained in this report, which
reflect our beliefs and expectations only as of the date of this report. We assume no obligation to update
or revise these forward looking statements to reflect new events or circumstances or any changes in our
beliefs or expectations, other that is required by law.
Critical Accounting Policies
The notes to the audited financial statements for the Company for the years ended May 31, 2012 and
2011, included in this Form 10-K, discusses those accounting policies that are considered to be significant
in determining the results of operations and financial position. Our management believes that their
accounting principles conform to accounting principles generally (GAAP) accepted in the United States
of America.
The preparation of financial statements in conformity with GAAP requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the year. The more significant areas requiring the use of estimates include
asset impairment, stock-based compensation, beneficial conversion features on debt instruments, and
future income tax amounts. Management bases its estimates on historical experience and on other
assumptions considered to be reasonable under the circumstances. Actual results may differ from the
estimates.
Stock-Based Compensation
We have adopted Accounting Standards Codification Topic (“ASC”) 718, Share-Based Payment, which
addresses the accounting for stock-based payment transactions in which an enterprise receives employee
services in exchange for (a) equity instruments of the enterprise or (b) liabilities that are based on the fair
value of the enterprise’s equity instruments or that may be settled by the issuance of such equity
instruments.
43
We account for equity instruments issued in exchange for the receipt of goods or services from other than
employees in accordance with ASC 505. Costs are measured at the estimated fair market value of the
consideration received or the estimated fair value of the equity instruments issued, whichever is more
reliably measurable. The value of equity instruments issued for consideration other than employee
services is determined on the earliest of a performance commitment or completion of performance by the
provider of goods or services.
Recent Accounting Pronouncements
We have examined all recent accounting pronouncements and believe that none of them will have a
material impact on the financial statements of the Company.
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
Not required.
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our audited financial statements for the years ended May 31, 2012 and 2011 are attached hereto as F-1
through F-54.
44
Abakan Inc.
(A Development Stage Company)
Index to Financial Statements
Report of Independent Registered Public Accounting Firm
F-2
Consolidated Balance Sheets for the years ended May 31, 2012 and 2011
F-3
Consolidated Statements of Operations for the years ended May 31, 2012 and 2011, and cumulative
amounts from development stage activities (June 27, 2006 (Inception) through May 31, 2012)
F-4
Consolidated Statements of Stockholders' Equity (Deficit) for the period from inception on
June 27, 2006 through May 31, 2012
F-5
Consolidated Statements of Cash Flows for the years ended May 31, 2012 and 2011, and cumulative
amounts from development stage activities (June 27, 2006 (Inception) through May 31, 2012)
F-10
Notes to the Consolidated Financial Statements
F-12
F-1
SKODA MINOTTI
CPAs, BUSINESS & FINANCIAL ADVISORS
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of
Abakan, Inc. (a development stage company)
We have audited the accompanying consolidated balance sheets of Abakan, Inc. as of May 31, 2012 and
2011, and the related consolidated statements of operations, stockholders’ equity (deficit) and cash flows
for the years then ended and for the period from June 27, 2006 (date of inception) through May 31, 2012.
These financial statements are the responsibility of the Company’s management. Our responsibility is to
express an opinion on these consolidated financial statements based on our audits. We did not audit the
financial statements for the period June 27, 2006 (date of inception) through May 31, 2010. Those
statements were audited by other auditors whose report has been furnished to us, and our opinion on the
statements of operations, stockholders’ equity (deficit), and cash flows for the period June 27, 2006 (date
of inception) through May 31, 2012, insofar as it relates to the amounts for prior periods through May 31,
2010, is based solely on the report of the other auditors.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audits to obtain reasonable
assurance about whether the financial statements are free of material misstatement. The Company is not
required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.
Our audits included consideration of internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on
the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no
such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material
respects, the financial position of Abakan, Inc. at May 31, 2012 and the results of their operations and
their cash flows for the periods described above in conformity with accounting principles generally
accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the Company will continue as a
going concern. As discussed in Note 3 to the financial statements, the Company has incurred net losses
since inception in the amount of $6,322,365 and a working capital deficiency of $2,438,854.
Management’s plans concerning these matters are also described in Note 3. The accompanying financial
statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ Skoda Minotti
Skoda Minotti
Mayfield Village, Ohio
September 11, 2012
Cleveland / 6685 Beta Drive, Mayfield Village, Ohio 44143 / ph 440 449 6800 / fx 440 646 1615
Akron / 3875 Embassy Parkway, Suite 200, Fairlawn, Ohio 44333 / ph 330 668 1100 / fx 440 646 1615
Skoda Minotti / Certified Public Accountants / www.skodaminotti.com
F-2
ABAKAN, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED BALANCE SHEETS
May 31,
May 31,
2012
2011
ASSETS
Current assets
Cash and cash equivalents
$
859,566 $
-
Accounts receivable
22,854
-
Note receivable - related parties
4,500
4,500
Prepaid expenses (Note 7)
183,134
16,200
Prepaid expenses - related parties
-
1,485
Total current assets
1,070,054
22,185
Noncurrent assets
Property, plant and equipment, net (Note 4)
3,021,088
4,630
Patents and licenses, net (Note 5)
7,776,315
-
Assignment agreement – MesoCoat (Note 6)
250,000
250,000
Investment deposit on MesoCoat investment (Note 8)
-
2,050,000
Investment - MesoCoat (Note 8)
-
858,418
Investment - Powdermet (Note 8)
2,710,189
1,721,656
Goodwill
364,384
-
Total Assets
$
15,192,030 $
4,906,889
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable
$
425,868 $
202,017
Accounts payable - related parties (Note 13)
80,773
79,214
Capital leases - current portion
42,999
-
Loans payable, net of discounts of $456,164 (Note 10)
2,465,165
70,600
Accrued interest - loans payable (Note 10)
183,106
41,532
Accrued liabilities
310,997
139,689
Total current liabilities
3,508,908
533,052
Non-current liabilities
Loans payable, net of discounts of $601,940 (Note 10)
1,146,277
1,400,914
Capital leases - non-current portion
72,176
-
Total liabilities
4,727,361
1,933,966
Commitments and contingencies (Note 15)
Stockholders' equity (Note 11)
Preferred stock, $0.0001 par value, 50,000,000 shares
authorized, none issued and outstanding
-
-
Common stock, par value $0.0001, 2,500,000,000 shares
authorized, 61,465,445 issued and outstanding - May 31, 2012,
59,247,425 issued and outstanding - May 31, 2011
6,147
5,924
Paid-in capital
13,321,527
8,330,530
Subscription receivable
-
(165,465)
Contributed capital
5,050
5,050
Accumulated deficit during the development stage
(6,322,365)
(5,203,116)
7,010,359
2,972,923
Non-controlling interest
3,454,310
-
Total stockholders' equity
10,464,669
2,972,923
Total liabilities and stockholders' equity
$
15,192,030 $
4,906,889
See accompanying notes to the consolidated financial statements.
F-3
ABAKAN, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF OPERATIONS
Cumulative
amounts from
development stage
activities
For the years ended
June 27, 2006
May 31,
(Inception) to
2012
2011
May 31, 2012
Revenues
Commercial
$
77,391 $
- $
77,391
Contract and grants
2,098,754
-
2,098,754
Other income
763,283
-
764,879
2,939,428
-
2,941,024
Cost of Revenues
1,049,198
-
1,049,198
Gross profit
1,890,230
-
1,891,826
Expenses
General and administrative
625,301
163,562
895,267
Professional fees
246,743
172,504
569,801
Professional fees - related parties
60,000
60,000
165,000
Consulting
928,449
533,876
1,704,295
Consulting - related parties
306,580
393,900
1,239,980
Payroll and benefits expense
741,436
190,608
998,305
Depreciation and amortization
302,858
5,790
332,084
Research and development
737,316
-
737,316
Impairment of asset
-
-
180,000
Stock expense on note conversion
153,317
195,290
490,977
Stock options expense
1,311,032
964,439
2,588,784
Total expenses
5,413,032
2,679,969
9,901,809
Loss from operations
(3,522,802)
(2,679,969)
(8,009,983)
Other (expense) income
Interest expense:
Interest - loans
(273,117)
(36,000)
(325,745)
Interest - related parties
(1,118)
(811)
(6,560)
Liquidated damages
-
(250,000)
(250,000)
Amortization of discount on debt
(475,374)
(137,490)
(612,864)
Total interest expense
(749,609)
(424,301)
(1,195,169)
Interest income
242
2,125
4,371
Loss on debt settlement
--
(5,257)
(5,257)
Gain on debt settlement
56,543
200,709
257,252
Gain on sale of assets
429,717
-
429,717
Unrealized gain on MesoCoat acquisition
1,764,345
-
1,764,345
Equity in Powdermet income
988,533
71,656
1,060,189
Equity in MesoCoat loss
(44,408)
(349,947)
(586,020)
Total Other (expense) income
2,445,363
(505,015)
1,729,428
Net (loss) before non-controlling interest
(1,077,439)
(3,184,984)
(6,280,555)
Non-controlling interest in MesoCoat Loss
(41,810)
-
(41,810)
Net (loss) attributable to Abakan Inc.
(1,119,249)
(3,184,984)
(6,322,365)
Provision for income taxes
-
-
-
Net (loss)
$
(1,119,249) $
(3,184,984) $
(6,322,365)
Net (loss) per share - basic
$
(0.02) $
(0.06)
Net (loss) per share - diluted
$
(0.02) $
(0.06)
Weighted average number of common
shares outstanding - basic
59,752,413
57,058,470
Weighted average number of common
shares outstanding - diluted
59,752,413
57,058,470
See accompanying notes to the consolidated financial statements.
F-4
ABAKAN, INC.
(Formerly known as Waste to Energy Group, Inc.)
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFECIT)
Accumulated
Deficit
Non-
During
Total
Contributed
Subscription
controlling
Development
Stockholders’
Shares
Amount
Capital
Capital
Receivable
Interest
Stage
Equity
Inception, June 27, 2006
- $
- $
- $
- $
- $
- $
- $
-
Common Shares issued to director for cash
June 27, 2006
2,500,000
250
(150)
-
-
-
-
100
Common Shares issued to director for cash
June 27, 2006
125,300,000
12,530
(7,518)
-
-
-
-
5,012
Common Shares issued to director for cash
October 31, 2006
62,500,000
6,250
(3,750)
-
-
-
-
2,500
Private placement closed April 30, 2007
35,265,000
3,527
67,003
-
-
-
-
70,530
Net (loss) for the period
(28,079)
(28,079)
Balance, May 31, 2007
225,565,000 $
22,557 $
55,585 $
- $
- $
- $
(28,079) $
50,063
Net (loss) for the year
(28,993)
(28,993)
Balance, May 31, 2008 (Restated)
225,565,000 $
22,557 $
55,585 $
- $
- $
- $
(57,072) $
21,070
Common Shares cancelled to directors
(17,531)
17,531
-
-
-
September 2, 2008
(175,300,000)
-
Contributed Capital
-
-
-
5,050
-
-
-
5,050
Net (loss) for the year
(354,363)
(354,363)
Balance, May 31, 2009
50,265,000 $
5,026 $
73,116 $
5,050 $
- $
- $
(411,434) $
(328,242)
Private placement, closed December 16,
2009 for $0.50 per share
4,200,000
420
2,099,580
-
-
-
-
2,100,000
Debt Converted into stock December 16,
2009 for $0.60 per share, including costs
of $102,370
400,000
40
342,330
-
-
-
-
342,370
Subscription receivable from above private
placement
-
-
-
-
(1,750)
-
-
(1,750)
Common shares issued services on April
26, 2010
150,000
15
89,985
-
-
-
-
90,000
Common shares issued services on April
30, 2010
100,000
10
99,990
-
-
-
-
100,000
Stock options expense
-
-
313,313
-
-
-
-
313,313
Net (loss) for the year
(1,606,698)
(1,606,698)
Balance, May 31, 2010
55,115,000 $
5,511 $
3,018,313 $
5,050 $
(1,750) $
- $
(2,018,132) $
1,008,992
See accompanying notes to the consolidated financial statements.
F-5
ABAKAN, INC.
(Formerly known as Waste to Energy Group, Inc.)
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFECIT) - CONTINUED
Accumulated
Deficit
Non-
During
Total
Contributed
Subscription
controlling
Development
Stockholders’
Shares
Amount
Capital
Capital
Receivable
Interest
Stage
Equity
Balance forwarded, May 31, 2010
55,115,000 $
5,511 $
3,018,313 $
5,050 $
(1,750) $
- $
(2,018,132) $
1,008,992
Private placement for cash, closed
October 21, 2010 for $0.75 per share
566,667
57
424,943
-
-
-
-
425,000
Debt Converted into stock October 21,
2010 for $0.82 per share, including
costs of $37,333
533,333
53
437,280
-
-
-
-
437,333
Private placement for cash, closed
October 22, 2010 for $0.75 per share
1,660,000
166
1,244,834
-
-
-
-
1,245,000
Common shares issued for services on
November 16, 2010
60,000
6
60,594
-
-
-
-
60,600
Debt Converted into stock December
10, 2010 for $0.75 per share,
including costs of $23,400
90,000
9
90,891
-
-
-
-
90,900
Common shares issued for services on
December 10, 2010
150,000
15
152,985
-
-
-
-
153,000
Private placement for cash, closed
January 27, 2011 for $1.00 per share
160,000
16
159,984
-
-
-
-
160,000
Common shares issued for assignment
agreement on March 15, 2011
150,000
15
149,985
-
-
-
-
150,000
Debt Converted into stock March 25,
2011 for $1.00 per share, including
costs of $4,557
56,960
6
61,511
-
-
-
-
61,517
Common shares issued for services on
May 2, 2011
50,000
5
49,995
-
-
-
-
50,000
Common shares issued for services on
May 11, 2011
60,000
6
49,194
-
-
-
-
49,200
Private placement for cash, closed May
17, 2011 for $1.00 per share
115,000
11
114,989
-
-
-
-
115,000
Common shares issued for services on
May 20, 2011
15,000 $
1 $
18,599 $
- $
- $
- $
- $
18,600
May 31, 2011 continued on following
page
See accompanying notes to the consolidated financial statements.
F-6
ABAKAN, INC.
(Formerly known as Waste to Energy Group, Inc.)
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFECIT) – CONTINUED
Accumulated
Deficit
Non-
During
Total
Common Stock
Paid-in
Contributed
Subscription
controlling
Development
Stockholders’
Shares
Amount
Capital
Capital
Receivable
Interest
Stage
Equity
May 31, 2011 continued from previous
page
Private placement for cash, closed May 25,
2011 for $1.00 per share
65,465 $
7 $
65,458 $
- - $
- $
- $
$
65,465
Subscription receivable from above private
placement
-
-
-
-
(65,465)
-
-
(65,465)
Private placement for cash, closed May 26,
2011 for $1.00 per share
50,000
5
49,995
-
-
-
-
50,000
Debt Converted into stock May 29, 2011
for $1.00 per share, including costs of
$15,600
30,000
3
45,597
-
-
-
-
45,600
Private placement for cash, closed May 29,
2011 for $1.00 per share
100,000
10
99,990
-
-
-
-
100,000
Subscription receivable from above private
placement
-
-
-
-
(100,000)
-
-
(100,000)
Debt Converted into stock May 31, 2011
for $1.00 per share, including costs of
$114,400
220,000
22
334,378
-
-
-
-
334,400
Subscription receivable write off from
December 16, 2009
-
-
-
1,750
-
-
1,750
Beneficial conversion warrant valuation
for convertible debts
-
-
736,576
-
-
-
-
736,576
Stock options expense
-
-
964,439
-
-
-
-
964,439
Net (loss) for the year
(3,184,984)
(3,184,984)
Balance, May 31, 2011
59,247,425 $
5,924 $
8,330,530 $
5,050 $
(165,465) $
- $
(5,203,116) $
2,972,923
Private placement for cash closed June 6,
2011 for $1.00 per share
20,000
2
19,998
-
-
-
-
20,000
Private placement for cash closed June 10,
2011 for $1.00 per share
20,000
2
19,998
-
-
-
-
20,000
Debt converted into stock June 10, 2011
for $1.00 per share, including costs of
$5,500
10,000
1
15,499
-
-
-
-
15,500
May 31, 2012 continued on following
page
See accompanying notes to the consolidated financial statements.
F-7
ABAKAN, INC.
(Formerly known as Waste to Energy Group, Inc.)
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFECIT) – CONTINUED
Accumulated
Deficit
During
Total
Common Stock
Paid-in
Contributed
Subscription
Non-controlling
Development
Stockholders’
Shares
Amount
Capital
Capital
Receivable
Interest
Stage
Equity
May 31, 2012 continued from previous
page
Common shares issued for services on
June29, 2011
50,000 $
5 $
75,995 $
- $
- $
- $
- $
76,000
Private placement for cash, closed July 6,
2011 for $1.00 per share
30,000
3
29,997
-
-
-
-
30,000
Common shares issued for services on
December 2, 2011
20,000
2
23,598
-
-
-
-
23,600
Private placement for cash, closed February
20, 2012 for $1.00 per share
300,000
30
299,970
-
-
-
-
300,000
Debt converted into stock February 20, 2012
for $1.00 per share, including costs of
$12,648
421,595
42
434,201
-
-
-
-
434,243
Common shares issued for services on
February 20, 2012
20,000
2
20,598
-
-
-
-
20,600
Private placement for cash, closed March 16,
2012 for $1.00 per share
382,000
38
381,962
-
-
-
-
382,000
Debt converted into stock March 16, 2012
for $1.00 per share, including costs of
$76,300
218,000
22
294,278
-
-
-
-
294,300
Common shares issued for services on March
20, 2012
27,500
3
39,047
-
-
-
-
39,050
Private placement for cash, closed April 20,
2012 for $1.60 per share
18,438
2
29,498
-
-
-
-
29,500
Debt converted into stock April 20, 2012 for
$1.60 per share, including costs of $29,219
26,562
3
71,716
-
-
-
-
71,719
Private placement for cash, closed April 23,
2012 for $1.60 per share
200,000
20
319,980
-
-
-
-
320,000
Private placement for cash, closed April 24,
2012 for $1.60 per share
74,550
7
119,193
-
-
-
-
119,200
Debt converted into stock April 24, 2012,
including costs of $5,650
5,000
1
13,649
-
-
-
-
13,650
May 31, 2012 continued on following page
See accompanying notes to the consolidated financial statements.
F-8
ABAKAN, INC.
(Formerly known as Waste to Energy Group, Inc.)
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFECIT) – CONTINUED
Accumulated
Deficit
During
Total
Common Stock
Paid-in
Contributed
Subscription
Non-controlling
Development
Stockholders’
Shares
Amount
Capital
Capital
Receivable
Interest
Stage
Equity
May 31, 2012 continued from
previous page
Private placement for cash,
closed April 25, 2012 for $1.60
per share
15,625 $
2 $
24,998 $
- $
- $
-
$
- $
25,000
Private placement for cash,
closed May 29, 2012 for $1.60
50,000
5
79,995
-
-
-
-
80,000
Private placement for cash,
closed May 30, 2012 for $1.60
per share
268,750
27
429,973
-
-
-
-
430,000
Debt converted into stock May
30, 2012 for $1.60 per share,
including costs of $24,000
40,000
4
87,996
-
-
-
-
88,000
Subscription receivables received
from May 25 and 29, 2011
-
-
-
-
165,456
-
-
165,456
Purchase of controlling interest
from non-controlling interest
on July 13, 2011
-
-
-
-
-
3,412,500
-
3,412,500
Beneficial conversion warrant
valuation for convertible debts
-
-
846,133
-
-
-
-
846,133
Stock options expense
-
-
1,312,725
-
-
-
-
1,312,725
Net loss for the year
-
-
-
-
-
41,810
(1,119,249)
(1,077,439)
Balance May 31, 2012
61,465,445 $
6,147 $
13,321,527 $
5,050 $
- $
3,454,310 $
(6,322,365) $
$10,464,669
See accompanying notes to the consolidated financial statements.
F-9
ABAKAN, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF CASH FLOWS
Cumulative
amounts from
development stage
activities
For the years ended
June 27, 2006
May 31,
(Inception) to
2012
2011
May 31, 2012
CASH FLOWS FROM DEVELOPMENT STAGE ACTIVITIES
Net (loss) before non-controlling interest
$
(1,077,439) $
(3,184,984) $
(6,280,551)
Adjustments to reconcile net (loss) to net
cash provided by (used in) development stage activities:
Depreciation and amortization
302,858
5,790
332,084
Amortization of discount on debt
475,374
137,490
612,864
Stock options expense
1,311,032
964,439
2,588,784
Stock expense from note conversion
153,317
195,290
490,977
Stock issued for services
159,250
331,401
680,651
Equity in investee loss
44,408
278,292
514,365
Equity in investee profit
(988,533)
-
(988,533)
Unrealized gain on MesoCoat acquisition
(1,764,345)
-
(1,764,345)
Gain on sale of capital asset
(429,717)
-
(429,717)
Changes in operating assets and liabilities:
Accounts receivable
148,603
-
148,603
Notes receivable - related parties
-
4,000
(4,500)
Prepaid expenses
(166,934)
8,951
(197,287)
Prepaid expenses - related parties
1,485
12,667
14,152
Accounts payable
299,070
129,118
639,558
Accounts payable - related parties
1,562
97,073
163,504
Accrued interest - related parties
-
-
2,664
Accrued interest - loans payable
104,961
35,847
159,404
Accrued liabilities
105,763
72,428
178,191
Waste to Energy Group Inc.
