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, 2013.
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. Accelerated filer 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 (41,554,855 shares) was $106,588,203 based on the average of the bid and ask price ($2.565) for the common stock on
August 27, 2013.
At August 29, 2013, the number of shares outstanding of the registrant’s common stock, $0.0001 par value (the only class of
voting stock), was 64,284,855.
1
TABLE OF CONTENTS
PART I
Business
3
Item 1A. Risk Factors
27
Item 1B. Unresolved Staff Comments
31
Properties
31
Legal Proceedings
32
Mine Safety Disclosure
32
PART II
Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of
33
Equity Securities
Selected Financial Data
38
Management's Discussion and Analysis of Financial Condition and Results of Operations
39
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
46
Financial Statements and Supplementary Data
47
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
48
Controls and Procedures
48
Item 9B. Other Information
49
PART III
Directors, Executive Officers, and Corporate Governance
50
Executive Compensation
58
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
62
Matters
Certain Relationships and Related Transactions, and Director Independence
63
Principal Accountant Fees and Services
64
PART IV
Exhibits, Financial Statement Schedules
65
66
2
As used herein the terms “Company,” “we,” “our,” and “us” refer to Abakan Inc. unless context
indicates otherwise.
ITEM 1.
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 designs, develops, manufactures, and markets advanced nanocomposite materials,
innovative fabricated metal products, highly engineered metal composites, and engineered
reactive materials for applications in the oil and gas, petrochemical, mining, aerospace and defense,
energy, infrastructure and processing industries. Our technology portfolio currently includes high-speed,
large-area metal cladding technology, long-life nanocomposite anti-corrosion and-wear coating
materials, high-strength, lightweight metal composites, and energetic materials. Operations are
conducted through our subsidiary, MesoCoat, Inc. (“MesoCoat”) and our affiliate, Powdermet, Inc.
(“Powdermet”).
The Company holds a 52.5% controlling interest in MesoCoat and a 41% non-controlling interest in
Powdermet. Powdermet directly owns the remaining 47.5% of MesoCoat. The Company’s interest in
Powdermet represents an additional 19.5% indirect interest in MesoCoat. The combined direct and
indirect interest equals a total 72.0% ownership of MesoCoat by the Company.
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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 Investment Agreement, MesoCoat
was owned 100% by Powdermet. Powdermet was owned 52% by Andrew Sherman, 41% by
Kennametal, Inc. (an unrelated company) and 7% by other unrelated parties. Andrew Sherman was the
CEO and director of both MesoCoat and Powdermet and became a director of the Company on August
20, 2010.
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 18.5% equity
interest for $2,800,000 on July 13, 2011 thereby increasing its direct ownership of MesoCoat to a fully
diluted 52.5% interest.
The Investment Agreement, as amended, provides us with additional options to increase our equity
interest in MesoCoat, as follows:
§ An option which entitles the Company to purchase an additional 24% equity interest in exchange
for $16,000,000, of which approximately $4,000,000 has been provided to MesoCoat as of May
31, 2013. 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 intending to become 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 technology transfer, and a
manufacturing support agreement.
4
MesoCoat has exclusively licensed and developed a proprietary metal cladding application process as
well as advanced nano-composite coating materials that combine corrosion and wear resistant alloys, and
nano-engineered cermet materials with proprietary high-speed coating or cladding application systems.
The result is protective cladding solutions 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. Ten of MesoCoat’s products (3 Corrosion Resistant Alloy (CRA)
materials (625,825, 316L), 3 Wear Resistant Alloy (WRA) material. (Tungsten Carbide (WC), Chrome
Carbide (CRC), Structurally Amorphous Metal (SAM) Alloys) and 3 PComP™ product families
(PComP™T, PComP™ S and PComP™ M) are currently undergoing extensive testing by oil and gas
majors, pipe manufacturers, oil field equipment manufacturing and service companies, original equipment
manufacturers (OEMs) and other end users.
MesoCoat’s commercial revenues are comprised of sales of the PComP™ powder and thermal spray
applications. The company also generates revenue from grants that are awarded to further the
development of various products. PComP™ is a family of nanocomposite cermet coating materials that
are used to impart wear and corrosion resistance, and to restore dimensions, of worn metal components.
CermaCladTM clad products are in the development and qualification stage and are nearing
commercialization, including the cladding of the inside of a full length pipe for the oil and gas industries.
MesoCoat has expanded its technical team to complete the various developments and is working towards
the expansion of the PComP™ powder and coating services.
PComP™
PComP™ is a family of nanocomposite cermet coating materials that are used to impart wear and
corrosion resistance and to restore dimensions of worn metal components. Named for its particulate
composite powders, PComP™, is the result of over a decade of nanoengineered materials development,
and is now one of the few commercially viable industry replacement solutions for hard chrome and
carbides.
PComP™ competes against thermally sprayed carbide and other coatings such as chrome and nickel
plating in the $32 billion dollar (source, BCC Inc.) inorganic metal finishing market. Competing
materials like hexavalent chrome, carbides and tungsten carbide-cobalt have become a major concern 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 many countries. While businesses grapple with the need to
transition away from these harmful products, they continue to spend billions on these materials despite the
harm done to the environment. The adoption of green products and processes such as PComP™ thermal
spray coatings would place the business at a competitive advantage over destructive solutions while at the
same time mitigating environmental liabilities. PComP™ thermal spray coatings comprise a performance
leading solution platform which has shown order of magnitude improvements in head to head wear and
corrosion performance tests while offering a significantly better value proposition over other hard chrome
alternatives.
5
Under the PComP™ platform, MesoCoat has developed and patented a family of corrosion resistant and
wear resistant coating solutions that combine extreme corrosion and/ or 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 increases. However, by combining nano-
level structure control and advanced ductile phase toughening materials science, MesoCoat has developed
a material structure that can be both very tough and very wear resistant (hard). Equally important, the
hardness of a wear coating normally limits the ease with which it can be machined. The unique
hierarchical structure of the PComP™ coating solutions results in a coating that can be machined through
a finish grinder much faster than a product with a traditional carbide coating which needs to be diamond
ground. 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 produces a coating that is self-smoothing in service,
resulting in friction properties approaching those of diamond-like carbon films and solid lubricants, 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. This low friction property reduces wear, and improves energy efficiency
and life in sliding components such as drilling rotors, plungers, mandrels, ball and gate valves, rotating
and sliding seals, and metal processing equipment.
The PComP™ product platform, combined with metal finishing applications of the large area weld
overlay technologies underlying the CermaClad™ clad steel product family provides a high degree of
product differentiation and a sustainable competitive advantage, which includes OEM components and
the maintenance, repair, and overhaul of industrial assets and machinery in the “components
manufacturing and repair” segment of MesoCoat’s business (as opposed to the clad steel business lines
discussed under the CermaClad™ product line below).
MesoCoat is completing expansion of its production capacity for PComP™ powders from 3 tons to 18
tons/year, to meet initial demand from current customers and intends to further expand the PComP™
production capacity from 18 tons to 180 tons/year to serve the expected demand of prospective customers.
The process of installing the equipment necessary to meet this objective is underway in MesoCoat’s
Euclid, Ohio plant.
MesoCoat now has a 1-cell thermal spray coating facility operational in Ohio for coating mid-sized
components that has been used for qualifying coatings with early adopters. The plan is to expand this
capacity to set-up two additional thermal spray coating cells and other pre- and post-finishing equipment
to provide full coating service for large components like mandrels, plungers, valves, rods, stabilizer rolls,
mine truck wheels and other equipment. MesoCoat’s wholly-owned subsidiary MesoCoat Coating
Services, Inc. was formed in June 2013 to extract maximum value from the PComP™ family by offering
high margin coating services starting late 2013.
6
MesoCoat is currently selling PComP™ advance coating materials through different channels that are
appropriate to the specific market. Large OEM’s and government agencies like the U.S. Air Force procure
raw powders and apply them for their specific products under license as such agencies are vertically
integrated to perform their own thermal spray and coating applications using dedicated maintenance and
repair depots. Recently, several defense organizations have been given congressional mandates to make
better use of their existing equipment (planes, helicopters, jets, tanks and other armored vehicles, etc.) as
budgets for the purchase of new equipment is to be limited over the next few years. MesoCoat’s low-cost,
long-life coating materials appeal to government buyers striving to meet budgetary restrictions.
An effort to expand geographically the market for our coating services is now underway. MesoCoat is
actively qualifying licensed application partners that have an existing customer base, in certain territories
(Houston, Alberta, and Los Angeles), to provide coating services in territories in which it is not currently
able to service directly. We believe that this strategy is the fastest way to gain market entry into these
territories, while supporting economies of scale for the powder production needed to meet product cost
targets. Eventually, we expect that the majority of MesoCoat’s commercial sector accounts will be able
to order coating application services from it on a regional basis.
The PComP™ family of nanocomposite coatings currently consists of five products, not including
variation in composition, 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 these, and several other alternatives are
as follows:
Wear and Corrosion Resistance and Dimensional Restoration
PComP™ T is a titanium carbo-nitride based high corrosion/wear resistant, low friction high velocity
oxygen fuel (HVOF) coating that competes with hard chrome and diamond like carbon 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 Caterpillar).
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™ 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.
7
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.
Liquid Metal Corrosion
PComP™ -M is a hierarchically structured molybdenum boride coating designed for use in liquid metal
corrosion application, especially the rolls used in galvanizing baths. PComP™ -MB has completed
laboratory and initial field testing with several end users, such as CAL-steel, confirming internal results
showing more than two and one half times the life of other developmental coatings in galvanizing lines,
and ten times the resistance of widely used tungsten carbide (“WC”) coatings to molten metal erosion and
wear. MesoCoat is introducing its PComP™ -MB product line into the $150+ million primary metals
production equipment coatings market, with an initial focus on zinc pot stabilizer roll and pot bearing roll
refurbishment market in conjunction with MesoCoat’s market entry into the coating services market.
Thermal Barrier Coatings
ZComP™ is MesoCoat’s nanocomposite thermal barrier coatings that offers 50% lower thermal
conductivity, with improved toughness and cyclic thermal life compared to conventional thermal barrier
coatings in the $500 million thermal barrier coatings market. MesoCoat has been actively forming
partnerships to introduce ZComP materials into the turbine engine market, and is working with its
Powdermet affiliate under completed or in-progress contracts with the Department of Energy for power
turbines, the Air Force (Oklahoma Air Logistics Center), the Ohio Aerospace Institute (OAI), General
Dynamics Information Systems, and under a Space Act agreement with NASA for propulsion turbine
applications of engineered nanocomposite thermal barrier coatings.
CermaClad™
CermaClad™ is a multiple award winning technology used to produce coatings that protect metal,
primarily carbon steel, from wear and corrosion, that offers the benefits of corrosion resistant alloys such
as stainless steel, nickel, or titanium and wear resistant alloys such as tungsten carbide and chrome
carbide at a significantly lower cost by permanently altering, or cladding, the surface of a high strength,
low cost carbon steel with a layer of a much higher cost wear or corrosion resistant alloy. The result is a
hybrid product offering the wear and corrosion performance of costly alloys with the ease of fabrication
and the lower cost of traditional steel material.
8
Cladding refers to the process where a high performance wear or corrosion resistant metal alloy or
composite (the cladding material) is applied through the use of high pressure and/ or high temperature
processes onto another dissimilar metal (the base metal or substrate) to enhance its durability, strength or
appearance. The majority of clad products produced today use carbon steel as the substrate and nickel
alloys, stainless steel, or various hard materials such as chrome carbides as the clad layer to protect that
underlying steel base metal from the environment it resides in. MesoCoat is utilizing a unique, patented,
“High Density Infrared” or HDIR technology, exclusively licensed from Oak Ridge National Laboratory
(“ORNL”) to produce clad steel. Testing by ORNL has shown that this HDIR technology is capable of
applying a very high quality cladding at 10 to 40 times higher productivity (100’s of Kg’s versus 3-
20Kg/hr) than traditional laser bead or weld cladding techniques, in current wide commercial use.
MesoCoat believes that this HDIR process represents the first truly scalable, large area cladding
technology. Scalable, low capital cost cladding technology then enables the production of large volumes
of customized, premium, high margin clad steel products.
CermaClad™ clad steel is a premier, metallurgically bonded, clad carbon steel materials solution that is
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, and other steel infrastructure. In corrosive environments, including
seawater, road salt, mining slurry transport lines, unprocessed oil containing water, sulphides 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
increase capital costs. Clad steel, and CermaClad™ in particular, offer a competing, lower cost solution
to these exotic alloys, allowing the owner or operator to use clad carbon steel which typically costs about
half of solid CRA. Combining the reduced material cost with reduced fabrication, installation, and
maintenance costs, cladding solutions such as CermaClad™ are estimated to save up to 75% over the cost
of using solid alloys, while still providing essentially maintenance free corrosion lifetimes equal to the life
of the asset. In the last 20 years, clad steel pipe has gained wide acceptance and continually increased its
market share in oil and gas exploration and production, marine transportation, mining, petrochemical
processing and refining, nuclear, paper and pulp, desalination, and power generation industries. The oil
and gas industry is the largest consumer of clad steel products. In order to meet growing global energy
demands, oil companies continue to extend their offshore drilling efforts into deeper waters farther from
shore. The higher temperatures and corrosivity (carbon dioxide, sea water, and hydrogen sulfide content)
of these new reserves are resulting in a significantly increased use of corrosion resistant alloys - and there
lower-cost clad steel alternatives.
Currently used cladding processes include weld overlay, roll-bonding, co-extrusion, explosion cladding,
and mechanical lining. While cladding carbon steel pipes is cheaper than using a solid stainless steel
alloy, current production technologies still have significant limitations which CermaClad is believed to
overcome. Directly comparable Metallurgical clad pipes are primarily manufactured using roll-bonded
clad plate which is then bent and welded to form a pipe. Though a higher productivity process, Roll-
bonded pipe involves a lot of welded area and the failure of that weld is the single most common reason
for pipeline leaks. Furthermore, current bimetal rolling mills are limited to around 5ft in width by 40ft in
length, limiting the size of pipe that can be fabricated without extensive welds. Expanding roll mill size
to enable the production of larger diameter pipe needed for large gas projects in Southeast Asia would
require very large investments, estimated to be in excess of a $1billion compared to a planned $40M
investment in an 8-line CermaClad™ large diameter pipe production facility expected to be constructed
on Bantam Island, Indonesia.
9
Mechanically lined (bi-metal) pipe now makes up a significant portion of the clad pipe market. Bimetal
pipe is lower in cost than metallurgically clad pipe, but provides only a mechanical attachment between
the inner and outer pipe. This reduced bonding results in a higher risk of buckling, wrinkling and
disbonding when under stress, such as during bending, reeling, or application of external coatings on
these pipes. Mechanically lined pipes also raise concerns with respect to uniformity and reliability in that
the gap between the inner and outer pipes, coupled with the mixture of materials, leads to challenges in
NDT (non-destructive testing) inspections. Co-extrusion is another process that involves extruding a
bimetal billet into a clad pipe. Co-extrusion has not been successful in producing long lengths of larger
diameter pipes, and would require significant capital investment and further technology development to
meet growing demand for the thicker wall and larger diameter clad pipes that CermaClad™ is targeted.
The remaining production process, weld overlay, does not have the productivity needed to meet clad pipe
demand, and is primarily used for smaller diameter and complex shapes, such as manifolds and
“Christmas tree’s” used in oil and gas, although weld overlay is a dominant technology for wear resistant
overlays that cannot be produced by the other techniques.
Worldwide, there is a large and growing need for clad pipes as deeper and hotter, corrosive reserves come
into production. Current production methods not only have the above limitations, but plants are
operating at capacity, creating an increasing tight supply and lead-times of 2 years or more to delivery. A
number of organizations have stated that the market for clad pipe is expected to grow from $1.5 billion to
$2 billion per year currently, to $4 billion to $8 billion within 3 to 4 years.
CermaClad™ clad steel utilizes MesoCoat’s proprietary cladding process based on the use of a high-
intensity arc lamp to rapidly melt, fuse, and metallurgically bond (make inseparable) the protective,
proprietary cladding materials onto steel pipes and tubes (internal and external surfaces), plates, sheets,
and bars. The CermaClad™ clad steel product portfolio combines this high-speed fusion cladding process
with proprietary corrosion resistant alloy (“CRA”) and wear resistant alloy (“WR”) coating materials
which incorporate patented microstructural and compositional modifications. The HDIR process melts
and fuses material onto the inside of a pipe within seconds to produce the CermaClad product that offers a
seamless metallurgical bond, a smooth surface, low porosity, and minimal dilution of the overlay, along
with good strength retention of the substrate . More importantly, CermaClad™ clad pipe is easier to
inspect and install (reel) irrespective of the size and thickness of the pipe compared to current alternatives.
Today, clad steel is a specialized, profitable segment of the steel industry where demand has outstripped
supply and margins are high as a result. Management believes that the CermaClad™ process is scalable
to large volumes with a modest capital investment that is lower than that invested in existing production
methods.
Historically, the typical contract for clad pipe was for 3 to 5 kilometers of product with larger contracts
for 20 to 30 kilometres of product. Currently, typical requirements are for tens of kilometres with growing
numbers of projects needing hundreds of kilometres per project. As a result the clad pipe market is
growing rapidly and the limitations of current solutions in terms of installation, inspectability, quality, and
availability are restraining this growth. Full commercialization of CermaClad™ clad pipes can address
these constrains to clad pipe market growth.
Management believes the competitive advantages of CermaClad™ over current competing technologies
and products are:
§ CermaClad™ and other clad steel products are typically used where they are offered at a 25% to
more than 50% lower cost than solid alloy products.
10
§ CermaClad™ clad steel provides a metallurgically bonded overlay, making the clad pipes easier
to inspect, bend, reel, and install compared to the widely used and slightly lower cost
mechanically bonded clad pipes.
§ CermaClad™ clad steel offers a seamless metallurgical cladding requiring only girth welds,
unlike the pipes made from metallurgically clad plates which have longitudinal welds
§ CermaClad™ application technology utilizes a 30cm wide, high density, infrared “lamp”
compared to a 0.7 cm wide laser “torch” for laser or inert gas welding torches, resulting in
application rates between one and two orders of magnitude higher than current weld overlay
technologies.
§ The proprietary process used to make CermaClad™ clad steel products is more flexible (it can do
both wear and corrosion resistant alloys, for example), and has relatively low capital costs for
initial and added capacity. This provides the advantage of being able to respond to customer
needs, such as meeting local content requirements, faster and with less investment risk than
currently established alternatives.
§ CermaClad™ products exceed the requirements of the defining API 5LD and DNV OS F101
standard requirements for clad pipe.
§ CermaClad™ offers a smoother surface, minimal dilution, greater flexibility in materials, and the
ability to do thinner, lower cost claddings than current production technologies.
The CermaClad™ clad steel product lines under development include:
§ CermaClad™ CRA (Corrosion Resistant Alloys). 1-4mm thick CRA clad steel that offers a lower
cost alternative to solid nickel, stainless steel, and titanium alloys for oil and gas, mining,
desalination, pulp and paper, and chemical process.
§ CermaClad™ WR (Wear Resistant). 1-15mm thick carbide, metal matrix composite, structurally
amorphous metal, and nanocomposite wear resistant clad steel that extends the life of steel
structures such as hydrotransport slurry lines, pump components, valve components, spools, T’s,
and elbows for oil sands, heavy oil, mining and mineral processing.
§ CermaClad™ HT (High Temperature). Steel clad with nickel-chromium and metal-chromium-
aluminum alloys for high temperature applications such as heat exchanger tubing, boiler
waterwalls, 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). Lower cost thin-clad steel that exploits the unique high purity
capabilities of the HDIR application process to provide thin (less than 0.5mm) claddings that
provide 50-200 year corrosion free life in atmospheric and seawater corrosion environments.
This “stainless steel paint” is applicable to the outside diameter transportation pipelines, marine
structures, fuel and cargo tanks, bridges, architectural steel, and transportation structures.
Product Development Timeline
MesoCoat’s PComP™-W high performance materials are now established with initial customers and
adoption is expected to increase through qualified regional application partners, with capacity being
expanded to match growing demand. PComP™-T best-value chrome plating products are still in
qualification and limited to beta release though coating applicators have been partnered with an original
equipment manufacturer. A six fold capacity expansion and the introduction of higher value application
(component) services is underway to be completed in the second half of 2013. The CermaClad™
corrosion resistant (CRA) product is expected to enter the market in the fourth quarter of 2013.
11
PRODUCT
COMMERCIAL TIMELINE
TIME
(MONTHS)
PComP™ W
Growth and expansion
Current
PComP™ T
Partner sales
Current
PComP™ M
Market entry
2
PComP™ S
Qualification
12
ZComP™
Development
24
CermaClad™ WR
Development
14
CermaClad™ LT
Development
24
ZComP™
Development
24
CermaClad™ HT
Incubation
36
Product Commercial Expansion Timeline
Our near term plan is to expand the presence of our products into Brazil and the Asia-Pacific market. We
remain in the process of negotiating the terms of a “build to suit” agreement to construct a manufacturing
plant in the Recife, Brazil free trade zone that might give us direct access to Brazilian markets.
Meanwhile, we have incorporated an Asian operating subsidiary, PT MesoCoat Indonesia, which is
currently negotiating the terms of a “build-to-suit” agreement to construct a manufacturing plant on the
island of Batam, Indonesia. The expected time-frame for the completion of each project has not yet been
finalized.
PRODUCT
COMMERCIAL EXPANSION
TIME
TIMELINE
(MONTHS)
PComP™ Coating Services Market entry
3
CermaClad™ CRA
Market entry
4
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
47.50% 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 producing the first 50 tons of PComP™
powders. The license agreement will end upon the last valid claim of licensed patents to expire unless
terminated earlier with the terms of the agreement.
12
MesoCoat's exclusivity agreement with Mattson Technology, Inc.
On April 7, 2011, MesoCoat and Mattson Technology Inc. (“Mattson”) entered into an Exclusivity
Agreement whereby MesoCoat agreed to exclusively purchase, and Mattson agreed to exclusively supply,
plasma arc lamps systems. The Exclusivity Agreement contemplated that the MesoCoat and Mattson
would enter into a separate supply agreement that fixed additional terms of the sale and purchase of the
plasma arc lamps. Mattson has to date failed to enter into a supply agreement with MesoCoat and has
been noticed to be in breach of the terms of the Exclusivity Agreement and related purchase orders.
Mattson has committed to rectify the problems outlined in MesoCoat’s breach letter.
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 license, executed on March 7, 2011, that 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 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. MesoCoat has met the aforesaid conditions of the license
agreement.
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.
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 Cooperation Agreement was initially for 18 months during which
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 a feasibility demonstration designed to
verify that the CermaClad™ process and resultant materials were compliant with industry standards and
acceptable for clad pipe use. Phase II was the development of a prototype pipe cladding facility that could
clad the inner surface of a 10 inch diameter pipe, and then verify that the CermaClad™ process as applied
to prototype pipes was suitable for application to line pipe in accordance with current industry standards.
The prospective third phase would be to finalize the design and construction of a clad pipe manufacturing
facility in Brazil with the capacity of producing cladding on the interior diameter of pipes and tubes with
section lengths of 12 meters.
13
The immediate objective of the Cooperation Agreement, subject to obtaining successful results, in each of
Phase I and II, is that the CermaClad™ product and samples meet the American Petroleum Institute
(API) 5LD and Det Norte Veritas (DNV) OS F101 standard requirements. API and DNV approvals
would, assuming the completion of a suitable manufacturing facility as anticipated by the prospective
third phase, permit MesoCoat’s market entry into the oil and gas industry and cause full scale production
activities.
MesoCoat has successfully completed Phase I of the Cooperation Agreement by demonstrating that the
CermaClad™ process is capable of producing clad steel products that meet API 5LD and DNV OS F101 -
Specifications for CRA clad steel pipe on flat plate coupons.
MesoCoat completed the major objectives of Phase II with the design, fabrication, installation, and initial
operation of a prototype ID cladding system in our Eastlake, Ohio facility, which became operational in
April, 2012. Clad sections of pipe were prepared and tested against API and DNV standards, resulting in
proof of capability that the pipe cladding system could produce sections of clad pipe product compliant
with industry standards. To expand the time available for testing, the development agreement was
extended by six months until January, 2013. The Phase II final report was submitted in November 2012,
including equipment and facility designs and plant layouts for a 4-line Brazilian production facility.
In January of 2013 Petrobras and MesoCoat agreed to a further nine month extension and an expanded
scope of development work to include the addition of thermal modeling and imaging to enhance
instrumentation and other controls of the pipe cladding process, prior to the delivery of clad pipe sections
for qualification testing. This expanded scope was designed to provide defect-free larger sections of clad
pipe, and is part of MesoCoat’s overall manufacturing development program which continues to be
supported by Petrobras internal support. This work has been progressing and MesoCoat expects
completing the expanded program in the 4th quarter of 2013. Results to date from these activities resulted
in improvements to our ability to monitor the thermal “effects” through the use of high temperature
sensors and cameras along with developing and validating simulation software to analyze the results to
support improving the process quality. In addition to supporting prototype development and defect
elimination efforts, the added data generation, imaging, calibration, simulation, and analysis techniques
support the development of quality and manufacturing process control systems necessary to ensure the
highest quality clad products.
Outside of the Cooperative Agreement, but supporting the Phase III manufacturing objectives of the
cooperative agreement, MesoCoat further expanded the scope through the design, procurement,
installation, and ramp up of a full-scale, 12-meter clad pipe manufacturing facility in Euclid, Ohio that is
validating the production, quality, and economics of cladding the inside diameter of 10, 18 & 24 inch
diameter, 12 meter pipe. This facility is part of manufacturing scale-up, verification, and de-bugging of
full scale production equipment, and to support further automation of the cladding process to achieve high
level of process control.
A construction and installation team is being added to work on Phase III for facility design as well the
design and manufacturing of the plant operating equipment.
14
Powdermet
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, and energetic materials in addition to the PComP™ nanocomposite cermets (a
cermet is a metal-ceramic composite) exclusively licensed to MesoCoat. The business has historically
financed itself non-dilutively through revenues from corporate engineering consulting and development
fees, government and private sector contracts and grants and recently through partnerships with prime
contractors and systems integrators. Powdermet operates as a commercial technology incubator with a
subsidiary, spin-out, or license model for major commercial markets (such as with Mesocoat), while
retaining and supporting the supply of critical nanocomposite powders to licensees, spin-outs, and
through toll production, equipment sales, and engineering services. The company provides
nanoengineered materials, technology development services, and specialized production equipment in the
nano- and engineered particle space”.
While MesoCoat’s product focus is on market development and commercialization of 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, energy absorption and
release, 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:
(1) 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. One new patent applications was filed this quarter on low
density, mill product and method of manufacture.
(2) 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.
15
(3) 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. A new patent application was filed related to environmentally-triggered reactive
composites, with applications to well perforation devices, reactive warheads, and dissolvable
frack balls for shale gas field completions for new product launches in the EnComP product
family
(4) 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. Two new patent applications were filed for high temperature structural
insulation, and for high temperature insulation for production flowlines to support new product
releases in the Synfoam™ Product line.
Powdermet’s two developmental products closest to commercialization are SynFoam™ syntactic foams
and EnComP™ energetic nanocomposites.
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.
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 has been awarded a greater than
$1M contract for further device development and demonstration (prototyping). Powdermet continues to
receive significant interest in its nanocomposite lithium anode and cathode production capabilities, and
has secured a Department of Energy contract to develop materials for the next generation magnesium,
multivalent cationic batteries which theoretically can provide 4X the power density of lithium cells.
Working with Purdue University and Michigan State University, Powdermet is scaling up its reversible
nanocomposite liquid hydrogen storage media that has exhibited particular promise as a transportable,
renewable source for hydrogen fuel cells exposed to temperatures below -10C.
Powdermet’s MComP™ metal nanocomposite development group continues to work on reducing the cost
of record-breaking light metal nanocomposites. Nanocomposite metals which have been engineered with
specific distributions of nano- and micro-scale features have been shown to possess previously
unachievable combinations of strength and ductility, with nanocomposite aluminum approaching the
strength of steel at 11/3rd the density/weight. These nanoengineered metals are highly sought after for
weight reduction and fuel economy benefits in transportation vehicles, including armoured military, high
speed rail, and large truck applications. Powdermet has more recently made significant advances in its
joint venture with Oshkosh defense, Eck industries, and the University of Wisconsin to develop a low
cost (compared to powder metallurgy routes) castable aluminum nanocomposite exhibiting record-
breaking combinations of strength and ductility along with improved fabricability. Powdermet is
working with its partners to demonstrate scalable production, and our next major milestone is to produce
a several hundred pound casting suitable for use in a heavy transport vehicle.
