Converted by EDGARwiz

10-K 1 abakan10k.htm ABAKAN 10K 31ST MAY 2012 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.

TABLE OF CONTENTS

PART I

Item1.

Business

Item 1A. Risk Factors

Item 1B. Unresolved Staff Comments

Item 2.

Properties

Item 3.

Legal Proceedings

Item 4.

Mine Safety Disclosure

PART II

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of

Equity Securities

Item 6.

Selected Financial Data

Item 7.

Management's Discussion and Analysis of Financial Condition and Results of Operations

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

Item 8.

Financial Statements and Supplementary Data

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

Item 9A.

Controls and Procedures

Item 9B. Other Information

PART III

Item 10.

Directors, Executive Officers, and Corporate Governance

Item 11.

Executive Compensation

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Item 13.

Certain Relationships and Related Transactions, and Director Independence

Item 14.

Principal Accountant Fees and Services

PART IV

Item 15.

Exhibits, Financial Statement Schedules

Signatures

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.

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.

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).

CermaClad^TM 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.

• 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.

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.

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.

• 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

PComP™ Coating Services

Market Entry

CermaClad™ CR

Market Entry

CermaClad™ CR

Full Scale Production

16-18

CermaClad™ WR

Market Entry

CermaClad™ WR

Full Scale Production

18-20

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.

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.

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.

• 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.

• 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.

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.

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.

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.

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.

• 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.

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.

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.

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.

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.

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.

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.

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.

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.

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:

• 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

ITEM 3.

LEGAL PROCEEDINGS

None.

ITEM 4.

MINE SAFETY DISCLOSURE

Not applicable.

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.

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.

• 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.

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.

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

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

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

Exemption

Financial Insights

Services

12,500

Sec. 4(2)/Reg D

Livingston Securities