-
-
180,000
Total adjustments
(241,846)
2,272,786
3,321,420
NET CASH PROVIDED BY/ (USED IN) DEVELOPMENT
STAGE ACTIVITIES
(1,319,285)
(912,198)
(2,959,135)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property, plant, equipment and website
(1,073,018)
(4,394)
(1,106,874)
Proceeds from sale of capital assets
470,000
-
470,000
MesoCoat - minority interest, net of cash assumed in business
combination
1,059,764
(2,050,000)
(2,390,266)
Investment in Mesocoat
(750,070)
--
(750,070)
Powdermet - minority interest
-
(1,650,000)
(1,650,000)
Assignment agreement - MesoCoat
-
(100,000)
(100,000)
Capitalized patents and licenses
(98,185)
-
(98,185)
Waste to Energy Group Inc.
-
-
(180,000)
NET CASH USED IN INVESTING ACTIVITIES
(391,509)
(3,804,394)
(5,805,395)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from sale of common stock
1,755,700
1,997,999
5,931,841
Proceeds from loans payable
1,079,485
2,625,769
3,851,287
Payments on loans payable
(375,651)
-
(375,651)
Proceeds from loans payable - related parties
-
79,680
79,680
Payments on loans payable - related parties
-
(27,420)
21,063
Repayments of capital leases
(54,639)
-
(54,639)
Stock issuable
165,465
--
165,465
Proceeds from capital contributed
-
-
5,050
NET CASH PROVIDED BY FINANCING ACTIVITIES
2,570,360
4,676,028
9,624,096
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS
859,566
(40,564)
859,566
CASH AND CASH EQUIVALENTS, BEGINNING OF
PERIOD
-
40,564
-
CASH AND CASH EQUIVALENTS, END OF PERIOD
$
859,566 $
- $
859,566
See accompanying notes to the consolidated financial statements.
F-10
ABAKAN, INC.
(Formerly known as Waste to Energy Group, Inc.)
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF CASH FLOWS – CONTINUED
Supplemental Disclosures:
Cash paid for income taxes
$
-
$
-
$
-
Cash paid for interest
$
-
$
964
$
964
Supplemental Non-cash Disclosures:
Notes and accounts payable converted to stock
Accounts payable - related parties
$
(188,460)
$
(141,960) $
(394,431)
Loans payable
(567,895)
(625,169)
(1,218,064)
Accrued interest
(7,737)
(4,331)
(12,068)
Notes payable - related parties
--
-
(99,515)
Accrued interest - related parties
--
-
(9,724)
Common stock
764,092
774,460
1,738,552
Subscription payable
-
(3,000)
(3,000)
Subscription receivable
-
-
(1,750)
$
-
$
-
$
-
Stock issued for assignment agreement - MesoCoat
Assignment agreement - MesoCoat
$
-
$
(150,000)
$
(150,000)
Common stock
-
150,000
150,000
$
-
$
-
$
-
Capital lease equipment acquired
Property, plant and equipment
$
126,907
$
-
$
126,907
Capital lease payable
(126,907)
-
(126,907)
$
-
$
-
$
-
Non-cash write off of balances
Accounts payable - related parties
$
-
$
52,030
$
52,030
Loans payable
-
(156)
(156)
Accrued interest
-
(553)
(553)
Notes payable - related parties
-
(52,260)
(52,260)
Accrued interest - related parties
-
(811)
(811)
Subscription receivable
-
1,750
1,750
$
-
$
-
$
-
Accounts payable converted to Notes Payable
Accounts payable
$
155,161
$
-
$
155,161
Notes payable
$
(155,161)
$
-
$
(156,161)
$
-
$
-
$
-
Beneficial conversion valuation
Additional paid-in capital
$
815,669
$
736,576
$
1,241,449
Discount on convertible debts
(815,669)
(736,576)
(1,241,449)
$
-
$
-
$
-
Stock issued for consideration for subscription receivable
Subscription receivable
$
-
$
165,465
$
165,465
Common stock
-
(17)
(17)
Paid in capital
-
(164,448)
(164,448)
$
-
$
-
$
-
Controlling interest purchase - MesoCoat
Accounts receivable
$
171,457
$
-
$
171,457
Property and equipment, net
1,899,598
-
1,899,598
Patents and licenses, net
7,938,206
-
7,938,206
Total assets
$
10,009,261 $
-
$
10,009,261
Accounts payable
(268,398)
-
(268,398)
Capital leases
(42,907)
-
(42,907)
Loans Payable and accrued interest
(2,233,474)
-
(2,233,474)
Other accrued liabilities
(65,545)
-
(65,545)
Total liabilities
$
(2,610,324) $
-
$
(2,610,324)
Net assets
7,398,937
-
7,398,937
Non-controlling interest equity
(3,412,500)
-
(3,412,500)
Goodwill
364,384
-
364,384
Investment in MesoCoat
(1,849,665)
-
(1,849,665)
MesoCoat net assets received
$
2,501,156
$
-
$
2,501,156
See accompanying notes to the consolidated financial statements.
F-11
Abakan Inc.
(Formerly Waste to Energy Group Inc.)
(A Development Stage Enterprise)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended May 31, 2012 and 2011
Note 1 – BUSINESS
Your Digital Memories, Inc. was incorporated in the state of Nevada on June 27, 2006.
Waste to Energy Group Inc., a wholly-owned subsidiary of Your Digital Memories Inc., was incorporated
in the state of Nevada on August 13, 2008. Waste to Energy Group Inc. and Your Digital Memories Inc.
entered into an Agreement and Plan of Merger on August 14, 2008. The board of directors of Waste to
Energy Group Inc. and Your Digital Memories Inc. deemed it advisable and in the best interest of their
respective companies and shareholders that Waste to Energy be merged with and into Your Digital
Memories Inc. with Your Digital Memories Inc. remaining as the surviving corporation under the name
Waste to Energy Group Inc.
Abakan Inc., a wholly-owned subsidiary of Waste to Energy Group Inc., was incorporated in the state of
Nevada on November 6, 2009. Abakan Inc. and Waste to Energy Group Inc. entered into an Agreement
and Plan of Merger on November 6, 2009. The board of directors of Abakan Inc. and Waste to Energy
Group Inc. deemed it advisable and in the best interest of their respective companies and shareholders that
Abakan Inc. be merged with and into Waste to Energy Group Inc. with Waste to Energy Group Inc.
remaining as the surviving corporation under the name “Abakan Inc.”
Unless the context indicates otherwise, all references herein to the “Company”, “we,” “us,” and “our”
refer to Abakan Inc. and its consolidated subsidiaries. The Company is in the development stage as
defined under FASB ASC 915-10, "Development Stage Entities."
On December 10, 2009 the Company purchased a thirty-four percent (34%) interest in MesoCoat, Inc.
("MesoCoat"), and on July 13, 2011 purchased an additional seventeen percent (17%), for an aggregate
total of fifty-one percent (51%) of the outstanding stock of MesoCoat.
MesoCoat (formerly “Powdermet Coating Technologies, Inc.”) was incorporated in Nevada as a wholly
owned subsidiary of Powdermet, Inc. (“Powdermet”) on May 18, 2007. Operations began in 2008 and
effective March 31, 2008 it was renamed as MesoCoat. Future success of operations is subject to several
technical hurdles and risk factors, including satisfactory product development, regulatory approval and
market acceptance of MesoCoat’s products and its continued ability to obtain future funding. MesoCoat is
currently in the development stage, as operations consist primarily of research and development
expenditures, and revenues from planned principal operations that have not yet been realized. MesoCoat
has invested heavily in intellectual property, machinery and equipment to initiate the research and
development of its core technology. Currently, MesoCoat’s revenue consists almost entirely of
government grants and cooperative reimbursement agreements.
On March 21, 2011, the Company purchased 596,813 shares of Powdermet from Kennametal, Inc., an
unrelated party, equal to a fully diluted 41% interest in Powdermet.
Powdermet was formed in 1996 as an Ohio corporation and has since developed a product platform of
advanced materials solutions derived from nano-engineered particle agglomerate technology and derived
hierarchically structured materials. Powdermet also owns 49% of MesoCoat.
On June 8, 2011, the Company formed a wholly owned subsidiary company named, AMP Distributors,
Ltd. (“AMP Distributors”), a Grand Cayman corporation. AMP Distributors was formed to distribute
MesoCoat products to consumer markets.
F-12
Abakan Inc.
(Formerly Waste to Energy Group Inc.)
(A Development Stage Enterprise)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended May 31, 2012 and 2011
NOTE 1 – BUSINESS - continued
The Company’s plan of operation is to acquire interests in early stage companies. Since those firms are
typically pre-commercialization, it is anticipated that each firm the Company decides to acquire will need
successive rounds of financing to fund research & development, lengthy qualification periods, sales and
marketing efforts. However, this may not necessarily be the case if the Company acquires a new
technology company with existing sales or we agree to a licensing strategy.
The Company’s acquisition strategy is to make sure it negotiates upfront future ownership based on a
series of value creating steps whereby we have the right to continue or discontinue investing based on an
investee meeting those milestone steps. Our approach allows management to forecast potential financing
needs of any given firm in stages to plan for present and future fundraising efforts. Further, our approach
also enables the Company to hedge its investing if it feels a company is not performing up to the goals
that were anticipated during the negotiating process. By taking this approach, each investee company is
expected to reach certain operating milestones prior to receiving the next round of fundraising or us
exercising our next round of acquisition.
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Accounting Basis
These financial statements are prepared on the accrual basis of accounting in conformity with
accounting principles generally accepted in the United States of America (GAAP).
We follow accounting standards set by the Financial Accounting Standards Board, commonly referred
to as the FASB. The FASB sets GAAP that we follow to ensure we consistently report our financial
condition, results of operations, and cash flows. References to GAAP issued by the FASB in these
footnotes are to the FASB Accounting Standards Codification, sometimes referred to as the Codification
or ASC.
Cash and Cash Equivalents
For the purposes of the statements of cash flows, cash equivalents include all highly liquid investments
with a maturity of three months or less.
Concentration in Sales to Few Customers
In the year ended May 31, 2012, our government contracts accounted for 71% of our revenues.
Cash in Excess of FDIC Insured Limits
We maintain our cash in bank deposit accounts which, at times, may exceed federally insured limits.
Accounts are guaranteed by the Federal Deposit Insurance Corporation (FDIC) up to $250,000. At May
31, 2012 and 2011, we had approximately $207,239 and none, respectively, in excess of FDIC insured
limits. We have not experienced any losses in such accounts.
F-13
Abakan Inc.
(Formerly Waste to Energy Group Inc.)
(A Development Stage Enterprise)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended May 31, 2012 and 2011
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – continued
Consolidation Policy
The accompanying May 31, 2012 financial statements include the Company’s accounts and the accounts of
its subsidiaries. All significant intercompany transactions and balances have been eliminated in
consolidation. The Company’s ownership of its subsidiaries as of May 31, 2012 is as follows:
Name of Subsidiary
Percentage of Ownership
AMP Distributors
100%
MesoCoat, Inc.
51%
Fair Value of Financial Instruments
In January 2008, the Company adopted FASB ASC 820, Fair Value Measurements and Disclosures
(“ASC 820”) (Formerly referenced as SFAS No. 157, Fair Value Measurements), to value its financial
assets and liabilities. The adoption of ASC 820 did not have a significant impact on the Company’s
results of operations, financial position or cash flows. ASC 820 defines fair value, establishes a
framework for measuring fair value under GAAP and expands disclosures about fair value
measurements. ASC 820 defines fair value as the exchange price that would be paid by an external party
for an asset or liability (exit price).
ASC 820 also establishes a fair value hierarchy which requires an entity to maximize the use of
observable inputs and minimize the use of unobservable inputs when measuring fair value. Three levels
of inputs may be used to measure fair value:
· Level 1 – Active market provides unadjusted quoted prices for identical assets or liabilities that the
company has the ability to access;
· Level 2 – Quoted prices for similar assets or liabilities in active markets or quoted prices for identical
or similar assets or liabilities in inactive markets. Level 2 inputs include those other than quoted
prices that are observable for the asset or liability and that are derived principally from, or
corroborated by, observable market data by correlation of other means. If the asset or liability has a
specified term the Level 2 input must be observable for substantially the full term of the asset or
liability; and
· Level 3 – Inputs to the valuation methodology are unobservable and significant to the fair value
measurement.
Fair value estimates discussed herein are based upon certain market assumptions and pertinent
information available to management as of May 31, 2012. The Company uses the market approach to
measure fair value for its Level 1 financial assets and liabilities. The market approach uses prices and
other relevant information generated by market transactions involving identical or comparable assets or
liabilities.
F-14
Abakan Inc.
(Formerly Waste to Energy Group Inc.)
(A Development Stage Enterprise)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended May 31, 2012 and 2011
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
Fair Value of Financial Instruments - continued
The respective carrying value of certain on-balance-sheet financial instruments approximated their fair
values. These financial instruments which include cash, accounts receivable, accounts payable, and notes
payable are valued using Level 1 inputs and are immediately available without market risk to
principal. Fair values were assumed to approximate carrying values for these financial instruments since
they are short term in nature and their carrying amounts approximate fair values or they are receivable or
payable on demand. The carrying value of note payable to stockholder approximates its fair value
because the interest rates associated with the instrument approximates current interest rates charged on
similar current borrowings. The Company does not have other financial assets that would be
characterized as Level 2, but we do feel that our investment in Powdermet would be characterized as
Level 3 assets.
Non-Controlling Interest
Non-controlling interest represents the minority members’ proportionate share of the equity of MesoCoat,
Inc. The Company’s controlling interest in MesoCoat requires that its operations be included in the
consolidated financial statements. The equity interest of MesoCoat that is not owned by the Company is
shown as non-controlling interest in the consolidated financial statements.
Equity Method
Investee companies that are not consolidated, but over which the Company exercises significant
influence, are accounted for under the equity method of accounting, in accordance with ASC 323.
Whether or not the Company exercises significant influence with respect to an Investee depends on an
evaluation of several factors including, among others, representation on the investee company’s board of
directors and ownership level, which is generally a 20% to 50% interest in the voting securities of the
investee company. Under the equity method of accounting, an investee company’s accounts are not
reflected within the Company’s Balance Sheets and Statements of Operations; however, the Company’s
share of the earnings or losses of the investee company is reflected in the caption “Equity in (Investee)
income (loss)” in the Statements of Operations. The Company’s carrying value in an equity method
investee company is reflected in the caption “Investment – (Investee)” in the Company’s Balance Sheets.
Occasionally, we may make payments towards our investment in investee companies. As we make those
deposits on our total investment, we account for those payments on our balance sheet as “Investment
deposits in (investee).” When we complete the total investment amount, these amounts are moved into the
individual investment accounts discussed above.
F-15
Abakan Inc.
(Formerly Waste to Energy Group Inc.)
(A Development Stage Enterprise)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended May 31, 2012 and 2011
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
Earnings (Loss) Per Common Share
The Company computes net loss per share in accordance with FASB ASC 260-10, "Earnings per Share".
FASB ASC 260 requires presentation of both basic and diluted earnings per share (EPS) on the face of
the statement of operations. Basic EPS is computed by dividing net loss available to common
stockholders (numerator) by the weighted average number of shares outstanding (denominator)
during the period. Diluted EPS gives effect to all potentially dilutive common shares outstanding during
the period. Diluted EPS excludes all potentially dilutive shares if their effect is anti-dilutive. The only
potentially dilutive common shares outstanding are stock options and warrants from inception (Note 10).
Development Stage Enterprise
At May 31, 2012, the Company’s business operations had not fully developed and the Company is highly
dependent upon funding and therefore is considered a development stage enterprise.
Accounts receivable
Accounts receivable are stated at face value, less an allowance for doubtful accounts. The Company
provides an allowance for doubtful accounts based on management's periodic review of accounts,
including the delinquency of account balances. Accounts are considered delinquent when payments have
not been received within the agreed upon terms, and are written off when management determines that
collection is not probable. As of May 31, 2012 management has determined that no allowance for
doubtful accounts is required.
Notes Receivable
Notes receivable are stated at face value, plus any accrued interest earned. The Company analyzes each
note receivable each period for probability of collectability. Notes are considered in default when
payments have not been received within the agreed upon terms, and are written off when management
determines that collection is not probable. As of May 31, 2012 and 2011, management has determined
that no occurrence of default exists.
Property, plant and equipment
Property, plant and equipment are stated at cost less accumulated depreciation and amortization.
Maintenance and repairs are charged to operations as incurred. Depreciation and amortization are based
on the straight-line method over the estimated useful lives of the related assets. When assets are retired or
otherwise disposed of, the cost and accumulated depreciation and amortization are removed from the
accounts, and any resulting gain or loss is reflected in operations in the period realized.
Asset construction in progress
Construction in progress assets, represent assets that are in process of construction and rehabilitation in
order to bring them to operational status. All costs are captured in a separate Construction in Progress
account, and are included in the “Property, plant and equipment – net” amounts, and when the asset is
ready to enter service, the total costs are capitalized and depreciation commences per the schedule below.
F-16
Abakan Inc.
(Formerly Waste to Energy Group Inc.)
(A Development Stage Enterprise)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended May 31, 2012 and 2011
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
Depreciation
Depreciation is computed on the straight-line method net of salvage value with useful lives as follows:
Computer equipment and software
3 - 5 years
Office furniture and equipment
5 - 7 years
Machinery and equipment
7 - 10 years
Leasehold improvements
balance of lease term
Patent and technology licenses
Patent costs are recorded at the cost to obtain the patent and are amortized on a straight-line basis over their estimated
useful lives up to 20 years, beginning when the patent is secured by the Company. License costs are recorded at
the cost to obtain the license and are amortized on a straight-line basis over effective term of the license, up to 15
years.
Indefinite-lived Intangible Assets
In accordance with GAAP, Intellectual Property – Research and Development in the amount of $6,120,200
related to the acquisition of MesoCoat, will not be amortized and will be reviewed for impairment on an annual
basis starting fiscal year ending May 31, 2013, due to its indefinite life.
Goodwill
In accordance with GAAP, goodwill in the amount of $364,384 related to the acquisition of MesoCoat will be
evaluated for impairment on an annual basis starting fiscal year ending May 31, 2013.
Dividends
The Company has not adopted any policy regarding payment of dividends. No dividends have been
paid during the periods shown.
Income Taxes
Income taxes are provided for using the liability method of accounting. A deferred tax asset or liability
is recorded for all temporary differences between financial and tax reporting. Deferred tax expense
(benefit) results from the net change during the year in deferred tax assets and liabilities. Valuation
allowances are established when necessary to reduce deferred tax assets to the amount expected to more
likely than not be realized in future tax returns. Tax law and rate changes are reflected in income in the
period such changes are enacted.
F-17
Abakan Inc.
(Formerly Waste to Energy Group Inc.)
(A Development Stage Enterprise)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended May 31, 2012 and 2011
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
Revenue Recognition
The Company recognizes revenue when there is persuasive evidence of an arrangement, delivery has
occurred or services have been rendered, the sales price if fixed or determinable, and collectability is
reasonably assured.
Grant Revenue
Revenue from grants is generally recorded when earned as defined under the terms of the agreements. Each
grant document sets the timing of amounts that are allowed to be billed and how to bill those amounts. We generally
look at a two week time period to bill from and work on the incurred costs for the same time period and bill according
to preset amounts that are allowed to be billed for per the grant documents. This is then billed through a government
billing system, reviewed by the government department, and then payment is sent to us.
Research and development costs
Research and development costs are charged to expense as incurred and are included in operating expenses. Total
research and development costs were $737,316 and none for the years ended May 31, 2012 and 2011,
respectively.
Advertising Expenses
Advertising costs are expensed as incurred. Advertising expenses are included in general and
administrative expense in the accompanying statement of operations. Total advertising expenses were
$14,376 and $950 for the years ended May 31, 2012 and 2011, respectively.
Shipping and Handling Costs
The Company’s shipping and handling costs are included in cost of sales for all periods presented.