16
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.
Terves, Inc.
On July 23, 2013, Powdermet announced the launch of its wholly owned subsidiary Terves Inc., to
commercialize proprietary reactive materials technology for the shale gas and oil industry. Terves’
TervAlloy™ technology was initially developed by Powdermet’s ENComP™ energetic nanocomposite
development group to build reactive warheads for the US Department of Homeland Security.
TervAlloy™ technology has since been reconfigured and customized into engineered reactive materials
that can significantly improve the efficiency, oil recovery, and safety of well isolation, perforation and
completion for oil and gas companies operating in shale and tight rock formations in the United States
and across the globe.
TervAlloy™ is a class of patent pending, environmentally responsive, lightweight metallic materials
manufactured from magnesium and other light metals such as lithium that are high strength, machinable,
and also respond in an engineered and controlled manner to environmental stimuli such as changes in
fluid, pH, temperature or electrical or magnetic fields to induce material changes such as decoherence
(disintegration), gas generation, or heat generation. TervAlloy™ is engineered for various market
applications including oil and gas tools for well isolation and completion (frac-balls, sleeves, and seats),
well perforation, and fracturing, lightweight electronic packaging, beryllium replacement, airframe
structures, missile airframes and rocket motor cases, and transportation The primary application of
TervAlloy™ for oil and gas include controlled disintegration well completion tools and reactive tooling
that provides for the generation of heat and gas pressure inside a formation.
AMP Distributors Inc. SEZC and AMP Distributors, Inc.
AMP Distributors Inc. SEZC (“AMP SEZC”)(formerly AMP Distributors, Inc.) and AMP Distributors,
Inc. (“AMP FL”) were formed by the Company in June 2011 and July 2012, as a Cayman Islands
company and a Florida corporation respectively. In April 2013, AMP SEZC filed for a Trade Certificate
which was approved in full in May 2013 to begin operations as a Special Economic Zone Company. Fully
staffed offices have been established by AMP SEZC in the Cayman Enterprise City. The primary purpose
of these entities is to negotiate, execute and administer the set up of overseas operations as well as
handling some international sales of MesoCoat's products. AMP SEZC and AMP FL will also be tasked
with acquiring equipment and coating materials for the Company’s international transactions. AMP SEZC
has acquired a Work Certificate for its General Manager (with over 30 years of experience in the overseas
financial services industry) and has also retained Kariola Limited, a consultancy organization, to assist it
with technical advice and entry into Asian markets.
17
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. According to NACE International, the cost
of corrosion to the global economy is $2.2 trillion annually, or roughly 3% of the world’s GDP.
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 costs.
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.
18
§ 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, alkalis, 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.
19
MesoCoat
PComP™
PComP™ nanoenginered cermet products have few directly comparable competitors. Although there are
established thermal spray coating material manufacturers such as Deloro Stellite, Sulzer Metco, Hoganas;
and a few emerging companies like Nanosteel, Integran, Inframat, Xtallic, and Modumetal that offer
solutions for corrosion and wear competition, no competitor has yet been able to engineer the
combination of properties that MesoCoat has built into its PComP™ product line.
MesoCoat 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.
One good example of how the PComP™ family of products have a competitive edge over existing
alternatives is PComP™ W, MesoCoat’s tungsten cobalt carbide replacement solution. PComP™ W
exhibits high deposition efficiency and at a Vickers 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 generally also allow for conventional grinding techniques, eliminating
the expensive diamond finishing process needed for conventional materials used in tungsten carbide and
cobalt coating solutions.
The PComP™ family of products are expected to fare well among existing competitors on market entry.
CermaCladTM
A handful of large companies cater to this market segment – JSW Steel Co., Voest Alpine and Sulzer-
Metco are heavily involved in the clad plate market with a significant portion of the market share, Butting
GmbH and Cladtek International Pty Ltd. are large participants in the mechanically clad pipe market, and
ProClad Group is important in the metallurgically clad pipe market. Most of the large companies
participating in the cladding market have very similar technologies and impact 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 LLC (acquired by PCC), all of which offer
weld overlay services for the oil and gas industry which we believe generate less than $25 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 large amounts of clad pipe and components, and the emphasis is on
local shops and faster turnaround times
20
CermaClad™ is a seamless metallurgical clad product which is cost competitive with existing
metallurgically clad products and exhibit better properties in almost every parameter when compared to
competing technology. A superior product and the fact that several multi-billion dollar oil and gas
projects across the globe have been delayed due to availability of high-quality clad pipes may facilitate
the ready adoption of CermaClad™ clad pipes. Spearheaded by more than trillion dollars of spending to
exploit oil and gas reserves, the clad pipe market is expected to increase exponentially over the years
leading to an increasing demand-supply gap for clad pipes. Unlike our competition that have to spend
$200 million to $1 billion to set-up new clad pipe/plate manufacturing facilities or expand production
capability; the very high productivity of the CermaClad™ technology and lower equipment costs enables
MesoCoat to set-up clad pipe manufacturing facilities at a much lower capital cost than competing
technologies with similar production capacity. This competitive advantage would permit MesoCoat to set-
up multiple facilities across the globe to serve the regional market and fulfill the growing local content
requirements in the Asia Pacific, Middle East, South America, Gulf of Mexico and Africa with
significantly lower capital requirements. Even with considering the global shortage of cladding capacity
and the endemic quality problems the industry is suffering, the Company believes that it can achieve
significant sales without taking any business away from the current participants in the market.
Other specific competitive advantages supported by the application of the CermaClad™ products include:
Time and productivity
§ Much higher material application rate than weld/laser cladding, >100Kg vs 3-10Kg/hr
application rates. more scalable for production volume
§ Capital investment significantly lower than mechanical cladding or metallurgical cladding
(roll bonding) for similar capacity, reducing fixed costs
§ Ability to provide local content in scalable manner at reasonable capital investment levels
§ Reduces lead times for new capacity compared to current market, and provides high
scalability for market flexibility. Potentially enables distribution and customization of pipe
for fast-turnaround project needs
§ CermaClad™ solves many industry limitations for large diameter (14” diameter and up) and
thick walled (more than 1” wall thickness) where both the mechanically clad and
metallurgical clad plate to pipe do not provide an ideal solution.
Performance risk
§ True metallurgical bond coupled with a smoother surface enables easier inspection thus
reducing risk of failure
§ Smoother surface enables ease in fluid flow reducing operating costs incurred in
transportation of fluids
§ Crack-free hard coatings up to 15mm thickness enable performance multiples in hardfacing
§ Better properties than weld overlay due to lower dilution or dissolution.
§ Cermaclad™ enables the use of metallurgically bonded clad seamless pipe, eliminating 90%
or more of the welds compared to other product offerings.
21
Cost
§ Faster Application and high throughput lowers cost basis for metallurgically bonded clad
product
§ Technology allows the application of thinner clad layers, potentially enabling dramatic cost
reduction at sustained margins
§ High productivity and scalability can enable reduced lead times, reducing capital costs for
large projects.
§ Lower capital costs also enable the set-up of regional clad pipe manufacturing facilities to
meet the growing local content requirement, positioning us as the preferred vendor for the
region and to avoid import duties.
Powdermet
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 general 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 multi-billion dollar markets.
§ Intellectual Property – The intellectual property of MesoCoat and Powdermet includes owned
patents, exclusive licensing rights, and proprietary processes that make market penetration
effective and feasible.
§ Qualification and Testing – As leading companies in multiple industries as well as U.S.
government agencies test and qualify MesoCoat 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.
22
The Company has also constructed the following barriers for potential competitors:
§ Product development expertise in both MesoCoat and Powdermet;
§ Exclusive global license for the high density fusion cladding process from Oak Ridge National
Laboratory; and several additional design and utility patents filed by the companies coupled with
several product and process trade secrets
§ Strong product pipeline that would be ready for market in the next 2-3 years;
§ Strong R&D.
The Company will encounter the following barriers to entry:
§ American Petroleum Institute (API) 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, at a cost of over $6,000,000 (including funding from Joint
Development Agreements (“JDA’s”) and federal grants) 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.
§ Market acceptance of MesoCoat’s CermaClad™’ product line that would encourage entry into
markets such as the oil sands development in Alberta, Canada. MesoCoat is currently pursuing
the establishment of a research and development facility in Alberta, Canada to accelerate the
acceptance of its CermaClad™ WR clad pipe and components.
§ Developing the best product with the best value.
§ Protecting proprietary technology.
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 used today to solve operational
problems in industrial and infrastructure applications.
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
23
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.
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 (molybdenum 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.
CermaClad™
MesoCoat’s market entry plans for Cermaclad™ are to clad the interior diameter of full length oil and gas
pipes with corrosion resistance alloys, and initially Alloy 625 and 825 using high productivity
CermaClad™ application technology. In this market, MesoCoat is qualifying Cermaclad™ 625 and 825
to current industry standards, working with Petrobras and other oil and gas majors to ensure industry
24
acceptance of qualification data as the path to market acceptance. Due to the large order size for clad
pipes, ranging from $2-500+ million per project, successful introduction of CermaClad™ CRA clad pipes
is expected to 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 new inside diameter HDIR lamp head has now been operating for over a
year integrated into a subscale 6-ft CermaClad™ pipe coating system. Using this prototype cladding
system, MesoCoat has completed initial product demonstration and sub-scale prototype development and
industry-standard product qualification milestones. In April, 2013, Mesocoat completed the installation
of a full scale production cladding tool to demonstrate full scale manufacturing, with scale-up transition
anticipated to be completed by December, 2013. As part of the full scale manufacturing demonstration,
MesoCoat has completed the construction of a new 11,000 sq ft one-line clad pipe manufacturing facility,
which was completed in April, 2013. The end result is that MesoCoat expects to be able to deliver initial
product for qualification with several oil majors in the first quarter of 2014 and expects to begin full-scale
manufacturing in a 4-line plant in 2015. Completion of the full scale product facility and achieving
product quality certifications will enable MesoCoat to begin market roll-out and sales of clad pipe to the
oil and gas industry.
MesoCoat’s expansion within the market place 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.
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: 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 four pending U.S. Patents and three
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, six pending US patents and two pending
international patents. 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.
25
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.
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.
26
Employees
As of August 28, 2013 the Company has one employee, five directors, seven advisors, 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 August 28, 2013 MesoCoat had 27 employees.
As of August 28, 2013 Powdermet had 19 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 $13,545,788 for the period from June 27, 2006 (inception) to May
31, 2013. Since we have been without significant revenue since inception and have only recently
transitioned to producing limited revenue, as a result of the business combination with MesoCoat,
historical losses may continue into the future.
The Company has a history of uncertainty about continuing as a going concern.
The Company’s audits for the periods ended May 31, 2013 and 2012 expressed an opinion as to its ability
to continue as a going concern as a result of net losses of $13,545,788 since inception and a working
capital deficit of $2,222,670 as of May 31, 2013. Unless the Company is able to produce net income over
successive future periods its ability to continue as a going concern will be in jeopardy.
The Company requires additional capital funding.
The Company requires additional funds, either through equity offerings, debt placements or joint ventures
to develop our operations. Such additional capital will result in dilution to our current shareholders. Our
ability to meet long-term financial commitments will depend on future cash. There can be no assurance
that any future income will generate sufficient funds to enable us to meet our financial commitments.
The Company’s success is dependent on its ability 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 commercialize proprietary
technologies to produce sufficient revenue to sustain and expand operations. The success of these
endeavors will require that sufficient funding be available to assist in the development of its business
interests. Currently, the Company’s financial resources are limited, which limitation may slow the pace at
which proprietary technologies can be commercialized. Should the Company be unable to improve its
27
financial condition through debt or equity offerings, the ability to successfully advance its 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.
MesoCoat and Powdermet compete with larger and better financed corporations.
Competition within the industrial coatings industry and other high technology industries is intense. While
each of MesoCoat and Powdermet’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 MesoCoat’s and
Powdermet’s 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, MesoCoat’s and Powdermet’s 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 either MesoCoat’s or Powdermet’s research and
development, or be more successful at marketing new products, 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 and realize a gain on our interest in Powdermet 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.
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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 Powdermet 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 Powdermet have under development not comply
with applicable environmental laws then the Company’s business and financial results could be seriously
harmed. Furthermore, changes in legislation and governmental policy could also negatively impact us.
29
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 entities in which it holds an interest may face liability claims.
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.
The Company’s common stock is currently deemed to be “penny stock”, which makes it more difficult
for investors to sell their shares.
The Company’s common stock is and will be 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 our securities. If the Company’s securities are subject to the penny stock
rules, investors will find it more difficult to dispose of our securities.
The elimination of monetary liability against the Company’s directors, officers and employees under
Nevada law and the existence of indemnification rights to our directors, officers and employees may
result in substantial expenditures by the Company and may discourage lawsuits against our directors,
officers and employees.
The Company’s certificate of incorporation contains a specific provision that eliminates the liability of
directors for monetary damages to us and our 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 our 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 us from bringing a lawsuit
30
against directors and officers for breaches of their fiduciary duties and may similarly discourage the filing
of derivative litigation by our stockholders against the Company’s directors and officers even though such
actions, if successful, might otherwise benefit the us and our stockholders.
ITEM 1B.
UNRESOLVED STAFF COMMENTS
None.
ITEM 2.
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 and a 11,000 sq. feet clad pipe
manufacturing facility located at 24112 Rockwell Drive, Euclid, Ohio 44117 leased from 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 maintains 10,000 sq. feet of research and development space at 34099 Melinz Pkwy, Eastlake,
Ohio 44095. The cost of the lease is $3,750 per month, paid to an unrelated third party and the term runs
through February 28, 2014.
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ITEM 3.
LEGAL PROCEEDINGS
First Canadian Capital Corp.
The Company and Stratton S.A. (“Stratton”) initiated legal proceedings against First Canadian Capital
Corp. (“First Canadian”) on December 10, 2012, in the Circuit Court of the 6th Judicial Circuit in and For
Pinellas County, Florida. The claim was based on First Canadian’s alleged failure to perform according to
the terms of a consulting agreement dated December 1, 2011, pursuant to which First Canadian was to
provide services aimed at raising investor awareness, attracting investment and identifying prospective
financial parties in exchange for a monthly cash fee and Company shares. On May 8, 2013, the Company
and Stratton entered into a settlement agreement with First Canadian pursuant to which 51,000 of the
56,000 shares delivered to First Canadian were cancelled and returned to the Company’s authorized
common stock, On June 6, 2013 counsel for the Company and Stratton filed a notice of voluntary
dismissal with prejudice of the lawsuit.
Uptick Capital, LLC.
The Company initiated legal proceedings against Uptick Capital, LLC. (“Uptick”) on November 7, 2012,
in the United States District Court for the Southern District of New York Superior Court. The claim is
based on Uptick’s alleged failure to perform according to the terms of a consulting agreement dated
November 1, 2010, pursuant to which Uptick was to identify and introduce suitable investors to the
Company in exchange for certain consideration including 60,000 shares. The Company seeks the return of
the 60,000 shares delivered which were subsequently sold or in the alternative for a judgment in an
amount to be ascertained in excess of $1,000,000 for damages in addition to reasonable attorney’s fees
and court costs. The parties are currently in the process of exchanging document disclosure. The
Company believes that is will be successful in the pursuit of its claims.
Paloma Capital Group Ltd.
The Company initiated legal proceedings against Paloma Capital Group Ltd (“Paloma”) on July 2, 2013,
in the Circuit Court in and for Miami-Dade County. The claim is based on Paloma’s failure to perform
according to the terms of a consulting agreement dated May 2, 2011, pursuant to which Paloma was to
introduce suitable investors to the Company in exchange for certain consideration including 50,000 shares
of the Company and 150,000 stock options to purchase shares of the Company. The suit demands the
return of the Company shares and the stock options. Paloma is yet to be served with the complaint. The
Company believes it will be successful in the pursuit of its claims.
ITEM 4.
MINE SAFETY DISCLOSURE
Not applicable.
32
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
2013
May 31
$3.50
$2.52
2013
February 29
$2.85
$2.55
2012
November 30
$2.93
$1.46
2012
August 31
$2.45
$1.55
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
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 August 28, 2013, there were 903 shareholders of record holding a total of 64,284,855 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.
33
Preferred Stock
As of August 28, 2013, 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 August 28, 2013, there were 2,842,992 warrants outstanding to purchase shares of the Company’s
common stock.
Stock Options
As of August 28, 2013, there were 3,880,000 stock options outstanding to purchase shares of our common
stock.
Convertible Debt Securities
As of August 28, 2013 we had three debt instruments convertible into the shares of its common stock for
an aggregate total of $2,200,000, 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 Company extended the maturity dates for all three debt instruments. The $1,500,000
debt instrument that was due to mature on March 16, 2013 has been extended to September 15, 2014. The
$200,000 debt instrument that was due to mature on June 6, 2013 and been extended to September 15,
2014.The $500,000 debt instrument that was due to mature on July 14, 2013 has been extended to July
13, 2014.
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,
2013 or since that date through August 28, 2013.
34
Recent Sales of Unregistered Securities; Use of Proceeds from Registered Securities
On March 22, 2013, our board of directors authorized the grant of 100,000 stock options with an exercise
price of $2.80 per share that expire ten years from the date of grant with vesting in equal one-third
increments annually beginning on December 10, 2013, to Andrew C. Hall for consulting services
rendered, in reliance upon the exemptions from registration provided by Section 4(2) and Regulation D of
the Securities Act of 1933, as amended (“Securities Act”).
The Company complied with the exemption requirements of Section 4(2) of the Securities Act based on
the following factors: (1) the issuance was an isolated private transactions by the Company which did not
involve a public offering; (2) the offeree had access to the kind of information which registration would
disclose; and (3) the offeree is 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 an accredited offeree; (iii)
having not violated antifraud prohibitions with the information provided to the offeree; (iv) being
available to answer questions by the offeree; and (v) providing restricted stock options to the offeree.
On April 13, 2013, our board of directors authorized the issuance of 500,000 restricted common shares
and 250,000 share purchase warrants at an exercise price of $1.50 for a period of two years from the date
to LLI Trading Limited on the conversion of $500,000 due, comprised of principal and interest, in
reliance upon the exemptions from registration provided by Section 4(2) and Regulation S of the
Securities Act.
The Company complied with the exemption requirements of Section 4(2) of the Securities Act based on
the following factors: (1) the issuances was an isolated private transactions by the Company which did not
involve a public offering; (2) the offeree had access to the kind of information which registration would
disclose; and (3) the offeree is financially sophisticated.
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 an offeree who was outside the United
States at the time of the offering, and ensuring that the offeree to whom the common shares and warrants
were offered was a non-U.S. offeree with an address in a foreign country.
On April 17, 2013, our board of directors authorized the issuance of 145,000 shares of its common stock
and 145,000 warrants to purchase 72,500 shares of our common stock at an exercise price of $2.70 until
April 17, 2015 to the following entities and individuals for $2.30 each, or an aggregate of $333,500, and
the issuance of 50,000 shares pursuant to the exercise of warrants 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
Donald Shepard
$23,000
Subscription
10,000
10,000
Reg D/Sec 4(2)
Stratton SA
$310,500
Subscription
135,000
135,000
Reg. S/Sec 4(2)
Thomas Shea
$75,000
Warrant Exercise
50,000
Reg D/Sec. 4(2)
35
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 May 29, 2013 our board of directors authorized the issuance of 271,324 shares of its common stock
and 135,662 warrants to purchase 135,662 shares of our common stock at an exercise price of $3.00 until
May 29, 2015 to the following entities and individuals for $2.60 each, or an aggregate of $705,440, and
the issuance of 205,233 shares pursuant to the exercise of warrants 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
The Nielsen Associates, aka
$11,600
Services
4,462
2,231
Reg S
The Nielsen Group
Richard A. Beck
$10,400
Subscription
4,000
2,000 Sec. 4(2)/Reg D
Douglas D’Ewart
$26,000
Subscription
10,000
5,000 Sec. 4(2)/Reg D
Steve Ferris
$31,200
Subscription
12,000
6,000 Sec. 4(2)/Reg D
Financial Insights
$26,000
Subscription
10,000
5,000 Sec. 4(2)/Reg D
Ronald Tracy
$26,000
Subscription
10,000
5,000 Sec. 4(2)/Reg D
RedChip Companies, Inc
$22,000
Subscription
8,462
4,231 Sec. 4(2)/Reg D
Maria Eugenia Barroso Rivera
$202,800
Subscription
78,000
39,000 Sec. 4(2)/Reg S
Maria Eugenia Ribot Barroso
$35,100
Subscription
13,500
6,750 Sec. 4(2)/Reg S
Jose Maria Ribot Rodriguez
$101,400
Subscription
39,000
19,500 Sec. 4(2)/Reg S
Jose Maria Ribot Barroso
$202,800
Subscription
78,000
39,000 Sec. 4(2)/Reg S
Eduard Camelo Rosique
$10,140
Subscription
3,900
1,950 Sec. 4(2)/Reg S
Orsa & Company
$11,250 Warrant Exercise
7,500
Sec. 4(2)/Reg D
Mark Sullivan
$86,250 Warrant Exercise 57,500
Sec. 4(2)/Reg D
Stratton SA
$49,099 Warrant Exercise 32,733
Sec. 4(2)/Reg S
Green Chip SA
$37,500 Warrant Exercise 25,000
Sec. 4(2)/Reg S
Kossen Ventures
$123,750 Warrant Exercise 82,500
Sec. 4(2)/Reg S
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
36
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 June 14, 2013, our board of directors authorized the grant of 80,000 stock options with an exercise
price of $2.94 per share that expire ten years from the date of grant with vesting in equal one-third
increments annually beginning on June 14, 2014, to Richard Burns for services rendered as an employee,
in reliance upon the exemptions from registration provided by Section 4(2) and Regulation D of the
Securities Act of 1933.
The Company complied with the exemption requirements of Section 4(2) of the Securities Act based on
the following factors: (1) the issuance was an isolated private transactions by the Company which did not
involve a public offering; (2) the offeree had access to the kind of information which registration would
disclose; and (3) the offeree is 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 an accredited offeree; (iii)
having not violated antifraud prohibitions with the information provided to the offeree; (iv) being
available to answer questions by the offeree; and (v) providing restricted stock options to the offeree.
Trading Information
The Company’s common stock is currently approved for quotation under the symbol “ABKI”. The
information for our transfer agent is as follows:
Island Stock Transfer
100 Second Avenue South, Suite 300
St. Petersburg, Florida 33701
Tel: (727) 289-0010.
37
ITEM 6.
SELECTED FINANCIAL DATA
The selected consolidated financial data presented below should be read in conjunction with
“Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our
consolidated financial statements and the related notes included elsewhere in this Annual Report on Form
10-K. The selected consolidated statements of operation data, balance sheet data and statements of cash
flow data as of and for each of the five years in the period ended May 31, 2013, have been derived from
the audited consolidated financial statements. The results presented below are not necessarily indicative
of financial results to be achieved in future periods.
For the Years Ended May 31,
2013
2012
2011
2010
2009
Statement of Operations Data:
Net revenues
$ 1,846,862 $ 2,939,428 $
--- $
--- $
---
(Loss) income from operations
(7,223,423 ) (1,119,249 ) (3,184,984 ) (1,606,698 ) (354,363 )
(Loss) income from continuing operations
(7,223,423 )
(1,119,249)
(3,184,984)
(1,606,698 ) (354,363)
Net (loss) earnings per share from continuing operations:
Basic
(0.12)
(0.02)
(0.06)
(0.03)
**
Diluted
(0.12)
(0.02
(0.06)
(0.03)
**
** = less than $(0.01) per share
For the Years Ended May 31,
2013
2012
2011
2010
2009
Selected Consolidated Balance Sheet Data:
Cash and cash equivalents
$
233,040 $
859,566 $
--- $
40,564 $
15
Working capital (1)
(2,222,670 )
(2,438,854 )
(510,867 )
(205,399 )
(344,019 )
Total assets
16,640,284
15,192,030
4,906,889
1,302,759
15,862
Current and long-term debt
5,484,526
3,909,723
1,513,046
81,536
255,037
Total liabilities
7,003,713
4,727,361
1,933,966
293,767
344,104
Total shareholders’ equity
9,636,571
10,464,669
2,972,923
1,008,992
(328,242 )
(1) Working capital is defined as current assets less current liabilities.
38
For the Years Ended May 31,
2013
2012
2011
2010
2009
Selected Consolidated Statements of Cash Flow Data:
Net cash (used by) development stage activities
$ (2,940,182) $ (1,319,285) $
(912,198) $
(609,229) $
(67,964)
Net cash (used in) investing activities
(2,719,490)
(391,509)
(3,804,394)
(1,400,030)
(182,645)
Net cash provided by financing activities
5,033,146
2,570,360
4,676,028
2,049,808
249,758
Net increase (decrease) in cash and cash equivalents
(626,526)
859,566
(40,564)
40,549
(671)
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION
This Management’s Discussion and Analysis of Financial Condition and Results of Operations and other
parts of this current report contain forward-looking statements that involve risks and uncertainties.
Forward-looking statements can also be identified by words such as “anticipates,” “expects,” “believes,”
“plans,” “predicts,” and similar terms. Forward-looking statements are not guarantees of future
performance and our actual results may differ significantly from the results discussed in the forward-
looking statements. Factors that might cause such differences include but are not limited to those
discussed in the subsection entitled Forward-Looking Statements and Factors That May Affect Future
Results and Financial Condition below. The following discussion should be read in conjunction with our
financial statements and notes thereto included in this current report. Our fiscal year end is May 31.
The Company’s plan of operation for the coming year is to focus on realizing the commercialization
efforts aimed at expanded market entry for PComP™ and CermaClad™ products while continuing
research and development efforts to ensure the continuity of our product pipeline. To achieve this success
the Company and its subsidiaries during the twelve month period ended May 31, 2013:
§
The Company completed debt and equity financings in the amount of $7,692,378.
§
The Company filed an application to quote its common stock on the NASDAQ Capital Market.
§
The Company added two independent directors to its board of directors, appointed a chief
financial officer and principal accounting officer and adopted corporate governance charters.
§
MesoCoat focused its efforts on the continued development of its products.
§
MesoCoat continued negotiations with prospective joint venture partners in parts of the world in
which it does not intend to operate independently, such as the Middle East, Germany, Russia and
South Korea.
§
MesoCoat continued negotiations with prospective joint venture partners in respect to the
development of technological applications that it does not intend to develop on our own, such as
development of laser cladding systems for cladding very smaller diameter tubulars and complex
shapes.
§
MesoCoat filled several key employee positions, including those for engineers and a chief
operating officer.
39
§
MesoCoat engaged industry experts as consultants or advisors and collaborated with some of the
leading research and development entities in its field, such as the Edison Welding Institute.
§
MesoCoat obtained ISO 9001:2008 and AS9100C certifications for its facilities to ensure the
highest standards in quality management.
§
MesoCoat secured a $1 million low interest loan from the State of Ohio to partially fund
equipment for the new 11,000 sq. ft CermaClad™ clad piping manufacturing plant in Euclid,
Ohio which opened for testing, research and development in April.
§
MesoCoat expanded marketing efforts that focused on targeted sales of PComP™.
§
MesoCoat secured a $150,000 loan as part of an overall capital budget to increase its PComP™
powder production to meet demand.
§
MesoCoat entered into a memorandum of understanding with Cone S.A. to construct a
manufacturing facility in Brazil for lease on a “build to suit” basis.
§
MesoCoat won highly prestigious trade and industry awards such as the ‘Technology Innovation
Award’ from the Wall Street Journal, the ‘Subsea Pipeline Technology of the Year’ from the
Pipelines Industry Guild, the ‘Steel Excellence Award’ from the American Metal Market, and the
‘R&D 100’ award from the R&D Magazine.
§
Powdermet was awarded three grants from Department of Energy, U.S. Army and U.S. Navy for
developing advanced nano-dielectric materials for capacitors, advanced composites for airframe
bearings, and advanced nanocomposite membranes for batteries.