Stock-Based Compensation
The Company adopted FASB ASC 718-10 and valued our employee stock based awards based on the
grant-date fair value estimated in accordance with the provisions of FASB ASC 718-10. The Company
accounts for equity instruments issued in exchange for the receipt of goods or services from other than
employees in accordance with FASB ASC 718-10 and the conclusions reached in FASB ASC 505-10.
Costs are measured at the estimated fair market value of the consideration received or the estimated fair
value of the equity instruments issued, whichever is more reliably measurable. The value of equity
instruments issued for consideration other than employee services is determined on the earliest of a
performance commitment or completion of performance by the provider of goods or services as defined
by FASB ASC 505-10.
F-18
Abakan Inc.
(Formerly Waste to Energy Group Inc.)
(A Development Stage Enterprise)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended May 31, 2012 and 2011
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
Derivatives
The Company occasionally issues financial instruments that contain an embedded instrument. At
inception, the Company assesses whether the economic characteristics of the embedded derivative
instrument are clearly and closely related to the economic characteristics of the financial instrument (host
contract), whether the financial instrument that embodies both the embedded derivative instrument and
the host contract is currently measured at fair value with changes in fair value reported in earnings, and
whether a separate instrument with the same terms as the embedded instrument would meet the definition
of a derivative instrument.
If the embedded derivative instrument is determined not to be clearly and closely related to the host
contract, is not currently measured at fair value with changes in fair value reported in earnings, and the
embedded derivative instrument would qualify as a derivative instrument, the embedded derivative
instrument is recorded apart from the host contract and carried at fair value with changes recorded in
current-period earnings.
The Company determined that all embedded items associated with financial instruments at this time do
not qualify for derivative treatment, nor should those be separated from the host.
Impairment of Long Lived Assets
We evaluate whether events and circumstances have occurred which indicate the remaining estimated
useful life of long lived assets, including other intangible assets, may warrant revision or the remaining
balance of an asset may not be recoverable. The measurement of possible impairment is based on a
comparison of the fair value of the related assets to the carrying value using discount rates that reflect the
inherent risk of the underlying business. Impairment losses, if any, would be recorded to the extent the
carrying value of the assets exceeds the implied fair value resulting from this calculation. As of May 31,
2012 and 2011, the Company has not recognized any impairment associated with long lived assets.
F-19
Abakan Inc.
(Formerly Waste to Energy Group Inc.)
(A Development Stage Enterprise)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended May 31, 2012 and 2011
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
General Accounting Policy for Contingencies
Certain conditions may exist which may result in a loss to the Company, but which will only be resolved
when one or more future events occur or fail to occur. The Company’s management and its legal counsel
assess such contingent liabilities, and such assessment inherently involves an exercise of judgment. In
assessing loss contingencies related to legal proceedings that are pending against the Company, or
unasserted claims that may result in such proceedings, the Company’s legal counsel evaluates the
perceived merits of any legal proceedings or unasserted claims as well as the perceived merits of the
amount of relief sought or expected to be sought therein.
If the assessment of a contingency indicates that it is probable that a material loss has been incurred and
the amount of the liability can be estimated, the estimated liability would be accrued in the Company’s
financial statements. If the assessment indicates that a potentially material loss contingency is not
probable but is reasonably possible, or is probable but cannot be estimated, the nature of the contingent
liability, together with an estimate of the range of possible loss if determinable and material, would be
disclosed.
Loss contingencies considered remote are generally not disclosed unless they arise from guarantees, in
which case the guarantees would be disclosed.
As of May 31, 2012 and 2011, the Company’s management believes that there are no outstanding legal
proceedings which would have a material adverse effect on the financial position of the Company.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with GAAP requires management to make
estimates and assumptions that affect the reported amounts of assets, the disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts of revenues and expenses
during the reporting periods. The more significant areas requiring the use of estimates include asset
impairment, stock-based compensation, beneficial conversion features on debt instruments, and future
income tax amounts. Management bases its estimates on historical experience and on other assumptions
considered to be reasonable under the circumstances. Actual results may differ from the estimates.
Subsequent Events
In accordance with ASC 855-10 “Subsequent Events”, the Company has evaluated subsequent events and
transactions for potential recognition or disclosure in the financial statements through the date the
financial statements were issued (Note 19).
F-20
Abakan Inc.
(Formerly Waste to Energy Group Inc.)
(A Development Stage Enterprise)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended May 31, 2012 and 2011
NOTE 3 – GOING CONCERN
The accompanying financial statements have been prepared assuming that the Company will continue as
a going concern. The Company has net losses for the period of June 27, 2006 (inception) to the year
ended May 31, 2012, of $6,322,365, and a working capital deficit of $2,438,854. These conditions raise
substantial doubt about the Company’s ability to continue as a going concern. The Company’s
continuation as a going concern is dependent on its ability to develop additional sources of capital,
and/or achieve profitable operations and positive cash flows. Management’s plan is to aggressively
pursue its present business plan. Since inception we have funded our operations through the issuance of
common stock, debt financing, and related party loans and advances, and we will seek additional debt or
equity financing as required. The accompanying financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
NOTE 4 – PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following:
May 31, 2012
May 31, 2011
Machinery and equipment
$
427,641
$
-
Construction in progress
2,617,196
-
Computer equipment and office furniture
35,369
12,856
Leasehold improvements
53,818
-
3,134,024
12,856
Less accumulated depreciation and amortization
(112,936)
(8,226)
$
3,021,088
$
4,630
Depreciation and amortization expense was $42,782 and $2,290 for the years ended May 31, 2012 and
2011, respectively. On July 13, 2011 we completed our second purchase of ownership in MesoCoat, Inc,
as more fully discussed in Note 8. Because of consolidation of MesoCoat’s accounting with ours we
acquired $1,961,526 of property and equipment, and accumulated depreciation of $61,928.
NOTE 5 – PATENTS AND L ICENSES
Patents and licenses consist of the following:
May 31, 2012
May 31, 2011
Patents
$
72,991 $
-
Website
21,000
21,000
Intellectual Property Research and Development
6,120,200
-
Licenses
1,843,200
-
8,057,391
21,000
Less accumulated amortization
(281,076)
(21,000)
$
7,776,315 $
-
F-21
Abakan Inc.
(Formerly Waste to Energy Group Inc.)
(A Development Stage Enterprise)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended May 31, 2012 and 2011
NOTE 5 – PATENTS AND L ICENSES – continued
Amortization expense was $260,076 and $3,500 for the years ended May 31, 2012 and 2011,
respectively. In the year ended May 31, 2012, we have capitalized an additional $98,185 on patents and
licenses, and have begun amortizing those according to our policy. On July 13, 2011 we completed our
second purchase of ownership in MesoCoat, Inc., as more fully discussed in Note 8. Due to the consolidation
of MesoCoat’s accounts with our own we gained all of the above assets.
Future amortization patents and licenses are presented in the table below:
For the years ended May 31,
2013
288,398
2014
288,398
2015
288,398
2016
288,398
2017 and beyond
502,523
$ 1,656,115
Patent license agreement
The Company has an exclusive commercial patent license agreement with a third party which requires the
Company to invest in the research and development of technology and the market for products by
committing to a certain level of personnel hours and $350,000 of expenditures.
The patent license agreement required a total of $50,000 in execution fees which are included in
intangible assets. The patent license agreements requires royalty payments equal to 2.5% of net sales of
the product sold by the Company beginning after the first commercial sale. For the first calendar year
after the achievement of a certain milestone and the following two calendar years during the term of the
agreement, the Company will pay a minimum annual royalty payment of $10,000, $15,000 and $20,000
respectively. A total of $15,000 in royalty payments have been made through May 31, 2012.
NOTE 6 – ASSIGNMENT AGREEMENT – MESOCOAT
On March 25, 2011, the Company entered into an assignment agreement (the Agreement) whereby it
would assume the exclusive rights to distribute MesoCoat’s products intended for applications specific to
the oil and gas pipeline industry in consideration of $250,000 (Note 11). The Agreement was entered into
with a company who entered into an exclusive distribution agreement with MesoCoat dated October 10,
2008 which was in effect for 10 years following the original date of the exclusive distribution agreement.
On May 31, 2011, the Company completed the transfer of consideration and assumed all rights to the
agreement. As of May 31, 2012, the Company will amortize the Agreement over the remaining term of
88 months.
F-22
Abakan Inc.
(Formerly Waste to Energy Group Inc.)
(A Development Stage Enterprise)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended May 31, 2012 and 2011
NOTE 7 – PREPAID EXPENSES
Prepaid expenses consisted of the following at May 31, 2012:
Name
Description
Amount
Steven Ferris
Prepayment retainer for services
$
7,500
Better Investing
Prepayment retainer for services
4,125
Urish Popeck & Co
Prepayment retainer for valuation
8,000
Optiminera SA
Prepayment retainer for services
76,500
The Money Channel
Prepayment retainer for services
8,775
Crystal Research Associates
Prepayment retainer for services
41,667
Hall, Lamb, & Hall
Prepayment retainer for legal fees
29,572
Deposits
Prepayment retainer for services
6,995
Total
$
183,134
Prepaid expenses consisted of the following at May 31, 2011:
Name
Description
Amount
Steven Ferris
Prepayment retainer for services
$
16,200
NOTE 8 – INVESTMENT IN NON-CONTROLLING INTEREST
MesoCoat, Inc.
MesoCoat, Inc. (“MesoCoat”) is an Ohio based nanotechnology materials science business in which the
Company previously held a fully diluted thirty four percent (34%) equity interest, 79,334 shares of
common stock, with the option to acquire up to a seventy five percent (75%) interest.
On December 8, 2010, the Company amended the Investment Agreement with MesoCoat to extend the
time frame in which we hold the exclusive option to acquire a fully diluted 51% interest in MesoCoat
until the later of January 31, 2011 or five business days subsequent to the completion of MesoCoat’s May
31, 2010 audit. As of May 31, 2011, we made the above discussed deposits on the next stage of our
investment, and we completed our next stage of investment on July 13, 2011, and have acquired an
additional 86,156 shares of common stock from MesoCoat in exchange for $2,800,000. Accordingly, in
subsequent periods since our ownership has increased to a fully diluted 51% and we can affect control, we
have consolidated the financials of MesoCoat into ours.
As of May 31, 2012, we advanced to MesoCoat, $787,550, which represent deposits on our next stage of
investment in their company. These amounts are offset by the corresponding equity on MesoCoat’s books
and are eliminated through the consolidation as intercompany accounts.
F-23
Abakan Inc.
(Formerly Waste to Energy Group Inc.)
(A Development Stage Enterprise)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended May 31, 2012 and 2011
NOTE 8 – INVESTMENT IN NON-CONTROLLING INTEREST – continued
We have analyzed our investment for the period of June 1 through July 12, 2011 in accordance of
“Investments – Equity Method and Joint Ventures” (ASC 323), and concluded that our 34% minority
interest investment did give us significant influence over MesoCoat’s business actions, board of directors,
or its management, and therefore we did account for our investment using the Equity Method. The table
below reconciles our investment amount and equity method amounts to the amount on the accompanying
balance sheet.
December 10, 2009, initial investment
$
1,400,030
Equity in loss for year ended May 31, 2010
(191,665)
Investment balance, May 31, 2010
$
1,208,365
Equity in loss for year ended May 31, 2011
(349,947)
Investment balance, May 31, 2011
$
858,418
Equity in loss for period ended July 12, 2011
(44,408)
Investment balance, July 12, 2011
$
814,010
Below is a table with summary financial results of operations and financial position of MesoCoat:
MesoCoat Inc.
UNAUDITED
For the period June 1 –
For the year ended
July 12, 2011
May 31, 2011
Equity Percentage
34%
34%
Condensed income statement information:
Total revenues
$
245,389 $
2,334,940
Total cost of revenues
229,641
993,393
Gross margin
15,748
1,341,547
Total expenses
146,356
2,370,804
Net loss
$
(130,611) $
(1,029,257)
Company’s equity in net loss
$
(44,408) $
(349,947)
For the year ended
For the year ended
July 12, 2011
May 31, 2011
Condensed balance sheet information:
Total current assets
$
1,199,061 $
980,635
Total non-current assets
4,073,596
4,019,646
Total assets
$
5,272,657
5,000,281
Total current liabilities
$
691,771 $
1,005,334
Total non-current liabilities
2,100,547
2,104,092
Total equity
2,480,339
1,890,855
Total liabilities and equity
$
5,272,657 $
5,000,281
F-24
Abakan Inc.
(Formerly Waste to Energy Group Inc.)
(A Development Stage Enterprise)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended May 31, 2012 and 2011
NOTE 8 – INVESTMENT IN NON-CONTROLLING INTEREST – continued
Please see below for a discussion as to how our ownership in Powdermet affects our investment in
MesoCoat.
Powdermet, Inc.
Under the terms of our September 7, 2010 amendment to our stock purchase agreement dated June 28,
2010, the Company entered into a stock purchase agreement with Kennametal Inc. (“Kennametal”) to
purchase from Kennametal five hundred and ninety six thousand eight hundred and thirteen (596,813)
shares, representing a forty one percent (41%) interest in Powdermet, Inc. (“Powdermet”), in exchange
for one million six hundred fifty thousand dollars ($1,650,000).
The terms and conditions of the stock purchase agreement required the Company to pay an initial
payment of five hundred thousand dollars ($500,000) to Kennametal on September 7, 2010, and the
remainder on or before September 30, 2010. The stock purchase agreement contains additional terms
related to monthly liquidated damages in the amount of fifty thousand ($50,000) per month starting
October 1, 2010. The transaction was to close no later than December 31, 2010.
We made the initial payment of $500,000 on September 7, 2010 and did not make the payment on the
balance as agreed; accordingly we recorded liquidating damages of $50,000 per month beginning October
1, 2010, for a total of $250,000 as of the period ended February 28, 2011.
On January 19, 2011, we amended the Stock Purchase Agreement with Kennametal to complete the
purchase of Powdermet shares from Kennametal no later than February 15, 2011 for $1,150,000. We did
not make our payment on the balance as agreed. On March 21, 2011, we entered into an accord and
satisfaction agreement to fulfill the terms of our agreement and settled our debt in full to Kennametal in
the amount of $1,200,000.
Powdermet was the parent company of MesoCoat, owning 66% of MesoCoat at May 31, 2011. Andy
Sherman serves as the chief executive officer of both Powdermet and MesoCoat in addition to his duties
as a member of the Company’s board of directors. Through the Company’s purchase of 41% of
Powdermet, we also gain indirect ownership of the additional shares that Powdermet owns.
We have analyzed our investment in accordance of “Investments – Equity Method and Joint Ventures”
(ASC 323), and concluded that when the stock purchase agreement was completed our 41% minority
interest investment gave us significant influence over Powdermet’s business actions, board of directors,
and its management, and therefore we account for our investment using the Equity Method. The table
below reconciles our investment amount and equity method amounts to the amount on the accompanying
balance sheet.
March 21, 2011, initial investment
$ 1,650,000
Equity in profit for period of March 21
through May 31, 2011
71,656
Investment balance, May 31, 2011
$ 1,721,656
Equity in profit for year ended May 31, 2012
988,533
Investment balance, May 31, 2012
$ 2,710,189
F-25
Abakan Inc.
(Formerly Waste to Energy Group Inc.)
(A Development Stage Enterprise)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended May 31, 2012 and 2011
NOTE 8 – INVESTMENT IN NON-CONTROLLING INTEREST – continued
Powdermet’s ownership in MesoCoat was diluted when the Company exercised its initial option to
purchase 86,156 shares of common stock from MesoCoat. Powdermet’s ownership in MesoCoat as of
May 31, 2012 is 47.50%.
Below is a table with summary financial results of operations and financial position of Powdermet:
Powdermet Inc.
For the year ended
For the period of March
May 31, 2012
21 through May 31, 2011
Equity Percentage
41%
41%
Condensed income statement information:
Total revenues
$
2,053,959 $
475,597
Total cost of revenues
941,441
164,267
Gross margin
1,112,518
311,330
Total expenses
1,055,386
136,560
Other income/ (expense)
3,515,113
-
Provision for income taxes
1,161,190
-
Net profit
$
2,411,055 $
174,770
Company’s equity in net profit
$
988,533 $
71,656
Condensed balance sheet information:
May 31, 2012
May 31, 2011
Total current assets
$
578,725 $
438,869
Total non-current assets
4,234,600
857,866
Total assets
$
4,813,325 $
1,296,735
Total current liabilities
$
395,614 $
648,351
Total non-current liabilities
2,105,370
745,599
Total equity
2,312,341
(97,215)
Total liabilities and equity
$
4,813,325 $
1,296,735
NOTE 9 - MATERIAL BUSINESS COMBINATION
On December 10, 2009, the Company acquired a fully diluted 34% of the outstanding common shares of
MesoCoat, Inc. (MesoCoat). On July 13, 2011, the Company acquired 17% of the outstanding common
shares of MesoCoat for an aggregate total of 51% of the outstanding common shares. The goodwill of
$364,384 arising from the acquisition of a non-controlling interest consists largely of the excess fair value
paid due to the added values associated with progress associated with ongoing research and development
completed, values credited to the product and intellectual property portfolio owned by MesoCoat and
scientific recognition over and above that recorded in relation to the credibility attached to government
and university grants. The Company believes that the MesoCoat acquisition is in line with its business
plan and the amount paid will be supported on completion of independent valuations. None of the
goodwill recognized is expected to be deductible for income tax purposes.
F-26
Abakan Inc.
(Formerly Waste to Energy Group Inc.)
(A Development Stage Enterprise)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended May 31, 2012 and 2011
NOTE 9 - MATERIAL BUSINESS COMBINATION - continued
The following table summarizes the consideration paid for MesoCoat and the amounts of the estimated
fair values of the identifiable assets acquired and liabilities assumed recognized at the acquisition date, as
well as the fair value at the acquisition date of the noncontrolling interest in MesoCoat at July 13, 2011:
Consideration:
Cash paid for 17% equity
$
2,800,070
Fair value of Company’s 34% equity interest in MesoCoat held before
business combination
2,578,355
$
5,378,425
Recognized amounts of identifiable assets acquired and liabilities assumed:
Financial assets
$
1,199,061
Property, plant and equipment
1,899,598
Intellectual property – research and development
6,120,200
Identifiable intangible assets
1,818,006
Financial liabilities
(2,610,324)
Total identifiable net assets
8,426,541
Non-controlling interest in MesoCoat
(3,412,500)
Goodwill
364,384
$
5,378,425
The fair value of the financial assets acquired includes cash and cash equivalents and accounts receivables
with an aggregate fair value of $1,199,061.
We recently completed an independent valuation of the assets of MesoCoat in order to have actual
numbers to allocate the acquisition price to. We have updated the figures contained here in this Note from
past filings which were estimates to the final actual numbers from the valuation report. Based on the
valuation report we redistributed from previous classifications to final classifications.
The fair value of the non-controlling interest in MesoCoat, a private company, was estimated by applying
the negotiated share price per share and applying that to the outstanding shares of MesoCoat. This fair
value measurement is based on significant inputs that are not observable in the market and, therefore,
represents a Level 3 measurement as defined in FASB ASC 820. Key assumptions include (a) negotiated
share price, (b) financial multiples of companies deemed to be similar to MesoCoat, and (d) adjustments
because of the lack of control or lack of marketability that market participants would consider when
estimating the fair value of the non-controlling interest in MesoCoat.
The Company recognized a gain of $1,764,345 as a result of remeasuring to fair value its 34% equity
interest in MesoCoat held before the business combination. The gain is included in other income in the
Company’s statement of operations for the year ended May 31, 2012.
The following (unaudited) pro forma consolidated results of operations have been prepared as if the
acquisition of MesoCoat had occurred at June 1, 2010:
F-27
Abakan Inc.
(Formerly Waste to Energy Group Inc.)
(A Development Stage Enterprise)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended May 31, 2012 and 2011
NOTE 9 - MATERIAL BUSINESS COMBINATION – continued
UNAUDITED PROFORMA CONSOLIDATED CONDENSED
STATEMENTS OF OPERATIONS
For the years ended
June 1 - May 31,
2012
2011
Revenues
Commercial
$
99,572 $
82,852
Contract and grants
2,304,275
1,765,924
Other income
780,931
486,164
Total revenues
3,184,778
2,334,940
Cost of Revenues
1,178,280
2,029,109
Gross profit
2,006,498
305,831
Expenses
General and administrative
661,267
582,822
Professional fees
309,682
172,504
Professional fees - related parties
60,000
45,000
Consulting
954,222
921,552
Consulting - related parties
306,580
393,900
Payroll and benefits expense
789,524
403,298
Depreciation and amortization
326,171
31,058
Research and development
838,264
-
Stock expense on note conversion
153,317
60,733
Stock options expense
1,311,032
964,439
Total expenses
5,710,059
3,575,306
Loss from operations
(3,703,561)
(3,269,475)
Other (expense) income
Interest expense:
Interest - loans
(275,407)
(58,644)
Interest – related parties
(1,118)
(811)
Amortization of discount on debt
(765,784)
(40,044)
Liquidated damages
-
(250,000)
Total interest expense
(1,042,309)
(349,499)
Interest income
303
2,125
Loss on debt settlement
--
(5,257)
Gain on debt settlement
56,543
200,709
Gain on sale of assets
429,717
-
Unrealized gain on MesoCoat acquisition
1,764,345
-
Equity in Powdermet income
988,533
71,656
Non-controlling interest in MesoCoat loss
--
-
Loss before provision for income taxes
(1,506,429)
(3,349,741)
Provision for income taxes
-
-
Net profit/ (loss) before minority interest
$
(1,506,429) $
(3,349,741)
Non-controlling minority interest
29,715
-
Net Profit/ (loss)
$
(1,476,714) $
(3,349,741)
Net profit/ (loss) per share - basic
$
(0.02) $
(0.07)
Net profit/ (loss) per share - diluted
$
(0.02) $
(0.07)
F-28
Abakan Inc.
(Formerly Waste to Energy Group Inc.)
(A Development Stage Enterprise)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended May 31, 2012 and 2011
NOTE 9 - MATERIAL BUSINESS COMBINATION - continued
The pro forma information is presented for informational purposes only and is not necessarily indicative
of the results of operations that actually would have been achieved had the acquisition been consummated
as of that time, nor is it intended to be a projection of future results.
NOTE 10 – LOANS PAYABLE
As of May 31, 2012 and 2011, the loans payable balance comprised of:
Description
May 31, 2012
May 31, 2011
Convertible demand note to an unrelated entity bearing 5% interest per annum which matures
$
400,231 $
337,256
on April 13, 2013. The note is shown net of a discount of $99,769 and $162,744, respectively,
attributable to the beneficial conversion feature, and an effective interest rate of 30.19%.
Convertible demand note to an unrelated entity bearing 5% interest per annum which matures
1,214,917
1,063,658
on March 17, 2013. The note is shown net of a discount of $285,083 and $436,342,
respectively, attributable to the beneficial conversion feature, and an effective interest rate of
31.19%.
Convertible demand note to an unrelated entity bearing 5% interest per annum which matures
38,531
-
on June 7, 2013. The note is shown net of a discount of $161,469 attributable to the beneficial
conversion feature, and an effective interest rate of 175.84%.
Convertible demand note to an unrelated entity bearing 5% interest per annum which matures
70,671
-
on July 14, 2013. The note is shown net of a discount of $429,329 attributable to the
beneficial conversion feature, and an effective interest rate of 142.77%.
Uncollateralized demand note to an unrelated entity bearing 8% interest per annum
70,000
70,000
Uncollateralized demand note to an unrelated entity bearing 8% interest per annum
3,850
600
Uncollateralized demand note to an unrelated entity bearing 8% interest per annum
303
-
Uncollateralized demand note to an unrelated entity bearing 8% interest per annum
19,350
-
Uncollateralized demand note to an unrelated entity bearing 8% interest per annum
20,000
-
Convertible demand note to an unrelated entity bearing 7.5% imputed interest per annum
56,043
-
which matures on July 10, 2018.
Capital leases payable to various vendors expiring in various years through September 2016;
115,175
-
collateralized by certain equipment with a cost of $205,157.
Uncollateralized demand note to an unrelated entity for royalties show net of discount of
1,717,546
-
$82,454
$
3,726,617 $
1,471,514
Less current liabilities
2,508,164
70,600
Total long term liabilities
$
1,218,453 $
1,400,914
We also owed $183,106 and $41,532 in accrued interest for the above notes as of May 31, 2012 and
2011, respectively.
As of May 31, 2012 and 2011, we had no restrictive covenants attached to any of the above referenced
notes.
F-29
Abakan Inc.
(Formerly Waste to Energy Group Inc.)
(A Development Stage Enterprise)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended May 31, 2012 and 2011
NOTE 10 – LOANS PAYABLE - continued
Future maturity of our notes payable is presented in the table below:
For the years ended May 31,
2013
$
2,508,164
2014
928,928
2015
228,969
2016
29,563
2017 and beyond
30,993
$ 3,726,617
Convertible Debentures - 2011
On March 17 and April 13, 2011 we signed two convertible debentures for a total of $2,000,000, due
March 17 and April 13, 2013, respectively. As of May 31, 2011, we received all of the proceeds from
these debentures. The notes bear an interest rate of 5% per annum, if any amounts are not paid when due
the interest rate will adjust and will be 10% per annum until paid.
The notes have a provision for conversion of the outstanding amounts owed into conversion units for
$1.00 per unit; units consists of one share of our common stock and one-half share common stock
warrant to purchase shares of stock for $1.50 per share, with an expiration date of two years from the
conversion date. We have analyzed these detachable warrants in accordance with FASB ASC 470-20-
25-4, Debt with conversion options, and have determined that they have a beneficial conversion feature.
Accordingly we have valued these using the Black-Scholes method and have arrived at an aggregate
total $736,576, of relative fair value and was recorded as additional paid-in capital and has been
recorded as a discount on debt against the corresponding convertible note payable. In our valuation of
the warrant value we used the following terms:
March 17 and April 13, 2011
Expected volatility (based on historical
178.10%
volatility)
Expected dividends
0.00
Expected term in years
2.0
Risk-free rate
0.95%
In accordance with FASB ASC 470-20-55-32, we are amortizing this amount using the effective interest
method over the life of the notes payable of 24 months. For the years ended May 31, 2012 and 2011, we
have recorded $214,234 and $137,490, respectively, in amortization of discount on debt and are reflected
as a component of interest expense in our statement of operations. The remaining aggregate total of
$384,852 and $599,086 for the years ended May 31, 2012 and 2011, respectively, will be amortized over
the remaining life of the notes.
F-30
Abakan Inc.
(Formerly Waste to Energy Group Inc.)
(A Development Stage Enterprise)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended May 31, 2012 and 2011
NOTE 10 – LOANS PAYABLE – continued
Convertible Debentures - 2012
On June 7, July 14, and August 29, 2011 we signed three convertible debentures for a total of $846,665,
due June 7, July 14 and August 29, 2013, respectively. As of May 31, 2012, we received all of the
proceeds from these debentures. The notes bear an interest rate of 5% per annum, if any amounts are not
paid when due the interest rate will adjust and will be 10% per annum until paid.
On February 20, 2012, we converted $146,665 of the above debentures into shares of our common stock
as part of the private placements completed in the year ended May 31, 2012 (Note 11). As part of this
conversion the note holder also converted $3,748 of accrued interest, and expensed the remaining
amount of $110,255 from the related discount on debt.
The notes have a provision for conversion of the outstanding amounts owed into conversion units for
$1.00 per unit; units consists of one share of our common stock and one-half share common stock
warrant to purchase shares of stock for $1.50 per share, with an expiration date of two years from the
conversion date. We have analyzed these detachable warrants in accordance with FASB ASC 470-20-
25-4, Debt with conversion options, and have determined that they have a beneficial conversion feature.
Accordingly we have valued these using the Black-Scholes method and have arrived at an aggregate
total $815,670, of relative fair value and was recorded as additional paid-in capital and has been
recorded as a discount on debt against the corresponding convertible note payable. In our valuation of
the warrant value we used the following terms:
June 7, 2011
July 14 2011
August 29, 2011
Expected volatility (based on historical
170.29%
170.29%
170.29%
volatility)
Expected dividends
0.00
0.00
0.00
Expected term in years
2.0
2.0
2.0
Risk-free rate
0.39%
0.38%
0.20%
In accordance with FASB ASC 835-30-35-2, we are amortizing discounts of debt using the effective
interest method over the life of the notes payable of 24 months. For the year ended May 31, 2012, we
have recorded $224,872 in amortization of discount on debt and are reflected as a component of interest
expense in our statement of operations. The remaining aggregate total of $590,798 will be amortized over
the remaining life of the notes.
NOTE 11 – STOCKHOLDERS' EQUITY
Common Shares – Authorized
The Company has 2,500,000,000 common shares authorized at a par value of $0.0001 per share and
50,000,000 shares of preferred stock, par value $0.0001 per share. All common stock shares have equal
voting rights, are non-assessable and have one vote per share. Voting rights are not cumulative and,
therefore, the holders of more than 50% of the common stock could, if they choose to do so, elect all the
directors of the Company.
F-31
Abakan Inc.
(Formerly Waste to Energy Group Inc.)
(A Development Stage Enterprise)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended May 31, 2012 and 2011
NOTE 11 – STOCKHOLDERS' EQUITY - continued
Common Stock Issuances
Private placements
On October 21, 2010, we completed a private placement for 1,100,000 shares of common stock for
$825,000. This was paid for by $425,000 in cash and a conversion of debt owed of $400,000, on the debt
conversion we also incurred a stock expense on note conversion of $37,333, and this is reflected in our
statement of operations.
On October 22, 2010, we completed a private placement for 1,660,000 shares of common stock for cash
of $1,245,000.
On November 16, 2010, we issued 60,000 shares of our common stock for services performed valued at
$60,600.
On December 10, 2010, we issued 150,000 shares of our common stock for a bonus granted to a
consultant for services performed valued at $153,000, which is reflected in consulting fees in our
statement of operations.
On December 10, 2010, we completed a private placement for 90,000 shares of common stock for
$90,900. This was paid for by cash of $3,000, previously recorded as a subscription payable, and a
conversion of debt owed of $64,500, on the debt conversion we also incurred a stock expense on note
conversion of $23,400, and this is reflected in our statement of operations.
On January 27, 2011, we closed a private placement for $160,000, or 160,000 units consisting of one
share of our common stock and one-half share common stock warrant to purchase shares of our common
stock, with a purchase price of $1.50 per share and an expiration date of two years from the closing. In
connection with this placement we had no offering costs for a net of $160,000.
On March 15, 2011, we issued 150,000 shares of our common stock for an assignment agreement with
MesoCoat valued at $150,000; in addition we also paid $100,000 in cash for a total of $250,000 and is
reflected in Assignment agreement – MesoCoat (Note 6) in our balance sheet.
On March 25, 2011, we completed a private placement for 56,960 shares of common stock for $61,517.
This was paid for by conversion of debt owed of $56,690, on the debt conversion we also incurred a stock
expense on note conversion of $4,557, and this is reflected in our operations statement.
On May 2, 2011, we issued 50,000 shares of our common stock for services performed valued at $50,000.
On May 11, 2011, we issued 60,000 shares of our common stock for services performed valued at
$49,200.
On May 17, 2011, we closed a private placement for $115,000, or 115,000 units consisting of one share
of our common stock and one-half share common stock warrant to purchase shares of our common stock,
with a purchase price of $1.50 per share and an expiration date of two years from the closing. In
connection with this placement we had no offering costs for a net of $160,000.
F-32
Abakan Inc.
(Formerly Waste to Energy Group Inc.)
(A Development Stage Enterprise)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended May 31, 2012 and 2011
NOTE 11 – STOCKHOLDERS' EQUITY – continued
On May 20, 2011, we issued 15,000 shares of our common stock for services performed valued at
$18,600.
On May 25, 2011, we closed a private placement for $65,465, or 65,465 units consisting of one share of
our common stock and one-half share common stock warrant to purchase shares of our common stock,
with a purchase price of $1.50 per share and an expiration date of two years from the closing. In
connection with this placement we had no offering costs for a net of $65,465. In addition, we recorded a
subscription receivable of $65,465 in connection with this placement.
On May 26, 2011, we closed a private placement for $50,000, or 50,000 units consisting of one share of
our common stock and one-half share common stock warrant to purchase shares of our common stock,
with a purchase price of $1.50 per share and an expiration date of two years from the closing. In
connection with this placement we had no offering costs for a net of $50,000.
On May 29, 2011, we closed a private placement for $45,600, or 30,000 units consisting of one share of
our common stock and one-half share common stock warrant to purchase shares of our common stock,
with a purchase price of $1.50 per share and an expiration date of two years from the closing. This was
paid for by conversion of debt owed of $30,000. On the debt conversion we also incurred a stock expense
on note conversion of $15,600, and this is reflected in our statement of operations.
On May 29, 2011, we closed a private placement for $100,000, or 100,000 units consisting of one share
of our common stock and one-half share common stock warrant to purchase shares of our common stock,
with a purchase price of $1.50 per share and an expiration date of two years from the closing. In
connection with this placement we had no offering costs for a net of $100,000. In addition, we recorded a
subscription receivable of $100,000 in connection with this placement.
On May 31, 2011, we closed three private placements for $334,400, or 220,000 units consisting of one
share of our common stock and one-half share common stock warrant to purchase shares of our common
stock, with a purchase price of $1.50 per share and an expiration date of two years from the closing. This
was paid for by conversion of debts owed of $220,000, on the debt conversions we also incurred a stock
expense on note conversion of $114,400, and this is reflected in our statement of operations.
On May 31, 2011, we wrote off an uncollectable subscription receivable of $1,750 for a placement dated
December 16, 2009, and is reflected in loss on debt settlement and is reflected in our statement of
operations.
On June 6, 2011, we closed a private placement for $20,000, or 20,000 units consisting of one share of
our restricted common stock and one-half share common stock warrant to purchase shares of our common
stock, with a purchase price of $1.50 per share and an expiration date of two years from the closing. In
connection with this placement we had no offering costs for a net of $20,000.
On June 10, 2011, we closed a private placement for $20,000, or 20,000 units consisting of one share of
our restricted common stock and one-half share common stock warrant to purchase shares of our common
stock, with a purchase price of $1.50 per share and an expiration date of two years from the closing. In
connection with this placement we had no offering costs for a net of $20,000.
F-33
Abakan Inc.
(Formerly Waste to Energy Group Inc.)
(A Development Stage Enterprise)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended May 31, 2012 and 2011
NOTE 11 – STOCKHOLDERS' EQUITY – continued
On July 6, 2011, we closed a private placement for $30,000, or 30,000 units consisting of one share of our
restricted common stock and one-half share common stock warrant to purchase shares of our common
stock, with a purchase price of $1.50 per share and an expiration date of two years from the closing. In
connection with this placement we had no offering costs for a net of $30,000.
On February 20, 2012, we closed a private placement for $300,000, or 300,000 units consisting of one
share of our restricted common stock and one common stock warrant to purchase shares of our common
stock, with a purchase price of $1.25 per share and an expiration date of two years from the closing. In
connection with this placement we had no offering costs for a net of $300,000.
On March 16, 2012, we closed a private placement for $382,000, or 382,000 units consisting of one share
of our restricted common stock and one common stock warrant to purchase shares of our common stock,
with a purchase price of $2.00 per share and an expiration date of two years from the closing. In
connection with this placement we had no offering costs for a net of $382,000.
On April 20, 2012, we closed a private placement for $29,500, or 18,438 units consisting of one share of
our restricted common stock and one-half common stock warrant to purchase shares of our common
stock, with a purchase price of $2.00 per share and an expiration date of two years from the closing. In
connection with this placement we had no offering costs for a net of $29,500.
On April 23, 2012, we closed a private placement for $320,000, or 200,000 units consisting of one share
of our restricted common stock and one-half common stock warrant to purchase shares of our common
stock, with a purchase price of $2.00 per share and an expiration date of two years from the closing. In
connection with this placement we had no offering costs for a net of $320,000.
On April 24, 2012, we closed a private placement for $119,200, or 74,550 units consisting of one share of
our restricted common stock and one-half common stock warrant to purchase shares of our common
stock, with a purchase price of $2.00 per share and an expiration date of two years from the closing. In
connection with this placement we had no offering costs for a net of $119,200.
On April 25, 2012, we closed a private placement for $25,000, or 15,625 units consisting of one share of
our restricted common stock and one-half common stock warrant to purchase shares of our common
stock, with a purchase price of $2.00 per share and an expiration date of two years from the closing. In
connection with this placement we had no offering costs for a net of $25,000.
On May 29, 2012, we closed a private placement for $80,000, or 50,000 units consisting of one share of
our restricted common stock and one-half common stock warrant to purchase shares of our common
stock, with a purchase price of $2.00 per share and an expiration date of two years from the closing. In
connection with this placement we had no offering costs for a net of $80,000.
On May 30, 2012, we closed a private placement for $430,000, or 268,750 units consisting of one share
of our restricted common stock and one-half common stock warrant to purchase shares of our common
stock, with a purchase price of $2.00 per share and an expiration date of two years from the closing. In
connection with this placement we had no offering costs for a net of $430,000.
F-34
Abakan Inc.
(Formerly Waste to Energy Group Inc.)
(A Development Stage Enterprise)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended May 31, 2012 and 2011
NOTE 11 – STOCKHOLDERS' EQUITY – continued
Conversion of debt to shares
On June 10, 2011, we closed a private placement for $10,000, or 10,000 units consisting of one share of
our restricted common stock and one-half share common stock warrant to purchase shares of our common
stock, with a purchase price of $1.50 per share and an expiration date of two years from the closing. In
connection with this placement we incurred stock expense on conversion of $5,500.
On February 20, 2012, we converted several debt obligations for $418,793, or 406,595 units consisting of
one share of our restricted common stock and one common stock warrant to purchase shares of our
common stock, with a purchase price of $1.25 per share and an expiration date of two years from the
closing. In connection with this placement we incurred stock expense on conversion of $12,198.
On February 20, 2012, we also converted accounts payable for $15,450, or 15,000 shares of our restricted
common stock. In connection with this placement we incurred stock expense on conversion of $450.
On March 16, 2012, we converted several debt obligations for $294,300, or 218,000 units consisting of
one share of our restricted common stock and one common stock warrant to purchase shares of our
common stock, with a purchase price of $2.00 per share and an expiration date of two years from the
closing. In connection with this placement we incurred stock expense on conversion of $76,300.
On April 20, 2012, we converted several debt obligations for $71,719, or 26,562 units consisting of one
share of our restricted common stock and one-half common stock warrant to purchase shares of our
common stock, with a purchase price of $2.00 per share and an expiration date of two years from the
closing. In connection with this placement we incurred stock expense on conversion of $29,219.
On April 24, 2012, we converted several debt obligations for $13,650, or 5,000 units consisting of one
share of our restricted common stock and one-half common stock warrant to purchase shares of our
common stock, with a purchase price of $2.00 per share and an expiration date of two years from the
closing. In connection with this placement we incurred stock expense on conversion of $5,650.
On May 30, 2012, we converted several debt obligations for $88,000, or 40,000 units consisting of one
share of our restricted common stock and one-half common stock warrant to purchase shares of our
common stock, with a purchase price of $2.00 per share and an expiration date of two years from the
closing. In connection with this placement we incurred stock expense on conversion of $24,000.
Share based compensation
On June 29, 2011, we issued 50,000 shares of our common stock for services performed valued at
$76,000.
On December 2, 2011, we issued 20,000 shares of our common stock for services performed valued at
$23,600.
On February 20, 2012, we issued 20,000 shares of our common stock for services performed valued at
$20,600.
F-35
Abakan Inc.
(Formerly Waste to Energy Group Inc.)
(A Development Stage Enterprise)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended May 31, 2012 and 2011
NOTE 11 – STOCKHOLDERS' EQUITY - continued
Share based compensation - continued
On March 20, 2012, we issued 27,500 shares of our common stock for services performed valued at
$39,050.
Common Stock Warrants
In connection with the above private placements we valued the common stock warrants granted during
the year ended May 31, 2012 and 2011, using the Black-Scholes model with the following assumptions:
January 27, 2011
May 31, 2011
Expected volatility (based
183.18%
178.10%
on historical volatility)
Expected dividends
0.00
0.00
Expected term in years
2.00
2.00
Risk-free rate
0.95%
0.95%
June 6, 2011
June 10, 2011
July 6, 2011
February 20, 2012
Expected volatility
(based on historical
170.29%
170.29%
170.29%
162.25%
volatility)
Expected dividends
0.00
0.00
0.00
0.00
Expected term in years
2.00
2.00
2.00
2.00
Risk-free rate
0.39%
0.41%
0.43%
0.39%
March 16, 2012
April 20, 2012
April 23, 2012
April 25, 2012
Expected volatility
(based on historical
156.34%
156.34%
156.34%
156.34%
volatility)
Expected dividends
0.00
0.00
0.00
0.00
Expected term in
2.00
2.00
2.00
2.00
years
Risk-free rate
0.39%
0.39%
0.39%
0.39%
May 29, 2012
May 30, 2012
Expected volatility
(based on historical
156.34%
156.34%
volatility)
Expected dividends
0.00
0.00
Expected term in
2.00
2.00
years
Risk-free rate
0.39%
0.39%
F-36
Abakan Inc.
(Formerly Waste to Energy Group Inc.)