Subsequent to the twelve month period ended May 31, 2013:
§
MesoCoat incorporated a subsidiary in Indonesia and hired a local country manager, legal
counsel and a tax advisory firm.
§
MesoCoat entered into negotiations with PT Kabil Citranusa to lease, with the option to
purchase, a parcel of land on Batam for the purpose of constructing a manufacturing facility on a
“build to suit basis”.
§
MesoCoat executed a deposit agreement with Cone S.A. in connection with the construction of a
manufacturing facility in Brazil in respect to a lease agreement for a “build to suit” facility.
§
Powdermet formed Terves Inc., to develop and commercialize proprietary reactive materials
technology for the shale gas and oil industry.
Results of Operations
Revenues
For the period from June 27, 2006 (inception) until May 31, 2013, the Company realized revenues of
$4,787,886. Revenues for the year ended May 31, 2013 were $1,846,862 as compared to $2,939,428 for
the year ended May 31, 2012, a decrease of 63%. Revenues for the two periods can be wholly attributed
to the operations of MesoCoat.
Revenue in the current year was derived from commercial revenues of $190,362 as compared to $77,391
in the prior year, contract and grant revenues of $1,656,500 in the current year as compared to $2,098,754
in the prior year, and other income of zero as compared to $763,283 in the prior year. Commercial
revenue increased by 246% as MesoCoat continues implementation of its commercial products. The
majority of the increase in commercialized revenue was the result of activity in the last six months. The
21% decrease in contract and grant revenue in the current year over the prior year is due to the reduction
in grant applications as MesoCoat focused on developing and commercializing its products. The largest
decrease in revenue in the current period when compared to the prior period is in other revenue which was
40
comprised mostly of amounts paid by Petrobras under the terms and conditions of the cooperation
agreement.
We expect grant revenue to decrease over the next twelve months as MesoCoat’s government sponsored
contracts that commenced late last year are completed. However, we do expect a significant increase in
commercial revenue over the next twelve months as MesoCoat implements the PComP™ expansion plan.
Meanwhile, we continue to focus on the development of both current and new products while continuing
to commercialize existing products lines.
Gross Profit
For the period from June 27, 2006 (inception) until May 31, 2013, the Company realized a gross profit of
$2,999,615. Gross profit for the twelve month period ended May 31, 2013 was $1,107,789 compared to
$1,890,230 for the twelve month period ended May 31, 2012, a decrease of 41%. Gross profits in both
annual periods can be wholly attributed to the operations of MesoCoat. Gross profit decreased in the
current year over the comparative year as the result of the decrease in other revenue generated under the
terms and conditions of the cooperation agreement with Petrobras.
We expect gross profit to decrease over the next twelve months as result of the reduction in grant
applications. This reduction is expected to be offset at an increase margin throughout the year as the
Company expands its PComP™ product line.
Net Losses
For the period from June 27, 2006 (inception) until May 31, 2013, the Company incurred net losses of
$13,545,788. Net losses for the year ended May 31, 2013 were $7,223,423 compared to a net loss of
$1,119,249 for the year ended May 31, 2012, an increase of 545%.
Net losses in the current year as compared to net losses in the prior year can be attributed to the decrease
in revenues which resulted in a $782,441 decrease in gross profit. In addition, operating expenses
increased by $2,494,833 in order to continue the development and implementation of commercial
applications. Other income (expense) changed by $3,982,642 resulting in an additional reduction to net
income when compared to the prior year. Over the prior year other income included among other
categories unrealized gain on the MesoCoat acquisition of $1,764,345 and equity gain in Powdermet
income of $988,533 versus a loss in the current year of $260,877. Powdermet’s prior year equity gain
was higher since it included a valuation gain in the prior year from the Company acquisition. The
allocation of a non-controlling interest in MesoCoat from the current year to the prior year has increased
by $1,155,742 which resulted in an increase in income.
We do not expect to realize net income in the near term as anticipated operational expenses associated
most significantly with research and development, consulting, payroll expenses and the depreciation and
amortization of existing assets. The increase in expenses are expected to be the direct result of continued
research and development costs associated with the CermClad™ product line in addition to costs
anticipated for the building of the planned manufacturing plant in Batam, Indonesia.
Despite management’s focus on ensuring operating efficiencies, we expect to continue to operate at a loss
through fiscal 2014.
41
Expenses
For the period from June 27, 2006 (inception) until May 31, 2013, the Company incurred operating
expenses of $17,809,674. Operating expenses for the year ended May 31, 2013 was $7,907,865
compared to $5,413,032 the year ended May 31, 2012, an increase of 45%. The increase in operating
expenses over the prior year can be attributed to increases in administrative costs, professional fees,
consulting fees, consulting fees to related parties, payroll, depreciation and amortization, and research and
development as the Company continues to develop its product for commercial applications. Research &
development and consulting fees increased by $1,198,579 as the Company continue to focus on
development and commercialization of its products. Stock option expense increased by $516,464 during
the current year as the Company continues to expand it management team, directors and advisor. General
& administrative expense, payroll and professional fees increased by $579,773 as the Company continues
the development and commercialization its products including the initially opening of its research and
testing manufacturing facility in Euclid, Ohio.
We expect that operating expenses will continue to increase as our aggressive growth strategy over the
next five years will require significant increases in personnel and facilities along with significant research
and development to ensure that products nearing commercialization are brought to market as quickly and
as effectively as possible.
Other Expense/Income
For the period from June 27, 2006 (inception) until May 31, 2013, the Company realized other income of
$192,149. Other expense for the year ended May 31, 2013 was $1,537,279 as compared to other income
of $2,445,363 for the year ended May 31, 2012. The transition to other expense in the current year over
other income in the prior year can be primarily attributed to unrecognized gain on the acquisition of
MesoCoat of $1,764,345 in the prior comparative year versus none in the current year. The Company
also recorded an equity gain in Powdermet income of $988,533 in the prior year versus a loss in the
current year of $260,877. Powdermet’s prior year equity gain was higher since they included a valuation
gain in the prior year from the Company’s acquisition of MesoCoat.
We expect to continue to incur other expense in future periods due to the interest accruing on convertible
debt and the anticipated increase in interest on new debentures that are required for future growth.
Income Tax Expense (Benefit)
The Company may have a prospective income tax benefit resulting from a net operating loss carry-
forward and start up costs that will offset any future operating profit.
Capital Expenditures
The Company has spent significant amounts of capital expenditures for the period from June 27, 2006
(inception) to May 31, 2013 which amounted to $8,524,885. A large portion of these expenditures are
related to plant, property and equipment in the construction of the manufacturing facility in Euclid, Ohio,
minority interest in Powdermet.
42
Liquidity and Capital Resources
The Company has been in the development stage since inception, and has experienced significant changes
in liquidity, capital resources, and stockholders’ equity.
As of May 31, 2013, the Company had current assets of $475,890 consisting of cash and cash equivalents
of $233,040, accounts receivable of $105,523, a note receivable from a related party of $4,500, prepaid
expenses of $117,028 and net prepaid deferred finance fees of $15,799. The Company had total assets of
$16,640,284 consisting of current assets, property, plant and equipment of $5,595,007, patents and
licenses of $7,545,163, an assignment agreement of $210,528, an investment in Powdermet of
$2,449,312, and goodwill of $364,384.
As of May 31, 2013, the Company had current liabilities of $2,698,560, consisting of accounts payable of
$890,791, accounts payable to related parties of $251,004, capital leases of $28,006, loans payable of
$965,555, accrued interest of $153,825, loan payable to related parties of $30,000, accrued interest to
related party of $1,987 and accrued liabilities of $377,392. The Company had total liabilities of
$7,003,713 consisting of current liabilities of $2,695,955 and long-term liabilities of $4,307,758. Long-
term liabilities consist of loans payable of $4,241,278 and capital leases of $63,875.
The Company had stockholders’ equity of $9,636,571 and a working capital deficit of $2,222,670 at May
31, 2013.
For the period from June 27, 2006 (inception) to May 31, 2013, the Company’s net cash used in
development stage activities was $5,899,317. Net cash used in development stage activities for the year
ended May 31, 2013 was $2,940,182 as compared to $1,319,285 for the year ended May 31, 2012. Net
cash used in development stage activities is the result of the current year income plus a number of items
that are book expense items which do not affect the total amount relative to actual cash used including
depreciation, amortization of discount on debt, stock issued for services and stock option expense offset
by equity in investee profit. Balance sheet accounts that actually affect cash but are not income statement
related items and thus are added or deducted to arrive at cash used include accrued liabilities, accounts
payable, accrued interest on loans payable, and prepaid expenses offset by changes in accounts
receivable.
We expect to continue to generate negative cash flow in operating activities until such time as net losses
transition to net income.
For the period from June 27, 2006 (inception) until May 31, 2013, the Company’s net cash used in
investing activities was $8,524,885. Net cash used in investing activities for the year ended May 31, 2013,
was $2,719,490 as compared to net cash used in investing activities of $391,509 for the year ended May
31, 2012. Net cash used in investing activities in the current period can be primarily attributed to the
purchase of property, plant and equipment, and capitalized patents and licenses.
We expect to continue to generate negative cash flow in investing activities as the Company increases its
investment in property, plant and equipment through MesoCoat.
For the period from June 27, 2006 (inception) until May 31, 2013, the Company’s net cash provided by
financing activities was $14,657,242. Net cash provided by financing activities for the year ended May
31, 2013 was $5,033,146 as compared to $2,570,360 the year ended May 31, 2012. Net cash provided by
financing activities in the current period is attributable to proceeds from the sale of common stock and
43
loans payable, including related party loans, offset by payments on loans payable, including those to
related parties, and repayments on capital leases.
We expect to continue to generate positive cash flow from financing activities as the Company seeks new
rounds of financing to build its business.
Our current assets are insufficient to meet our current obligations or to satisfy our cash needs over the
next twelve months and as such the Company will require additional debt or equity financing.
Management to this end initiated private equity placements prior to period end pursuant to which the
Company had raised $5,518,885 during the twelve month period ended May 31, 2013. Nevertheless,
additional capital will be required to meet obligations and needs over the next twelve months. Except for
the private equity placements noted, we had no other commitments or arrangements for financing at May
31, 2013, though we continue to pursue a number of prospective sources that include industry or strategic
partners, sale of additional equity, the sale of additional equity, the procurement of long term debt,
shareholder loans or the settlement of additional debt for equity. We face certain financial obstacles to
attracting new financing due to our historical record of net losses and working capital deficits. Therefore,
despite our efforts we can provide no assurance that the Company will be able to obtain the financing
required to meet its stated objectives or even to continue as a going concern.
The Company does not expect to pay cash dividends in the foreseeable future.
The Company has a defined stock option plan titled “The Abakan Inc., 2009 Stock Option Plan” and
contractual commitments with all of its officers and directors.
The Company has plans for the purchase of plant or equipment in connection with expansion of the
PComP™ powder production commercial line. MesoCoat has obtained verbal commitments for future
capital expenditures from the Company to fund any shortfalls (including plant and equipment) in the
expansion of the PComP™ powder equipment required for expansion should it not be able to raise funds
in the normal course of business.
The Company intends to increase the number of employees engaged by MesoCoat on completion on the
PComP™ product line expansion and upon completion of development and commercialization of the
Cermaclad™ product in the new Euclid, Ohio manufacturing facility.
Off Balance Sheet Arrangements
As of May 31, 2013, the Company had no off-balance sheet arrangements that have or are reasonably
likely to have a current or future effect on our financial condition, changes in financial condition,
revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources that is
material to stockholders.
Going Concern
The Company’s auditors have expressed an opinion that refers to our ability to continue as a going
concern as a result of net losses of $13,545,788 and a working capital deficit of $2,222,670 as of May 31,
2013. Our ability to continue as a going concern is dependent on realizing net income from operations,
gains on investment, obtaining funding from outside sources or realizing some combination of these
objectives. Management’s plan to address the Company’s ability to continue as a going concern includes:
44
(i) obtaining funding from the private placement of debt or equity; (ii) revenue from operations; (iii)
converting debt to equity; and (iv) obtaining loans and grants from financial or government institutions.
Management believes that it will be able to obtain funding to allow the Company to remain a going
concern through the methods discussed above, though there can be no assurances that such methods will
prove successful.
The statements contained in the section titled Results of Operations and Description of Business, with the
exception of historical facts, are forward looking statements. We are ineligible to rely on the safe-harbor
provision of the Private Litigation Reform Act of 1995 for forward looking statements made in this
current report. Forward looking statements reflect our current expectations and beliefs regarding our
future results of operations, performance, and achievements. These statements are subject to risks and
uncertainties and are based upon assumptions and beliefs that may or may not materialize. These
statements include, but are not limited to, statements concerning:
§ our anticipated financial performance;
§ uncertainties related to the commercialization of proprietary technologies held by entities in which
we have an investment interest;
§ our ability to generate revenue from operations or gains on investments;
§ our ability to raise additional capital to fund cash requirements for operations;
§ the volatility of the stock market; and
§ general economic conditions.
We wish to caution readers that our operating results are subject to various risks and uncertainties that
could cause our actual results to differ materially from those discussed or anticipated including the factors
set forth in the section entitled Risk Factors included elsewhere in this report. We also wish to advise
readers not to place any undue reliance on the forward looking statements contained in this report, which
reflect our beliefs and expectations only as of the date of this report. We assume no obligation to update
or revise these forward looking statements to reflect new events or circumstances or any changes in our
beliefs or expectations, other that is required by law.
Critical Accounting Policies
The notes to the audited financial statements for the Company for the years ended May 31, 2013 and
2012, included in this Form 10-K, discusses those accounting policies that are considered to be significant
in determining the results of operations and financial position. Our management believes that their
accounting principles conform to accounting principles generally (GAAP) accepted in the United States
of America.
The preparation of financial statements in conformity with GAAP requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the year. The more significant areas requiring the use of estimates include
asset impairment, stock-based compensation, beneficial conversion features on debt instruments, and
future income tax amounts. Management bases its estimates on historical experience and on other
assumptions considered to be reasonable under the circumstances. Actual results may differ from the
estimates.
45
Stock-Based Compensation
We have adopted Accounting Standards Codification Topic (“ASC”) 718, which addresses the accounting
for stock-based payment transactions in which an enterprise receives employee services in exchange for
(a) equity instruments of the enterprise or (b) liabilities that are based on the fair value of the enterprise’s
equity instruments or that may be settled by the issuance of such equity instruments. We have adopted
Accounting Standards Codification Topic (“ASC”) 718, Share-Based Payment, which addresses the
accounting for stock-based payment transactions in which an enterprise receives employee services in
exchange for (a) equity instruments of the enterprise or (b) liabilities that are based on the fair value of the
enterprise’s equity instruments or that may be settled by the issuance of such equity instruments.
We account for equity instruments issued in exchange for the receipt of goods or services from other than
employees in accordance with ASC 505. Costs are measured at the estimated fair market value of the
consideration received or the estimated fair value of the equity instruments issued, whichever is more
reliably measurable. The value of equity instruments issued for consideration other than employee
services is determined on the earliest of a performance commitment or completion of performance by the
provider of goods or services.
Recent Accounting Pronouncements
We have examined all recent accounting pronouncements and believe that none of them will have a
material impact on the financial statements of the Company.
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
Interest Rate Risk
We had cash and cash equivalents totaling $233,040, $859,566 and zero as of May 31, 2013, 2012, and
2011, respectively. Our exposure to interest rate risk primarily relates to the interest income generated by
excess cash deposited in interest bearing accounts. The cash and cash equivalents are held for working
capital purposes. We have not used derivative financial instruments in our investment portfolio. We have
not been exposed nor do we anticipate being exposed to material risks due to changes in market interest
rates. Declines in interest rates, however, will reduce future investment income, at our current balance
levels the change in our interest income will not be material, assuming consistent balance levels.
Interest rate risk also refers to our exposure to movements in interest rates associated with our interest
bearing liabilities. The interest bearing liabilities are denominated in U.S. dollars and the interest expense
is based on the market rates of interest. If the credit markets in the United States changed significantly it
could cause a material change in our interest expense and our costs of borrowing.
Foreign Currency Risk
We currently operate primarily in the United States. As we expand our business outside the United States
through foreign subsidiaries, business is largely transacted in non-U.S. dollar currency. Accordingly, we
will be subject to exposure from adverse movements in the exchange rates of the local currency.
Consequently, changes in the exchange rates of the currencies may impact the translation of the foreign
46
subsidiaries’ statements of operations into U.S. dollars, which may in turn affect our consolidated
statement of operations.
We have not entered into any financial derivative instruments that expose us to material market risk,
including any instruments designed to hedge the impact of foreign currency exposures. We may,
however, hedge such exposure to foreign currency exchange rate fluctuations in the future.
Credit Risk
Credit risk refers to our exposures to financial institutions, suppliers and customers that have in the past
and may in the future experience financial difficulty, particularly in light of recent conditions in the credit
markets and the global economy. As of May 31, 2013, our cash and cash equivalents were held in
deposits with maturities of three months or less with banks and other financial institutions having credit
ratings of BBB or above. We generally monitor the financial performance of our suppliers and
customers, as well as other factors that may affect their access to capital and liquidity. Presently, we
believe that we will not incur material losses due to our exposures to such credit risk.
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our audited financial statements for the years ended May 31, 2013 and 2012 are attached hereto as F-1
through F-66.
47
Abakan Inc.
(A Development Stage Company)
Index to Financial Statements
Report of Independent Registered Public Accounting Firm
F-2
Consolidated Balance Sheets for the years ended May 31, 2013 and 2012
F-4
Consolidated Statements of Operations for the years ended May 31, 2013 and 2012, and cumulative
amounts from development stage activities (June 27, 2006 (Inception) through May 31, 2013)
F-5
Consolidated Statements of Stockholders' Equity (Deficit) for the period from inception on
June 27, 2006 through May 31, 2013
F-6
Consolidated Statements of Cash Flows for the years ended May 31, 2013 and 2012, and cumulative
amounts from development stage activities (June 27, 2006 (Inception) through May 31, 2013)
F-16
Notes to the Consolidated Financial Statements
F-18
F-1
SKODA MINOTTI
CPAs, BUSINESS & FINANCIAL ADVISORS
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of
Abakan Inc. (a development stage company)
We have audited the accompanying consolidated balance sheets of Abakan, Inc. and Subsidiaries
(together the “Company”) as of May 31, 2013 and 2012, and the related consolidated statements of
operations, stockholders’ equity (deficit) and cash flows for each of the three years in the period ended
May 31, 2013 and for the period from June 27, 2006 (date of inception) through May 31, 2013. We also
have audited the Company’s internal control over financial reporting as of May 31, 2013, based on
criteria established in Internal Control—Integrated Framework (1992) issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO 1992). The Company’s management is
responsible for these financial statements, for maintaining effective internal control over financial
reporting, and for its assessment of the effectiveness of internal control over financial reporting, included
in the accompanying Management’s Report on Internal Control over Financial Reporting. Our
responsibility is to express an opinion on these financial statements and an opinion on the Company's
internal control over financial reporting based on our audits. We did not audit the financial statements for
the period June 27, 2006 (date of inception) through May 31, 2010. Those statements were audited by
other auditors whose report has been furnished to us, and our opinion on the statements of operations,
stockholders’ equity (deficit), and cash flows for the period June 27, 2006 (date of inception) through
May 31, 2013, insofar as it relates to the amounts for prior periods through May 31, 2010, is based solely
on the report of the other auditors.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audits to obtain reasonable
assurance about whether the financial statements are free of material misstatement and whether effective
internal control over financial reporting was maintained in all material respects. Our audits of the
financial statements included examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements, assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. Our audit of internal control
over financial reporting included obtaining an understanding of internal control over financial reporting,
assessing the risk that a material weakness exists, and testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk. Our audits also included performing such
other procedures as we considered necessary in the circumstances. We believe that our audits provide a
reasonable basis for our opinions.
Cleveland / 6685 Beta Drive, Mayfield Village, Ohio 44143 / ph 440 449 6800 / fx 440 646 1615
Akron / 3875 Embassy Parkway, Suite 200, Fairlawn, Ohio 44333 / ph 330 668 1100 / fx 440 646 1615
Tampa /4301 Anchor Plaza Parkway, Suite 140, Tampa, Florida 33634 /ph 813 288 8826 /fx 813 288 8826
Skoda Minotti / Certified Public Accountants / www.skodaminotti.com
F-2
A company's internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles. A company's internal
control over financial reporting includes those policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the
assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted accounting principles,
and that receipts and expenditures of the company are being made only in accordance with authorizations
of management and directors of the company; and (3) provide reasonable assurance regarding prevention
or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have
a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk
that controls may become inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our opinion, the consolidated financial statements referred to above present fairly, in all material
respects, the consolidated financial position of Abakan, Inc. and Subsidiaries at May 31, 2013 and the
results of the consolidated results of their operations and their cash flows for each of the three years in the
period ended May 31, 2013, in conformity with U.S. generally accepted accounting principles. Also in
our opinion, Abakan, Inc. and Subsidiaries maintained, in all material respects, effective internal control
over financial reporting as of May 31, 2013, based on criteria established in Internal Control – Integrated
Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
The accompanying financial statements have been prepared assuming that the Company will continue as a
going concern. As discussed in Note 3 to the financial statements, the Company has incurred net losses
since inception in the amount of $13,545,788 and a working capital deficiency of $2,222,670.
Management’s plans concerning these matters are also described in Note 3. The accompanying financial
statements do not include any adjustments that might result from the outcome of this uncertainty.
Skoda Minotti
Cleveland, Ohio
/s/ Skoda Minotti
Skoda Minotti
Cleveland, Ohio
August 29, 2013
Cleveland / 6685 Beta Drive, Mayfield Village, Ohio 44143 / ph 440 449 6800 / fx 440 646 1615
Akron / 3875 Embassy Parkway, Suite 200, Fairlawn, Ohio 44333 / ph 330 668 1100 / fx 440 646 1615
Tampa /4301 Anchor Plaza Parkway, Suite 140, Tampa, Florida 33634 /ph 813 288 8826 /fx 813 288 8826
Skoda Minotti / Certified Public Accountants / www.skodaminotti.com
F-3
ABAKAN INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED BALANCE SHEETS
May 31,
May 31,
2013
2012
ASSETS
Current assets
Cash and cash equivalents
$
233,040 $
859,566
Accounts receivable
105,523
22,854
Note receivable - related parties
4,500
4,500
Prepaid expenses
117,028
183,134
Deferred finance fees, net
15,799
-
Total current assets
475,890
1,070,054
Noncurrent assets
Property, plant and equipment, net (Note 4)
5,595,007
3,021,088
Patents and licenses, net (Note 5)
7,545,163
7,776,315
Assignment agreement - MesoCoat (Note 6)
210,528
250,000
Investment - Powdermet (Note 7)
2,449,312
2,710,189
Goodwill
364,384
364,384
Total Assets
$
16,640,284 $
15,192,030
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable
$
890,791 $
425,868
Accounts payable - related parties (Note 11)
251,004
80,773
Capital leases - current portion
28,006
42,999
Loans payable, net of discounts of $171,615 and $456,164 (Note 8)
965,555
2,465,165
Accrued interest - loans payable (Note 8)
153,825
183,106
Loan payable- related parties (Note 11)
30,000
-
Accrued interest - related parties (Note 11)
1,987
-
Accrued liabilities
377,392
310,997
Total current liabilities
2,698,560
3,508,908
Non-current liabilities
Loans payable, net of discounts of $444,881and $601,940 (Note 8)
4,241,278
1,146,277
Capital leases - non-current portion
63,875
72,176
Total liabilities
7,003,713
4,727,361
Commitments and contingencies (Note 13)
Stockholders' equity (Note 9)
Preferred stock, $0.0001 par value, 50,000,000 shares
authorized, none issued and outstanding
-
-
Common stock, par value $0.0001, 2,500,000,000 shares
authorized, 64,284,855 issued and outstanding - May 31, 2013,
61,465,445 issued and outstanding - May 31, 2012
6,430
6,147
Paid-in capital
20,833,426
13,321,527
Subscription receivable
(76,244)
-
Subscription payable
-
-
Contributed capital
5,050
5,050
Accumulated deficit during the development stage
(13,545,788)
(6,322,365)
7,222,874
7,010,359
Non-controlling interest
2,413,697
3,454,310
Total stockholders' equity
9,636,571
10,464,669
Total liabilities and stockholders' equity
$
16,640,284 $
15,192,030
See accompanying notes to the consolidated financial statements.
F-4
ABAKAN INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF OPERATIONS
Cumulative amounts
from development
stage activities June
For the years ended
27, 2006 (inception)
May 31,
to
2013
2012
2011
May 31, 2013
Revenues
Commercial
$
190,362 $
77,391 $
- $
267,753
Contract and grants
1,656,500
2,098,754
-
3,755,254
Other income
-
763,283
-
764,879
1,846,862
2,939,428
-
4,787,886
Cost of revenues
739,073
1,049,198
-
1,788,271
Gross profit
1,107,789
1,890,230
-
2,999,615
Expenses
General and administrative
General and administrative
831,387
625,301
163,562
1,726,654
Professional fees
513,068
246,743
172,504
1,082,869
Professional fees - related parties
60,000
60,000
60,000
225,000
Consulting
1,382,484
928,449
533,876
3,086,779
Consulting - related parties
441,250
306,580
393,900
1,681,230
Payroll and benefits expense
848,798
741,436
190,608
1,847,103
Depreciation and amortization
417,072
302,858
5,790
749,156
Research and development
1,347,190
737,316
-
2,084,506
Impairment of asset
-
-
-
180,000
Stock expense on note conversion
239,120
153,317
195,290
730,097
Stock options expense
1,827,496
1,311,032
964,439
4,416,280
Total expenses
7,907,865
5,413,032
2,679,969
17,809,674
Loss from operations
(6,800,076)
(3,522,802)
2,679,969
(14,810,059)
Other (expense) income
Interest expense:
Interest - loans
(222,134)
(273,117)
(36,000)
(547,879)
Interest - related parties
(773)
(1,118)
(811)
(7,333)
Liquidated damages
-
-
(250,000)
(250,000)
Amortization of discount on debt
(838,289)
(475,374)
(137,490)
(1,451,153)
Total interest expense
(1,061,196)
(749,609)
(424,301)
(2,256,365)
Interest income
3,794
242
2,125
8,165
Loss on debt settlement
-
-
(5,257)
(5,257)
Creditor fee
(235,794)
-
-
(241,051)
Gain on debt settlement
17,715
56,543
200,709
274,967
Gain/ (loss) on sale of assets
(921)
429,717
-
428,796
Unrealized gain on MesoCoat acquisition
-
1,764,345
-
1,764,345
Equity in Powdermet income/ (loss)
(260,877)
988,533
71,656
799,312
Equity in MesoCoat loss
-
(44,408)
(349,947)
(586,020)
Total Other (expense) income
(1,537,279)
2,445,363
(505,015)
192,149
Net (loss) before noncontrolling interest
(8,337,355)
(1,077,439)
(3,184,984)
(14,617,910)
Non-controlling interest in MesoCoat loss
1,113,932
(41,810)
-
1,072,122
Net (loss) attributable to Abakan Inc.
(7,223,423)
(1,119,249)
(3,184,984)
(13,545,788)
Provision for income taxes
-
-
-
-
Net (loss)
$
(7,223,423) $
(1,119,249) $
(3,184,984
(13,545,788)
Net (loss) per share - basic
$
(0.12) $
(0.02) $
(0.06)
Net (loss) per share - diluted
$
(0.12) $
(0.02) $
(0.06)
Weighted average number of common
shares outstanding - basic
62,443,108
59,752,413
57,058,470
Weighted average number of common
shares outstanding - diluted
62,443,108
59,752,413
57,058,470
See accompanying notes to the consolidated financial statements.