(A Development Stage Enterprise)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended May 31, 2012 and 2011
NOTE 11 – STOCKHOLDERS' EQUITY - continued
Common Stock Warrants - continued
The expected volatility assumption was based upon historical stock price volatility measured on a daily
basis. The risk-free interest rate assumption is based upon U.S. Treasury bond interest rates appropriate
for the term of the Company’s warrants. The dividend yield assumption is based on our history and
expectation of dividend payments. All warrants are immediately exercisable upon granting, with the
exception of the warrants connected with the convertible debentures (Note 10), which are immediately
exercisable upon conversion of the debt.
A summary of the common stock warrants granted during the years ended May 31, 2012 and 2011 is
presented below:
Weighted
Average
Weighted
Remaining
Average
Contractual
Aggregate
Number of
Exercise
Terms
Intrinsic
Options
Price
(In Years)
Value
Balance at June 1, 2010
2,300,000
$
0.75
Granted
370,233
1.50
Exercised
-
--
Forfeited or expired
--
--
Balance at May 31, 2011
2,670,233
$
0.85
2.00 years
$
--
Exercisable at May 31, 2011
2,670,233
$
0.85
2.00 years
$
--
Weighted average fair value of
options granted during the year
ended May 31, 2011
$
0.85
Balance at June 1, 2011
2,670,233
$
0.85
Granted
1,696,063
1.67
Exercised
-
-
Forfeited or expired
(2,300,000)
.75
Balance at May 31, 2012
2,066,296
$
1.64
2.00 years
$
--
Exercisable at May 31, 2012
2,066,296
$
1.64
2.00 years
$
--
Weighted average fair value of
options granted during the year
ended May 31, 2012
$
1.64
F-37
Abakan Inc.
(Formerly Waste to Energy Group Inc.)
(A Development Stage Enterprise)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended May 31, 2012 and 2011
NOTE 11 – STOCKHOLDERS' EQUITY - continued
Common Stock Warrants - continued
The following table summarizes information about the warrants outstanding at May 31, 2012:
Options Outstanding
Options Exercisable
Range
Number
Weighted
Weighted
Number
Weighted
of
Outstanding
Average
Average
Exercisable
Average
Aggregate
Exercise
at May 31,
Remaining
Exercise
Intrinsic
at May 31,
Exercise
Intrinsic
Price
2012
Contractual Life
Price
Value
2012
Price
Value
$
1.25
706,600
2.00 Years
$
1.25
$
--
706,600 $
1.25
$
--
$
1.50
410,233
2.00 Years
$
1.50
$
--
410,233 $
1.50
$
--
$
2.00
949,463
2.00 Years
$
2.00
$
--
949,463 $
2.00
$
--
2,066,296
2.00 Years
$
1.64
$
--
2,066,296 $
1.64
$
--
NOTE 12 – EARNINGS-PER-SHARE CALCULATION
Basic earnings per common share for the years ended May 31, 2012 and 2011 are calculated by dividing
net income by weighted-average common shares outstanding during the period. Diluted earnings per
common share for the years ended May 31, 2012 and 2011 are calculated by dividing net income by
weighted-average common shares outstanding during the period plus dilutive potential common shares,
which are determined as follows:
For the year ended
For the year ended
May 31, 2012
May 31, 2011
Net earnings from operations
$
(1,119,249) $
(3,184,984)
Weighted-average common shares
59,752,413
57,058,470
Effect of dilutive securities:
Warrants
-
-
Options to purchase common stock
-
-
Dilutive potential common shares
59,752,413
57,058,470
Net earnings per share from operations:
Basic
$
(0.02) $
(0.06)
Diluted
$
(0.02) $
(0.06)
Dilutive potential common shares are calculated in accordance with the treasury stock method, which
assumes that proceeds from the exercise of all warrants and options are used to repurchase common stock
at market value. The amount of shares remaining after the proceeds are exhausted represents the
potentially dilutive effect of the securities. The increasing number of warrants used in the calculation is a
result of the increasing market value of the Company’s common stock.
F-38
Abakan Inc.
(Formerly Waste to Energy Group Inc.)
(A Development Stage Enterprise)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended May 31, 2012 and 2011
NOTE 12 – EARNINGS-PER-SHARE CALCULATION - continued
In periods where losses are reported the weighted-average number of common shares outstanding
excludes common stock equivalents because their inclusion would be anti-dilutive.
These securities below were excluded from the calculations above because to include them would be anti-
dilutive:
For the year ended
For the year ended
May 31, 2012
May 31, 2011
Common Stock Equivalents:
Warrants
2,066,296
2,670,233
Options to purchase common stock
5,160,000
5,420,000
Total of Common Stock Equivalents:
7,226,296
8,090,233
NOTE 13 – RELATED PARTY TRANSACTIONS
Due to the common control between the Company and its related parties, the Company is exposed to the
potential that ownership risks and rewards could be transferred among the parties.
In addition to related party transactions mentioned elsewhere, we have the below agreements and
transactions:
Consulting Agreements
On December 1, 2009 we entered into an agreement with a related individual to provide bookkeeping
services. The terms of the consulting agreement are $2,500 per month payable in consulting fees and
reimbursement to the consultant for all reasonable business expenses incurred by her in the performance
of her duties, and was in effect until December 1, 2010. The consultant was also granted 100,000 stock
options with an exercise price of $0.60 per share; they will vest equally over 2 years and the first third
was vested upon signing (see Note 14). On April 1, 2010, we entered into an amended agreement with
the same related individual to provide bookkeeping services. The terms of the amended consulting
agreement are $5,000 per month payable in consulting fees and reimbursement for all reasonable
business expenses incurred in the performance of her duties effective until April 1, 2011. The agreement
also had a provision to automatically renew for subsequent annual terms unless terminated in writing by
either party. For the years ended May 31, 2012 and 2011, we expensed $60,000 and $60,000,
respectively, in connection with these contracts and are included in professional fees – related party. As
of May 31, 2012 and 2011, we owed $4,751 and $5,000, respectively, and is included in accounts
payable - related party.
F-39
Abakan Inc.
(Formerly Waste to Energy Group Inc.)
(A Development Stage Enterprise)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended May 31, 2012 and 2011
NOTE 13 – RELATED PARTY TRANSACTIONS – continued
Consulting Agreements - continued
On April 26, 2010, we entered into an employment agreement with a related individual to perform the
duties of Vice President – Pipeline Coating Sales. The terms of the employment agreement were $6,000
per month payable in consulting fees, with increases payable with the attaining of certain milestones of
performance, and reimbursement to the employee for all reasonable business expenses incurred by him
in the performance of his duties, and will be in effect until March 31, 2013. The employee was also
granted 400,000 stock options with an exercise price of $0.60 per share; they will vest equally over 3
years, beginning April 26, 2011 and continuing on the anniversary date of signing (see Note 14). For the
year ended May 31, 2012 and 2011, we expensed $90,000 and $87,000, respectively, in connection with
this contract and are included in payroll and benefits expense. On December 20, 2010, we amended the
above employment agreement to include certain performance milestones and shares of our common
stock as payment for completing them. On March 23, 2012, his employment agreement was terminated.
As of May 31, 2012 and 2011, we owed $85,633 and $12,247, respectively, and is included in accrued
liabilities.
On August 20, 2010, we entered into a consulting agreement commencing August 1, 2010 with a related
individual to perform duties as our Chief Financial Officer. On May 11, 2011, this individual resigned
his position as Chief Financial Officer. Effective May 10, 2011, this agreement was amended to change
the consultant’s role from Chief Financial Officer to general consultant, and all other provisions remain
the same. The terms of the consulting agreement are $8,000 per month payable in consulting fees and
reimbursement to the consultant for all reasonable business expenses incurred by him in the
performance of his duties, and will be in effect until July 31, 2012. The consultant was also granted
200,000 stock options with an exercise price of $0.65 per share; they will vest equally over 3 years (see
Note 14). For the years ended May 31, 2012 and 2011, we expensed $96,000 and $86,600, respectively,
in connection with this contract and are included in consulting – related party. As of May 31, 2012 and
2011, we owed $7,292 and $20,376, respectively, and is included in accounts payable - related party.
On May 1, 2011, we entered into a consulting agreement with a related individual to perform the duties
of Vice President – Business Development and a Director of the Company. The terms of the consulting
agreement are $5,000 per month payable in consulting fees, and reimbursement to the consultant for all
reasonable business expenses incurred by him in the performance of his duties, and will be in effect
until April 30, 2012, and was not renewed. For the years ended May 31, 2012 and 2011, we expensed
$60,000 and $5,000, respectively, in connection with this contract and are included in consulting –
related party. As of May 31, 2012 and 2011, we owed $56,243 and $5,000, respectively, and is included
in accounts payable - related party.
F-40
Abakan Inc.
(Formerly Waste to Energy Group Inc.)
(A Development Stage Enterprise)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended May 31, 2012 and 2011
NOTE 13 – RELATED PARTY TRANSACTIONS – continued
Consulting Agreements - continued
On June 1, 2010, we entered into a consulting agreement with a company controlled by the spouse of
our Chief Executive Officer. The terms of the consulting agreement are $2,500 per month payable in
consulting fees and reimbursement to the consultant for all reasonable business expenses incurred by it
in the performance of its duties, and rental of office space for $1,200 per month, and will be in effect
until June 1, 2011. On December 1, 2010, we entered into a revised consulting agreement to supersede
the above agreement, with the same company as above. The terms of the consulting agreement are
$2,500 per month payable in consulting fees and reimbursement to the consultant for all reasonable
business expenses incurred by it in the performance of its duties, and rental of office space for $2,213
per month, and will be in effect until December 1, 2011 and continues in force. For the years ended May
31, 2012 and 2011, we expensed $30,000 and $30,000, respectively, in connection with this contract
and are included in consulting – related party. As of May 31, 2012 and 2011, we owed none and
$10,348, respectively, and is included in accounts payable - related party.
On May 5, 2011, we entered into an employment agreement commencing May 1, 2011 with a related
individual to perform duties as our Chief Financial Officer. The terms of the employment agreement are
$10,000 per month salary, a car reimbursement of $500 per month and reimbursement to the employee
for all reasonable business expenses incurred by him in the performance of his duties, and will be in
effect until April 30, 2013. The employee was also granted 400,000 stock options with an exercise price
of $1.00 per share; they will vest equally over 3 years (see Note 14). The employee was also granted a
stock signing bonus of 60,000 shares of our common stock (Note 11) valued at $49,200 and is reflected
in consulting- related party. For the years ended May 31, 2012 and 2011, we expensed $56,262 and
$10,000, in connection with this contract and is included in payroll and benefits expense. As of May 31,
2012 and 2011 we owed $0 to this employee. On October 24, 2011, this individual resigned his position
as Chief Financial Officer, this agreement was discontinued, and he forfeited the 400,000 stock options
granted to him as part of this agreement.
On June 1, 2011, we entered into a consulting agreement commencing June 1, 2011, with a related
individual to provide services as our Chief Executive Officer. The terms of the consulting agreement are
the consultant will be paid $10,000 per month. We also agreed to reimburse the consultant for all
reasonable business expenses incurred by him in the performance of his duties, and will be in effect
until June 1, 2012. For the year ended May 31, 2012, we expensed $120,000 in connection with this
contract, which amount is included in consulting – related party. As of May 31, 2012, we owed $12,487,
which amount is included in accounts payable - related party.
Note receivable – Related Party
On April 29, 2010, we entered in to a non-collateralized note receivable with a related company to ours
with some common ownership on an interest free basis, payable on demand. On July 15, 2010, we were
repaid $4,000 cash on this note and as of May 31, 2012 and 2011 we are owed a balance remaining of
$4,500.
F-41
Abakan Inc.
(Formerly Waste to Energy Group Inc.)
(A Development Stage Enterprise)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended May 31, 2012 and 2011
NOTE 13 – RELATED PARTY TRANSACTIONS – continued
Notes Payable – Related Party
For the year ended May 31, 2012, we entered into two uncollateralized demand notes to a Company
controlled by our Chief Executive Officer’s spouse, Proper Financial, bearing 8% interest per annum for
an aggregate total of $9,000. On May 31, 2012, we repaid the principal amount of $9,000 plus accrued
interest of $499. As of May 31, 2012 we owed no balance.
On February 2, 2012, we entered into an uncollateralized demand note to a related individual, bearing
8% interest per annum for an aggregate total of $10,500. We also owed $63 in accrued interest for the
above note as of February 29, 2012. On March 16, this debt and accrued interest was converted into
share of our common stock as discussed in Note 11, and has a zero balance.
License agreement – Related Party
The Company has a license agreement with Powdermet, Inc., a related party, which grants the
Company an exclusive license to the use of technical information, proprietary know-how, data and patent
rights assigned to and/or owned by Powdermet, Inc. The agreement will end upon the last to expire valid
claim of licensed patents, unless terminated within the terms of the agreement.
As part of the agreement, the Company has a commitment to purchase consumable powders from
Powdermet, Inc. through July 1, 2013. Also, as part of the agreement the Company will receive
technology transition and development service to support its research and development activities on a cost
reimbursement basis. Total expense related to the cost reimbursement was $275,365 for the year ended
May 31, 2012.
F-42
Abakan Inc.
(Formerly Waste to Energy Group Inc.)
(A Development Stage Enterprise)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended May 31, 2012 and 2011
NOTE 14 – STOCK – BASED COMPENSATION
2009 Stock Option Plan – The Company
Our board of directors adopted and approved our 2009 Stock option Plan (“Plan”) on December 14,
2009, which provides for the granting and issuance of up to 10 million shares of our common stock. On
August 20, 2010, we granted 200,000 stock options to our Chief Financial Officer at an exercise price of
$0.65 per share. The options will expire ten years from the grant date, and will vest in equal one third
parts on the anniversary of the option grant date. On October 19, 2010, we granted 1,200,000 stock
options to several consultants at an exercise price of $0.75 per share. On November 17, 2010, we
granted 25,000 stock options to a consultant at an exercise price of $1.01 per share. On January 25,
2011, we granted 25,000 stock options to a consultant at an exercise price of $1.25 per share. On March
16, 2011, we granted 20,000 stock options to a consultant at an exercise price of $1.05 per share. On
April 13, 2011, we granted 100,000 stock options to a consultant at an exercise price of $1.05 per share.
On May 12, 2011, we granted 400,000 stock options to an employee at an exercise price of $1.02 per
share. On May 13, 2011, we granted 250,000 stock options to four consultants at an exercise price of
$1.02 per share. All of these options will expire ten years from the grant date, and will vest in equal one
third parts on the anniversary of the option grant date. In addition, on May 2, 2011, we granted 150,000
stock options to a consultant at an exercise price of $1.05 per share, and these options will expire ten
years from the grant date, and will vest one-third immediately and the remaining two-thirds over the
next two years on the anniversary date of granting. On August 15, 2011, we granted 25,000 stock
options to a consultant at an exercise price of $1.25 per share, and these options will expire ten years
from the grant date, and will vest in equal one third parts on the anniversary of the option grant date. On
October 24, 2011, we granted 100,000 stock options to our former Chief Financial Officer in connection
with his Separation Agreement at an exercise price of $1.20 per share, and these options will expire five
years from the grant date, and will vest immediately. On January 2, 2012, we granted 100,000 stock
options to a consultant at an exercise price of $1.00 per share, and these options will expire ten years
from the grant date, and will vest in equal one third parts on the anniversary of the option grant date. On
January 5, 2012, we granted 150,000 stock options to a consultant at an exercise price of $1.00 per
share, and these options will expire ten years from the grant date, and will vest in equal one third parts
on the anniversary of the option grant date. On February 1, 2012, we granted 70,000 stock options to a
consultant at an exercise price of $1.07 per share, and these options will expire ten years from the grant
date, and will vest in equal one half parts on the six month anniversary of the option grant date, and
another one half part on the twelve month anniversary of the option grant date. On February 6, 2012, we
granted 25,000 stock options to a consultant at an exercise price of $1.07 per share, and these options
will expire ten years from the grant date, and will vest in equal one half parts on the date of grant, and
another one half part on the six month anniversary of the option grant date. On February 15, 2012, we
granted 50,000 stock options to a consultant at an exercise price of $1.03 per share, and these options
will expire four years from the grant date, and will vest in equal one third parts on the anniversary of the
option grant date. During the year ended May 31, 2012, we had 780,000 options that were expired or
forfeited for termination and resignation from service. After these grants there will be 4,840,000
available for future grant.
Our board of directors administers our Plan, however, they may delegate this authority to a committee
formed to perform the administration function of the Plan. The board of directors or a committee of the
board has the authority to construe and interpret provisions of the Plan as well as to determine the terms
of an award. Our board of directors may amend or modify the Plan at any time. However, no
amendment or modification shall adversely affect the rights and obligations with respect to outstanding
awards unless the holder consents to that amendment or modification.
F-43
Abakan Inc.
(Formerly Waste to Energy Group Inc.)
(A Development Stage Enterprise)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended May 31, 2012 and 2011
NOTE 14 – STOCK – BASED COMPENSATION - continued
2009 Stock Option Plan – The Company - continued
The Plan permits us to grant Non-Statutory stock options to our employees, directors and consultants.
The options issued under this Plan are intended to be Non-Statutory Stock Options exempt from Code
Section 409A.
The duration of a stock option granted under our Plan cannot exceed ten years. The exercise price of an
incentive stock option cannot be less than 100% of the fair market value of the common stock on the
date of grant.
The Plan administrator determines the term of stock options granted under our Plan, up to a maximum
of ten years, except in the case of certain events, as described below. Unless the terms of an optionee's
stock option agreement provide otherwise, if an optionee's relationship with us ceases for any reason
other than disability or death, the optionee may exercise any vested options for a period of ninety days
following the cessation of service. If an optionee's service relationship with us ceases due to disability
or death the optionee or a beneficiary may exercise any vested options for a period of 12 months in the
event of disability or death.
Unless the Plan administrator provides otherwise, options generally are not transferable except by will,
the laws of descent and distribution, or pursuant to a domestic relations order. An optionee may
designate a beneficiary, however, who may exercise the option following the optionee's death.
The value of employee and non-employee stock warrants granted during the year ended May 31, 2012
was estimated using the Black-Scholes model with the following assumptions:
August 15, 2011
October 24, 2011
January 2, 5, and
February 6, &
February 1, 2012
15, 2012
Expected volatility (based
170.18%
166.66%
162.25%
162.25%
on historical volatility)
Expected dividends
0.00
0.00
0.00
0.00
Expected term in years
10
5
10
5/10
Risk-free rate
2.29%
1.10%
1.10%
1.10%
The expected volatility assumption was based upon historical stock price volatility measured on a daily
basis. The risk-free interest rate assumption is based upon U.S. Treasury bond interest rates appropriate
for the term of the Company’s employee stock options. The dividend yield assumption is based on our
history and expectation of dividend payments.
A summary of the options granted to employees and non-employees under the plan and changes during
the years ended May 31, 2012 and 2011 is presented below:
F-44
Abakan Inc.
(Formerly Waste to Energy Group Inc.)
(A Development Stage Enterprise)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended May 31, 2012 and 2011
NOTE 14 – STOCK – BASED COMPENSATION - continued
2009 Stock Option Plan – The Company - continued
Weighted
Average
Weighted
Remaining
Average
Contractual
Aggregate
Number of
Exercise
Terms
Intrinsic
Options
Price
(In Years)
Value
Balance at June 1, 2010
3,150,000
$
0.64
Granted
2,370,000
0.87
Exercised
-
-
Forfeited or expired
(100,000)
0.60
Balance at May 31, 2011
5,420,000
$
0.75
9.00 years
$
185,000
Exercisable at May 31, 2011
983,240
$
0.63
9.00 years
$
--
Weighted average fair value of
options granted during the year
Ended May 31, 2011
$
0.87
Balance at June 1, 2011
5,420,000
$
0.75
Granted
520,000
1.06
Exercised
-
-
Forfeited or expired
(780,000)
-
Balance at May 31, 2012
5,160,000
$
0.77
9.00 years
$
185,000
Exercisable at May 31, 2012
2,980,829
$
0.71
9.00 years
$
--
Weighted average fair value of
options granted during the year
ended May 31, 2012
$
1.06
F-45
Abakan Inc.
(Formerly Waste to Energy Group Inc.)