F-5
ABAKAN INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFECIT)
Accumulated
Deficit
Non-
During
Total
Contributed
Subscription
Subscription
controlling
Development
Stockholders’
Shares
Amount
Capital
Capital
Receivable
Payable
Interest
Stage
Equity
Inception, June 27, 2006
- $
- $
-
$
-
$
- $
- $
- $
- $
-
Common Shares issued to director
for cash June 27, 2006
2,500,000
250
(150)
-
-
-
-
-
100
Common Shares issued to director
for cash June 27, 2006
125,300,000
12,530
(7,518)
-
-
-
-
-
5,012
Common Shares issued to director
for cash October 31, 2006
62,500,000
6,250
(3,750)
-
-
-
-
-
2,500
Private placement closed April
30, 2007
35,265,000
3,527
67,003
-
-
-
-
-
70,530
Net (loss) for the period
-
(28,079)
(28,079)
Balance, May 31, 2007
225,565,000 $
22,557 $
55,585
$
-
$
-
- $
- $
(28,079) $
50,063
Net (loss) for the year
(28,993)
(28,993)
Balance, May 31, 2008
(Restated)
225,565,000 $
22,557 $
55,585
$
-
$
-
- $
- $
(57,072) $
21,070
Common Shares cancelled to
directors September 2, 2008
(175,300,000)
(17,531)
17,531
-
-
-
-
-
Contributed Capital
-
-
-
5,050
-
-
-
-
5,050
Net (loss) for the year
(354,363)
(354,363)
Balance, May 31, 2009
50,265,000 $
5,026 $
73,116
$
5,050
$
-
- $
- $
(411,434) $
(328,242)
Private placement, closed
December 16, 2009 for $0.50
per share
4,200,000
420
2,099,580
-
-
-
-
-
2,100,000
Debt Converted into stock
December 16, 2009 for $0.60
per share, including costs of
$102,370
400,000
40
342,330
-
-
-
-
-
342,370
Subscription receivable from
above private placement
-
-
-
-
(1,750)
-
-
-
(1,750)
Common shares issued services
on April 26, 2010
150,000
15
89,985
-
-
-
-
-
90,000
Common shares issued services
on April 30, 2010
100,000
10
99,990
-
-
-
-
-
100,000
Stock options expense
-
-
313,313
-
-
-
-
-
313,313
Net (loss) for the year
(1,606,698)
(1,606,698)
Balance, May 31, 2010
55,115,000 $
5,511 $
3,018,313
$
5,050
$
(1,750) $
- $
- $
(2,018,132) $
1,008,992
See accompanying notes to the consolidated financial statements.
F-6
ABAKAN INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFECIT) - CONTINUED
Accumulated
Deficit
Non-
During
Total
Contributed
Subscription
Subscription
controlling
Development
Stockholders’
Shares
Amount
Capital
Capital
Receivable
Payable
Interest
Stage
Equity
Balance forwarded, May 31,
$
2010
55,115,000 $
5,511 $
3,018,313
$
5,050 $
(1,750) $
- $ -
(2,018,132) $
1,008,992
Private placement for cash,
closed October 21, 2010 for
-
$0.75 per share
566,667
57
424,943
-
-
-
-
425,000
Debt Converted into stock
October 21, 2010 for $0.82 per
share, including costs of
$37,333
533,333
53
437,280
-
-
-
-
-
437,333
Private placement for cash,
closed October 22, 2010 for
-
$0.75 per share
1,660,000
166
1,244,834
-
-
-
-
1,245,000
Common shares issued for
services on November 16,
-
2010
60,000
6
60,594
-
-
-
-
60,600
Debt Converted into stock
December 10, 2010 for $0.75
per share, including costs of
$23,400
90,000
9
90,891
-
-
-
-
-
90,900
Common shares issued for
services on December 10, 2010
150,000
15
152,985
-
-
-
-
-
153,000
Private placement for cash,
closed January 27, 2011 for
-
$1.00 per share
160,000
16
159,984
-
-
-
-
160,000
Common shares issued for
assignment agreement on
March 15, 2011
150,000
15
149,985
-
-
-
-
-
150,000
Debt Converted into stock March
25, 2011 for $1.00 per share,
including costs of $4,557
56,960
6
61,511
-
-
-
-
-
61,517
Common shares issued for
services on May 2, 2011
50,000
5
49,995
-
-
-
-
-
50,000
Common shares issued for
services on May 11, 2011
60,000
6
49,194
-
-
-
-
-
49,200
Private placement for cash,
closed May 17, 2011 for $1.00
-
per share
115,000
11
114,989
-
-
-
-
115,000
Common shares issued for
services on May 20, 2011
15,000 $
1 $
18,599
$
- $
- $
- $
- $
- $
18,600
May 31, 2011 continued on
following page
See accompanying notes to the consolidated financial statements.
F-7
ABAKAN INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFECIT) – CONTINUED
Accumulated
Deficit
Non-
During
Total
Common Stock
Paid-in
Contributed
Subscription
Subscription
controlling
Development
Stockholders’
Shares
Amount
Capital
Capital
Receivable
Payable
Interest
Stage
Equity
May 31, 2011 continued from
previous page
Private placement for cash, closed
May 25, 2011 for $1.00 per
share
65,465 $
7 $
65,458 $
- - $
-
$
-
$
- $
- $
65,465
Subscription receivable from
above private placement
-
-
-
-
(65,465)
-
-
(65,465)
Private placement for cash, closed
-
May 26, 2011 for $1.00 per
share
50,000
5
49,995
-
-
-
-
50,000
Debt Converted into stock May
-
29, 2011 for $1.00 per share,
including costs of $15,600
30,000
3
45,597
-
-
-
-
45,600
Private placement for cash, closed
-
May 29, 2011 for $1.00 per
share
100,000
10
99,990
-
-
-
-
100,000
Subscription receivable from
-
above private placement
-
-
-
-
(100,000)
-
-
(100,000)
Debt Converted into stock May
-
31, 2011 for $1.00 per share,
including costs of $114,400
220,000
22
334,378
-
-
-
-
334,400
Subscription receivable write off
-
from December 16, 2009
-
-
-
1,750
-
-
1,750
Beneficial conversion warrant
-
valuation for convertible debts
-
-
736,576
-
-
-
-
736,576
Stock options expense
-
-
964,439
-
-
-
-
-
964,439
Net (loss) for the year
(3,184,984)
(3,184,984)
Balance, May 31, 2011
59,247,425 $
5,924 $ 8,330,530
$
5,050 $
(165,465) $
-
- $
(5,203,116) $
2,972,923
Private placement for cash closed
June 6, 2011 for $1.00 per share
20,000
2
19,998
-
-
-
-
-
20,000
Private placement for cash closed
June 10, 2011 for $1.00 per
share
20,000
2
19,998
-
-
-
-
-
20,000
Debt converted into stock June 10,
2011 for $1.00 per share,
including costs of $5,500
10,000
1
15,499
-
-
-
-
-
15,500
May 31, 2012 continued on
following page
See accompanying notes to the consolidated financial statements.
F-8
ABAKAN INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFECIT) – CONTINUED
Accumulated
Deficit
During
Total
Common Stock
Paid-in
Contributed
Subscription
Subscription
Non-controlling
Development
Stockholders’
Shares
Amount
Capital
Capital
Receivable
Payable
Interest
Stage
Equity
May 31, 2012 continued from
previous page
Common shares issued for
services on June29, 2011
50,000 $
5
$
75,995
$
- $
- $
- $
- $
-
$
76,000
Private placement for cash,
closed July 6, 2011 for $1.00
per share
30,000
3
29,997
-
-
-
-
-
30,000
Common shares issued for
services on December 2, 2011
20,000
2
23,598
-
-
-
-
-
23,600
Private placement for cash,
closed February 20, 2012 for
$1.00 per share
300,000
30
299,970
-
-
-
-
-
300,000
Debt converted into stock
February 20, 2012 for $1.00
per share, including costs of
$12,648
421,595
42
434,201
-
-
-
-
-
434,243
Common shares issued for
services on February 20, 2012
20,000
2
20,598
-
-
-
-
-
20,600
Private placement for cash,
closed March 16, 2012 for
$1.00 per share
382,000
38
381,962
-
-
-
-
-
382,000
Debt converted into stock
March 16, 2012 for $1.00 per
share, including costs of
$76,300
218,000
22
294,278
-
-
-
-
-
294,300
Common shares issued for
services on March 20, 2012
27,500
3
39,047
-
-
-
-
-
39,050
Private placement for cash,
closed April 20, 2012 for
$1.60 per share
18,438
2
29,498
-
-
-
-
-
29,500
Debt converted into stock April
20, 2012 for $1.60 per share,
including costs of $29,219
26,562
3
71,716
-
-
-
-
-
71,719
Private placement for cash,
closed April 23, 2012 for
$1.60 per share
200,000
20
319,980
-
-
-
-
-
320,000
Private placement for cash,
closed April 24, 2012 for
$1.60 per share
74,550
7
119,193
-
-
-
-
-
119,200
Debt converted into stock April
24, 2012, including costs of
$5,650
5,000
1
13,649
-
-
-
-
-
13,650
May 31, 2012 continued on
following page
See accompanying notes to the consolidated financial statements.
F-9
ABAKAN INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFECIT) – CONTINUED
Accumulated
Deficit
Common Stock
Paid-in
During
Total
Contributed
Subscription
Subscription
Non-controlling
Development
Stockholders’
Shares
Amount
Capital
Capital
Receivable
Payable
Interest
Stage
Equity
May 31, 2012 continued from
previous page
Private placement for cash, closed
April 25, 2012 for $1.60 per
share
15,625 $
2
$
24,998 $
-
$
- $
- $
-
$
- $
25,000
Private placement for cash, closed
May 29, 2012 for $1.60
50,000
5
79,995
-
-
-
-
-
80,000
Private placement for cash, closed
May 30, 2012 for $1.60 per share
268,750
27
429,973
-
-
-
-
-
430,000
Debt converted into stock May 30,
2012 for $1.60 per share,
including costs of $24,000
40,000
4
87,996
-
-
-
-
-
88,000
Subscription receivables received
from May 25 and 29, 2011
-
-
-
-
165,465
-
-
-
165,465
Purchase of controlling interest
from non-controlling interest on
July 13, 2011
-
-
-
-
-
-
3,412,500
-
3,412,500
Beneficial conversion warrant
valuation for convertible debts
-
-
846,133
-
-
-
-
-
846,133
Stock options expense
-
-
1,312,725
-
-
-
-
-
1,312,725
Net loss for the year
-
-
-
-
-
-
41,810
(1,119,249)
(1,077,439)
Balance May 31, 2012
61,465,445
6,147
13,321,527
5,050
-
-
3,454,310
(6,322,365)
10,464,669
Common shares issued for services
on July 9, 2012 at $2.00 per share
10,000
1
19,999
-
-
-
-
-
20,000
Private placement for cash, closed
July 30, 2012 for $1.75 per share
300,000
30
524,970
-
-
-
-
-
525,000
Common shares issued for services
on June 1, 2012 for services on
May 1, 2012 at $2.61 per share
12,500
1
32,624
-
-
-
-
-
32,625
Common shares issued for services
on June 1, 2012 at $2.22 per
share
12,500
1
23,124
-
-
-
-
-
23,125
Common shares issued for services
on July 1, 2012 at $2.00 per share
12,500
1
24,999
-
-
-
-
25,000
Common shares issued for services
on August 7, 2012 at $1.90 per
share
10,000
1
18,999
-
-
-
-
19,000
May 31, 2013 continued on
following page
See accompanying notes to the consolidated financial statements.
F-10
ABAKAN INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFECIT) – CONTINUED
Accumulated
Deficit
During
Total
Common Stock
Paid-in
Contributed
Subscription
Subscription
Non-controlling
Development
Stockholders’
Shares
Amount
Capital
Capital
Receivable
Payable
Interest
Stage
Equity
May 31, 2013 continued from
previous page
Common shares issued for services on
September 18, 2012 for $1.75 per
share
25,000 $
3
$
42,747 $
-
$
- $
-
$
-
$
- $
42,750
Private placement for cash, closed
September 28 , 2012 for $1.75
150,000
15
262,485
-
-
-
-
-
262,500
Private placement for cash, closed
October 18, 2012 for $2.30 per
share
100,000
10
229,990
-
-
-
-
-
230,000
Private placement for cash, closed
November 26, 2012 for $2.30
7,000
1
16,099
-
-
-
-
-
16,100
Common shares issued for services on
November 29, 2012 at $1.70 per
share, including costs of $21,000
20,000
2
54,998
-
-
-
-
-
55,000
Debt converted into stock November
30, 2012 for $2.30 per share,
including costs of $28,000
70,000
7
188,993
-
-
-
-
-
189,000
Accounts payable debt converted into
stock November 30, 2012 for $2.30
per share, including costs of $8,000
20,000
2
53,998
-
-
-
-
-
54,000
Private placement for cash, closed
November 30, 2012 for $2.30 per
-
-
62,718
share including costs of $5,217
25,000
3
62,715
-
-
-
Subscription receivable from above
private placement
-
-
-
-
(27,500)
-
-
(27,500)
Subscription payable deposit against
stock subscription
-
-
-
-
-
12,000
-
-
12,000
Note payable debt converted into stock
November 30, 2012 for $2.30 per
share including costs of $1,223
3,038
1
8,255
-
-
-
-
8,256
Private placement for cash, closed
December 3, 2012 for $2.30 per
share
121,500
12
278,988
-
-
-
-
279,000
Private placement for cash, closed
December 3, 2012 for $2.30
22,000
2
50,598
-
-
(12,000)
-
-
38,600
May 31, 2013 continued on following
page
See accompanying notes to the consolidated financial statements.
F-11
ABAKAN INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFECIT) – CONTINUED
Accumulated
Deficit
During
Total
Common Stock
Paid-in
Contributed
Subscription
Subscription
Non-controlling
Development
Stockholders’
Shares
Amount
Capital
Capital
Receivable
Payable
Interest
Stage
Equity
May 31, 2013 continued from
previous page
Private placement for cash,
closed December 19, 2012 for
$2.30 per share
70,000 $
7
$
160,993 $
- $
- $
-
$
-
$
- $
161,000
Private placement for cash,
closed December 19, 2012 for
$2.30 per share
45,000
5
103,495
-
-
-
-
103,500
Private placement for cash,
closed December 20, 2012 for
$2.30
76,522
8
175,992
-
-
-
-
-
176,000
Subscription receivable from
above private placement
-
-
-
-
(84,000)
-
-
-
(84,000)
Private placement for cash,
closed December 30, 2012 for
$2.30 per share
100,000
10
229,990
-
-
-
-
-
230,000
Common shares issued for
services on January 8, 2013 at
$2.80 per share
21,429
2
59,998
-
-
-
-
-
60,000
Common shares issued for
services on February 21, 2013
at $2.70 per share
20,000
2
53,998
-
-
-
-
-
54,000
Common shares issued for
services on February 21, 2013
at $2.70 per share
10,000
1
26,999
-
-
-
-
-
27,000
Subscription receivables received
from November 30, 2012
-
-
-
-
27,500
-
-
-
27,500
Subscription payable deposit
against stock subscription
-
-
-
-
-
101,200
-
-
101,200
Common shares issued for
services on March 18, 2013 at
$2.80 per share
15,000
2
41,999
-
-
-
-
-
42,000
Common shares issued for raffle
prize on March 18, 2013 at
$2.54 per share
100
0
270
-
-
-
-
-
270
Common shares issued for
services to be rendered on
March 18, 2013 at $2.54 per
share
26,622
2
59,998
-
-
-
-
-
60,000
May 31, 2013 continued on
following page
See accompanying notes to the consolidated financial statements.
F-12
ABAKAN INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFECIT) – CONTINUED
Accumulated
Deficit
During
Total
Common Stock
Paid-in
Contributed
Subscription
Subscription
Non-controlling
Development
Stockholders’
Shares
Amount
Capital
Capital
Receivable
Payable
Interest
Stage
Equity
May 31, 2013 continued from
previous page
Common shares issued for services
to be rendered on March 18,
2013 at $2.52 per share
10,000 $
1
$
25,199 $
- $
- $
-
$
-
$
- $
25,200
Private placement for cash, closed
March 18, 2013 for $2.30 per
share
44,000
4
101,196
-
-
(101,200)
-
-
(0)
Note payable debt converted into
stock March 18, 2013 for $2.30
per share, including costs of
$81,200
232,000
23
614,777
-
-
-
-
-
614,800
Accounts payable debt of $25,000
converted into stock and $96,000
prepaid expenses March 18,
-
2013 for $2.30 per share,
55,000
6
138,595
-
-
-
including costs of $12,100
-
138,600
Accounts payable debt converted
into stock March 25, 2013
including costs of $5,783
16,522
2
43,782
-
-
-
-
-
43,783
Cash exercise of warrants on April
1, 2013 at $1.50 per share
15,000
2
22,499
-
-
-
-
-
22,500
Common shares issued for services
on April 2, 2013 at $2.70 per
share
23,600
2
63,718
-
-
-
-
-
63,720
Private placement for cash, closed
April 10, 2013 at $1.00 per share
10,000
1
22,999
-
-
-
-
-
23,000
Common shares issued for
conversion of convertible debt
on April 13, 2013 at $1.00 per
share
500,000
50
499,950
-
-
-
-
-
500,000
Note payable debt converted into
stock April 15, 2013 for $2.30
per share, including costs of
$47,250
135,000
14
357,737
-
-
-
-
-
357,750
Cash exercise of warrants on April
18, 2013 at $1.50 per share
50,000
5
74,995
-
-
-
-
-
75,000
May 31, 2013 continued on
following page
See accompanying notes to the consolidated financial statements.
F-13
ABAKAN INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFECIT) – CONTINUED
Accumulated
Deficit
During
Total
Common Stock
Paid-in
Contributed
Subscription
Subscription
Non-controlling
Development
Stockholders’
Shares
Amount
Capital
Capital
Receivable
Payable
Interest
Stage
Equity
May 31, 2013 continued from
previous page
Private placement for cash,
closed April 22, 2013 for $2.60
per share
39,000 $
4
$
101,396 $
- $
- $
-
$
-
$
- $
101,400
Private placement for cash,
closed April 23, 2013 for $2.60
per share
78,000
8
202,792
-
-
-
-
-
202,800
Private placement for cash,
closed April 29, 2013 for $2.60
per share
78,000
8
202,792
-
-
-
-
-
202,800
Private placement for cash,
closed April 30, 2013 for $2.60
per share
13,500
1
35,099
-
-
-
-
-
35,100
Cash exercise of warrants on May
7, 2013 at $1.50 per share
7,500
1
11,249
-
-
-
-
-
11,250
Note payable debt converted into
stock May 7, 2013 for $2.60
per share including costs of
$6,800
10,000
1
32,799
-
-
-
-
-
32,800
Private placement for cash,
closed May 9, 2013 for $2.60
per share
12,000
1
31,199
-
-
-
-
-
31,200
Note payable debt converted into
stock May 15, 2013 for $2.60
per share including costs of
$6,000
10,000
1
31,999
-
-
-
-
-
32,000
Cash exercise of warrants on May
17, 2013 at $1.50 per share
32,733
3
49,096
-
-
-
-
-
49,099
Cash exercise of warrants on May
21, 2013 at $1.50 per share
82,500
8
123,742
-
-
-
-
-
123,750
Private placement for cash,
closed May 21, 2013 for $2.60
per share
3,900
0
10,140
-
-
-
-
-
10,140
Cash exercise of warrants on May
29, 2013 at $1.50 per share
82,500
8
123,742
-
-
-
-
-
123,750
Subscription receivable from
above exercise of warrants
-
-
-
-
(67,244)
-
-
-
(67,244)
May 31, 2013 continued on
following page
See accompanying notes to the consolidated financial statements.
F-14
ABAKAN INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFECIT) – CONTINUED
Accumulated
Deficit
During
Total
Common Stock
Paid-in
Contributed
Subscription
Subscription
Non-controlling
Development
Stockholders’
Shares
Amount
Capital
Capital
Receivable
Payable
Interest
Stage
Equity
May 31, 2013 continued from
previous page
Accounts payable debt converted
into stock May 31, 2013 for
$2.60 per share including costs
of $16,547
26,924 $
3
$
86,546 $
- $
- $
-
$
-
$
- $
86,549
Shares returned and cancelled per
settlement agreement dated
May 8, 2013, at $1.13 per
share
(31,000)
(3)
(35,027)
-
-
-
-
-
(35,030)
Shares returned and cancelled per
settlement agreement dated
May 8, 2013, at $1.18 per
share
(20,000)
(2)
(23,598)
-
-
-
-
-
(23,600)
Subscription receivables received
from December 20, 2012
-
-
-
-
75,000
-
-
-
75,000
Stock options expense
-
-
1,827,496
-
-
-
-
-
1,827,496
MesoCoat stock option expense
allocated to non-controlling
interest
-
-
(73,318)
-
-
-
73,318
-
-
Net loss for the year
-
-
-
-
-
-
(1,113,932)
(7,223,423)
(8,337,355)
Balance, May 31, 2013
64,284,855 $
6,430 $
20,833,426 $
5,050 $
(76,244) $
-
$
2,413,697 $
(13,545,788) $
9,636,571
See accompanying notes to the consolidated financial statements.
F-15
ABAKAN INC
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF CASH FLOW
Cumulative
Amounts from
Development stage
For the years
Activities
ended
June 27, 2006
May 31,
(inception) to
2013
2012
2011
May 31, 2013
CASH FLOWS FROM DEVELOPMENT STAGE
ACTIVITIES
Net profit/ (loss) before non-controlling interest
$
(8,337,355) $
(1,077,439) $
(3,184,384) $
(14,617,910)
Adjustments to reconcile net (loss) to net
cash provided by (used in) development stage activities:
Depreciation and amortization
417,072
302,858
5,790
749,156
Amortization of discount on debt
838,289
475,374
137,490
1,451,153
Imputed interest on debt
59,343
-
-
59,343
Stock options expense
1,827,496
1,311,032
964,439
4,416,280
Stock expense from note conversion
239,120
153,317
195,290
730,097
Stock issued for services
415,791
159,250
331,401
1,096,442
Equity in investee (profit)/ loss
260,878
(944,125)
278,292
(213,289)
Unrealized gain on MesoCoat acquisition
-
(1,764,345)
-
(1,764,345)
Gain/ (loss) on sale of capital asset
-
(429,717)
-
(429,717)
Changes in operating assets and liabilities:
Accounts receivable
(82,669)
148,603
-
65,934
Notes receivable - related parties
-
-
4,000
(4,500)
Prepaid expenses
66,106
(166,934)
8,951
(131,181)
Prepaid expenses - related parties
(16,676)
1,485
12,667
(2,524)
Accounts payable
1,150,049
299,070
129,118
1,789,606
Accounts payable - related parties
170,231
1,562
97,073
333,735
Accrued interest - related parties
-
-
-
2,664
Accrued interest - loans payable
(14,251)
104,961
35,847
145,153
66,395
105,763
72,428
244,586
Accrued liabilities
Waste to Energy Group Inc.
-
-
-
180,000
Total adjustments
$
5,397,173
(241,846) $
2,272,786 $
8,718,593
NET CASH (USED IN) DEVELOPMENT STAGE
ACTIVITIES
(2,940,182)
(1,319,285)
(912,198)
(5,899,317)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property, plant, equipment and website
(2,675,328)
(1,073,018)
(4,394)
(3,782,202)
Proceeds from sale of capital assets
921
470,000
-
470,921
MesoCoat - minority interest, net of cash assumed in
business combination
-
1 ,059,764
(2,050,000)
(2,390,266)
Investment in MesoCoat
-
(750,070)
-
(750,070)
Powdermet - minority interest
-
-
(1,650,000)
(1,650,000)
Assignment agreement - MesoCoat
-
-
(100,000)
(100,000)
Capitalized patents and licenses
(45,083)
(98,185)
-
(143,268)
Waste to Energy Group Inc.
-
-
(180,000)
(180,000)
NET CASH PROVIDED BY/ (USED) IN INVESTING
ACTIVITIES
(2,719,490)
(391,509)
(3,804,394)
(8,524,885)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from sale of common stock
3,126,964
1,755,700
1,997,999
9,058,805
Proceeds from loans payable
2,107,292
1,079,485
2,625,769
5,958,579
Payments on loans payable
(207,816)
(375,651)
-
(583,467)
Proceeds from loans payable - related parties
66,200
-
79,680
145,880
Payments on loans payable - related parties
(36,200)
-
(27,420)
(15,137)
Repayments of capital leases
(23,294)
(54,639)
-
(77,933)
Stock issuable
-
-
-
165,465
Proceeds from capital contributed
-
-
-
5,050
NET CASH PROVIDED BY FINANCING
ACTIVITIES
5,033,146
2,570,360
4,676,028
14,657,242
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS
(626,526)
859,566
(40,564)
233,040
CASH AND CASH EQUIVALENTS, BEGINNING OF
-
PERIOD
859,566
-
40,564
-
CASH AND CASH EQUIVALENTS, END OF PERIOD
$
233,040 $
859,566 $
- $
233,040
See accompanying notes to the consolidated financial statements.
F-16
ABAKAN INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF CASH FLOWS – CONTINUED
Supplemental Disclosures:
Cash paid for income taxes
$
- $
- $
- $
-
Cash paid for interest
$
- $
964 $
- $
964
Supplemental Non-cash Disclosures:
Notes and accounts payable converted to stock
Accounts payable - related parties
$
(279,255) $
(188,460) $
(141,960) $
(485,226)
Loans payable
(1,607,595)
(567,895)
(625,169)
(2,257,764)
Accrued interest
(13,044)
(7,737)
(4,331)
(17,375)
Notes payable - related parties
-
-
-
(99,515)
Accrued interest - related parties
-
-
-
(9,724)
Common stock
1,976,138
764,092
774,460
2,874,354
Subscription payable
-
-
(3,000)
(3,000)
-
(1,750)
(1,750)
Subscription receivable
(76,244)
$
- $
-
$
- $
-
Stock issued for assignment agreement - MesoCoat
Assignment agreement - MesoCoat
$
- $
- $
(150,000) $
(150,000)
Common stock
-
-
(150,000)
150,000
$
- $
- $
- $
-
Capital lease equipment acquired
Property, plant and equipment
$
- $
126,907 $
- $
126,907
Capital lease payable
-
(126,907)
126,907
(126,907)
$
- $
- $
- $
-
Non-cash write off of balances
Accounts payable - related parties
$
- $
- $
52,030 $
52,030
Loans payable
-
-
(156)
(156)
Accrued interest
-
-
(553)
(553)
Notes payable - related parties
-
-
(52,260)
(52,260)
Accrued interest - related parties
-
-
(811)
(811)
Subscription receivable
-
-
1,750
1,750
$
- $
- $
- $
-
Accounts payable converted to Notes Payable
Accounts payable
155,161
-
-
155,161
Notes payable
(155,161)
-
-
(155,161)
-
-
-
-
Beneficial conversion valuation
Additional paid-in capital
$
- $
815,669 $
736,576 $
1,241,449
Discount on convertible debts
-
(815,669)
(736,576)
(1,241,449)
$
- $
- $
- $
-
Controlling interest purchase - Mesocoat
Accounts receivable
$
- $
171,457 $
- $
171,457
Property and equipment, net
-
1,899,598
-
1,899,598
Patents and licenses, net
-
7,938,206
-
7,938,206
Total assets
-
10,009,261
-
10,009,261
Accounts payable
-
(268,398)
-
(268,398
Capital leases
-
(42,907)
-
(42,907)
Loans Payable and accrued interest
-
(2,233,474)
-
(2,233,474)
Other accrued liabilities
-
(65,545)
-
(65,545)
Total liabilities
-
(2,610,324)
-
(2,610,324)
Net assets
-
7,398,937
-
7,398,937
Noncontrolling interest equity
-
(3,412,500)
-
(3,412,500)
Goodwill
-
364,384
-
364,384
Investment in Mesocoat
-
(1,849,665)
-
(1,849,665)
MesoCoat net assets received
$
- $
2,501,156 $
-
2,501,156
See accompanying notes to the consolidated financial statements.
F-17
Abakan Inc.
(A Development Stage Enterprise)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended May 31, 2013 and 2012
Note 1 – BUSINESS
Your Digital Memories, Inc. was incorporated in the state of Nevada on June 27, 2006.
Waste to Energy Group Inc., a wholly-owned subsidiary of Your Digital Memories Inc., was
incorporated in the state of Nevada on August 13, 2008. Waste to Energy Group Inc. and Your Digital
Memories Inc. entered into an Agreement and Plan of Merger on August 14, 2008. The board of
directors of Waste to Energy Group Inc. and Your Digital Memories Inc. deemed it advisable and in the
best interest of their respective companies and shareholders that Waste to Energy be merged with and
into Your Digital Memories Inc. with Your Digital Memories Inc. remaining as the surviving
corporation under the name Waste to Energy Group Inc.
Abakan Inc., a wholly-owned subsidiary of Waste to Energy Group Inc., was incorporated in the state of
Nevada on November 6, 2009. Abakan Inc. and Waste to Energy Group Inc. entered into an Agreement
and Plan of Merger on November 6, 2009. The board of directors of Abakan Inc. and Waste to Energy
Group Inc. deemed it advisable and in the best interest of their respective companies and shareholders
that Abakan Inc. be merged with and into Waste to Energy Group Inc. with Waste to Energy Group Inc.
remaining as the surviving corporation under the name “Abakan Inc.”
Unless the context indicates otherwise, all references herein to the “Company”, “we,” “us,” and “our”
refer to Abakan Inc. and its consolidated subsidiaries. The Company is in the development stage as
defined under FASB ASC 915-10, "Development Stage Entities."
On December 10, 2009 the Company purchased a thirty-four percent (34%) interest in MesoCoat, Inc.
("MesoCoat"), and on July 13, 2011 purchased an additional eighteen and one-half percent (18.50%),
for an aggregate total of fifty two and one-half percent (52.50%) of the outstanding stock of MesoCoat.
MesoCoat (formerly “Powdermet Coating Technologies, Inc.”) was incorporated in Nevada as a wholly
owned subsidiary of Powdermet, Inc. (“Powdermet”) on May 18, 2007. Operations began in 2008 and
effective March 31, 2008 it was renamed as MesoCoat Inc. Future success of operations is subject to
several technical hurdles and risk factors, including satisfactory product development, regulatory
approval and market acceptance of MesoCoat’s products and its continued ability to obtain future
funding. MesoCoat is currently in the development stage, as operations consist primarily of research and
development expenditures, and revenues from planned principal operations that have not yet been
realized. MesoCoat has invested heavily in intellectual property, machinery and equipment to initiate
the research and development of its core technology. Currently, MesoCoat’s revenue consists of
government grants, cooperative reimbursement agreements and commercial contracts.
On March 21, 2011, the Company purchased 596,813 shares of Powdermet from Kennametal, Inc., an
unrelated party, equal to a fully diluted 41% interest in Powdermet.
Powdermet was formed in 1996 as a Delaware corporation and has since developed a product platform
of advanced materials solutions derived from nano-engineered particle agglomerate technology and
derived hierarchically structured materials. Powdermet also owns 47.50% of MesoCoat.
F-18
Abakan Inc.
(A Development Stage Enterprise)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended May 31, 2013 and 2012
NOTE 1 – BUSINESS - continued
On June 8, 2011, the Company formed a wholly owned subsidiary company named, AMP Distributors,
Ltd. (“AMP Distributors”), a Grand Cayman corporation. In April 2013, AMP SEZC filed for a Trade
Certificate which was approved in full in May 2013 to begin operations as a Special Economic Zone
Company, accordingly we change name from AMP Distributors to AMP SEZC. Fully staffed offices
have been established by AMP SEZC in the Cayman Enterprise City. The primary purpose of these
entities is to negotiate, execute and administer the set up of overseas operations as well as handling
some international sales of MesoCoat's products.
On July 27, 2012, the Company formed a wholly owned subsidiary company named, AMP Distributors,
Inc. (“AMP FL”), a Florida corporation. AMP Distributors was formed to distribute MesoCoat products
to consumer markets.
Abakan’s plan of operations is to develop and commercialize their products in advanced coatings and
metal formulations markets as a result of its investment in MesoCoat, Inc. (“MesoCoat”) and
Powdermet, Inc. (“Powdermet”). Abakan is actively involved in supporting their R&D, market
development, and commercialization efforts. Since the Company is in the pre-commercialization phase
for the majority of its products, it is anticipated that the Company will need successive rounds of
financing to fund research & development, lengthy qualification periods, sales and marketing efforts.
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Accounting Basis
These financial statements are prepared on the accrual basis of accounting in conformity with
accounting principles generally accepted in the United States of America (GAAP).
We follow accounting standards set by the Financial Accounting Standards Board, commonly referred
to as the FASB. The FASB sets GAAP that we follow to ensure we consistently report our financial
condition, results of operations, and cash flows. References to GAAP issued by the FASB in these
footnotes are to the FASB Accounting Standards Codification, sometimes referred to as the Codification
or ASC.
Cash and Cash Equivalents
For the purposes of the statements of cash flows, cash equivalents include all highly liquid investments
with a maturity of three months or less.
Concentration in Sales to Few Customers
In the years ended May 31, 2013 and 2012, our government contracts accounted for 90% and 71% of our
revenues, respectively. There was no revenue for the year ended May 31, 2011.
F-19
Abakan Inc.
(A Development Stage Enterprise)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended May 31, 2013 and 2012
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – continued
Cash in Excess of FDIC Insured Limits
We maintain our cash in bank deposit accounts which, at times, may exceed federally insured limits.
Accounts are guaranteed by the Federal Deposit Insurance Corporation (FDIC) up to $250,000. At May
31, 2013 and 2012, we had approximately none and $207,239, respectively, in excess of FDIC insured
limits. We have not experienced any losses in such accounts.
Consolidation Policy
The accompanying May 31, 2013 financial statements include the Company’s accounts and the accounts of
its subsidiaries. All significant intercompany transactions and balances have been eliminated in
consolidation. The Company’s ownership of its subsidiaries as of May 31, 2013 is as follows:
Name of Subsidiary
Percentage of Ownership
AMP SEZC (Cayman)
100.00%
AMP Distributors (Florida)
100.00%
MesoCoat, Inc.
52.50%
Fair Value of Financial Instruments
In January 2008, the Company adopted FASB ASC 820, Fair Value Measurements and Disclosures
(“ASC 820”) (Formerly referenced as SFAS No. 157, Fair Value Measurements), to value its financial
assets and liabilities. The adoption of ASC 820 did not have a significant impact on the Company’s
results of operations, financial position or cash flows. ASC 820 defines fair value, establishes a
framework for measuring fair value under GAAP and expands disclosures about fair value
measurements. ASC 820 defines fair value as the exchange price that would be paid by an external party
for an asset or liability (exit price).
ASC 820 also establishes a fair value hierarchy which requires an entity to maximize the use of
observable inputs and minimize the use of unobservable inputs when measuring fair value. Three levels
of inputs may be used to measure fair value:
·
Level 1 – Active market provides unadjusted quoted prices for identical assets or liabilities that the
company has the ability to access;
·
Level 2 – Quoted prices for similar assets or liabilities in active markets or quoted prices for identical
or similar assets or liabilities in inactive markets. Level 2 inputs include those other than quoted
prices that are observable for the asset or liability and that are derived principally from, or
corroborated by, observable market data by correlation of other means. If the asset or liability has a
specified term the Level 2 input must be observable for substantially the full term of the asset or
liability; and
·
Level 3 – Inputs to the valuation methodology are unobservable and significant to the fair value
measurement.
F-20
Abakan Inc.
(A Development Stage Enterprise)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended May 31, 2013 and 2012
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
Fair value estimates discussed herein are based upon certain market assumptions and pertinent
information available to management as of May 31, 2013. The Company uses the market approach to
measure fair value for its Level 1 financial assets and liabilities. The market approach uses prices and
other relevant information generated by market transactions involving identical or comparable assets or
liabilities.
Fair Value of Financial Instruments - continued
The respective carrying value of certain on-balance-sheet financial instruments approximated their fair
values. These financial instruments which include cash, accounts receivable, accounts payable, and notes
payable are valued using Level 1 inputs and are immediately available without market risk to
principal. Fair values were assumed to approximate carrying values for these financial instruments since
they are short term in nature and their carrying amounts approximate fair values or they are receivable or
payable on demand. The carrying value of note payable to stockholder approximates its fair value
because the interest rates associated with the instrument approximates current interest rates charged on
similar current borrowings. The Company does not have other financial assets that would be
characterized as Level 2, but we do feel that our investment in Powdermet would be characterized as
Level 3 assets.
Non-Controlling Interest
Non-controlling interest represents the minority members’ proportionate share of the equity of MesoCoat,
Inc. The Company’s controlling interest in MesoCoat requires that its operations be included in the
consolidated financial statements. The equity interest of MesoCoat that is not owned by the Company is
shown as non-controlling interest in the consolidated financial statements.
Equity Method
Investee companies that are not consolidated, but over which the Company exercises significant
influence, are accounted for under the equity method of accounting, in accordance with ASC 323.
Whether or not the Company exercises significant influence with respect to an Investee depends on an
evaluation of several factors including, among others, representation on the investee company’s board of
directors and ownership level, which is generally a 20% to 50% interest in the voting securities of the
investee company. Under the equity method of accounting, an investee company’s accounts are not
reflected within the Company’s Balance Sheets and Statements of Operations; however, the Company’s
share of the earnings or losses of the investee company is reflected in the caption “Equity in (Investee)
income (loss)” in the Statements of Operations. The Company’s carrying value in an equity method
investee company is reflected in the caption “Investment – (Investee)” in the Company’s Balance Sheets.
Occasionally, we may make payments towards our investment in investee companies. As we make those
deposits on our total investment, we account for those payments on our balance sheet as “Investment
deposits in (investee).” When we complete the total investment amount, these amounts are moved into the
individual investment accounts discussed above.
F-21
Abakan Inc.
(A Development Stage Enterprise)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended May 31, 2013 and 2012
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
Earnings (Loss) Per Common Share
The Company computes net loss per share in accordance with FASB ASC 260-10, "Earnings per Share".
FASB ASC 260 requires presentation of both basic and diluted earnings per share (EPS) on the face of
the statement of operations. Basic EPS is computed by dividing net loss available to common
stockholders (numerator) by the weighted average number of shares outstanding (denominator)
during the period. Diluted EPS gives effect to all potentially dilutive common shares outstanding during
the period. Diluted EPS excludes all potentially dilutive shares if their effect is anti-dilutive. The only
potentially dilutive common shares outstanding are stock options and warrants from inception (Note 10).
Development Stage Enterprise
At May 31, 2013, the Company’s business operations had not fully developed and the Company is highly
dependent upon funding and therefore is considered a development stage enterprise.
Accounts Receivable
Accounts receivable are stated at face value, less an allowance for doubtful accounts. The Company
provides an allowance for doubtful accounts based on management's periodic review of accounts,
including the delinquency of account balances. Accounts are considered delinquent when payments have
not been received within the agreed upon terms, and are written off when management determines that
collection is not probable. As of May 31, 2013 and 2012 management has determined that no allowance
for doubtful accounts is required.
Notes Receivable
Notes receivable are stated at face value, plus any accrued interest earned. The Company analyzes each
note receivable each period for probability of collectability. Notes are considered in default when
payments have not been received within the agreed upon terms, and are written off when management
determines that collection is not probable. As of May 31, 2013 and 2012, management has determined
that no occurrence of default exists.
Property, Plant and Equipment
Property, plant and equipment are stated at cost less accumulated depreciation and amortization.
Maintenance and repairs are charged to operations as incurred. Depreciation and amortization are based
on the straight-line method over the estimated useful lives of the related assets. When assets are retired or
otherwise disposed of, the cost and accumulated depreciation and amortization are removed from the
accounts, and any resulting gain or loss is reflected in operations in the period realized.
F-22
Abakan Inc.
(A Development Stage Enterprise)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended May 31, 2013 and 2012
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
Asset Construction In Progress
Construction in progress assets, represent assets that are in process of construction and rehabilitation in
order to bring them to operational status. All costs are captured in a separate Construction in Progress
account, and are included in the “Property, plant and equipment – net” amounts, and when the asset is
ready to enter service, the total costs are capitalized and depreciation commences per the schedule below.
Depreciation
Depreciation is computed on the straight-line method net of salvage value with useful lives as follows:
Computer equipment and software
3 - 5 years
Office furniture and equipment
5 - 7 years
Machinery and equipment
7 - 10 years
Leasehold improvements
balance of lease term
Patent and Technology Licenses
Patent costs are recorded at the cost to obtain the patent and are amortized on a straight-line basis over their estimated
useful lives up to 20 years, beginning when the patent is secured by the Company. License costs are recorded at
the cost to obtain the license and are amortized on a straight-line basis over effective term of the license, up to 15
years.
Indefinite-lived Intangible Assets
In accordance with GAAP, Intellectual Property – Research and Development in the amount of $6,120,200
related to the acquisition of MesoCoat, will not be amortized, and was reviewed for impairment starting fiscal
year ending May 31, 2013, due to its indefinite life. Indefinite-lived intangible assets are tested for impairment
using qualitative analysis and, if necessary, fair value measurement techniques. As of the years ended May 31,
2013 and 2012, no impairment charges were necessary.
Goodwill
In accordance with GAAP, goodwill in the amount of $364,384 related to the acquisition of MesoCoat was
evaluated for impairment on an annual basis starting fiscal year ending May 31, 2013.
Dividends
The Company has not adopted any policy regarding payment of dividends. No dividends have been
paid during the periods shown.
F-23
Abakan Inc.
(A Development Stage Enterprise)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended May 31, 2013 and 2012
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
Income Taxes
Income taxes are provided for using the liability method of accounting. A deferred tax asset or liability
is recorded for all temporary differences between financial and tax reporting. Deferred tax expense
(benefit) results from the net change during the year in deferred tax assets and liabilities. Valuation
allowances are established when necessary to reduce deferred tax assets to the amount expected to more
likely than not be realized in future tax returns. Tax law and rate changes are reflected in income in the
period such changes are enacted.
Revenue Recognition
The Company recognizes revenue when there is persuasive evidence of an arrangement, delivery has
occurred or services have been rendered, the sales price is fixed or determinable, and collectability is
reasonably assured.
Grant Revenue
Revenue from grants is generally recorded when earned as defined under the terms of the agreements. Each
grant document sets the timing of amounts that are allowed to be billed and how to bill those amounts. We generally
look at a two week time period to bill from and work on the incurred costs for the same time period and bill according
to preset amounts that are allowed to be billed for per the grant documents. This is then billed through a government
billing system, reviewed by the government department, and then payment is sent to us.
Research and Development Costs
Research and development costs are charged to expense as incurred and are included in operating expenses. Total
research and development costs were $1,347,190, $737,316 and none for the years ended May 31, 2013, 2012
and 2011, respectively.
Advertising Expenses
Advertising costs are expensed as incurred. Advertising expenses are included in general and
administrative expense in the accompanying statements of operations. Total advertising expenses were
$6,875, $14,376 and $950 for the years ended May 31, 2013, 2012 and 2011, respectively.
Shipping and Handling Costs
The Company’s shipping and handling costs are included in cost of revenues for all periods presented.
F-24
Abakan Inc.
(A Development Stage Enterprise)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended May 31, 2013 and 2012
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
Stock-Based Compensation
The Company follows FASB ASC 718-10 and values our employee stock based awards based on the
grant-date fair value estimated in accordance with the provisions of FASB ASC 718-10. The Company
accounts for equity instruments issued in exchange for the receipt of goods or services from other than
employees in accordance with FASB ASC 718-10 and the conclusions reached in FASB ASC 505-10.
Costs are measured at the estimated fair market value of the consideration received or the estimated fair
value of the equity instruments issued, whichever is more reliably measurable. The value of equity
instruments issued for consideration other than employee services is determined on the earliest of a
performance commitment or completion of performance by the provider of goods or services as defined
by FASB ASC 505-10.
Derivatives
The Company occasionally issues financial instruments that contain an embedded instrument. At
inception, the Company assesses whether the economic characteristics of the embedded derivative
instrument are clearly and closely related to the economic characteristics of the financial instrument (host
contract), whether the financial instrument that embodies both the embedded derivative instrument and
the host contract is currently measured at fair value with changes in fair value reported in earnings, and
whether a separate instrument with the same terms as the embedded instrument would meet the definition
of a derivative instrument.
If the embedded derivative instrument is determined not to be clearly and closely related to the host
contract, is not currently measured at fair value with changes in fair value reported in earnings, and the
embedded derivative instrument would qualify as a derivative instrument, the embedded derivative
instrument is recorded apart from the host contract and carried at fair value with changes recorded in
current-period earnings.
The Company determined that all embedded items associated with financial instruments at this time do
not qualify for derivative treatment, nor should those be separated from the host.
Impairment of Long Lived Assets
We evaluate whether events and circumstances have occurred which indicate the remaining estimated
useful life of long lived assets, including other intangible assets, may warrant revision or the remaining
balance of an asset may not be recoverable. The measurement of possible impairment is based on a
comparison of the fair value of the related assets to the carrying value using discount rates that reflect the
inherent risk of the underlying business. Impairment losses, if any, would be recorded to the extent the
carrying value of the assets exceeds the implied fair value resulting from this calculation. As of May 31,
2013 and 2012, the Company has not recognized any impairment associated with long lived assets.
F-25
Abakan Inc.
(A Development Stage Enterprise)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended May 31, 2013 and 2012
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
General Accounting Policy for Contingencies
Certain conditions may exist which may result in a loss to the Company, but which will only be resolved
when one or more future events occur or fail to occur. The Company’s management and its legal counsel
assess such contingent liabilities, and such assessment inherently involves an exercise of judgment. In
assessing loss contingencies related to legal proceedings that are pending against the Company, or
unasserted claims that may result in such proceedings, the Company’s legal counsel evaluates the
perceived merits of any legal proceedings or unasserted claims as well as the perceived merits of the
amount of relief sought or expected to be sought therein.
If the assessment of a contingency indicates that it is probable that a material loss has been incurred and
the amount of the liability can be estimated, the estimated liability would be accrued in the Company’s
financial statements. If the assessment indicates that a potentially material loss contingency is not
probable but is reasonably possible, or is probable but cannot be estimated, the nature of the contingent
liability, together with an estimate of the range of possible loss if determinable and material, would be
disclosed.
Loss contingencies considered remote are generally not disclosed unless they arise from guarantees, in
which case the guarantees would be disclosed.
As of May 31, 2013 and 2012, the Company’s management believes that there are no outstanding legal
proceedings which would have a material adverse effect on the financial position of the Company.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with GAAP requires management to make
estimates and assumptions that affect the reported amounts of assets, the disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts of revenues and expenses
during the reporting periods. The more significant areas requiring the use of estimates include asset
impairment, stock-based compensation, beneficial conversion features on debt instruments, and future
income tax amounts. Management bases its estimates on historical experience and on other assumptions
considered to be reasonable under the circumstances. Actual results may differ from the estimates.
Subsequent Events
In accordance with ASC 855-10 “Subsequent Events”, the Company has evaluated subsequent events and
transactions for potential recognition or disclosure in the financial statements through the date the
financial statements were issued (Note 17).
F-26
Abakan Inc.
(A Development Stage Enterprise)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended May 31, 2013 and 2012
NOTE 3 – GOING CONCERN
The accompanying financial statements have been prepared assuming that the Company will continue as
a going concern. The Company has net losses for the period of June 27, 2006 (inception) to the year
ended May 31, 2013, of $13,545,788, and a working capital deficit of $2,222,670. These conditions
raise substantial doubt about the Company’s ability to continue as a going concern. The Company’s
continuation as a going concern is dependent on its ability to develop additional sources of capital,
and/or achieve profitable operations and positive cash flows. Management’s plan is to aggressively
pursue its present business plan. Since inception we have funded our operations through the issuance of
common stock, debt financing, and related party loans and advances, and we will seek additional debt or
equity financing as required. The accompanying financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
NOTE 4 – PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following:
May 31, 2013
May 31, 2012
Machinery and equipment
$
4,227,464
$
427,641
Construction in progress
692,655
2,617,196
Computer equipment and office furniture
47,032
35,369
Leasehold improvements
840,953
53,818
5,808,104
3,134,024
Less accumulated depreciation and amortization
(213,097)
(112,936)
$
5,595,007
$
3,021,088
Depreciation and amortization expense was $100,488, $42,782 and $2,290 for the years ended May 31,
2013, 2012 and 2011, respectively. The Company recognized a loss of $921 for equipment sold the year
ended May 31, 2013.
F-27
Abakan Inc.
(A Development Stage Enterprise)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended May 31, 2013 and 2012
NOTE 5 – PATENTS AND LICENSES
Patents and licenses consist of the following:
May 31, 2013
May 31, 2012
Patents
$
118,074 $
72,991
Website
21,000
21,000
Intellectual Property Research and Development
6,120,200
6,120,200
Licenses
1,843,200
1,843,200
8,102,474
8,057,391
Less accumulated amortization
(557,311)
(281,076)
$
7,545,163 $
7,776,315
Amortization expense was $276,235, $260,076 and $3,500 for the years ended May 31, 2013, 2012 and
2011, respectively. In the years ended May 31, 2013 and 2012, we have capitalized an additional $45,083
and $98,185, respectively, on patents and licenses, and have begun amortizing those according to our policy.
Future amortization patents and licenses are presented in the table below:
For the years ended May 31,
2014
$
291,152
2015
291,152
2016
291,152
2017
291,152
2018 and beyond
260,355
$
1,424,963
Patent license agreement
The Company has an exclusive commercial patent license agreement with a third party which requires the
Company to invest in the research and development of technology and the market for products by
committing to a certain level of personnel hours and $350,000 of expenditures.
The patent license agreement required a total of $50,000 in execution fees which are included in
intangible assets. The patent license agreement requires royalty payments equal to 2.5% of net sales of the
product sold by the Company beginning after the first commercial sale. For the first calendar year after
the achievement of a certain milestone and the following two calendar years during the term of the
agreement, the Company will pay a minimum annual royalty payment of $10,000, $15,000 and $20,000
respectively. During the year ended May 31, 2013, $19,742 of royalty payments were made.
F-28
Abakan Inc.
(A Development Stage Enterprise)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended May 31, 2013 and 2012
NOTE 6 – ASSIGNMENT AGREEMENT – MESOCOAT
On March 25, 2011, the Company entered into an assignment agreement (the Agreement) whereby it
would assume the exclusive rights to distribute MesoCoat’s products intended for applications specific to
the oil and gas pipeline industry in consideration of $250,000. The Agreement was entered into with a
company who entered into an exclusive distribution agreement with MesoCoat dated October 10, 2008
which was in effect for 10 years following the original date of the exclusive distribution agreement. On
May 31, 2011, the Company completed the transfer of consideration and assumed all rights to the
agreement. We commenced amortization on June 1, 2012, over the remaining term of 76 months, and
have recorded $39,472, none and none in amortization expense as of the year ended May 31, 2013, 2012
and 2011, respectively.
NOTE 7 – INVESTMENT IN NON-CONTROLLING INTEREST
Powdermet, Inc.
The Company purchased a forty one percent (41%) interest in Powdermet, Inc. (“Powdermet”), on June
28, 2010 from Kennametal in exchange for one million six hundred fifty thousand dollars ($1,650,000).
Powdermet was formerly the parent company of MesoCoat, owning 66% of MesoCoat at May 31, 2011.
Andy Sherman serves as the chief executive officer of both Powdermet and MesoCoat in addition to his
duties as a member of the Company’s board of directors. Through the Company’s purchase of 41% of
Powdermet, it also gained indirect ownership of the additional shares of MesoCoat that Powdermet owns.
We have analyzed our investment in accordance of “Investments – Equity Method and Joint Ventures”
(ASC 323), and concluded that when the stock purchase agreement was completed our 41% minority
interest investment gave us significant influence over Powdermet’s business actions, board of directors,
and its management, and therefore we account for our investment using the Equity Method. The table
below reconciles our investment amount and equity method amounts to the amount on the accompanying
balance sheet.
March 21, 2011, initial investment
$
1,650,000
Equity in profit for period of March 21
through May 31, 2011
71,656
Investment balance, May 31, 2011
$
1,721,656
Equity in profit for year ended May 31, 2012
988,533
Investment balance, May 31, 2012
$
2,710,189
Equity in loss for the year ended May 31, 2013
(260,877)
Investment balance, May 31, 2013
$
2,449,312
Powdermet’s ownership in MesoCoat was diluted when the Company exercised its initial option to
purchase 86,156 shares of common stock from MesoCoat. Powdermet’s ownership in MesoCoat as of
May 31, 2013 and 2012 is 47.50%.
F-29
Abakan Inc.
(A Development Stage Enterprise)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended May 31, 2013 and 2012
NOTE 7 – INVESTMENT IN NON-CONTROLLING INTEREST - CONTINUED
Powdermet, Inc.- continued
Below is a table with summary financial results of operations and financial position of Powdermet:
Powdermet Inc.
For the year ended
For the year ended
May 31, 2013
May 31, 2012
Equity Percentage
41%
41%
Condensed income statement information:
Total revenues
$
2,178,117 $ $
2,053,959
Total cost of revenues
1,188,988
941,441
Gross margin
1,042,264
1,112,518
Total expenses
(946,873)
(1,055,386)
Other income/ (expense)
(1,057,278)
3,515,113
Provision (for) benefit from income taxes
378,737
(1,161,190)
Net profit (loss)
$
(636,285) $ $
2,411,055
Company’s equity in net profit
$
(260,877) $ $
988,533
Condensed balance sheet information:
May 31, 2013
May 31, 2012
Total current assets
$
533,168 $ $
578,725
Total non-current assets
3,080,248
4,234,600
Total assets
$
3,613,416 $ $
4,813,325
Total current liabilities
$
260,897 $ $
395,614
Total non-current liabilities
1,676,463
2,105,370
Total equity
1,676,056
2,312,341
Total liabilities and equity
$
3,613,416 $ $
4,813,325
F-30
Abakan Inc.
(A Development Stage Enterprise)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended May 31, 2013 and 2012
NOTE 8 – LOANS PAYABLE
As of May 31, 2013 and 2012, the loans payable balance was comprised of:
Description
May 31, 2013
May 31, 2012
Convertible demand note to an unrelated entity bearing 5% interest per annum which matures
$
- $
400,231
on April 13, 2013. The note is shown net of a discount of $-0- and $99,769, respectively,
attributable to the beneficial conversion feature, and an effective interest rate of 30.19%.
Convertible demand note to an unrelated entity bearing 5% interest per annum which matures
1,500,000
1,214,917
on September 15, 2015. The note is shown net of a discount of $-0- and $285,083,
respectively, attributable to the beneficial conversion feature, and an effective interest rate of
31.19%.
Convertible demand note to an unrelated entity bearing 5% interest per annum which matures
175,163
38,531
on September 15, 2015. The note is shown net of a discount of $24,837 and $161,469,
respectively, attributable to the beneficial conversion feature, and an effective interest rate of
175.84%.
Convertible demand note to an unrelated entity bearing 5% interest per annum which matures
387,473
70,671
on July 14, 2013. The note is shown net of a discount of $112,527 and $429,329, respectively,
attributable to the beneficial conversion feature, and an effective interest rate of 142.77%.
Uncollateralized demand note to an unrelated entity bearing 8% interest per annum
70,000
70,000
Uncollateralized demand note to an unrelated entity bearing 8% interest per annum
3,850
3,850
Uncollateralized demand note to an unrelated entity bearing 8% interest per annum
-
303
Uncollateralized demand note to an unrelated entity bearing 8% interest per annum
19,350
19,350
Uncollateralized demand note to an unrelated entity bearing 8% interest per annum
20,000
20,000
Collateralized note to an unrelated entity bearing 1% interest for the first year and then 7%
1,000,000
-
per annum for years two – seven.
Uncollateralized demand note to a related entity bearing 8% interest per annum
30,000
-
Convertible demand note to an unrelated entity bearing 7.5% imputed interest per annum
48,228
56,043
which matures on July 10, 2018.
Uncollateralized notes to an unrelated entity bearing 8% interest per annum, matures on
405,877
-
September 15, 2014
Capital leases payable to various vendors expiring in various years through September 2016;
91,881
115,175
collateralized by certain equipment with a cost of $205,157.
Uncollateralized demand note to an unrelated entity for royalties shown net of discount of
1,576,892
1,717,546
$23,108 and $82,454, respectively
5,328,714 $
3,726,617
Less current liabilities
1,023,561
2,508,164
Total long term liabilities
$
4,305,153 $
1,218,453
We also owed $155,812 and $183,106 in accrued interest for the above notes as of May 31, 2013 and
2012, respectively. We also amortized $838,289, $475,374 and $137,490 in discount on debt as of May
31, 2013, 2012 and 2011, respectively.