(A Development Stage Enterprise)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended May 31, 2012 and 2011
NOTE 14 – STOCK – BASED COMPENSATION - continued
2009 Stock Option Plan – The Company - continued
The following table summarizes information about employee stock options under the 2009 Plan
outstanding at May 31, 2012:
Options Outstanding
Options Exercisable
Weighted
Range
Number
Average
Weighted
Number
Weighted
of
Outstanding
Remaining
Average
Exercisable
Average
Aggregate
Exercise
at May 31,
Contractual
Exercise
Intrinsic
at May 31,
Exercise
Intrinsic
Price
2012
Life
Price
Value
2012
Price
Value
$
0.60
1,945,000
8.00 Years
$
0.60
$
--
1,900,040 $
0.60
$
--
$
0.65
1,400,000
8.00 Years
$
0.65
$
120,000
394,968 $
0.65
$
--
$
0.75
100,000
9.00 Years
$
0.75
$
15,000
100,000 $
0.75
$
--
$
1.00
50,000
10.00 Years $
1.00
$
--
-- $
0.00
$
--
$
1.01
225,000
9.00 Years
$
1.01
$
--
106,656 $
1.01
$
--
$
1.02
650,000
10.0 Years
$
1.02
$
50,000
116,660 $
1.02
$
--
$
1.03
50,000
4.00 Years
$
1.03
$
--
-- $
0.00
$
--
$
1.05
270,000
10.0 Years
$
1.05
$
--
83,330 $
1.05
$
--
$
1.07
95,000
10.00 Years $
1.07
$
--
12,500 $
1.07
$
--
$
1.20
100,000
5.0 Years
$
1.20
$
--
100,000 $
1.20
$
--
$
1.25
25,000
10.0 Years
$
1.25
$
--
-- $
0.00
$
--
$
1.30
250,000
10.0 Years
$
1.30
$
--
166,675 $
1.30
$
--
5,160,000
9.0 Years
$
0.77
$
185,000
2,980,829 $
0.71
$
--
The total value of employee and non-employee stock options granted during the years ended May 31,
2012 and 2011, was $541,490 and $2,015,157, respectively. During years ended May 31, 2012 and 2011
the Company recorded $1,311,032 and $964,439, respectively, in stock-based compensation expense
relating to stock option grants.
At May 31, 2012 and 2011 there was $1,331,281 and $2,779,371, respectively, of total unrecognized
compensation cost related to stock options granted under the plan. That cost is expected to be
recognized pro-rata through February 15, 2015. The following table represents the stock options
expense for the each of the next three fiscal years ended May 31:
For years ended May 31,
Expense
2013
$
973,575
2014
297,645
2015
60,061
$
1,331,281
F-46
Abakan Inc.
(Formerly Waste to Energy Group Inc.)
(A Development Stage Enterprise)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended May 31, 2012 and 2011
NOTE 14 – STOCK – BASED COMPENSATION - continued
Stock Option Plan - MesoCoat
MesoCoat accounts for equity awards using the grant-date fair value.
The Company’s stock option plan (the Stock Option Plan) is intended to advance the interest of the
Company and its shareholders. Options granted under the Stock Option Plan can be either incentive stock
options or non-qualified stock options. The Stock Option Plan authorized the issuance of a maximum of
9,000 shares of the Company’s common stock. These options have a term of six years and will expire
beginning August 2014 through November 2014.
A summary of the Company’s stock option plan as of May 31, 2012, and the changes during the year
then ended is presented in the table below:
Options Outstanding
Number of
Weighted
Shares
Average Exercise
Price
Outstanding at May 31, 2011
4,200 $
1.95
Granted
250
18.11
Exercised
-
Forfeited
-
Outstanding at May 31, 2012
4,450 $
2.68
Options exercisable at May 31, 2012
3,150 $
1.95
NOTE 15 –COMMITMENTS
Consulting Agreements
On March 15, 2011, we entered into a consulting agreement commencing April 1, 2011 with an
unrelated individual to provide business consulting. The terms of the consulting agreement are a
minimum 20 hours per month at $110 per hour or $2,200 per month payable in consulting fees and
reimbursement to the consultant for all reasonable business expenses incurred by him in the
performance of his duties, and was in effect until March 31, 2012.
On March 16, 2011, we entered into a consulting agreement commencing March 16, 2011, with an
unrelated individual to provide graphic design work for print and website and website maintenance. The
terms of the consulting agreement are $500 per month and reimbursement to the consultant for all
reasonable business expenses incurred by him in the performance of his duties, and was in effect until
April 16, 2012. In addition, the consultant was also granted 20,000 stock options, with an exercise price
of $1.05 per share of common stock, and will expire ten years from the date of the agreement (see Note
14).
F-47
Abakan Inc.
(Formerly Waste to Energy Group Inc.)
(A Development Stage Enterprise)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended May 31, 2012 and 2011
NOTE 15 –COMMITMENTS - continued
Consulting Agreements- continued
On April 13, 2011, we entered into a consulting agreement commencing April 13, 2011, with an
unrelated individual to provide business consulting in South East Asia. The terms of the consulting
agreement included a grant of 100,000 stock options, with an exercise price of $1.05 per share of
common stock that expire ten years from the date of the agreement, and vest over three years on the
anniversary date of April 13 (see Note 14). We also agreed to reimburse the consultant for all reasonable
business expenses incurred by him in the performance of his duties, with a term expiring April 12, 2014.
On May 2, 2011, we entered into a consulting agreement commencing May 2, 2011, with an unrelated
individual to provide business consulting in the Europe and Asia geographic region. The terms of the
consulting agreement included a grant of 50,000 shares of our restricted common stock, and 150,000
stock options, with an exercise price of $1.05 per share of common stock that expire ten years from the
date of the agreement, that vest as follows; one-third on the date of the agreement, the remaining two-
thirds over two years on the anniversary date of May 2 (see Note 14). We also agreed to reimburse the
consultant for all reasonable business expenses incurred by it in the performance of its duties. The
agreement was in effect until May 1, 2012.
On May 20, 2011, we entered into a consulting agreement commencing May 20, 2011, with an
unrelated individual to provide business consulting. The terms of the consulting agreement included a
grant of 5,000 shares of our restricted common stock each month, and a prepayment of 15,000 shares on
signing the agreement. We also agreed to reimburse the consultant for all reasonable business expenses
incurred by him in the performance of his duties. The agreement was in effect until August 19, 2011.
On December 1, 2011, we entered into a consulting agreement commencing December 1, 2011, with an
unrelated individual to provide investor relations and corporate communications consulting. We made
the initial payment of $40,680, issued the initial issuance of 20,000 shares of our common stock, and
granted the initial payment of 35,000 options to purchase shares of our common stock for $1.00 that
expire in 24 months. On February 6, 2012, we notified the consultant of termination due to lack of
performance and that the remaining contract was void, and to return to the Company the 20,000
restricted common shares, and that all stock options granted were rescinded and no longer in effect.
On March 1, 2012, we entered into a consulting agreement commencing March 1, 2012, with an
unrelated individual to provide investor relations consulting. The terms of the consulting agreement are
that the consultant is paid $6,000 per month in addition the consultant was issued 50,000 shares of our
restricted common stock for the six month period. The shares will be issued in 12,500 share increments
each month on the signing date, May 1, July 1, and August 31. We also agreed to reimburse the
consultant for all reasonable business expenses incurred by him in the performance of his duties, with a
term expiring September 1, 2012.
F-48
Abakan Inc.
(Formerly Waste to Energy Group Inc.)
(A Development Stage Enterprise)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended May 31, 2012 and 2011
NOTE 15 –COMMITMENTS - continued
Consulting Agreements- continued
On March 1, 2012, we entered into a consulting agreement commencing March 1, 2012, with an
unrelated individual to provide capital investment consulting. The terms of the consulting agreement are
that the consultant is paid $102,000 for the twelve month term; at the start of each subsequent quarter,
the consultant and the Company will review the work performed and the projected work for the
following quarter to ensure the retainer balance is sufficient to pay for the requested services. We also
agreed to reimburse the consultant for all reasonable business expenses incurred by him in the
performance of his duties with a term expiring March 1, 2013.
On March 26, 2012, we entered into a consulting agreement commencing March 26, 2012, with an
unrelated individual to provide capital investment consulting. The terms of the consulting agreement are
that the consultant is paid $5,000 per month; in addition the consultant was issued 15,000 shares of our
restricted common stock for the initial three month period. Then commencing July 1, 2012 and each
quarter after the Company will issue 15,000 shares. We also agreed to reimburse the consultant for all
reasonable business expenses incurred by him in the performance of his duties, with a term expiring
September 26, 2012, at which time the agreement will become a month to month agreement.
Leases
In August 2011, the Company entered into a non-cash leasing arrangement where services are provided in
exchange for an asset. The Company has an obligation to provide 600 hours of services at a fair value of
$120,000 as consideration during the period from August 2011 to August 2017. The Company has
recorded this capital lease at its fair value. During the year ended May 31, 2012, the Company completed
143 hours of service with a fair value of $28,600. This amount is included in revenue.
The Company leases its office space in Miami on a month to month basis at a cost of $2,213 a month paid
to Prosper Financial, Inc., a related party. The Company is also committed to a non-cancellable operating
lease for a vehicle that expired in March 2012.
MesoCoat subleases its research and development and laboratory space, in Ohio, from Powdermet, a related
party. The cost of the sub-lease to MesoCoat is $6,700 per month that expires on May 31, 2020.
MesoCoat also leases machinery and equipment under various capital lease arrangements, which expires
through September 2016. These leases are included in long-term and short-term debt and the related assets have
been capitalized.
Total expense related to the operating leases was $148,854 for the period of July 13 through May 31, 2012.
Interest expense for the leases for the period of July 13 through May 31, 2012 was $2,593.
F-49
Abakan Inc.
(Formerly Waste to Energy Group Inc.)
(A Development Stage Enterprise)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended May 31, 2012 and 2011
NOTE 15 –COMMITMENTS - continued
Leases - continued
Minimum annual rental commitments are as follows at May 31, 2012:
For the years ended May 31,
Capital Leases
Operating Leases
2013
$
46,585 $
86,100
2014
23,181
80,400
2015
22,197
80,400
2016
21,273
80,400
2017 and thereafter
7,951
328,300
Total minimum lease payments
$
121.187 $
655,600
Less amount representing interest
(6,012)
Present value of net minimum capital lease payments
115,175
Less current maturities
(42,999)
Long-term obligations under capital leases
$
72,176
NOTE 16 – INCOME TAXES
The following is an analysis of deferred tax assets as of May 31, 2012 and 2011:
Deferred
Valuation
Tax Assets
Allowance
Balance
Deferred tax assets at May 31, 2010
$
272,631
$ (272,631)
$
-
Provision to tax returns true ups
29,506
(29,506)
-
Additions for the year
475,058
(475,058)
-
Net deferred tax assets at May 31, 2011
$
777,195
$ (777,195)
$
-
Tax effective of rate change
984,449
(984,449)
-
Provision to tax return true ups
142,476
(142,476)
-
Additions for the year
378,172
(378,172)
-
Deferred tax assets at May 31, 2012
$
2,282,292
$ (2,282,292)
$
-
F-50
Abakan Inc.
(Formerly Waste to Energy Group Inc.)
(A Development Stage Enterprise)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended May 31, 2012 and 2011
NOTE 16 – INCOME TAXES - continued
Deferred income taxes are provided to recognize the effects of temporary differences between financial
reporting and income tax reporting. These differences arise principally from federal net operating losses,
stock compensation expense, basis differences in investments in affiliates and the use of accelerated
depreciation methods for tax purposes as opposed to the straight-line depreciation method for financial
reporting purposes and Federal net operating losses.
Temporary differences between financial statement carrying amounts and tax basis of assets and
liabilities that give rise to significant deferred tax assets and liabilities are presented below at May 31:
2012
2011
Deferred tax assets:
Current:
Compensation accruals
$
87,096
$
-
Non-current:
Deferred tax assets:
Net operating loss carry forward
1,962,349
461,935
Fixed asset basis differences
113,236
-
Stock options
880,187
220,956
Equity loss in affiliates, net
-
70,493
Other
387
23,811
Total non-current deferred tax assets
2,956,159
777,195
Deferred tax liabilities:
Equity profit in affiliates, net
(161,217)
-
Book fair value adjustment of
(599,746)
-
investment in affiliate
Total non-current deferred tax
(760,963)
-
liabilities
Net non-current deferred tax liabilities
2,195,196
777,195
Net deferred tax liability before valuation
2,282,292
777,195
allowance
Valuation allowance
(2,282,292)
(777,195)
Net deferred tax asset
$
-
$
-
F-51
Abakan Inc.
(Formerly Waste to Energy Group Inc.)
(A Development Stage Enterprise)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended May 31, 2012 and 2011
NOTE 16 – INCOME TAXES - continued
The following is reconciliation from the expected statutory Federal income tax rate to the Company’s
actual income tax rate for the years ended May 31:
2012
2011
Expected income tax (benefit) at
Federal statutory tax rate – 34% and 15%
$
(380,545)
$
(475,257)
Permanent differences
2,372
199
Tax effect of rate change
(984,449)
-
Other adjustments
(142,474)
-
Change in valuation allowance
1,505,096
475,058
Income tax expense
$
-
$
-
We currently have three years of tax returns that are subject to examination, including the fiscal years
ended May 31, 2011, 2010 and 2009, based on their filing dates by taxing authorities. We currently have
no uncertainty of the tax positions that we have taken and believe that we can defend them to any tax
jurisdiction.
The net operating loss carry forward as of May 31, 2011 expires as follows:
Expiring Year
Amount
2027
$
554
2028
61,834
2029
352,219
2030
1,044,860
2031
1,715,508
2032
2,596,641
Total
$
5,771,616
These loss carryovers could be limited under the Internal Revenue Code should a significant change in
ownership occur.
NOTE 17 - EMPLOYEE BENEFIT PLANS
The Company has a 401(k) Plan (the Plan) covering substantially all of its employees who are at least age
21 and have completed three months of service. Participating employees may elect to contribute, on a tax
deferred basis, a portion of their compensation in accordance with Section 401(k) of the Internal Revenue
Code. Additional matching contributions may be made to the Plan at the discretion of the Company. For
the year ended May 31, 2012, the Company contributed $19,376.
F-52
Abakan Inc.
(Formerly Waste to Energy Group Inc.)
(A Development Stage Enterprise)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended May 31, 2012 and 2011
NOTE 18 – RECENT ACCOUNTING PRONOUNCEMENTS
We have examined all recent accounting pronouncements and believe that none of them will have a
material impact on the financial statements of the Company.
NOTE 19– SUBSEQUENT EVENTS
Management has evaluated subsequent events after the balance sheet date, through the issuance of the
financial statements, for appropriate accounting and disclosure. The Company has determined that there
were no such events that warrant disclosure or recognition in the financial statements, except for the
below:
Board of Advisors
On June 1, 2012, we appointed a new member to our Board of Advisors and granted him 100,000 stock
options for their service. The stock options have an exercise price of $2.20 per share of common stock,
and expire ten years from the date of grant. These options vest in equal one-third parts beginning on June
1, 2013, and every grant date anniversary for the next two years. The term of the Board of Advisors
Agreement will be in force until June 1, 2013, and shall renew automatically on an annual basis unless
terminated in writing. We also agreed to reimburse the advisor for all reasonable business expenses.
On June 20, 2012, we appointed a new member to our Board of Advisors and agreed to pay him $5,000
per month for his services beginning July 1, 2012. We also granted him 50,000 stock options for their
service. The stock options have an exercise price of $2.05 per share of common stock, and expire ten
years from the date of grant. These options vest in equal one-third parts beginning on June 20, 2013, and
every grant date anniversary for the next two years. The term of the Board of Advisors Agreement will be
in force until May 31, 2013, and shall renew automatically on an annual basis unless terminated in
writing. We also agreed to reimburse the advisor for all reasonable business expenses.
Board of Directors
On June 15, 2012, we appointed a new member to our Board of Directors. We agreed to pay him $15,000
per annum, payable in four equal payments. We also agreed to issue him 10,000 restricted shares of our
common stock and granted him 150,000 stock options for their service. The stock options have an
exercise price of $2.30 per share of common stock, and expire ten years from the date of grant. These
options vest in equal one-third parts beginning on September 15, 2012, and every September 15 after that.
We also agreed to pay for continuing education classes and related travel expenses, for a maximum of
$4,500. This agreement will be in force until May 31, 2015, unless terminated with a sixty day notice. We
also agreed to reimburse the advisor for all reasonable business expenses.
On August 7, 2012, we appointed a new member to our Board of Directors. We agreed to issue him
10,000 restricted shares of our common stock and granted him 150,000 stock options for their service.
The stock options have an exercise price of $1.90 per share of common stock, and expire ten years from
the date of grant. These options vest in equal one-third parts beginning on August 7, 2013 and every
August 7 after that. This agreement will be in force until August 7, 2015, unless terminated with a sixty
day notice. We also agreed to reimburse the advisor for all reasonable business expenses.
F-53
Abakan Inc.
(Formerly Waste to Energy Group Inc.)
(A Development Stage Enterprise)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended May 31, 2012 and 2011
NOTE 19– SUBSEQUENT EVENTS- continued
Stock Options Granted
On June 12, 2012, we granted 75,000 stock options to a consultant at an exercise price of $2.30 per share,
and these options will expire ten years from the grant date, and will vest in equal one third parts on the
anniversary of the option grant date, beginning on June 12, 2012
Private Placement
On July 25, 2012, we closed a private placement for $525,000, or 300,000 units consisting of one share of
our restricted common stock and one-half common stock warrant to purchase shares of our common
stock, with a purchase price of $2.00 per share and an expiration date of two years from the closing. In
connection with this placement we had no offering costs for a net of $525,000.
F-54
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A.
CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
In connection with the preparation of this annual report, an evaluation was carried out by the Company’s
management, with the participation of the chief executive officer and the acting chief financial officer, of
the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934 (“Exchange Act”)) as of May 31, 2012. Disclosure
controls and procedures are designed to ensure that information required to be disclosed in reports filed or
submitted under the Exchange Act is recorded, processed, summarized, and reported within the time
periods specified in the Commission’s rules and forms, and that such information is accumulated and
communicated to management, including the chief executive officer and the chief financial officer, to
allow timely decisions regarding required disclosures.
Based on that evaluation, the Company’s management concluded, as of the end of the period covered by
this report, that the Company’s disclosure controls and procedures were not effective in recording,
processing, summarizing, and reporting information required to be disclosed, within the time periods
specified in the Commission’s rules and forms, and such information was accumulated and communicated
to management, including the chief executive officer and the chief financial officer, to allow timely
decisions regarding required disclosures.
Management’s Report on Internal Control over Financial Reporting
The Company’s management is responsible for establishing and maintaining adequate internal control
over financial reporting. The Company’s internal control over financial reporting is a process, under the
supervision of the chief executive officer and the chief financial officer, designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of the Company’s financial
statements for external purposes in accordance with United States generally accepted accounting
principles (GAAP). Internal control over financial reporting includes those policies and procedures that:
• Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the
transactions and dispositions of the Company’s assets.
• Provide reasonable assurance that transactions are recorded as necessary to permit preparation of
the financial statements in accordance with generally accepted accounting principles, and that
receipts and expenditures are being made only in accordance with authorizations of management
and the board of directors.
• Provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the Company’s assets that could have a material effect on the
financial statements.
Due to its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk
that controls may become inadequate because of changes in conditions or that the degree of compliance
with the policies or procedures may deteriorate.
45
The Company’s management conducted an assessment of the effectiveness of our internal control over
financial reporting as of May 31, 2012 based on criteria established in Internal Control – Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, which
assessment identified material weaknesses in internal control over financial reporting. A material
weakness is a control deficiency, or a combination of deficiencies in internal control over financial
reporting that creates a reasonable possibility that a material misstatement in annual or interim financial
statements will not be prevented or detected on a timely basis. Since the assessment of the effectiveness
of our internal control over financial reporting did identify material weaknesses, management considers
its internal control over financial reporting to be ineffective.
The Company identified the following material weakness:
Lack of Appropriate Independent Oversight. The board of directors was not providing an appropriate
level of oversight of the Company’s consolidated financial reporting and procedures for internal control
over financial reporting as of May 31, 2012 since there was only one independent director at that time
who could not provide an appropriate level of oversight, including challenging management’s accounting
for and reporting of transactions. Our lack of appropriate independent oversight over the period was a
material weakness due to the interested nature of those individuals who comprised our board of directors.
While this control deficiency did not result in any audit adjustments to our 2012 or 2011 interim or annual
financial statements, it could have resulted in material misstatements that might have been prevented or
detected by independent oversight. Accordingly we determined that this control deficiency as of May 31,
2012 constituted a material weakness.
Since the end of the current reporting period the Company has remedied the lack of appropriate
independent oversight by:
• Forming an audit committee comprised solely of independent directors which committee
provided oversight in connection with the Company’s consolidated financial reporting and
procedures for internal control over financial reporting for the fiscal period ended May 31, 2012
subsequent to period end.
This annual report does not include an attestation report of our independent registered public accounting
firm regarding internal control over financial reporting. We were not required to have, nor have we,
engaged our independent registered public accounting firm to perform an audit of internal control over
financial reporting pursuant to the rules of the Commission that permit us to provide only management’s
report in this annual report.