As of May 31, 2013 and 2012, we had no restrictive covenants attached to any of the above referenced
notes except for the $1,000,000 Development Loan which requires MesoCoat to create or maintain 46
jobs by the 3rd anniversary date of the completion of the project in Euclid, Ohio. If the 46 jobs are not
created or maintained by such date, the interest rate will increase from 7% to 10% per annum.
F-31
Abakan Inc.
(A Development Stage Enterprise)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended May 31, 2013 and 2012
NOTE 8 – LOANS PAYABLE – CONTINUED
Future maturity of our notes payable is presented in the table below:
For the years ended May 31,
2014
$ 1,023,561
2015
3,056,282
2016
588,010
2017
193,126
2018 and beyond
467,735
$ 5,328,714
Development Loan - MesoCoat
On October 2, 2012 we began drawing against a development loan from the State of Ohio with a
maximum amount of $1,000,000, and bearing an interest rate of one percent the first year after the
disbursement date, and then for years two through seven, the interest rate is seven percent. On October 2,
2012, we received our first payout from this loan of $584,066. We received three additional draws on
October 5, 2012, February 7, 2013, and April 30, 2013 of $316,477, $69,441, and $30,016, respectively,
for a total of $1,000,000. The loan is to be repaid over seven years, and is collateralized by the project
equipment, one CermaClad system and automated pipe blasting equipment, and all inventory, equipment,
all fixtures, all intangibles and accounts receivables owned by MesoCoat.
Convertible Debentures - 2011
On March 17 and April 13, 2011 we signed two convertible debentures for a total of $2,000,000, due
March 17 and April 13, 2013, respectively. As of May 31, 2011, we received all of the proceeds from
these debentures. The notes bear an interest rate of 5% per annum, if any amounts are not paid when due
the interest rate will adjust and will be 10% per annum until paid.
On April 13, 2013, we converted $500,000 of the above debentures into shares of our common stock as
part of the private placements completed in the year ended May 31, 2013 (Note 9). The $1,500,000
convertible debenture was extended to September 15, 2014.
The notes have a provision for conversion of the outstanding amounts owed into conversion units for
$1.00 per unit; units consists of one share of our common stock and one-half share common stock
warrant to purchase shares of stock for $1.50 per share, with an expiration date of two years from the
conversion date. We have analyzed these detachable warrants in accordance with FASB ASC 470-20-
25-4, Debt with conversion options, and have determined that they have a beneficial conversion feature.
Accordingly we have valued these using the Black-Scholes method and have arrived at an aggregate
total $736,576, of relative fair value and was recorded as additional paid-in capital and has been
recorded as a discount on debt against the corresponding convertible note payable. In our valuation of
the warrant value we used the following terms:
F-32
Abakan Inc.
(A Development Stage Enterprise)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended May 31, 2013 and 2012
NOTE 8 – LOANS PAYABLE – CONTINUED
Convertible Debentures – 2011 - continued
March 17 and April 13, 2011
Expected volatility (based on historical
178.10%
volatility)
Expected dividends
0.00
Expected term in years
2.0
Risk-free rate
0.95%
In accordance with FASB ASC 470-20-55-32, we are amortizing this amount using the effective interest
method over the life of the notes payable of 24 months. For the years ended May 31, 2013, 2012 and
2011, we have recorded $384,852, $214,234 and $137,490, respectively, in amortization of discount on
debt and are reflected as a component of interest expense in our statement of operations. The remaining
aggregate total of none and $384,852 for the years ended May 31, 2014 and 2013, respectively, will be
amortized over the remaining life of the notes.
Convertible Debentures - 2012
On June 7, July 14, and August 29, 2011 we signed three convertible debentures for a total of $846,665,
due June 7, July 14 and August 29, 2013, respectively. As of May 31, 2012, we received all of the
proceeds from these debentures. The notes bear an interest rate of 5% per annum, if any amounts are not
paid when due the interest rate will adjust and will be 10% per annum until paid.
On February 20, 2012, we converted $146,665 of the above debentures that was due on August 29, 2013
into shares of our common stock
as part of the private placements completed in the year ended May 31, 2012 (Note 9). As part of this
conversion the note holder also converted $3,748 of accrued interest, and expensed the remaining
amount of $110,255 from the related discount on debt.
The notes have a provision for conversion of the outstanding amounts owed into conversion units for
$1.00 per unit; units consists of one share of our common stock and one-half share common stock
warrant to purchase shares of stock for $1.50 per share, with an expiration date of two years from the
conversion date. We have analyzed these detachable warrants in accordance with FASB ASC 470-20-
25-4, Debt with conversion options, and have determined that they have a beneficial conversion feature.
Accordingly we have valued these using the Black-Scholes method and have arrived at an aggregate
total $815,670, of relative fair value and was recorded as additional paid-in capital and has been
recorded as a discount on debt against the corresponding convertible note payable. In our valuation of
the warrant value we used the following terms:
F-33
Abakan Inc.
(A Development Stage Enterprise)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended May 31, 2013 and 2012
NOTE 8 – LOANS PAYABLE – CONTINUED
Convertible Debentures – 2012 - continued
June 7, 2011
July 14 2011
August 29, 2011
Expected volatility (based on historical
170.29%
170.29%
170.29%
volatility)
Expected dividends
0.00
0.00
0.00
Expected term in years
2.0
2.0
2.0
Risk-free rate
0.39%
0.38%
0.20%
In accordance with FASB ASC 835-30-35-2, we are amortizing discounts of debt using the effective
interest method over the life of the notes payable of 24 months. For the years ended May 31, 2013, 2012
and 2011, we have recorded $453,434, $224,872 and none, respectively, in amortization of discount on
debt and are reflected as a component of interest expense in our statement of operations. The remaining
aggregate total of $137,364 and $590,798 for the years ended May 31, 2014 and 2013, respectively, will
be amortized over the remaining life of the notes.
Convertible Debt Note Extensions
The Company extended two of the above convertible notes, $1,500,000 and $200,000, to September 15,
2014 that were due to mature on March 16, 2013 and June 7, 2013, respectively. The accrued interest on
both notes and a creditor fee was placed into a new $405,877 note bearing interest at 8% and will mature
on September 15, 2014. In addition to the extension date, certain force conversion options were modified
on each of the original notes.
F-34
Abakan Inc.
(A Development Stage Enterprise)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended May 31, 2013 and 2012
NOTE 9 – STOCKHOLDERS' EQUITY
Common Shares – Authorized
The Company has 2,500,000,000 common shares authorized at a par value of $0.0001 per share and
50,000,000 shares of preferred stock, par value $0.0001 per share. All common stock shares have equal
voting rights, are non-assessable and have one vote per share. Voting rights are not cumulative and,
therefore, the holders of more than 50% of the common stock could, if they choose to do so, elect all the
directors of the Company.
Common Stock Issuances
Private placements
For the years ended May 31, 2013 and 2012, we issued the following shares:
On June 6, 2011, we closed a private placement for $20,000, or 20,000 units consisting of one share of
our restricted common stock and one-half share common stock warrant to purchase shares of our common
stock, with a purchase price of $1.50 per share and an expiration date of two years from the closing. In
connection with this placement we had no offering costs for a net of $20,000.
On June 10, 2011, we closed a private placement for $20,000, or 20,000 units consisting of one share of
our restricted common stock and one-half share common stock warrant to purchase shares of our common
stock, with a purchase price of $1.50 per share and an expiration date of two years from the closing. In
connection with this placement we had no offering costs for a net of $20,000.
On July 6, 2011, we closed a private placement for $30,000, or 30,000 units consisting of one share of our
restricted common stock and one-half share common stock warrant to purchase shares of our common
stock, with a purchase price of $1.50 per share and an expiration date of two years from the closing. In
connection with this placement we had no offering costs for a net of $30,000.
On February 20, 2012, we closed a private placement for $300,000, or 300,000 units consisting of one
share of our restricted common stock and one common stock warrant to purchase shares of our common
stock, with a purchase price of $1.25 per share and an expiration date of two years from the closing. In
connection with this placement we had no offering costs for a net of $300,000.
On March 16, 2012, we closed a private placement for $382,000, or 382,000 units consisting of one share
of our restricted common stock and one common stock warrant to purchase shares of our common stock,
with a purchase price of $2.00 per share and an expiration date of two years from the closing. In
connection with this placement we had no offering costs for a net of $382,000.
On April 20, 2012, we closed a private placement for $29,500, or 18,438 units consisting of one share of
our restricted common stock and one-half common stock warrant to purchase shares of our common
stock, with a purchase price of $2.00 per share and an expiration date of two years from the closing. In
connection with this placement we had no offering costs for a net of $29,500.
F-35
Abakan Inc.
(A Development Stage Enterprise)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended May 31, 2013 and 2012
NOTE 9 – STOCKHOLDERS' EQUITY – CONTINUED
Common Stock Issuances - continued
Private placements - continued
On April 23, 2012, we closed a private placement for $320,000, or 200,000 units consisting of one share
of our restricted common stock and one-half common stock warrant to purchase shares of our common
stock, with a purchase price of $2.00 per share and an expiration date of two years from the closing. In
connection with this placement we had no offering costs for a net of $320,000.
On April 24, 2012, we closed a private placement for $119,200, or 74,550 units consisting of one share of
our restricted common stock and one-half common stock warrant to purchase shares of our common
stock, with a purchase price of $2.00 per share and an expiration date of two years from the closing. In
connection with this placement we had no offering costs for a net of $119,200.
On April 25, 2012, we closed a private placement for $25,000, or 15,625 units consisting of one share of
our restricted common stock and one-half common stock warrant to purchase shares of our common
stock, with a purchase price of $2.00 per share and an expiration date of two years from the closing. In
connection with this placement we had no offering costs for a net of $25,000.
On May 29, 2012, we closed a private placement for $80,000, or 50,000 units consisting of one share of
our restricted common stock and one-half common stock warrant to purchase shares of our common
stock, with a purchase price of $2.00 per share and an expiration date of two years from the closing. In
connection with this placement we had no offering costs for a net of $80,000.
On May 30, 2012, we closed a private placement for $430,000, or 268,750 units consisting of one share
of our restricted common stock and one-half common stock warrant to purchase shares of our common
stock, with a purchase price of $2.00 per share and an expiration date of two years from the closing. In
connection with this placement we had no offering costs for a net of $430,000.
On July 30, 2012, we closed a private placement for $525,000, or 300,000 units consisting of one share of
our restricted common stock and one-half common stock warrant to purchase shares of our common
stock, with a purchase price of $2.00 per share and an expiration date of two years from the closing. In
connection with this placement we had no offering costs for a net of $525,000.
On September 28, 2012, we closed a private placement for $262,500, or 150,000 units consisting of one
share of our restricted common stock and one-half common stock warrant to purchase shares of our
common stock, with a purchase price of $2.00 per share and an expiration date of two years from the
closing. In connection with this placement we had no offering costs for a net of $262,500.
On October 18, 2012, we closed a private placement for $230,000, or 100,000 units consisting of one
share of our restricted common stock and one-half common stock warrant to purchase shares of our
common stock, with a purchase price of $2.70 per share and an expiration date of two years from the
closing. In connection with this placement we had no offering costs for a net of $230,000.
F-36
Abakan Inc.
(A Development Stage Enterprise)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended May 31, 2013 and 2012
NOTE 9 – STOCKHOLDERS' EQUITY – CONTINUED
Common Stock Issuances - continued
Private placements - continued
On November 26, 2012, we closed a private placement for $16,100, or 7,000 units consisting of one share
of our restricted common stock and one-half common stock warrant to purchase shares of our common
stock, with a purchase price of $2.70 per share and an expiration date of two years from the closing. In
connection with this placement we had no offering costs for a net of $16,100.
On November 30, 2012, we closed a private placement for $62,715, or 25,000 units consisting of one
share of our restricted common stock and one-half common stock warrant to purchase shares of our
common stock, with a purchase price of $2.70 per share and an expiration date of two years from the
closing. In connection with this placement we had no offering costs for a net of $5,217.
On December 3, 2012, we closed two private placements for a total of $279,000, or 121,500 units
consisting of one share of our restricted common stock and one-half common stock warrant to purchase
shares of our common stock, with a purchase price of $2.70 per share and an expiration date of two years
from the closing. In connection with this placement we had no offering costs for a net of $279,000.
On December 8, 2012, we closed a private placement for a total of $50,600, or 22,000 units consisting of
one share of our restricted common stock and one-half common stock warrant to purchase shares of our
common stock, with a purchase price of $2.70 per share and an expiration date of two years from the
closing. In connection with this placement we had no offering costs for a net of $50,600.
On December 18, 2012, we closed two private placements for a total of $161,000, or 70,000 units
consisting of one share of our restricted common stock and one-half common stock warrant to purchase
shares of our common stock, with a purchase price of $2.70 per share and an expiration date of two years
from the closing. In connection with this placement we had no offering costs for a net of $161,000.
On December 19, 2012, we closed a private placement for $103,500, or 45,000 units consisting of one
share of our restricted common stock and one-half common stock warrant to purchase shares of our
common stock, with a purchase price of $2.70 per share and an expiration date of two years from the
closing. In connection with this placement we had no offering costs for a net of $103,500.
On December 20, 2012, we closed a private placement for $176,000, or 76,522 units consisting of one
share of our restricted common stock and one-half common stock warrant to purchase shares of our
common stock, with a purchase price of $2.70 per share and an expiration date of two years from the
closing. In connection with this placement we had no offering costs for a net of $176,500.
On December 30, 2012, we closed a private placement for $230,000, or 100,000 units consisting of one
share of our restricted common stock and one-half common stock warrant to purchase shares of our
common stock, with a purchase price of $2.70 per share and an expiration date of two years from the
closing. In connection with this placement we had no offering costs for a net of $230,000.
F-37
Abakan Inc.
(A Development Stage Enterprise)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended May 31, 2013 and 2012
NOTE 9 – STOCKHOLDERS' EQUITY – CONTINUED
Common Stock Issuances - continued
Private placements - continued
On March 18, 2013, we closed a private placement for $101,200, or 44,000 units consisting of one share
of our restricted common stock and one-half common stock warrant to purchase shares of our common
stock, with a purchase price of $2.70 per share and an expiration date of two years from the closing. In
connection with this placement we had no offering costs for a net of $101,200.
On April 1, 2013, we issued 15,000 shares of our common stock for $1.50 per share, to a warrant holder
exercising previously issued warrants for a total of $22,500.
On April 10, 2013, we closed a private placement for $23,000 or 10,000 units consisting of one share of
our restricted common stock and one-half common stock warrant to purchase shares of our common
stock, with a purchase price of $2.70 per share and an expiration date of two years from the closing. In
connection with this placement we had no offering costs for a net of $23,000.
On April 18, 2013, we issued 50,000 shares of our common stock for $1.50 per share, to a warrant holder
exercising previously issued warrants for a total of $75,000.
On April 22, 2013, we closed a private placement for $101,400 or 39,000 units consisting of one share of
our restricted common stock and one-half common stock warrant to purchase shares of our common
stock, with a purchase price of $3.00 per share and an expiration date of two years from the closing. In
connection with this placement we had no offering costs for a net of $101,400.
On April 23, 2013, we closed a private placement for $202,800 or 78,000 units consisting of one share of
our restricted common stock and one-half common stock warrant to purchase shares of our common
stock, with a purchase price of $3.00 per share and an expiration date of two years from the closing. In
connection with this placement we had no offering costs for a net of $202,800.
On April 29, 2013, we closed a private placement for $202,800 or 78,000 units consisting of one share of
our restricted common stock and one-half common stock warrant to purchase shares of our common
stock, with a purchase price of $3.00 per share and an expiration date of two years from the closing. In
connection with this placement we had no offering costs for a net of $202,800.
On April 30, 2013, we closed a private placement for $35,100 or 13,500 units consisting of one share of
our restricted common stock and one-half common stock warrant to purchase shares of our common
stock, with a purchase price of $3.00 per share and an expiration date of two years from the closing. In
connection with this placement we had no offering costs for a net of $35,100.
On May 7, 2013, we issued 7,500 shares of our common stock for $1.50 per share, to a warrant holder
exercising previously issued warrants for a total of $11,250.
F-38
Abakan Inc.
(A Development Stage Enterprise)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended May 31, 2013 and 2012
NOTE 9 – STOCKHOLDERS' EQUITY – CONTINUED
Common Stock Issuances - continued
Private placements - continued
On May 9, 2013, we closed a private placement for $31,200 or 12,000 units consisting of one share of our
restricted common stock and one-half common stock warrant to purchase shares of our common stock,
with a purchase price of $3.00 per share and an expiration date of two years from the closing. In
connection with this placement we had no offering costs for a net of $31,200.
On May 17, 2013, we issued 32,733 shares of our common stock for $1.50 per share, to a warrant holder
exercising previously issued warrants for a total of $49,099.
On May 21, 2013, we issued 82,500 shares of our common stock for $1.50 per share, to a warrant holder
exercising previously issued warrants for a total of $123,750.
On May 21, 2013, we closed a private placement for $10,140 or 3,900 units consisting of one share of our
restricted common stock and one-half common stock warrant to purchase shares of our common stock,
with a purchase price of $3.00 per share and an expiration date of two years from the closing. In
connection with this placement we had no offering costs for a net of $10,140.
On May 29, 2013, we issued 82,500 shares of our common stock for $1.50 per share, to a warrant holder
exercising previously issued warrants for a total of $123,750.
Conversion of debt to shares
On June 10, 2011, we closed a private placement for $10,000, or 10,000 units consisting of one share of
our restricted common stock and one-half share common stock warrant to purchase shares of our common
stock, with a purchase price of $1.50 per share and an expiration date of two years from the closing. In
connection with this placement we incurred stock expense on conversion of $5,500.
On February 20, 2012, we converted several debt obligations for $418,793, or 406,595 units consisting of
one share of our restricted common stock and one common stock warrant to purchase shares of our
common stock, with a purchase price of $1.25 per share and an expiration date of two years from the
closing. In connection with this placement we incurred stock expense on conversion of $12,198.
On February 20, 2012, we also converted accounts payable for $15,450, or 15,000 shares of our restricted
common stock. In connection with this placement we incurred stock expense on conversion of $450.
On March 16, 2012, we converted several debt obligations for $294,300, or 218,000 units consisting of
one share of our restricted common stock and one common stock warrant to purchase shares of our
common stock, with a purchase price of $2.00 per share and an expiration date of two years from the
closing. In connection with this placement we incurred stock expense on conversion of $76,300.
F-39
Abakan Inc.
(A Development Stage Enterprise)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended May 31, 2013 and 2012
NOTE 9 – STOCKHOLDERS' EQUITY – CONTINUED
Common Stock Issuances - continued
Conversion of debt to shares - continued
On April 20, 2012, we converted several debt obligations for $71,719, or 26,562 units consisting of one
share of our restricted common stock and one-half common stock warrant to purchase shares of our
common stock, with a purchase price of $2.00 per share and an expiration date of two years from the
closing. In connection with this placement we incurred stock expense on conversion of $29,219.
On April 24, 2012, we converted several debt obligations for $13,650, or 5,000 units consisting of one
share of our restricted common stock and one-half common stock warrant to purchase shares of our
common stock, with a purchase price of $2.00 per share and an expiration date of two years from the
closing. In connection with this placement we incurred stock expense on conversion of $5,650.
On May 30, 2012, we converted several debt obligations for $88,000, or 40,000 units consisting of one
share of our restricted common stock and one-half common stock warrant to purchase shares of our
common stock, with a purchase price of $2.00 per share and an expiration date of two years from the
closing. In connection with this placement we incurred stock expense on conversion of $24,000.
On November 30, 2012, we converted several debt obligations for $168,033, or 73,058 units consisting of
one share of our restricted common stock and one-half common stock warrant to purchase shares of our
common stock, with a purchase price of $2.70 per share and an expiration date of two years from the
closing. In connection with this placement we incurred stock expense on conversion of $29,223.
On November 30, 2012, we converted several accounts payables for $46,000, or 20,000 units consisting
of one share of our restricted common stock and one-half common stock warrant to purchase shares of
our common stock, with a purchase price of $2.70 per share and an expiration date of two years from the
closing. In connection with this placement we incurred stock expense on conversion of $8,000.
On November 30, 2012, we converted several accounts payable for $30,000, or 13,043 units consisting of
one share of our restricted common stock and one-half common stock warrant to purchase shares of our
common stock, with a purchase price of $2.70 per share and an expiration date of two years from the
closing. In connection with this placement we incurred stock expense on conversion of $5,217.
On February 21, 2013, we converted accounts payables due to related party for $54,000, or 20,000 units
consisting of one share of our restricted common stock. In connection with this placement we did not
incurred any stock expense.
On March 18, 2013, we converted several debt obligations for $660,100, or 287,000 units consisting of
one share of our restricted common stock and one-half common stock warrant to purchase shares of our
common stock, with a purchase price of $2.70 per share and an expiration date of two years from the
closing. In connection with this placement we incurred stock expense on conversion of $93,300.
F-40
Abakan Inc.
(A Development Stage Enterprise)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended May 31, 2013 and 2012
NOTE 9 – STOCKHOLDERS' EQUITY – CONTINUED
Common Stock Issuances - continued
Conversion of debt to shares - continued
On March 25, 2013, we converted several accounts payables for $38,000, or 16,522 units consisting of
one share of our restricted common stock and one-half common stock warrant to purchase shares of our
common stock, with a purchase price of $2.70 per share and an expiration date of two years from the
closing. In connection with this placement we incurred stock expense on conversion of $5,783.
On April 13, 2013, we converted one of our convertible debentures for $500,000 to 500,000 shares of our
restricted common stock with a conversion price of $1.00 per share. As part of the original convertible
debenture agreement, the holder received one-half common stock warrant to purchase shares of our
common stock upon conversion, with a purchase price of $1.25 per share and an expiration date of two
years from the closing.
On April 15, 2013, we converted several debt obligations for $310,500, or 135,000 units consisting of one
share of our restricted common stock and one-half common stock warrant to purchase shares of our
common stock, with a purchase price of $2.70 per share and an expiration date of two years from the
closing. In connection with this placement we incurred stock expense on conversion of $47,250.
On May 7, 2013, we converted a note payable for $26,000, or 10,000 units consisting of one share of our
restricted common stock and one-half common stock warrant to purchase shares of our common stock,
with a purchase price of $3.00 per share and an expiration date of two years from the closing. In
connection with this placement we incurred stock expense on conversion of $6,800.
On May 15, 2013, we converted a note payable for $26,000, or 10,000 units consisting of one share of our
restricted common stock and one-half common stock warrant to purchase shares of our common stock,
with a purchase price of $3.00 per share and an expiration date of two years from the closing. In
connection with this placement we incurred stock expense on conversion of $6,000.
On May 31, 2013, we converted several debt obligations for $70,002, or 26,924 units consisting of one
share of our restricted common stock and one-half common stock warrant to purchase shares of our
common stock, with a purchase price of $3.00 per share and an expiration date of two years from the
closing. In connection with this placement we incurred stock expense on conversion of $16,547.
Share based compensation
For the years ended May 31, 2013 and 2012, we issued the following shares for compensation:
On June 29, 2011, we issued 50,000 shares of our common stock for services performed valued at
$76,000.
On December 2, 2011, we issued 20,000 shares of our common stock for services performed valued at
$23,600.
F-41
Abakan Inc.
(A Development Stage Enterprise)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended May 31, 2013 and 2012
NOTE 9 – STOCKHOLDERS' EQUITY – CONTINUED
Common Stock Issuances - continued
Share based compensation - continued
On February 20, 2012, we issued 20,000 shares of our common stock for services performed valued at
$20,600.
On March 20, 2012, we issued 27,500 shares of our common stock for services performed valued at
$39,050.
On June 1, 2012, we issued 12,500 shares of our common stock for services performed valued at $32,625.
On August 20, 2012, we issued 12,500 shares of our common stock for services performed valued at
$23,125.
On July 1, 2012, we issued 12,500 shares of our common stock for services performed valued at $25,000.
On July 9, 2012, we issued 10,000 shares of our common stock for services performed valued at $20,000.
On August 7, 2012, we issued 10,000 shares of our common stock for services performed valued at
$19,000.
On September 18, 2012, we issued 25,000 shares of our common stock for services performed valued at
$42,750.
On November 29, 2012, we issued 20,000 shares of our common stock for services performed valued at
$55,000, including costs of $21,000.
On January 8, 2013, we issued 21,429 shares of our common stock for services performed valued at
$60,000.
On February 21, 2013, we issued 10,000 shares of our common stock for future services to be performed
valued at $27,000.
On March 18, 2013, we issued 15,000 shares of our common stock for future services performed valued
at $42,000.
On March 18, 2013, we issued 100 shares of our common stock for a raffle prize valued at $270.
On March 18, 2013, we issued 33,622 shares of our common stock for future services to be performed
valued at $85,200.
On April 2, 2013, we issued 23,600 shares of our common stock for future services performed valued at
$63,720.
F-42
Abakan Inc.
(A Development Stage Enterprise)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended May 31, 2013 and 2012
NOTE 9 – STOCKHOLDERS' EQUITY – CONTINUED
Share returned and cancelled
On May 8, 2013, we received back to the Treasury 31,000 shares of our common stock that were issued
for consulting services and the services were never performed valued at $35,030. Subsequently these
shares were cancelled.
On May 8, 2013, we received back to the Treasury 20,000 shares of our common stock that were issued
for consulting services and the services were never performed valued at $23,600. Subsequently these
shares were cancelled.
Common Stock Warrants
In connection with the above private placement we valued the common stock warrants granted during
the year ended May 31, 2013, using the Black-Scholes model with the following assumptions:
July 30,
September
October
November
November
December 3,
2012
28, 2012
18, 2012
26, 2012
30, 2012
2012
Expected volatility
102.68%
89.29%
89.62%
81.57%
81.63%
81.48%
(based on historical
volatility)
Expected dividends
0.00
0.00
0.00
0.00
0.00
0.00
Expected term in years
2.00
2.00
2.00
2.00
2.00
2.00
Risk-free rate
0.23%
0.23%
0.29%
0.27%
0.25%
0.25%
December
December
February
March
April 4,
May 5,8,
7, 8, 18, 19,
30, 2012
18, 2013
18,22,25,
7, 10, 23,
9, 10,
and 20,
2013
29, 2013
15, 31,
2012
2013
Expected volatility
81.34%
81.46%
80.17%
79.48% -
79.45% -
73.16 -
(based on historical
79.53%
79.63%
79.45%
volatility)
Expected dividends
0.00
0.00
0.00
0.00
0.00
0.00
Expected term in years
2.00
2.00
2.00
2.00
2.00
2.00
Risk-free rate
0.25 –
0.25%
0.24%
0.24-
0.20 –
0.20% -
.28%
.26%
0.24%
0.30%
The expected volatility assumption was based upon historical stock price volatility measured on a daily
basis. The risk-free interest rate assumption is based upon U.S. Treasury bond interest rates appropriate
for the term of the Company’s warrants. The dividend yield assumption is based on our history and
expectation of dividend payments. All warrants are immediately exercisable upon granting.
F-43
Abakan Inc.
(A Development Stage Enterprise)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended May 31, 2013 and 2012
NOTE 9 – STOCKHOLDERS' EQUITY – CONTINUED
Common Stock Warrants - continued
A summary of the common stock warrants granted during the years ended May 31, 2013 and May 31,
2012 are presented below:
Weighted
Weighted
Average
Average
Remaining
Number of
Exercise
Contractual
Warrants
Price
Terms (In Years)
Balance at June 1, 2011
2,670,233
$
0.85
Granted
1,696,063
1.67
Exercised
-
-
Forfeited or expired
(2,300,000)
0.75
Balance at May 31, 2012
2,066,296
$
1.64
2.00 years
Exercisable at May 31, 2012
2,066,296
$
1.64
2.00 years
Weighted average fair value of
warrants granted during the year
ended May 31, 2012
$
1.64
Balance at June 1, 2012
2,066,296
$
1.64
Granted
1,186,934
2.35
Exercised
(270,233)
1.50
Forfeited or expired
(140,005)
1.50
Balance at May 31, 2013
2,842,992
$
1.80
2.00 years
Exercisable at May 31, 2013
2,842,992
$
1.80
2.00 years
Weighted average fair value of
warrants granted during the year ended
May 31, 2013
$
2.35
F-44
Abakan Inc.