Changes in Internal Controls over Financial Reporting
During the period ended May 31, 2012, there was no change in internal control over financial reporting
that materially affected or was reasonably likely to materially affect our internal control over financial
reporting.
Since the end of the period ended May 31, 2012, the Company formed an audit committee comprised
solely of independent members of the board of directors to ensure appropriate oversight of our
consolidated financial reporting and procedures for internal control over financial reporting over future
periods.
ITEM 9B.
OTHER INFORMATION
46
None.
PART III
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE
Set forth below is the name, age and present principal occupation or employment, and material
occupations, positions, offices or employments for the past five years of our current directors and
executive officers:
Name
Age
Year Appointed
Position(s) and Office(s)
Robert H. Miller
59
2009
President, Chief Executive Officer,
Chief Financial Officer and Director
Andrew J. Sherman
49
2010
Director
Stephen Goss
69
2012
Director
David Charbonneau
51
2012
Director
Jeffrey Webb
47
2012
Director
Business Experience
The following is a brief account of the business experience of our directors, executive officers, and other
significant employees, including their background occupations and employment over the past five years.
We also provide the responsibilities and qualifications of our executive officers and other significant
employees and the qualifications of our directors. The following includes other directorships in public
companies over the past five years of our directors. Except as otherwise noted, none of the following
referenced organizations are affiliates of the Company.
Robert H. Miller was appointed as a member of the board of directors and as the Company’s chief
executive officer on December 8, 2009.
Background:
From 2007 until the present Mr. Miller has been a director (and was an early investor) of Lifespan
Biosciences Inc., a company commercializing proprietary antibodies, providing immune histochemistry
services and developing localization databases. Since 2009 he has served as an officer and director of
Sonnen Corporation, a company involved in the research and development of a novel process for energy
generation consisting of specific materials and proprietary material combinations. (Mr. Miller is
the beneficial owner of more than five percent of Sonnen’s common stock.) From 2002 to present, Mr.
Miller has been a consultant to Prosper Financial, Inc., a management company that provides financial
and corporate consulting services to start-up companies. Between 1998 and 2000 he was a director and
financier of Zmax Corporation, a "y2k" company. From 1997 to 2002 Mr. Miller was the president of
Stamford International whose principal subsidiary, Nanovation Technologies Inc., was a developer of
nano-sized fiber-optic products and he served as director of Nanovation between 1998 and 2001. In 1992
Mr. Miller was the founder and president of Crystallex International Corporation and he served as the
company’s Chairman between 1992 and 1996. Between 1988 and 1992 he was the principal financier and
consultant to Asiamerica Equities Inc., a NASDAQ listed merchant bank.
47
Officer and Director Responsibilities and Qualifications:
Mr. Miller is responsible for the overall management of the Company and is involved in many of the
Company’s day-to-day operations. He is the Company’s primary leader, communicator and fundraiser.
Mr. Miller has worked as officer and director of many early-stage companies for almost three decades and
has participated as the principal investor in over 50 business ventures. He has founded corporations, listed
numerous companies on the NASDAQ and the Toronto Stock Exchange, worked full-time with and as a
consultant to numerous startups.
Other Public Company Directorships in the Last Five Years:
Mr. Miller has been a director of Sonnen Corporation since 2009.
Andrew J. Sherman was appointed as a member of the board of directors on August 20, 2010.
Business Experience:
From 1996 until the present Mr. Sherman has served as CEO for Powdermet and from 2007 until the
present he has served as CEO of MesoCoat (both of which are the Company’s subsidiaries). Between
1986and 1996 Mr. Sherman was Chief Metallurgist and New Business Development Manager for
Ultramet, Inc., a leading Chemical Vapor Deposition (CVD) company, in Pacoima, California, where his
technical and business developments resulted in a 10-fold growth in company revenues and the creation
of three spinouts (including a $100M plus exit). Mr. Sherman’s developments have been the basis for the
formation of eight successful companies to date.
Director Responsibilities and Qualifications:
Mr. Sherman brings his 25 years of experience in the nano-engineered coatings field (including an
intimate knowledge of both MesoCoat and Powermet) and his entrepreneurial spirit to the board of
directors.
Additionally, Mr. Sherman was appointed to the United States Department of Energy’s Hydrogen Safety
Panel and has served on the review panel since 2006. Panel duties include interfacing with codes and
standards, accident investigations, site reviews, H2 (hydrogen) project reviews, and H2 information and
training, education, and best practices development. He received a M.Sc. and B.Sc. in Ceramic
Engineering and a B.Sc. in Chemical Engineering from Ohio State University. He has also authored more
than 95 papers and presentations on ceramics, metallurgy and composite powder coatings and was
recognized with the 2000 R&D 100 award for his patented nano powder production and is a 2009 Ernst
and Young entrepreneur of the year finalist.
Other Public Company Directorships in the Last Five Years:
None.
Stephen Goss was appointed as a member of the board of directors on January 4, 2012. Mr. Goss further
serves on the Company’s audit committee, compensation committee, nominating & governance
committee and the Compliance & Ethics committee as an independent member of the board of directors.
48
Business Experience:
Mr. Goss has served as a director of Gemocasha, SA, a specialist consultancy group with emphasis on
giving technical, marketing and cash management advice to major firms such as Kraft, Heinz, Crystallex,
and BP from 1987 to present. He served as the chief executive officer of Crystallex de Venezuela, a
mining firm from 1992 to 1998 and Schindler Elevator from 1982 to 1987 in Venezuela, a role in which
he successfully integrated multiple acquisitions. He also served as the Technical Maintenance and
Installation Manager for Schindler Brazil between 1979 and 1982 in which position he managed over
2,000 people and turned it from the least efficient worldwide operation to one of the three most efficient
operations worldwide.
Director Responsibilities and Qualifications:
Mr. Goss brings independent oversight and a deep scientific and entrepreneurial background to the
Corporation with over three decades of senior management and consultancy experience. He speaks five
languages fluently, has received decorations from the Order of the British Empire for services related to
enhancing international trade and is a graduate of the University of Grenoble.
Mr. Goss serves on the Company’s Audit Committee, Compensation Committee, Nominating &
Governance Committee and the Compliance & Ethics Committee as an independent member of the board
of directors.
Other Public Company Directorships in the Last Five Years:
None.
David Charbonneau was appointed as a member of the board of directors on June 15, 2012.
Business Experience:
Mr. Charbonneau is the founder of CFO Consultant’s Inc. in Cleveland, Ohio for which he has advised
clients since 2008 on strategic planning, budget preparation, sales and margin enhancement, overhead
cost management, accounting and corporate affairs. He also works part-time with The Parkland Group
Inc. and has been appointed an Associate Director of the newly formed entity SS&G Parkland Consulting
LLC in Cleveland, Ohio. His duties focus on strategic planning, performance improvements and
institutional relationships. From 1998 to 2008, Mr. Charbonneau was the President of Premier Modular
Buildings LC, a Florida commercial modular builder.
Director Responsibilities and Qualifications:
Mr. Charbonneau brings independent management oversight and an expert accounting background with
over two decades of accounting, management and consultancy experience. He is a Certified Public
Accountant in Ohio, inactive. Mr. Charbonneau started his accounting career as an auditor for Arthur
Anderson & Co in Cleveland. His experience includes 5 years as Chief Financial Officer for Diamond
Engineered Space Inc. Diamond was a national commercial modular builder and a subsidiary of a UK
publically traded company. The company was sold to GE Capital in 1993. Thereafter, Mr. Charbonneau
worked as the Chief Financial Officer and a Director for Waco International Corporation, a subsidiary of
an Australian public company until 1998. Waco was a scaffolding manufacturer and construction rental
equipment company with multiple US locations, 600 employees and over $75 million in revenue.
49
Mr. Charbonneau earned a Bachelor of Science in Business Administration with a Major in Accounting
from The Ohio State University.
Mr. Charbonneau serves on the Company’s Audit Committee, Compensation Committee, Nominating &
Governance Committee and the Compliance & Ethics Committee as an independent member of the board
of directors.
Other Public Company Directorships in the Last Five Years:
None.
Jeffrey Webb was appointed as a member of the board of directors on August 7, 2012.
Business Experience:
Mr. Webb is the Business Development Manager and a Director of Fidelity (Cayman) Ltd., one of the
largest banks in the Cayman Islands. He joined Fidelity (Cayman) Ltd in January 1990 and has since
earned extensive experience in the international banking sector. Mr. Webb’s responsibilities have
included the development, management and direction of investment banking activities alongside
corporate finance and risk management. He has exhibited leadership in various roles and provided advice
on multiple committees within and without the banking community.
Director Responsibilities and Qualifications:
Mr. Webb brings independent management oversight and an expert leadership background with over two
decades of accounting, management and consultancy experience to the Corporation’s board of directors.
Mr. Webb serves on the Company’s Audit Committee, Compensation Committee, Nominating &
Governance Committee and the Compliance & Ethics Committee as an independent member of the board
of directors.
Other Public Company Directorships in the Last Five Years:
None.
Term of Office
Our directors are appointed for one year terms to hold office until the next annual meeting of our
shareholders or until removed from office in accordance with our bylaws. Our executive officers are
appointed by our board of directors and hold office pursuant to employment agreements or until removed
by the board.
Family Relationships
There are no family relationships between or among the directors or executive officers.
50
Involvement in Certain Legal Proceedings
During the past ten years there are no events that occurred related to an involvement in legal proceedings
that are material to an evaluation of the ability or integrity of any of the Company’s directors, persons
nominated to become directors or executive officers.
Compliance with Section 16(A) of the Exchange Act
Section 16(a) of the Securities Exchange Act of 1934 requires officers and directors of the Company and
persons who own more than ten percent of a registered class of the Company's equity securities to file
reports of ownership and changes in their ownership with the Commission, and forward copies of such
filings to us. Based solely upon a review of Forms 3, 4 and 5 furnished to the Company, we are not aware
of any persons who, during the annual period ended May 31, 2012, failed to file, on a timely basis, reports
required by Section 16(a) of the Securities Exchange Act of 1934.
Code of Ethics
The Company adopted a Code of Business Conduct & Ethics on June 13, 2012, within the meaning of
Item 406(b) of Regulation S-K of the Securities Exchange Act of 1934, a copy of which is attached hereto
as Exhibit 14 to this Form 10-K. Further, our Code of Business Conduct & Ethics is available in print, at
no charge, to any security holder who requests such information by contacting us. Our Code of Business
Conduct and Ethics applies to directors and senior officers, such as our principal executive officer,
principal financial officer, controller, persons performing similar functions and employees.
Board of Directors Committees
Audit Committee
The board of directors established an Audit Committee on June 25, 2012, comprised solely of
independent members to act on and report to the board of directors with respect to various auditing and
accounting matters, including the recommendations and performance of independent auditors, the scope
of the annual audits, fees to be paid to the independent auditors, and internal accounting and financial
control policies and procedures. Certain stock exchanges currently require companies to adopt a formal
written charter that establishes an audit committee that specifies the scope of an audit committee’s
responsibilities and the means by which it carries out those responsibilities.
Compensation Committee
The board of directors established a Compensation Committee on June 25, 2012, comprised solely of
independent members to help the board of directors discharge its responsibilities with respect to the
compensation of our Chief Executive Officer and other executive officers, the administration of the
Company's executive compensation and benefits programs and the production of an annual report on
executive compensation for inclusion in the Company's proxy statement.
Nominating Committee
The board of directors has established a Nominating & Corporate Governance Committee on June 25,
2012, comprised solely of independent members to assist the board of directors in connection with
nominations and corporate governance practices related to serving on the Company’s board of directors,
51
including candidates that may be referred by the Company’s stockholders. Stockholders who desire to
recommend candidates for evaluation may do so by contacting the Company in writing, identifying the
potential candidate and providing background information. Candidates may also come to the attention of
the board of directors through current members of the board of directors, professional search firms and
other persons. In evaluating potential candidates, the Nominating & Corporate Governance Committee
takes into account a number of factors, including among others, the following:
• independence from management;
• whether the candidate has relevant business experience;
• judgment, skill, integrity and reputation;
• existing commitments to other businesses;
• corporate governance background;
• financial and accounting background, to enable the board of directors to determine whether the
candidate would be suitable for audit committee membership; and
• the size and composition of the board.
Compliance
The board of directors established a Compliance and Ethics Committee on June 25, 2012, comprised
solely of independent members to assist the board of directors in connection with overseeing the
Company’s compliance program with respect to the laws and regulations applicable to the Company’s
business and compliance with Company’s Code of Business Conduct & Ethics and related policies by
employees, officers, directors and other agents or associates of the Company.
Director Compensation
Directors currently are reimbursed for out-of-pocket costs incurred in attending meetings, awarded stock
compensation, granted stock options pursuant to our 2009 Stock Option Plan and reimbursed for expenses
related to their service. The Company has entered into board of director’s compensation agreements with
each of its independent directors and employment agreements with its dependent directors which
compensation is not tied to their service to the board of directors.
52
The following table provides summary information for the fiscal year ended May 31, 2012 concerning
cash and non-cash compensation paid or accrued by the Company to or on behalf of our directors.
Director Compensation Table
Name
Fees
Stock
Option
Non-Equity
Nonqualified
All Other
Total
Earned
Awards Awards Incentive Plan
Deferred
Compensation
($)
Paid in
($)
($)
Compensation Compensation
($)
Cash ($)
($)
Earnings
($)
Robert H.
$0
$0
$0
$0
$0
$120,000 $120,000
Miller
Andrew J.
$0
$0
$0
$0
$0
$144,000 $144,000
Sherman
Stephen
$0
$0 $147,000
$0
$0
$0 $147,000
Goss
David
$0
$0
$0
$0
$0
$0
$0
Charbonneau
Jeffrey Webb
$0
$0
$0
$0
$0
$0
$0
James
$0
$0
$0
$0
$0
$40,600
$40,600
Chew(1)
Herman
$0
$0
$0
$0
$0
$60,000
$60,000
Buschor(2)
Theodore
$0
$0
$0
$0
$0
$0
$0
Sarniak III (3)
(1) James Chew resigned on January 4, 2012
(2) Herman Buschor resigned on June 14, 2012
(3) Theodore Sarniak III’s death was acknowledged on August 7, 2012 with the appointment of Jeffrey Webb.
Key Advisors
Reg Allen was most recently Chief Executive Officer of Vortek, a Canadian technology company that had
developed the world’s most powerful arc lamp. In 2004, Mr. Allen successfully sold Vortek to a public
U.S. semiconductor equipment manufacturer. Mr. Allen is considered a leading authority on applications
of the focused arc lamp system that is employed by the Company. At Vortek, Mr. Allen assembled an
international team of top-caliber staff and executed an ambitious business plan to commercialize the
application of arc lamp technology in advanced semiconductor equipment manufacturing. Mr. Allen has
over 30 years of experience working with engineering related solutions.
Mario Medanic was most recently General Manager of Cladtek Bimetal Manufacturing, an Australian
leader in the production of mechanically-bonded bimetal and weld-cladded corrosion resistant alloy pipes.
At Cladtek Mr. Medanic was instrumental in setting up one of the largest cladding plants in the world,
and was involved in management of daily operations to deliver industry-leading products in the oil & gas
sector. Mr. Medanic is an expert on the planning and construction of industrial facilities for the oil and
gas industry and in implementing management systems to increase competitiveness within the coating
and cladding industry. His two decades of experience in the marine and oil & gas sector involves
53
assessing various types of corrosion protection techniques and establishing plants to manufacture
solutions.
James Rodriguez de Castro's most recent professional background includes 14 years spent with Merrill
Lynch based in Japan and Hong Kong. His numerous senior executive roles there included Head of
Global Markets, New Initiatives and Advisory, Pacific Rim; Head of Trading, Equity Derivatives, CBs
and Index Arbitrage, Asia; and Head Trader, Japanese Equity Derivatives. His experience in the oil and
gas sector began with Bankers Trust during the 1992 Gulf War. He remains a very active investor in this
sector in Asia, and maintains active interests in mining and offshore equipment rental.
Dr. David Diehl, Ph.D. most recently led Corporate Technology Initiatives at PPG Industries, Inc. (PPG),
the world’s second largest supplier of paints, coatings, optical products, specialty materials, chemicals,
glass and fiberglass, for seven years. Prior to this position, Dr. Diehl held various R&D and business
development positions within the Industrial Coatings and Packaging strategic business units of PPG. He
formed his own company in 2006, Technology Specialists, Inc., to offer consulting services that augment
capability within organizations by increasing proficiency in open innovation, strategic thinking, and the
development or acquisition of proprietary and patentable technology to achieve business objectives. His
clients include well-known Fortune 500 companies as well as industry associations and NASA Langley.
Other clients include material science startups and growth phase companies. Dr. Diehl holds a B.S. in
Physics from Lebanon Valley College, an M.S. in Chemistry from the Pennsylvania State University, and
a Ph.D. in Chemistry from Marquette University.
Morris Reid was most recently Managing Director of BGR Group, a lobbying firm in 2008 through
BGR’s acquisition of his consulting and public affairs firm, Westin Rinehart. Morris has worked with
high-profile individuals, government officials and corporate executives in the successful resolution of
complex and high-level political and corporate issues for more than 15 years. He is adept at fostering
business development programs and specializes in launching partnerships that meld brand building,
coalition advocacy and effective public affairs and issue management strategies. As the Managing
Director of Westin Rinehart, Morris has consulted and provided counsel to the leaders of many Fortune
500 companies. He also served as a Clinton administration senior staff aide to the late Commerce
Secretary Ronald Brown and Housing Secretary Andrew Cuomo. Additionally, Morris was the director of
Vice President Al Gore's office at the 1996 Democratic Convention and Deputy Director of Vice
Presidential Operation for Clinton/Gore '96. In the 2008 presidential campaign, Morris was one of several
senior Democratic strategists utilized by the Obama campaign to engage the mainstream media.
Sam Thomas is a professor of Banking and Finance at the Weatherhead School of Management of Case
Western Reserve University. He teaches in the Weatherhead MBA, MS, and Undergraduate programs.
His research and consulting activities focus on the practice of investment science, valuation, and
corporate strategy. His notable expertise is in integrating the global macro business cycle with practices in
corporate finance strategy and investments strategy. Dr. Thomas is active in the research and development
activities of corporate strategists, institutional investors, financial advisors and money managers and is
known for his ability to materially integrate academic research with product development. His recent
projects incorporate innovations in the design of corporate strategy and life-long portfolio construction in
a manner that is compatible with phases of the business cycle. Dr. Thomas recently played a very
important role at BluFin to develop India’s first comprehensive monthly Consumer Confidence Index
(CCI) to assess the pulse rate of the consumer that is expected to become the de facto standard for
measuring consumer sentiment in India. Other projects include business cycle indicators and the design
of a comprehensive suite of stock market indices for India.
54
ITEM 11.
EXECUTIVE COMPENSATION
The objective of the Company’s compensation program is to provide compensation for services rendered
by our executive officers. The Company’s salaries and stock option awards are designed to retain the
services of our executive officers. Salary and stock option awards are currently the only type of
compensation used in our compensation program. We use these forms of compensation because we feel
that they are adequate to retain and motivate our executive officers. The amount we deem appropriate to
compensate our executive officers is determined in accordance with market forces as we have no specific
formula to determine compensatory amounts at this time. While we have deemed that our current
compensatory program and the decisions regarding compensation are easy to administer and are
appropriately suited for our objectives, we may expand our compensation program to additional future
employees to include other compensatory elements.
For the year ended May 31, 2012, $288,976 was paid in salary, stock option awards and separation
amounts to retain our chief executive officer and former chief financial officer. For the year ended May
31, 2011, $559,500 was paid in salary and stock option awards to retain said executive officers. We
expect that the amount paid to retain executive officers will increase over the next twelve months in
connection with the prospective engagement of a new chief financial officer which engagement will most
likely include stock option awards in addition to a salary.
During the annual period ended May 31, 2012 our chief executive officer received compensation of
$10,000 per month pursuant to his existing consulting agreement with the Company as compared
compensation of $7,500 per month for the period ended May 31, 2011. Management believes that the
executive compensation paid in salary to our chief executive officer will remain consistent over the next
twelve months as its business develops.
During the annual period ended May 31, 2012, our former chief financial officer received compensation
of $10,000 per month pursuant to an employment agreement and on his resignation dated October 24,
2011, a separation amount which included the grant of 100,000 stock options to purchase shares of the
Company’s common stock for $1.20 a share for a period of five years from the date of grant valued at
$112,714, as part of his agreement to cancel the 400,000 stock options granted pursuant to his
employment agreement.
During the annual period ended May 31, 2011, our former chief financial officer received compensation
of $10,000 per month pursuant to a consulting agreement in addition to a stock award valued at $49,200
and the grant of stock options valued at $408,000. The stock options granted during the annual period
ended May 31, 2011 were rescinded in connection with the resignation of our former chief financial
officer.
55
Summary Compensation
The following table provides summary information for the fiscal years ended May 31, 2012 and 2011
concerning cash and non-cash compensation paid or accrued by the Company to or on behalf of (i) the
chief executive officer, (ii) the two most highly compensated executive officers other than the chief
executive officer if compensated at over $100,000 and (iii) additional individuals if compensated at over
$100,000.
Executive Compensation Table
Name and
Year
Annual
Bonus
Stock
Option
Non-Equity
Nonqualified
All Other
Total
Principal
(ended
Salary
($)
Awards
Awards
Incentive Plan
Deferred
Compensation
($)
Position
May
($)
($)
($)
Compensation
Compensation
($)
31)
($)
Earnings
($)
Robert
2012
$120,000
$0
$0
$0
$0
$0
$0 $120,000
Miller: CEO,
2011
$90,000
$0
$0
$0
$0
$0
$0
$90,000
director(1)
Mark W.
2012
$56,262
$0
$0
$112,714
$0
$0
$0 $168,976
Sullivan:
2011
$10,000
$0
$49,200
$408,000
$0
$0
$0 $479,500
CFO, PAO(2)
Hermann
2012
$60,000
$0
$0
$0
$0
$0
$6,000
$66,000
Buschor:
2011
$115,000
$0
$0
$0
$0
$0
$6,000 $121,000
director, VP
Bus. Devel.
Andrew J.
2012
$144,000
$0
$0
$0
$0
$0
$0 $144,000
Sherman(3)
2011
$120,000
$0
$0
$0
$0
$0
$0 $120,000
Stephen Goss, 2012
$0
$0
$0
$147,044
$0
$0
$0 $147,044
director
2011
$0
$0
$0
$0
$0
$0
$0
$0
(1) Mr. Miller as appointed as chief executive officer and director on December 8, 2009.
(2) Mr. Sullivan entered into an employment agreement with the Company in connection with his appointment as chief financial
officer and principal accounting officer on May 11, 2011. Terms of the agreement included a signing bonus of 60,000
shares, options to purchase 400,000 shares, and a salary of $120,000 per annum. He resigned on October 24, 2011.
(3) Andrew J. Sherman was appointed as a director on August 20, 2010 and also serves as the president of both MesoCoat and
Powdermet.
Outstanding Equity Awards
The following table provides summary information for the period ended May 31, 2012 concerning
unexercised options, stock that has not vested, and equity incentive plan awards by the Company to or on
behalf of (i) the chief executive officer and chief financial officer and (ii) the three most highly
compensated individuals whose total compensation exceeds $100,000:
56
Outstanding Equity Awards at Fiscal Year-End
Option awards
Stock awards
Equity
Equity
incentive
Equity
incentive plan
plan
Market incentive plan awards: market
awards:
Number
value of
awards:
or payout
Number of
Number of
number of
of shares
shares
number of
value of
securities
securities
securities
or units
or units
unearned
unearned
underlying
underlying
underlying
of stock
of stock shares, units shares, units or
unexercised
unexercised
unexercised
Option
that have
that
or other rights other rights
options
options
unearned
exercise
Option
not
have not that have not that have not
(#)
(#)
options
price
expiration
vested
vested
vested
vested
Name
exercisable unexercisable
(#)
($)
date
(#)
(#)
(#)
($)
Robert H.
Miller(1)
666,700
333,300
-
0.60 December
11, 2019
-
-
-
-
Robert H.
Miller(1)
165,650
333,350
-
0.65 October 19,
2020
-
-
-
-
Andrew J.
Sherman
666,700
333,300
-
0.60 December
11, 2019
-
-
-
-
Stephen Goss
-
150,000
-
1.00 January 4,
2022
-
-
-
-
Mark
Sullivan
100,000
-
-
1.20 October 24,
2016
-
-
-
-
(1) Mr. Miller is the indirect, beneficial owner of these options.
(2) Mr. Chew resigned on January 4, 2012.
2009 Stock Option Plan
Our board of directors adopted and approved our 2009 Stock option Plan (“Plan”) on December 14,
2009, which provides for the granting and issuance of up to 10 million shares of our common stock. As
of September 11, 2012, we granted options to purchase 5,160,000 shares of common stock which were
outstanding at exercise prices of $0.60, $0.65, $0.75, $1.00, $1.01, $1.02, $1.03, $1.05, $1.07, $1.20, ,
$1.25, and $1.30 per share, which options vest over three years in equal increments. At September 11,
2012, 4,840,000 options remained available for future grant.
Our board of directors administers our Plan, however, they may delegate this authority to a committee
formed to perform the administration function of the Plan. The board of directors or a committee of the
board has the authority to construe and interpret provisions of the Plan as well as to determine the terms
of an award. Our board of directors may amend or modify Plan at any time. However, no amendment or
modification shall adversely affect the rights and obligations with respect to outstanding awards unless
the holder consents to that amendment or modification.
The Plan permits us to grant non-statutory stock options to our employees, directors and consultants.
The options issued under this Plan are intended to be non-statutory stock options exempt from Code
Section 409A. The duration of a stock option granted under our Plan cannot exceed ten years. The
exercise price of an incentive stock option cannot be less than 100% of the fair market value of the
common stock on the date of grant.
57
The Plan administrator determines the term of stock options granted under our Plan, up to a maximum
of ten years, except in the case of certain events, as described below. Unless the terms of an optionee's
stock option agreement provide otherwise, if an optionee's relationship with us ceases for any reason
other than disability or death, the optionee may exercise any vested options for a period of ninety days
following the cessation of service. If an optionee's service relationship with us ceases due to disability or
death the optionee or a beneficiary may exercise any vested options for a period of 12 months in the
event of disability or death.
Unless the Plan administrator provides otherwise, options generally are not transferable except by will,
the laws of descent and distribution, or pursuant to a domestic relations order. An optionee may
designate a beneficiary, however, who may exercise the option following the optionee's death.
Long Term Incentive Plan Awards.
We have no long-term incentive plans.
Termination of Employment and Change in Control Arrangements
The Company has no plans that provides for the payment of retirement benefits, or benefits that will be
paid primarily following retirement.
The Company has no agreement that provides for payment to any executive officer at, following, or in
connection with the resignation, retirement or other termination, or a change in control of Company or a
change in our executive officers’ responsibilities following a change in control.
58
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following table sets forth certain information concerning the ownership of the Company’s 61,465,445
shares of common stock issued and outstanding as of September 11, 2012 with respect to: (i) all directors;
(ii) each person known by us to be the beneficial owner of more than five percent of our common stock;
and (iii) our directors and executive officers as a group.
Title of Class
Name and Address of Beneficial
Amount and nature of
Percent of Class
Ownership
Beneficial Ownership1
Robert H. Miller
Common Stock
4801 Alhambra Circle
Coral Gables, Florida 33146
22,690,0002
36.9%
Andrew J. Sherman
Common Stock
9181 Boyer Lane
Kirtland Hills, Ohio 44060
03
0%
Stephen Goss
Common Stock
16373 Bridle Wood Circle
Delray Beach, Florida 33445
04
0%
David Charbonneau
Common Stock
9085 Ledgemont Drive
10,0005
<0.01%
Cleveland Ohio 44147
Jeffrey Webb
Common Stock
44 Oak Drive, Grand Cayman
Cayman Islands KY1 1107
10,0006
<0.01%
Common Stock
All Executive Officers and
Directors as a Group
22,710,000
36.9%
Maria Maz
Common Stock
4801 Alhambra Circle
22,690,0007
36.9%
Coral Gables, Florida 33146
Common Stock
Thomas and Mario Miller Family
Irrevocable Trust u/a/d 12/01/2009
5,250,0007
8.5%
(1) Beneficial ownership is determined in accordance with Commission rules and generally includes voting or investment power with respect to securities.
Shares of common stock subject to options, warrants and convertible preferred stock currently exercisable or convertible, or exercisable or convertible
within sixty (60) days, would be counted as outstanding for computing the percentage of the person holding such options or warrants but not counted as
outstanding for computing the percentage of any other person.
(2) Mr. Miller is a beneficial owner of 17,440,000 shares held by Ms. Maria Maz, to whom Mr. Miller is married, and the beneficial owner of 5,250,000
shares held by the Thomas and Mario Miller Family Irrevocable Trust u/a/d 12/01/2009, which trust’s beneficiaries are Mr. Miller’s children. See
footnote 7, below, for more details.
(3) Mr. Sherman was granted 1,000,000 options that vest in equal increments over three years to purchase shares of common stock at $0.60 per share on or
before December 14, 2019.
(4) Mr. Goss was granted 150,000 options that vest in equal increments beginning on January 5, 2013 over three years to purchase shares of common stock at
$1.00 per share on or before January 4, 2023.
(5) David Charbonneau was issued 10,000 common shares and granted 150,000 options that vest in equal increments beginning on September 15, 2012 over
three years to purchase common stock at $2.30 per share on or before September 14, 2022.
(6) Jeffrey Webb was issued 10,000 common shares and granted 150,000 options that vest in equal increments beginning on August 7, 2013 over three years
to purchase common stock at $1.90 per share on or before August 6, 2023.
(7) Ms. Maz directly owns 17,440,000 shares and indirectly owns 5,250,000 shares held by the Thomas and Mario Miller Family Irrevocable Trust u/a/d
12/01/2009, which trust’s beneficiaries are Ms. Maz’s children. Ms. Maz is the indirect owner of 1,000,000 options, owned by Prosper, to purchase
common stock at $0.60 per share before December 14, 2019, one third of which vests each year beginning on December 14, 2010. Ms. Maz is the indirect
owner of 500,000 options, owned by Prosper, to purchase common stock at $0.65 per share before October 19, 2020, one third of which vest each year
beginning on October 19, 2011.
59
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND
DIRECTOR INDEPENDENCE
Neither our director or executive officer, nor any proposed nominee for election as a director, nor any
person who beneficially owns, directly or indirectly, shares carrying more than 5% of the voting rights
attached to all of our outstanding shares, nor any members of the immediate family (including spouse,
parents, children, siblings, and in-laws) of any of the foregoing persons has any material interest, direct or
indirect, in any transaction in the period covered by this report or in any presently proposed transaction
which, in either case, has or will materially affect us, except as follows.
On August 7, 2012, we entered into a board of director’s compensation agreement with Jeffrey Webb,
pursuant to which agreement Mr. Webb was issued 10,000 shares of common stock and granted 150,000
stock options at an exercise price of $1.90 per share for a period of ten years that vest in equal amounts
over three years from the date of grant.
On June 15, 2012, we entered into a board of director’s compensation agreement with David
Charbonneau pursuant to which agreement Mr. Charbonneau was issued 10,000 shares of common
stock, granted 150,000 stock options at an exercise price of $2.30 per share for a period of ten years that
vest in equal amounts over three years beginning on September 15, 2012, an annual fee of $15,000 paid
in four installments and up to $4,500 in 2012 for continuing education expenses in accountancy.
On January 5, 2012, we entered into a stock option agreement with Stephen Goss in connection with his
service as a director, pursuant to which agreement Mr. Goss was granted 150,000 stock options at an
exercise price of $1.00 per share for a period of ten years that vest in equal amounts over three years
from the date of grant.
On October 24, 2011 we entered into a resignation and separation agreement with Mr. Sullivan, our
former chief financial officer in connection with his resignation. The terms of the settlement agreement
included a vested grant of 100,000 stock options to purchase shares of the Company’s common stock at
an exercise price of $1.20 a share as part of his agreement to cancel the 400,000 stock options granted
pursuant to his employment agreement.
On June 14, 2011 we entered into a subscription agreement with Mark Sullivan, a former executive
officer, to purchase 115,000 shares of our common stock and 57,500 share purchase warrants, which
purchase was pursuant to a private placement offering at $1.00 for one share and one half share purchase
warrant. Each whole warrant allows the grantee to purchase one share of the Company’s common stock
for $1.50 within two years of the date of grant.
On June 1, 2011, we entered into a consulting agreement with Robert Miller to provide services as our
Chief Executive Officer. The terms of the consulting agreement included a fee of $10,000 per month for
a term to expire on June 1, 2012. We also agreed to reimburse Mr. Miller for all reasonable business
expenses incurred by him in the performance of his duties. The agreement also has a provision to
automatically renew for subsequent annual terms unless terminated in writing by either party. Mr.
Miller’s agreement was renewed for an additional annual term on June 1, 2012.
60
Director Independence
Our common stock is quoted on the OTCQB electronic quotation system, which does not have director
independence requirements. Nonetheless, for the purposes of determining director independence, we have
applied the definitions set out in NASDAQ Rule 4200(a) (15), pursuant to which rule a director is not
considered independent if he or she is also an executive officer or employee of the corporation.
Accordingly, the Company deems Mr. Goss, Mr. Charbonneau and Mr. Webb to be independent
directors.
ITEM 14.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
The following is a summary of the fees that are billed to us by our auditors for professional services
rendered for the past two fiscal years:
Fee Category
Fiscal 2012 Fees ($) Fiscal 2011 Fees ($)
Audit Fees
59,000
25,000
Audit-Related Fees
0
0
Tax Fees
0
0
All Other Fees
0
0
Audit fees consist of fees billed for professional services rendered for the audit of our financial statements
and review of the interim financial statements included in quarterly reports and services that are normally
provided by Skoda Minotti & Co., Certified Public Accountants (“Skoda”), since July 19, 2011 in
connection with statutory and regulatory filings or engagements.
Audit Committee Pre-Approval
The Company did not have a standing audit committee at the time of the engagement of Skoda.
Therefore, all services provided to us by Skoda, as detailed above, were pre-approved by our board of
directors. Skoda performed all work only with their permanent full time employees.
61
PART IV
ITEM 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Financial Statements
The following documents are filed under Item 8. Financial Statements and Supplementary Data, pages
F-1 through F-54, and are included as part of this Form 10-K:
Financial Statements of the Company for the years ended May 31, 2012 and 2011:
Report of Independent Registered Public Accounting Firm
Balance Sheets
Statements of Operations
Statements of Stockholders’ Equity
Statements of Cash Flows
Notes to Financial Statements
(b) Exhibits
The exhibits required to be attached by Item 601 of Regulation S-K are listed in the Index to Exhibits on
page 64 of this Form 10-K, and are incorporated herein by this reference.
(c) Financial Statement Schedules
We are not filing any financial statement schedules as part of this Form 10-K because such schedules are
either not applicable or the required information is included in the financial statements or notes thereto.
62
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant
has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Abakan Inc.
Date
/s/ Robert H. Miller
September 11, 2012
By: Robert H. Miller
Its: Chief Executive Officer, Chief Financial Officer, Principal
Accounting Officer and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Date
/s/ Robert H. Miller
September 11, 2012
Robert H. Miller
Chief Executive Officer, Chief Financial Officer, Principal Accounting
Officer and Director
/s/ Andrew Sherman
September 11, 2012
Andrew Sherman
Director
/s/ Stephen Goss
September 11, 2012
Stephen Goss
Director
/s/ David Charbonneau
September 11, 2012
David Charbonneau
Director
/s/ Jeffrey Webb
September 11, 2012
Jeffrey Webb
Director
63
INDEX TO EXHIBITS
Exhibit No.
Exhibit Description
3.1*
Articles of Incorporation and Certificate of Amendment, incorporated hereto by reference to
the Form SB-2, filed with the Commission on June 19, 2007.
3.2*
Bylaws, incorporated hereto by reference to the Form SB-2, filed with the Commission on
June 19, 2007.
10.1*
Lease Agreement between Powdermet and Sherman Properties, LLC dated March 7, 2007,
incorporated hereto by reference to the Form 10-K filed with the Commission on September
13, 2011.
10.2*
License agreement between MesoCoat and Powdermet dated July 22, 2008, incorporated
hereto by reference to the Form 10-K/A-2 filed with the Commission on December 27, 2011.
10.3*
Exclusive license between MesoCoat and UT-Battelle, LLC, dated September 22, 2009,
incorporated hereto by reference to the Form 10-K/A-2 filed with the Commission on
December 27, 2011.
10.4*
Articles of Merger dated November 9, 2009, incorporated hereto by reference to the Form 8-
K filed with the Commission on December 9, 2009.
10.5*
Agreement and Plan of Merger dated November 9, 2009, incorporated hereto by reference to
the Form 8-K filed with the Commission on December 9, 2009.
10.5*
Consulting agreement dated December 1, 2009, between the Company and Mr. Greenbaum,
incorporated hereto by reference to the Form 8-K filed with the Commission on May 28,
2010.
10.7*
Employment agreement dated December 1, 2009, between MesoCoat and Andrew Sherman,
incorporated hereto by reference to the Form 10-K filed with the Commission on September
13, 2011.
10.8*
Consulting agreement date December 1, 2009 between the Company and Prosper Financial
Inc., incorporated hereto by reference to the Form 10-K filed with the Commission on
September 13, 2011.
10.9*
Consulting agreement dated December 8, 2009 between the Company and Robert Miller,
incorporated hereto by reference to the Form 10-K filed with the Commission on September
13, 2011.
10.10*
Investment Agreement dated December 9, 2009, between the the Company, MesoCoat and
Powdermet, incorporated hereto by reference to the Form 8-K filed with the Commission on
December 17, 2009.
10.11*
Agreement date March 17, 2010 between the Company and Sonnen Corporation,
incorporated hereto by reference to the Form 10-K filed with the Commission on September
13, 2011.
10.12*
Agreement dated April 30, 2010 between the Company and Mr. Buschor, incorporated hereto
by reference to the Form 8-K filed with the Commission on May 11, 2010.
10.13*
Commercial lease agreement date June 1, 2010, between Powdermet and MesoCoat,
incorporated hereto by reference to the Form 10-K filed with the Commission on September
13, 2011.
10.14*
Stock Purchase Agreement dated June 29, 2010 between the Company and Kennametal,
incorporated hereto by reference to the Form 8-K filed with the Commission on September
15, 2010.
10.15*
Employment agreement dated August 20, 2010, between the Company and Mr. Takkas,
incorporated hereto by reference to the Form 8-K filed with the Commission on August 26,
2010.
64
10.16*
Amendment No. 1 to Stock Purchase Agreement between the Company and Kennametal
dated September 7, 2010, incorporated hereto by reference to the Form 8-K filed with the
Commission on September 15, 2010.
10.17*
Amendment to the Investment Agreement dated December 8, 2010, between the Company,
MesoCoat and Powdermet, incorporated hereto by reference to the Form 10-Q filed with the
Commission on January 19, 2011.
10.18*
Cooperation Agreement between MesoCoat and Petroleo Brasileiro S.A. dated January 11,
2011, incorporated by reference to the Form 8-K/A-3 filed with the Commission on March 6,
2012. (Portions of this exhibit have been omitted pursuant to a request for confidential
treatment.)
10.19*
Amendment No. 2 to Stock Purchase Agreement between the Company and Kennametal
dated January 19, 2011, incorporated hereto by reference to the Form 8-K filed with the
Commission on July 13, 2011.
10.20*
Accord and Satisfaction Agreement dated March 21, 2011 between the Company and
Kennametal, Inc., incorporated hereto by reference to the Form 8-K filed with the
Commission on March 25, 2011.
10.21*
Assignment Agreement dated March 25, 2011 with Polythermics LLC and MesoCoat,
incorporated hereto by reference to the Form 10-Q/A filed with the Commission on
September 27, 2011.
10.22*
Exclusivity Agreement between MesoCoat and Mattson Technology, Inc. dated April 7,
2011, incorporated hereto by reference to the Form 8-K/A-3 filed with the Commission on
March 6, 2012. (Portions of this exhibit have been omitted pursuant to a request for
confidential treatment.)
14
Code of Business Conduct & Ethics adopted on June 13, 2012, attached.
21
Subsidiaries of the Company, attached.
31
Certification of the Chief Executive Officer and Chief Financial Officer pursuant to Rule
13a-14 of the Exchange Act as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002, attached.
32
Certification of the Chief Executive Officer and Chief Financial Officer pursuant to 18
U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
attached.
99
Powdermet audited financial statements for the period ended May 31, 2012, attached.
101. INS XBRL Instance Document†
101. PRE XBRL Taxonomy Extension Presentation Linkbase†
101. LAB XBRL Taxonomy Extension Label Linkbase†
101. DEF XBRL Taxonomy Extension Label Linkbase†
101. CAL XBRL Taxonomy Extension Label Linkbase†
101. SCH XBRL Taxonomy Extension Schema†
*
Incorporated by reference to previous filings of the Company.
†
Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed “furnished”
and not “filed” or part of a registration statement or prospectus for purposes of Section 11 or
12 of the Securities Act of 1933, or deemed “furnished” and not “filed” for purposes of
Section 18 of the Securities and Exchange Act of 1934, and otherwise is not subject to
liability under these sections.
65
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