(A Development Stage Enterprise)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended May 31, 2013 and 2012
NOTE 9 – STOCKHOLDERS' EQUITY – CONTINUED
Common Stock Warrants - continued
The following table summarizes information about the warrants outstanding at May 31, 2013:
Warrants Exercisable
Weighted
Weighted
Range of
Number
Weighted Average
Average
Number
Average
Exercise
Outstanding at
Remaining
Exercise
Exercisable at
Exercise
Price
May31, 2013
Contractual Life
Price
May 31, 2013
Price
$
1.25
1,306,595
2.00 Years
$
1.25
$
1,306,595 $
1.25
$
1.50
250,000
2.00 Years
$
1.50
$
250,000 $
1.50
$
2.00
574,463
2.00 Years
$
2.00
$
574,463 $
2.00
$
2.70
576,272
2.00 Years
$
2.70
$
576,272 $
2.70
$
3.00
135,662
2.00 Years
$
3.00
$
135,662 $
3.00
2,842,992
2.00 Years
$
1.80
$
2,842,992 $
1.80
F-45
Abakan Inc.
(A Development Stage Enterprise)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended May 31, 2013 and 2012
NOTE 10 – EARNINGS-PER-SHARE CALCULATION
Basic earnings per common share for the years ended May 31, 2013 and 2012 are calculated by dividing
net income by weighted-average common shares outstanding during the period. Diluted earnings per
common share for the years ended May 31, 2013 and 2012 are calculated by dividing net income by
weighted-average common shares outstanding during the period plus dilutive potential common shares,
which are determined as follows:
For the year ended
For the year ended
May 31, 2013
May 31, 2012
Net earnings from operations
$
(7,223,423)
$
(1,119,249)
Weighted-average common shares
62,443,108
59,752,413
Effect of dilutive securities:
Warrants
-
-
Options to purchase common stock
-
-
Dilutive potential common shares
62,443,108
59,752,413
Net earnings per share from operations:
Basic
$
(0.12)
$
(0.02)
Diluted
$
(0.12)
$
(0.02)
Dilutive potential common shares are calculated in accordance with the treasury stock method, which
assumes that proceeds from the exercise of all warrants and options are used to repurchase common stock
at market value. The amount of shares remaining after the proceeds are exhausted represents the
potentially dilutive effect of the securities. The increasing number of warrants used in the calculation is a
result of the increasing market value of the Company’s common stock.
In periods where losses are reported the weighted-average number of common shares outstanding
excludes common stock equivalents because their inclusion would be anti-dilutive.
These securities below were excluded from the calculations above because to include them would be anti-
dilutive:
For the year ended May
For the year ended May 31,
31, 2013
2012
Common Stock Equivalents:
Warrants
2,842,992
2,066,296
Options to purchase common stock
3,800,000
5,160,000
Total of Common Stock Equivalents:
6,642,992
7,226,296
F-46
Abakan Inc.
(A Development Stage Enterprise)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended May 31, 2013 and 2012
NOTE 11 – RELATED PARTY TRANSACTIONS
Due to the common control between the Company and its related parties, the Company is exposed to the
potential that ownership risks and rewards could be transferred among the parties.
In addition to related party transactions mentioned elsewhere, we have the below agreements and
transactions:
Board of Advisors
On June 1, 2012, we appointed a new member to our Board of Advisors and granted him 100,000 stock
options for his service. The stock options have an exercise price of $2.30 per share of common stock, and
expire ten years from the date of grant. These options vest in equal one-third parts beginning on June 1,
2013, and every grant date anniversary for the next two years. The term of the Board of Advisors
Agreement will be in force until June 1, 2013, and shall renew automatically on an annual basis unless
terminated in writing. We also agreed to reimburse the advisor for all reasonable business expenses.
On June 20, 2012, we appointed a new member to our Board of Advisors and agreed to pay him $5,000
per month for his services beginning July 1, 2012. We also granted him 50,000 stock options for his
service. The stock options have an exercise price of $2.05 per share of common stock, and expire ten
years from the date of grant. These options vest in equal one-third parts beginning on June 20, 2013, and
every grant date anniversary for the next two years. The term of the Board of Advisors Agreement will be
in force until May 31, 2013, and shall renew automatically on an annual basis unless terminated in
writing. This agreement has subsequently been terminated.
On August 1, 2012, we appointed a new member to our Board of Advisors and agreed to pay him $3,000
per month for his services beginning August 1, 2012. We also granted him 75,000 stock options for his
service. The stock options have an exercise price of $1.95 per share of common stock, and expire ten
years from the date of grant. These options vest in equal one-third parts beginning on August 1, 2013, and
every grant date anniversary for the next two years. The term of the Board of Advisors Agreement will be
in force until August 1, 2013, and shall renew automatically on an annual basis unless terminated in
writing. We also agreed to reimburse the advisor for all reasonable business expenses.
On February 21, 2013, we appointed a new member to our Board of Advisors and agreed to pay up to
$5,000 and 10,000 restricted shares for services rendered through April 30, 2013. Thereafter we agreed
to pay him $3,000 per month for his services through February 28, 2015. We also granted him 15,000
stock options for his services. The stock options have an exercise price of $2.70 per share of common
stock, and expire ten years from the date of grant. These options vest in equal one-third parts beginning
on March 1, 2013, and every year for the next two years. The term of the Board of Advisors Agreement
will be in force until February 28, 2015. We also agreed to reimburse the advisor for all reasonable
business expenses. As of May 31, 2013, we owed this advisor $3,000.
F-47
Abakan Inc.
(A Development Stage Enterprise)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended May 31, 2013 and 2012
NOTE 11 – RELATED PARTY TRANSACTIONS – CONTINUED
Board of Advisors-continued
On March 22, 2013, we appointed a new member to our Board of Advisors and agreed to grant him
100,000 stock options for his services. The stock options have an exercise price of $2.80 per share of
common stock, and expire ten years from the date of grant. These options vest in equal one-third parts
beginning on December 10, 2013, and every year for the next two years. The term of the Board of
Advisors Agreement will be in force until March 22, 2015. We also agreed to reimburse the advisor for
all reasonable business expenses. As of May 31, 2013, we owed this advisor $20,250.
Board of Directors
On June 15, 2012, we appointed a new member to our Board of Directors. We agreed to pay him $15,000
per annum, payable in four equal payments. We also agreed to issue him 10,000 restricted shares of our
common stock and granted him 150,000 stock options for his service. The stock options have an exercise
price of $2.30 per share of common stock, and expire ten years from the date of grant. These options vest
in equal one-third parts beginning on September 15, 2012, and every September 15 after that. We also
agreed to pay for continuing education classes and related travel expenses, for a maximum of $4,500.
This agreement will be in force until May 31, 2015, unless terminated with a sixty day notice. We also
agreed to reimburse the new director for all reasonable business expenses. The director resigned on
December 5, 2012 and accepted the chief financial officer position of the Company.
On August 7, 2012, we appointed a new member to our Board of Directors. We agreed to issue him
10,000 restricted shares of our common stock and granted him 150,000 stock options for his service. The
stock options have an exercise price of $1.90 per share of common stock, and expire ten years from the
date of grant. These options vest in equal one-third parts beginning on August 7, 2013 and every August 7
after that. This agreement will be in force until August 7, 2015, unless terminated with a sixty day notice.
We also agreed to reimburse the new director for all reasonable business expenses. As of May 31, 2013,
we owed this advisor $3,000.
On December 5, 2012, we appointed a new member to our Board of Directors. We agreed to grant him
175,000 stock options for his service. The stock options have an exercise price of $2.61 per share of
common stock, and expire ten years from the date of grant. These options vest as follows; 25,000 upon
the date of this agreement and then in equal parts of 50,000 options beginning on December 5, 2013 and
every December 5 after that. This agreement will be in force until December 5, 2015, unless terminated
with a sixty day notice. We also agreed to reimburse the new member of the Board for all reasonable
business expenses.
On February 1, 2013, the Board of Directors approved the proposal of the Compensation Committee that
all independent members of the Board of Directors and all members of the respective Compensation,
Governance and Nominating Committee be compensated for attending Board or Committee meetings in
the amount of $750. It was also agreed that the Company shall compensate the director which is the Head
of the Compensation, Compliance and Nominating Committees $5,000 per annum and issue 20,000
restricted shares which were issued on February 21, 2013.
F-48
Abakan Inc.
(A Development Stage Enterprise)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended May 31, 2013 and 2012
NOTE 11 – RELATED PARTY TRANSACTIONS – CONTINUED
Employment agreement
On December 5, 2012, we entered into an employment agreement commencing December 10, 2012
with a related individual to perform duties as our Chief Financial Officer. The individual was a prior
director and resigned the effective date of this agreement. The employee retained previously issued
stock options. The terms of the employment agreement are $16,000 per month salary of which a portion
is deferred. The employment agreement will end on December 31, 2015 at which time it can be renewed
for 2 one year periods. In the event that this agreement is terminated, the employee may be eligible for
severance pay based upon the length of employment. The employee was granted 125,000 stock options
with an exercise price of $2.61 per share; they will vest equally over 3 years beginning December 9,
2013. The employee was also given a retention award to be paid $20,000 in common shares the month
following the anniversary date of his employment. For the year ended May 31, 2013 we expensed
$19,000 in connection with these contracts and are included in professional fees – related party, and
$86,308 in Payroll and benefits expense. As of May 31, 2013 we owed $11,064 included in accounts
payable - related party.
Consulting Agreements
On December 1, 2009 we entered into an agreement with a related individual to provide bookkeeping
services. The terms of the consulting agreement are $2,500 per month payable in consulting fees and
reimbursement to the consultant for all reasonable business expenses incurred by her in the performance
of her duties, and was in effect until December 1, 2010. The consultant was also granted 100,000 stock
options with an exercise price of $0.60 per share; they will vest equally over 2 years and the first third
was vested upon signing. On April 1, 2010, we entered into an amended agreement with the same
related individual to provide bookkeeping services. The terms of the amended consulting
agreement are $5,000 per month payable in consulting fees and reimbursement for all reasonable
business expenses incurred in the performance of her duties effective until April 1, 2011. The agreement
also had a provision to automatically renew for subsequent annual terms unless terminated in writing by
either party. For the years ended May 31, 2013 and 2012, we expensed $60,000 and $60,000,
respectively, in connection with these contracts and are included in professional fees – related party. As
of May 31, 2013 and 2012, we owed $5,000 and $4,751, respectively, included in accounts payable -
related party.
F-49
Abakan Inc.
(A Development Stage Enterprise)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended May 31, 2013 and 2012
NOTE 11 – RELATED PARTY TRANSACTIONS – CONTINUED
Consulting Agreements - continued
On April 26, 2010, we entered into an employment agreement with a related individual to perform the
duties of Vice President – Pipeline Coating Sales. The terms of the employment agreement were $6,000
per month payable in consulting fees, with increases payable with the attaining of certain milestones of
performance, and reimbursement to the employee for all reasonable business expenses incurred by him
in the performance of his duties, and which was in effect until March 31, 2013. The employee was also
granted 400,000 stock options with an exercise price of $0.60 per share; they will vest equally over 3
years, beginning April 26, 2011 and continuing on the anniversary date of signing (see Note 12). For the
year ended May 31, 2013 and 2012, we expensed none and $90,000, respectively, in connection with
this contract and are included in payroll and benefits expense. On March 23, 2012, his employment agreement was terminated.
As of May 31, 2013 and 2012, we have recorded an accrued liability of $107,400 and $85,633,
respectively.
On August 20, 2010, we entered into a consulting agreement commencing August 1, 2010 with a related
individual to perform duties as our Chief Financial Officer. On May 11, 2011, this individual resigned
his position as Chief Financial Officer. Effective May 10, 2011, this agreement was amended to change
the consultant’s role from Chief Financial Officer to general consultant, and all other provisions remain
the same. The terms of the consulting agreement are $8,000 per month payable in consulting fees and
reimbursement to the consultant for all reasonable business expenses incurred by him in the
performance of his duties, and which was in effect until July 31, 2012. The consultant was also granted
200,000 stock options with an exercise price of $0.65 per share; they will vest equally over 3 years (see
Note 12). For the years ended May 31, 2013 and 2012, we expensed $96,000 and $96,000, respectively,
in connection with this contract and are included in consulting – related party. As of May 31, 2013 and
2012, we owed $63,310 and $7,292, respectively, and is included in accounts payable - related party.
On May 1, 2011, we entered into a consulting agreement with a related individual to perform the duties
of Vice President – Business Development and a Director of the Company. The terms of the consulting
agreement are $5,000 per month payable in consulting fees, and reimbursement to the consultant for all
reasonable business expenses incurred by him in the performance of his duties, and which was in effect
until April 30, 2013, and was not renewed. For the years ended May 31, 2013 and 2012, we expensed
$55,000 and $60,000, respectively, in connection with this contract and are included in consulting –
related party. As of May 31, 2013 and 2012, we have recorded a liability of $107,400 and $56,243,
respectively and is included in accounts payable - related party.
F-50
Abakan Inc.
(A Development Stage Enterprise)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended May 31, 2013 and 2012
NOTE 11 – RELATED PARTY TRANSACTIONS – CONTINUED
Consulting Agreements - continued
On June 1, 2010, we entered into a consulting agreement with a company controlled by the spouse of
our Chief Executive Officer. The terms of the consulting agreement are $2,500 per month payable in
consulting fees and reimbursement to the consultant for all reasonable business expenses incurred by it
in the performance of its duties, and rental of office space for $1,200 per month, and will be in effect
until June 1, 2011. On December 1, 2010, we entered into a revised consulting agreement to supersede
the above agreement, with the same company as above. The terms of the consulting agreement are
$2,500 per month payable in consulting fees and reimbursement to the consultant for all reasonable
business expenses incurred by it in the performance of its duties, and rental of office space for $2,213
per month, and will be in effect until December 1, 2011 and continues in force. For the years ended May
31, 2013 and 2012, we expensed $30,000 and $30,000, respectively, in connection with this contract
and are included in consulting – related party. As of May 31, 2013 and 2012, we owed $5,623 and none,
respectively, and is included in accounts payable - related party.
On May 5, 2011, we entered into an employment agreement commencing May 1, 2011 with a related
individual to perform duties as our Chief Financial Officer. The terms of the employment agreement are
$10,000 per month salary, a car reimbursement of $500 per month and reimbursement to the employee
for all reasonable business expenses incurred by him in the performance of his duties, and will be in
effect until April 30, 2013. The employee was also granted 400,000 stock options with an exercise price
of $1.00 per share; they will vest equally over 3 years (see Note 12). The employee was also granted a
stock signing bonus of 60,000 shares of our common stock (Note 9) valued at $49,200 and is reflected
in consulting- related party. For the years ended May 31, 2013 and 2012, we expensed none and
$56,262, in connection with this contract and is included in payroll and benefits expense. As of May 31,
2013 and 2012 we owed $0 to this employee. On October 24, 2011, this individual resigned his position
as Chief Financial Officer, this agreement was discontinued, and he forfeited the 400,000 stock options
granted to him and received in settlement 100,000 vested stock options as part of this agreement.
On June 1, 2011, we entered into a consulting agreement commencing June 1, 2011, with a related
individual to provide services as our Chief Executive Officer. The terms of the consulting agreement are
the consultant will be paid $10,000 per month. We also agreed to reimburse the consultant for all
reasonable business expenses incurred by him in the performance of his duties, and will be in effect
until June 1, 2012. For the year ended May 31, 2013 and 2012, we expensed $120,000 and $120,000,
respectively, in connection with this contract, which amount is included in consulting – related party. As
of May 31, 2013 and 2012, we owed $53,673 and $12,487, respectively, which amount is included in
accounts payable - related party.
Note receivable – Related Party
On April 29, 2010, we entered in to a non-collateralized note receivable with a related company to ours
with some common ownership on an interest free basis, payable on demand. On July 15, 2010, we were
repaid $4,000 cash on this note and as of May 31, 2013 and 2012 we are owed a balance remaining of
$4,500.
F-51
Abakan Inc.
(A Development Stage Enterprise)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended May 31, 2013 and 2012
NOTE 11 – RELATED PARTY TRANSACTIONS – CONTINUED
Notes Payable – Related Party
For the year ended May 31, 2012, we entered into two uncollateralized demand notes to a Company
controlled by our Chief Executive Officer’s spouse, Prosper Financial, bearing 8% interest per annum
for an aggregate total of $9,000. On May 31, 2012, we repaid the principal amount of $9,000 plus
accrued interest of $499. As of May 31, 2012 we owed no balance.
On February 2, 2012, we entered into an uncollateralized demand note to a related individual, bearing
8% interest per annum for an aggregate total of $10,500. We also owed $63 in accrued interest for the
above note as of February 29, 2012. On March 16, this debt and accrued interest was converted into
share of our common stock as discussed in Note 9, and has a zero balance.
For the year ended May 31, 2013, we entered into two uncollateralized demand notes to a Company
controlled by our Chief Executive Officer’s spouse, Prosper Financial, bearing 8% interest per annum
for an aggregate total of $66,200. On August 31, 2012, we applied $6,200 of principal in addition to
$59.24 of accrued interest to advances owed to us by the same company. On September 25, 2012, we
also made a cash principal payment of $30,000. As of May 31, 2013 we owed $30,000, and $1,987 of
accrued interest.
License agreement – Related Party
The Company has a license agreement with Powdermet, Inc., a related party, which grants the
Company an exclusive license to the use of technical information, proprietary know-how, data and patent
rights assigned to and/or owned by Powdermet, Inc. The agreement will end upon the last to expire valid
claim of licensed patents, unless terminated within the terms of the agreement.
As part of the agreement, the Company has a commitment to purchase consumable powders from
Powdermet, Inc. through July 1, 2014. Also, as part of the agreement the Company will receive
technology transition and development service to support its research and development activities on a cost
reimbursement basis. Total expense related to the cost reimbursement was $369,184 and $275,365 for the
years ended May 31, 2013 and 2012, respectively.
F-52
Abakan Inc.
(A Development Stage Enterprise)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended May 31, 2013 and 2012
NOTE 12 – STOCK – BASED COMPENSATION
2009 Stock Option Plan – The Company
Our board of directors adopted and approved our 2009 Stock option Plan (“Plan”) on December 14, 2009,
which provides for the granting and issuance of up to 10 million shares of our common stock.
On August 15, 2011, we granted 25,000 stock options to a consultant at an exercise price of $1.25 per
share, and these options will expire ten years from the grant date, and will vest in equal one third parts on
the anniversary of the option grant date.
On October 24, 2011, we granted 100,000 stock options to our former Chief Financial Officer in
connection with his Separation Agreement at an exercise price of $1.20 per share, and these options will
expire five years from the grant date, and will vest immediately.
On January 2, 2012, we granted 100,000 stock options to a consultant at an exercise price of $1.00 per
share, and these options will expire ten years from the grant date, and will vest in equal one third parts on
the anniversary of the option grant date.
On January 5, 2012, we granted 150,000 stock options to a consultant at an exercise price of $1.00 per
share, and these options will expire ten years from the grant date, and will vest in equal one third parts on
the anniversary of the option grant date.
On February 1, 2012, we granted 70,000 stock options to a consultant at an exercise price of $1.07 per
share, and these options will expire ten years from the grant date, and will vest in equal one half parts on
the six month anniversary of the option grant date, and another one half part on the twelve month
anniversary of the option grant date.
On February 6, 2012, we granted 25,000 stock options to a consultant at an exercise price of $1.07 per
share, and these options will expire ten years from the grant date, and will vest in equal one half parts on
the date of grant, and another one half part on the six month anniversary of the option grant date.
On February 15, 2012, we granted 50,000 stock options to a consultant at an exercise price of $1.03 per
share, and these options will expire four years from the grant date, and will vest in equal one third parts
on the anniversary of the option grant date.
During the year ended May 31, 2012, we had 780,000 options that were expired or forfeited for
termination and resignation from service. After these grants there will be 4,840,000 available for future
grant.
F-53
Abakan Inc.
(A Development Stage Enterprise)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended May 31, 2013 and 2012
NOTE 12 – STOCK – BASED COMPENSATION - CONTINUED
2009 Stock Option Plan – The Company - continued
For the year ended May 31, 2013, the Company granted the following stock options:
For the year ended May 31, 2013
Options
Exercise
Expiration
To Whom
Grant Date
Granted
Price
term in years
Granted
Vesting Terms
June 12,
Granted to a
Will vest in equal one third parts on the
2012
100,000
$
2.30
10.00
consultant
anniversary date of the option grant date
Will vest in one third on grant date and
June 12,
Granted to a
remaining equally over two years on
2012
75,000
$
2.30
10.00
employee
anniversary of the option grant date
Will vest in equal one third parts
beginning on September 15, 2012 and
June 15,
Granted to a new
then every September 15th for the next
2012
150,000
$
2.30
10.00
Director
two years
June 20,
Granted to a
Will vest in equal one third parts on the
2012
50,000
$
2.05
10.00
consultant
anniversary date of the option grant date
July 27,
Granted to a
Will vest in equal one third parts on the
2012
75,000
$
1.95
10.00
consultant
anniversary date of the option grant date
August 7,
Granted to a new
Will vest in equal one third parts on the
2012
150,000
$
1.90
10.00
Director
anniversary date of the option grant date
Will vest 25,000 options on Grant date,
remaining 150,000 options in equal one
December
Granted to a new
third parts on the anniversary date of the
5, 2012
175,000
$
2.61
10.00
Director
option grant date
Granted to our
December
new Chief
Will vest in equal one third parts on the
5, 2012
125,000
$
2.61
10.00
Financial Officer
anniversary date of the option grant date
February 1,
Granted to a
Will vest in equal one half parts on
2013
70,000
$
2.70
10.00
consultant
January 31, 2014 and 2015
February
Granted to a
Will vest in equal one third parts
21, 2013
15,000
$
2.70
10.00
consultant
beginning on March 1, 2013
December
Granted to a
Will vest in equal one third parts
17, 2012
50,000
$
2.80
10.00
employee
beginning on December 17, 2013
March 22,
Granted to a
Will vest in equal one third parts
2013
100,000
2.80
10.00
consultant
beginning on December 10, 2013
Total
Granted
1,135,000
On December 4, 2012, we rescinded 1,500,000 stock options by mutual agreement between the Company
and the respective holders. From June 1, 2012 to May 31, 2013, 945,000 stock options expired without
exercise according to the option agreement.
F-54
Abakan Inc.
(A Development Stage Enterprise)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended May 31, 2013 and 2012
NOTE 12 – STOCK – BASED COMPENSATION - CONTINUED
2009 Stock Option Plan – The Company - continued
After these grants and expirations there are 6,200,000 stock options available for future grant.
Our board of directors administers our Plan, however, they may delegate this authority to a committee
formed to perform the administration function of the Plan. The board of directors or a committee of the
board has the authority to construe and interpret provisions of the Plan as well as to determine the terms
of an award. Our board of directors may amend or modify the Plan at any time. However, no
amendment or modification shall adversely affect the rights and obligations with respect to outstanding
awards unless the holder consents to that amendment or modification.
The Plan permits us to grant Non-Statutory stock options to our employees, directors and consultants.
The options issued under this Plan are intended to be Non-Statutory Stock Options exempt from Code
Section 409A.
The duration of a stock option granted under our Plan cannot exceed ten years. The exercise price of an
incentive stock option cannot be less than 100% of the fair market value of the common stock on the
date of grant.
The Plan administrator determines the term of stock options granted under our Plan, up to a maximum
of ten years, except in the case of certain events, as described below. Unless the terms of an optionee's
stock option agreement provide otherwise, if an optionee's relationship with us ceases for any reason
other than disability or death, the optionee may exercise any vested options for a period of ninety days
following the cessation of service. If an optionee's service relationship with us ceases due to disability
or death the optionee or a beneficiary may exercise any vested options for a period of 12 months in the
event of disability or death.
Unless the Plan administrator provides otherwise, options generally are not transferable except by will,
the laws of descent and distribution, or pursuant to a domestic relations order. An optionee may
designate a beneficiary, however, who may exercise the option following the optionee's death.
The value of employee and non-employee stock options granted during the year ended May 31, 2013
was estimated using the Black-Scholes model with the following assumptions:
June 12, 2012
June 15, 2012
June 20, 2012
July 27, 2012
August 7,
2012
Expected volatility (based on
154.39%
154.39%
154.39%
154.39%
154.39%
historical volatility)
Expected dividends
0.00
0.00
0.00
0.00
0.00
Expected term in years
10
10
10
10
10
Risk-free rate
1.67%
1.60%
1.65%
1.58%
1.66%
F-55
Abakan Inc.
(A Development Stage Enterprise)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended May 31, 2013 and 2012
NOTE 12 – STOCK – BASED COMPENSATION - CONTINUED
2009 Stock Option Plan – The Company - continued
December 5,
February 1,
February 21,
December 17,
March 22,
2012
2012
2012
2012
2013
Expected volatility (based on
147.16%
147.16%
147.16%
142.93%
142.93%
historical volatility)
Expected dividends
0.00
0.00
0.00
0.00
0.00
Expected term in years
10
10
10
10
10
Risk-free rate
1.60%
2.04%
1.99%
1.78%
1.93%
The expected volatility assumption was based upon historical stock price volatility measured on a daily
basis. The risk-free interest rate assumption is based upon U.S. Treasury bond interest rates appropriate
for the term of the Company’s employee stock options. The dividend yield assumption is based on our
history and expectation of dividend payments.
A summary of the options granted to employees and non-employees under the plan and changes during
the years ended May 31, 2013 and 2012 is presented below:
Weighted
Average
Weighted
Remaining
Average
Contractual
Aggregate
Number of
Exercise
Terms
Intrinsic
Options
Price
(In Years)
Value
Balance at June 1, 2011
5,420,000
$
0.75
Granted
520,000
1.06
Exercised
-
-
Forfeited or expired
(780,000)
-
Balance at May 31, 2012
5,160,000
$
0.77
9.00 years
$
185,000
Exercisable at May 31, 2012
2,980,829
$
0.71
9.00 years
$
--
Weighted average fair value of
options granted during the year ended
May 31, 2012
$
1.06
Balance at June 1, 2012
5,160,000
$
0.77
Granted
1,135,000
2.39
Exercised
-
-
Forfeited or expired
(2,495,000)
$
0.69
Balance at May 31, 2013
3,800,000
$
1.26
7.78 years
$
108,750
Exercisable at May 31, 2013
2,396,662
$
0.86
7.78 years
$
--
Weighted average fair value of
options granted during the year ended
May 31, 2013
$
2.39
F-56
Abakan Inc.
(A Development Stage Enterprise)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended May 31, 2013 and 2012
NOTE 12 – STOCK – BASED COMPENSATION - CONTINUED
2009 Stock Option Plan – The Company - continued
The following table summarizes information about employee stock options under the 2009 Plan
outstanding at May 31, 2013:
Options Outstanding
Options Exercisable
Weighted
Range
Number
Average
Weighted
Number
Weighted
of
Outstanding
Remaining
Average
Exercisable
Average
Aggregate
Exercis
at May 31,
Contractual
Exercise
Intrinsic
at May 31,
Exercise
Intrinsic
e Price
2013
Life
Price
Value
2013
Price
Value
$
0.60
1,100,000
7.0 Years
$
0.60
$
--
1,100,000 $
0.60
$
--
$
0.65
475,000
7.0 Years
$
0.65
$
27,500
316,665 $
0.65
$
23,974
$
0.75
200,000
7.0 Years
$
0.75
$
30,000
200,000 $
0.75
$
30,000
$
1.00
250,000
9.0 Years
$
1.00
$
1,000
83,333 $
1.00
$
472
$
1.02
50,000
8.0 Years
$
1.02
$
10,000
33,333 $
1.02
$
6,827
$
1.03
50,000
9.0 Years
$
1.03
$
3,000
16,666 $
1.03
$
1,333
$
1.05
120,000
8.0 Years
$
1.05
$
--
79,999 $
1.05
$
--
$
1.07
95,000
9.0 Years
$
1.07
$
--
95,000 $
1.07
$
--
$
1.20
100,000
4.0 Years
$
1.20
$
--
100,000 $
1.20
$
--
$
1.25
25,000
8.0 Years
$
1.25
$
1,250
16,666 $
1.25
$
1,015
$
1.30
250,000
7.0 Years
$
1.30
$
--
250,000 $
1.30
$
--
$
1.90
150,000
9.0 Years
$
1.90
$
--
-- $
0.00
$
--
$
1.95
75,000
9.0 Years
$
1.95
$
9,000
-- $
0.00
$
2,532
$
2.30
325,000
9.0 Years
$
2.30
$
--
75,000 $
2.30
$
--
$
2.61
300,000
10.0 Years
$
2.61
$
27,000
25,000 $
2.61
$
6,325
$
2.70
85,000
10.0 Years
$
2,70
$
--
5,000 $
2.70
$
--
$
2.80
150,000
10.0 Years
$
2.80
$
--
-- $
0.00
$
--
3,800,000
7.78 Years
$
1.26
$ 108,750
2,396,662 $
0.86
$
72,429
The total value of employee and non-employee stock options granted during the years ended May 31,
2013 and 2012, was $2,730,968 and $541,490, respectively. During years ended May 31, 2013, 2012
and 2011 the Company recorded $1,752,087, $1,311,032 and $964,439, respectively, in stock-based
compensation expense relating to stock option grants.
F-57
Abakan Inc.
(A Development Stage Enterprise)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended May 31, 2013 and 2012
NOTE 12 – STOCK – BASED COMPENSATION - CONTINUED
2009 Stock Option Plan – The Company - continued
At May 31, 2013 and 2012 there was $2,015,966 and $1,331,281, respectively, of total unrecognized
compensation cost related to stock options granted under the plan. That cost is expected to be
recognized pro-rata through December 15, 2015. The following table represents the stock options
expense for the each of the next three fiscal years ended May 31:
For years ended May 31,
Expense
2014
$
1,040,976
2015
746,211
2016
228,779
$
2,015,966
Stock Option Plan - MesoCoat
MesoCoat accounts for equity awards using the grant-date fair value.
The Company’s stock option plan (the Stock Option Plan) is intended to advance the interest of the
Company and its shareholders. Options granted under the Stock Option Plan can be either incentive stock
options or non-qualified stock options. The Stock Option Plan authorized the issuance of a maximum of
9,000 shares of the Company’s common stock. These options have a term of up to seven years and will
expire through 2019.
A summary of the Company’s stock option plan as of May 31, 2013 and 2012, and the changes during the
years then ended is presented in the table below:
Options Outstanding
Number of
Weighted
Shares
Average Exercise
Price
Outstanding at May 31, 2011
4,200 $
1.95
Granted
250
18.11
Exercised
-
Forfeited
-
Outstanding at May 31, 2012
4,450 $
2.68
Options exercisable at May 31, 2012
3,150 $
1.95
F-58
Abakan Inc.
(A Development Stage Enterprise)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended May 31, 2013 and 2012
NOTE 12 – STOCK – BASED COMPENSATION - CONTINUED
2009 Stock Option Plan – The Company - continued
Number of
Weighted
Shares
Average Exercise
Price
Outstanding at May 31, 2012
4,450 $
2.68
Granted
5,270
25.09
Exercised
-
Forfeited
(4,200)
(1.95)
Outstanding at May 31, 2013
5,520 $
24.78
Options exercisable at May 31, 2013
2,043 $
18.11
The total value of employee and non-employee stock options granted during the years ended May 31,
2013 and 2012, was $286,647 and none, respectively. During years ended May 31, 2013 and 2012 the
Company recorded $75,408 and $2,089, respectively, in stock-based compensation expense relating to
stock option grants.
At May 31, 2013, 2012 and 2011 there was $211,239, $2,089 and none, respectively, of total
unrecognized compensation cost related to stock options granted under the plan. That cost is expected
to be recognized pro-rata through November 1, 2016. The following table represents the stock options
expense for the each of the next three fiscal years ended May 31:
For years ended May 31,
Expense
2014
$
66,862
2015
62,232
2016
54,876
2017
27,269
$
211,239
NOTE 13 – COMMITMENTS
Consulting Agreements
On March 1, 2012, we entered into a consulting agreement commencing March 1, 2012, with an
unrelated individual to provide investor relations consulting. The terms of the consulting agreement are
that the consultant is paid $6,000 per month in addition the consultant was issued 50,000 shares of our
restricted common stock for the six month period. The shares will be issued in 12,500 share increments
each month on the signing date, May 1, July 1, and August 31. We also agreed to reimburse the
F-59
Abakan Inc.
(A Development Stage Enterprise)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended May 31, 2013 and 2012
consultant for all reasonable business expenses incurred by him in the performance of his duties, with a
term expiring September 1, 2012.
Consulting Agreements-continued
On March 1, 2012, we entered into a consulting agreement commencing March 1, 2012, with an
unrelated individual to provide capital investment consulting. The terms of the consulting agreement are
that the consultant is paid $102,000 for the twelve month term; at the start of each subsequent quarter,
the consultant and the Company will review the work performed and the projected work for the
following quarter to ensure the retainer balance is sufficient to pay for the requested services. We also
agreed to reimburse the consultant for all reasonable business expenses incurred by him in the
performance of his duties with a term expiring March 1, 2013.
On March 26, 2012, we entered into a consulting agreement commencing March 26, 2012, with an
unrelated individual to provide capital investment consulting. The terms of the consulting agreement are
that the consultant is paid $5,000 per month; in addition the consultant was issued 15,000 shares of our
restricted common stock for the initial three month period. Then commencing July 1, 2012 and each
quarter after the Company will issue 15,000 shares. We also agreed to reimburse the consultant for all
reasonable business expenses incurred by him in the performance of his duties, with a term expiring
September 26, 2012, at which time the agreement became a month to month agreement.
On September 1, 2012, we entered into a consulting agreement commencing September 1, 2012, with an
unrelated individual to provide investor relations. The terms of the consulting agreement are that the
consultant is paid $5,000 per month for the six month term. In addition, we will grant 30,000 shares of
our restricted common stock to them as follows, upon signing – 10,000 shares, 5,000 shares on
November 1, 2012, December 1, 2012, January 1, 2013 and February 1, 2013. We also agreed to
reimburse the consultant for all reasonable business expenses incurred by him in the performance of his
duties with a term expiring March 1, 2013.
On March 1, 2013, we entered into a consulting agreement commencing March 8, 2013, with an
unrelated individual to provide website consulting. The terms of the consulting agreement are that the
consultant is paid 1,200 shares of our common stock for the six month term. We agreed to issue the first
three months in advance and then monthly after that until the six month term is reached. We also agreed
to reimburse the consultant for all reasonable business expenses incurred by him in the performance of
his duties with a term expiring March 1, 2013.
F-60
Abakan Inc.
(A Development Stage Enterprise)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended May 31, 2013 and 2012
NOTE 13 – COMMITMENTS - CONTINUED
Leases
In August 2011, the Company entered into a non-cash leasing arrangement where services are provided in
exchange for an asset. The Company has an obligation to provide 600 hours of services at a fair value of
$120,000 as consideration during the period from August 2011 to August 2017. The Company has
recorded this capital lease at its fair value. During the years ended May 31, 2013 and 2012, the Company
completed 51 and 143 hours of service, respectively, with a fair value of $10,200 and $28,600,
respectively. This amount is included in revenue.
The Company leases its office space in Miami on a month to month basis at a cost of $2,213 a month paid
to Prosper Financial, Inc., a related party. The Company was also committed to a non-cancellable operating
lease for a vehicle that expired in March 2012.
MesoCoat subleases its research and development and laboratory space, in Ohio, from Powdermet, a related
party. The cost of the sub-lease to MesoCoat is $6,700 per month that expires on May 31, 2020. Mesocoat
leases a research and testing facility in Euclid, Ohio from a non-related party. The cost of the lease to MesoCoat
is $3,750 per month and expires on February 28, 2014.
MesoCoat also leases machinery and equipment under various capital lease arrangements, which expires
through September 2016. These leases are included in long-term and short-term debt and the related assets have
been capitalized.
Total expense related to the operating leases was $156,116, $148,854 and $20,670 for the years ended
May 31, 2013, 2012 and 2011, respectively. Interest expense for the capitalized leases for the years ended
May 31, 2013, 2012 and 2011 was $5,357, $2,593 and none respectively.
Minimum annual rental commitments are as follows at May 31, 2013:
For the years ended May 31,
Capital Leases
Operating Leases
2014
$
28,006 $
114,150
2015
28,006
80,400
2016
28,006
80,400
2017
22,227
80,400
2018
-
80,400
2019 and thereafter
167,500
Total minimum lease payments
$
106,246 $
603,250
Less amount representing interest
14,365
Present value of net minimum capital lease payments
91,881
Less current maturities
(28,006)
Long-term obligations under capital leases
$
63,875
F-61
Abakan Inc.
(A Development Stage Enterprise)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended May 31, 2013 and 2012
NOTE 14 – INCOME TAXES
The following is an analysis of deferred tax assets as of May 31, 2013 and 2012:
Deferred
Valuation
Tax Assets
Allowance
Balance
Net deferred tax assets at May 31, 2011
$
777,195
$ (777,195)
$
-
Tax effective of rate change
984,449
(984,449)
Provision to tax return true ups
142,476
(142,476)
-
Additions for the year
378,172
(378,172)
-
Deferred tax assets at May 31, 2012
$
2,282,292
$ (2,282,292)
$
-
Provision to tax return true ups &
adjustments
(1,017,660)
1,017,660
-
Additions for the year
2,244,170
(2,244,170)
-
Deferred tax assets at May 31, 2013
$
3,508,802
$ (3,508,802)
$
-
Deferred income taxes are provided to recognize the effects of temporary differences between financial
reporting and income tax reporting. These differences arise principally from federal net operating losses,
stock compensation expense, basis differences in investments in affiliates and the use of accelerated
depreciation methods for tax purposes as opposed to the straight-line depreciation method for financial
reporting purposes and Federal net operating losses. The adjustment to deferred taxes for the current
year is to include the fixed asset and intangibles basis differences for 52.5% of MesoCoat.
F-62
Abakan Inc.
(A Development Stage Enterprise)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended May 31, 2013 and 2012
NOTE 14 – INCOME TAXES - CONTINUED
Temporary differences between financial statement carrying amounts and tax basis of assets and
liabilities that give rise to significant deferred tax assets and liabilities are presented below at May 31:
2013
2012
Deferred tax assets:
Current:
Compensation accruals
$
30,703
$
87,096
Non-current:
Deferred tax assets:
Net operating loss carry forward
3,733,957
1,962,349
Fixed asset basis differences
-
113,236
Stock options
1,489,357
880,187
Equity loss in affiliates, net
199,247
-
Credits
114,246
-
Other
7
387
Total non-current deferred tax
5,536,814
2,956,159
assets
Deferred tax liabilities:
Equity profit in affiliates, net
(271,766)
(161,217)
Fixed asset & intangibles basis
(1,187,203)
-
differences
Book fair value adjustment of
(599,746)
(599,746)
investment in affiliate
Total non-current deferred tax
(2,058,715)
(760,963)
liabilities
Net non-current deferred tax assets
3,478,099
2,195,196
Net deferred tax assets before
3,508,802
2,282,292
valuation allowance
Valuation allowance
(3,508,802)
(2,282,292)
Net deferred tax asset
$
-
$
-
F-63
Abakan Inc.
(A Development Stage Enterprise)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended May 31, 2013 and 2012
NOTE 14 – INCOME TAXES
The following is reconciliation from the expected statutory Federal income tax rate to the Company’s
actual income tax rate for the years ended May 31:
2013
2012
Expected income tax (benefit) at
Federal statutory tax rate – 34%
$
(2,455,949)
$
(380,545)
Permanent differences
211,779
2,372
Tax effect of rate change
(-)
(984,449)
Other adjustments
1,017,660
(142,474)
Change in valuation allowance
1,226,510
1,505,096
Income tax expense
$
-
$
-
We currently have three years of tax returns that are subject to examination, including the fiscal years
ended May 31, 2012, 2011 and 2010, based on their filing dates by taxing authorities. We currently have
no uncertainty of the tax positions that we have taken and believe that we can defend them to any tax
jurisdiction.
The net operating loss carry forward as of May 31, 2013 expires as follows:
Abakan
MesoCoat at
Expiring Year
52.5%
Amount
2027
$554
$
$
554
2028
61,834
-
61,834
2029
352,219
50,787
403,006
2030
1,044,860
732,433
1,777,293
2031
1,715,508
29,753
1,745,261
2032
2,359,640
-
2,359,640
2033
3,349,048
1,285,590
4,634,638
Total
8,883,663
2,098,563
$ 10,982,226
These loss carryovers could be limited under the Internal Revenue Code should a significant change in
ownership occur. These net operating losses include 52.5% of the losses related to MesoCoat.
F-64
Abakan Inc.
(A Development Stage Enterprise)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended May 31, 2013 and 2012
NOTE 15 - EMPLOYEE BENEFIT PLANS
The Company has a 401(k) Plan (the Plan) covering substantially all of its employees who are at least age
21 and have completed three months of service. Participating employees may elect to contribute, on a tax
deferred basis, a portion of their compensation in accordance with Section 401(k) of the Internal Revenue
Code. Additional matching contributions may be made to the Plan at the discretion of the Company. For
the years ended May 31, 2013, 2012 and 2011, the Company contributed $25,196, $19,376 and none,
respectively.
NOTE 16 – RECENT ACCOUNTING PRONOUNCEMENTS
We have examined all recent accounting pronouncements and believe that none of them will have a
material impact on the financial statements of the Company.
NOTE 17– SUBSEQUENT EVENTS
Management has evaluated subsequent events after the balance sheet date, through the issuance of the
financial statements, for appropriate accounting and disclosure. The Company has determined that there
were no such events that warrant disclosure or recognition in the financial statements, except for the
below:
Stock Options Granted
On June 14, 2013, we granted 80,000 stock options to a MesoCoat officer at an exercise price of $2.94
per share, and these options will expire ten years from the grant date, and will vest in equal one third parts
on the anniversary of the option grant date, beginning on June 14, 2014.
Amendment to Convertible Promissory Note
On July 14, 2013, we amended the maturity date and forced conversion rights of a $500,000 Convertible
Promissory Note that was due to mature on July 13, 2013. The maturity date was extended to July 14,
2014. The Company’s forced conversion of the Convertible Promissory Note changed from permitting
the Company to force a conversion if the Company’s Shares for each of 20 consecutive trading days is
greater than $3.00 to entitlement to a force conversion in the event that the Company completes a
$5,000,000 financing in a single closing.
New Demand Promissory Notes
The Company has closed five Demand Promissory Notes from July 2, 2013 to August 23, 2013 for a total
amount of $550,000. The Notes bear interest from 5% to 8% and are due on demand.
F-65
Abakan Inc.
(A Development Stage Enterprise)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended May 31, 2013 and 2012
NOTE 17– SUBSEQUENT EVENTS - CONTINUED
Other Business
On June 17, 2013, MesoCoat executed a deposit agreement with Cone S.A. in connection with the
construction of a manufacturing facility in Brazil. Negotiations are ongoing in respect to a lease
agreement for a “build to suit” facility.
F-66
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A.
CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
In connection with the preparation of this annual report, an evaluation was carried out by the Company’s
management, with the participation of the chief executive officer and the acting chief financial officer, of
the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934 (“Exchange Act”)) as of May 31, 2013. Disclosure
controls and procedures are designed to ensure that information required to be disclosed in reports filed or
submitted under the Exchange Act is recorded, processed, summarized, and reported within the time
periods specified in the Commission’s rules and forms, and that such information is accumulated and
communicated to management, including the chief executive officer and the chief financial officer, to
allow timely decisions regarding required disclosures.
Based on that evaluation, the Company’s management concluded, as of the end of the period covered by
this report, that the Company’s disclosure controls and procedures was effective in recording, processing,
summarizing, and reporting information required to be disclosed, within the time periods specified in the
Commission’s rules and forms, and such information was accumulated and communicated to
management, including the chief executive officer and the chief financial officer, to allow timely
decisions regarding required disclosures.
Management’s Report on Internal Control over Financial Reporting
The Company’s management is responsible for establishing and maintaining adequate internal control
over financial reporting. The Company’s internal control over financial reporting is a process, under the
supervision of the chief executive officer and the chief financial officer, designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of the Company’s financial
statements for external purposes in accordance with United States generally accepted accounting
principles (GAAP). Internal control over financial reporting includes those policies and procedures that:
§ Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the
transactions and dispositions of the Company’s assets.
§ Provide reasonable assurance that transactions are recorded as necessary to permit preparation of
the financial statements in accordance with generally accepted accounting principles, and that
receipts and expenditures are being made only in accordance with authorizations of management
and the board of directors.
§ Provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the Company’s assets that could have a material effect on the
financial statements.
Due to its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk
that controls may become inadequate because of changes in conditions or that the degree of compliance
with the policies or procedures may deteriorate.
48
The Company’s management conducted an assessment of the effectiveness of our internal control over
financial reporting as of May 31, 2013 based on criteria established in Internal Control – Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, this
assessment is to determine if there exist material weaknesses in internal control over financial reporting.
A material weakness is a control deficiency, or a combination of deficiencies in internal control over
financial reporting that creates a reasonable possibility that a material misstatement in annual or interim
financial statements will not be prevented or detected on a timely basis. Since the assessment of the
effectiveness of our internal control over financial reporting did not identify material weaknesses,
management considers its internal control over financial reporting to be effective.
This annual report includes an attestation report of our independent registered public accounting firm
regarding internal control over financial reporting for the year ended May 31, 2013. The attestation is
included in the accounting firm’s report on our audited financial statements.
Changes in Internal Controls over Financial Reporting
During the period ended May 31, 2013, management has implemented a variety of internal controls
procedure and financial reporting oversight. This has enabled the company to perform an assessment of
the effectiveness of our internal control over financial reporting. This assessment did not identify
material weaknesses, thus management considers its internal control over financial reporting to be
effective.
ITEM 9B.
OTHER INFORMATION
None.
49
PART III
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE
Set forth below is the name, age and present principal occupation or employment, and material
occupations, positions, offices or employments for the past five years of our current directors and
executive officers:
Name
Age
Year Appointed
Position(s) and Office(s)
Robert H. Miller
60
2009
President, Chief Executive Officer,
and Director
Andrew J. Sherman
50
2010
Director
Stephen Goss
70
2012
Director
David Charbonneau
52
2012
Chief Financial Officer
Jeffrey Webb
48
2012
Director
Raymond Tellini
47
2012
Director
Business Experience
The following is a brief account of the business experience of our directors, executive officers, and other
significant employees, including their background occupations and employment over the past five years.
We also provide the responsibilities and qualifications of our executive officers and other significant
employees and the qualifications of our directors. The following includes other directorships in public
companies over the past five years of our directors. Except as otherwise noted, none of the following
referenced organizations are affiliates of the Company.
Robert H. Miller was appointed as a member of the board of directors and as the Company’s chief
executive officer on December 8, 2009.
Background:
From 2007 until the present Mr. Miller has been a director of Lifespan Biosciences Inc., a company
commercializing proprietary antibodies, providing immune histochemistry services and developing
localization databases. Since 2009 he has served as an officer and director of Sonnen Corporation, a
company involved in the research and development of a novel process for energy generation consisting of
specific materials and proprietary material combinations. (Mr. Miller is the beneficial owner of more than
ten percent of Sonnen’s common stock.) From 2002 to present, Mr. Miller has been a consultant to
Prosper Financial, Inc., a management company that provides financial and corporate consulting services
to start-up companies. Between 1998 and 2000 he was a director and financier of Zmax Corporation, a
"y2k" company. From 1997 to 2002 Mr. Miller was the president of Stamford International whose
principal subsidiary, Nanovation Technologies Inc., was a developer of nano-sized fiber-optic products
and he served as director of Nanovation between 1998 and 2001. In 1992 Mr. Miller was the founder and
president of Crystallex International Corporation and he served as the company’s Chairman between 1992
and 1996. Between 1988 and 1992 he was the principal financier and consultant to Asiamerica Equities
Inc., a NASDAQ listed merchant bank.
50
Officer and Director Responsibilities and Qualifications:
Mr. Miller is responsible for the overall management of the Company and is involved in many of the
Company’s day-to-day operations. He is the Company’s primary leader, communicator and fundraiser.
Mr. Miller has worked as officer and director of many early-stage companies for almost three decades and
has participated as the principal investor in dozens of business ventures. He has founded corporations,
listed numerous companies on the NASDAQ and the Toronto Stock Exchange, worked full-time with and
as a consultant to numerous startups.
Other Public Company Directorships in the Last Five Years:
Mr. Miller has been a director of Sonnen Corporation since 2009.
Andrew J. Sherman was appointed as a member of the board of directors on August 20, 2010.
Business Experience:
From 1996 until the present Mr. Sherman has served as CEO for Powdermet and from 2007 until the
present he has served as CEO of MesoCoat (both of which are the Company’s affiliates). Between 1986
and 1996 Mr. Sherman was Chief Metallurgist and New Business Development Manager for Ultramet,
Inc., a leading Chemical Vapor Deposition (CVD) company, in Pacoima, California, where his technical
and business developments resulted in a 10-fold growth in company revenues and the creation of three
spinouts (including a $100M plus exit). Mr. Sherman’s developments have been the basis for the
formation of eight successful companies to date.
Director Responsibilities and Qualifications:
Mr. Sherman brings his 25 years of experience in the nano-engineered coatings field (including an
intimate knowledge of both MesoCoat and Powdermet) and his entrepreneurial spirit to the board of
directors.
Additionally, Mr. Sherman was appointed to the United States Department of Energy’s Hydrogen Safety
Panel and has served on the review panel since 2006. Panel duties include interfacing with codes and
standards, accident investigations, site reviews, H2 (hydrogen) project reviews, and H2 information and
training, education, and best practices development. He received a M.Sc. and B.Sc. in Ceramic
Engineering and a B.Sc. in Chemical Engineering from Ohio State University. He has also authored more
than 95 papers and presentations on ceramics, metallurgy and composite powder coatings and was
recognized with the 2000 R&D 100 award for his patented nano powder production and is a 2009 Ernst
and Young entrepreneur of the year finalist.
Other Public Company Directorships in the Last Five Years:
None.
Stephen Goss was appointed as a member of the board of directors on January 4, 2012. Mr. Goss further
serves on the Company’s audit committee, compensation committee, nominating & governance
committee and the Compliance & Ethics committee as an independent member of the board of directors.
51
Business Experience:
Mr. Goss has served as a director of Gemocasha, SA, a specialized consultancy group with emphasis on
giving technical, marketing and cash management advice to major firms such as Kraft, Heinz, Crystallex,
and BP from 1987 to present. He served as the chief executive officer of Crystallex de Venezuela, a
mining firm from 1992 to 1998 and Schindler Elevator from 1982 to 1987 in Venezuela, a role in which
he successfully integrated multiple acquisitions. He also served as the Technical Maintenance and
Installation Manager for Schindler Brazil between 1979 and 1982 in which position he managed over
2,000 people and turned it from the least efficient worldwide operation to one of the three most efficient
operations worldwide.
Director Responsibilities and Qualifications:
Mr. Goss brings independent oversight and a deep scientific and entrepreneurial background to the
Corporation with over three decades of senior management and consultancy experience. He speaks five
languages fluently, has received decorations from the Order of the British Empire for services related to
enhancing international trade and is a graduate of the University of Grenoble.
Mr. Goss serves on the Company’s Audit Committee, Compensation Committee, Nominating &
Governance Committee and the Compliance & Ethics Committee as an independent member of the board
of directors.
Other Public Company Directorships in the Last Five Years:
None.
Jeffrey Webb was appointed as a member of the board of directors on August 7, 2012.
Business Experience:
Mr. Webb is the Business Development Manager and a Director of Fidelity (Cayman) Ltd., one of the
largest banks in the Cayman Islands. He joined Fidelity (Cayman) Ltd in January 1990 and has since
earned extensive experience in the international banking sector. Mr. Webb’s responsibilities have
included the development, management and direction of investment banking activities alongside
corporate finance and risk management. He has exhibited leadership in various roles and provided advice
on multiple committees within and without the banking community.
Director Responsibilities and Qualifications:
Mr. Webb brings independent management oversight and an expert leadership background with over two
decades of accounting, management and consultancy experience to the Corporation’s board of directors.
Mr. Webb serves on the Company’s Audit Committee, Compensation Committee, Nominating &
Governance Committee and the Compliance & Ethics Committee as an independent member of the board
of directors.
Other Public Company Directorships in the Last Five Years:
None.
52
Raymond Tellini was appointed as a member of the board of directors on December 5, 2012.
Business Experience:
Mr. Tellini is currently the managing member of Brennecke Partners LLC, a private investment firm
located in Connecticut that makes specialty finance and growth capital investments. He brings to the
Company’s board of directors independent management oversight with an expert accounting and
investment background garnered over two decades of accounting, management and investment
experience.
Director Responsibilities and Qualifications:
Mr. Tellini serves as the head of the Company’s Audit Committee, and as a member of the Compensation
Committee, Nominating & Governance Committee and the Compliance & Ethics Committee as an
independent member of the board of directors. He is a Certified Public Accountant, inactive, in New
York. Mr. Tellini started his career at PricewaterhouseCoopers, LLC where he worked from 1987-1994
most recently as a manager in the corporate finance group. Afterward, Mr. Tellini has held executive
level financial positions for Wassall Plc (1995-1999), a private equity firm, and for the hedge fund firms
Palladin Partners Group LP and its successor, Imperium Partners Group LP, where he also ran their
investment banking affiliate. Mr. Tellini brings independent management oversight, investment
management, consultancy experience and expert leadership background to the Corporation’s board of
directors.
Mr. Tellini earned a Bachelor of Science in Accounting from Lehigh University and an MBA in Finance
from the New York University, Stern School of Business.
Other Public Company Directorships in the Last Five Years:
None.
David Charbonneau was appointed the Chief Financial Officer and Principal Accounting Officer on
December 5, 2012.
Business Experience:
Mr. Charbonneau is the founder of CFO Consultant’s Inc. in Cleveland, Ohio for which he has advised
clients since 2008 on strategic planning, budget preparation, sales and margin enhancement, overhead
cost management, accounting and corporate affairs. He also worked as an Associate Director of SS&G
Parkland Consulting LLC in Cleveland, Ohio. His duties focused on strategic planning, performance
improvements and institutional relationships. From 1998 to 2008, Mr. Charbonneau was the President and
Chief Financial Officer of Premier Modular Buildings LC, a Florida commercial modular builder.
53
Director Responsibilities and Qualifications:
Mr. Charbonneau brings independent management oversight and an expert accounting background with
over two decades of accounting, management and consultancy experience. He is a Certified Public
Accountant in Ohio. Mr. Charbonneau started his accounting career as an auditor for Arthur Anderson &
Co. in Cleveland. His experience includes 5 years as Chief Financial Officer for Diamond Engineered
Space Inc. Diamond was a national commercial modular builder and a subsidiary of a UK publically
traded company. After the company was sold, he transferred to their sister company, Waco International
Corporation, a subsidiary of an Australian public company. He was their Chief Financial Officer and a
Director from 1993 until 1998. Waco was a scaffolding manufacturer and construction rental equipment
company with multiple US locations and over 600 employees.
Mr. Charbonneau earned a Bachelor of Science in Business Administration with a Major in Accounting
from The Ohio State University.
Other Public Company Directorships in the Last Five Years:
None.
Term of Office
Our directors are appointed for one year terms to hold office until the next annual meeting of our
shareholders or until removed from office in accordance with our bylaws. Our executive officers are
appointed by our board of directors and hold office pursuant to employment agreements or until removed
by the board.
Family Relationships
There are no family relationships between or among the directors or executive officers.
Involvement in Certain Legal Proceedings
During the past ten years there are no events that occurred related to an involvement in legal proceedings
that are material to an evaluation of the ability or integrity of any of the Company’s directors, persons
nominated to become directors or executive officers.
Compliance with Section 16(A) of the Exchange Act
Section 16(a) of the Securities Exchange Act of 1934 requires officers and directors of the Company and
persons who own more than ten percent of a registered class of the Company's equity securities to file
reports of ownership and changes in their ownership with the Commission, and forward copies of such
filings to us. Based solely upon a review of Forms 3, 4 and 5 furnished to the Company, we are not aware
of any persons who, during the annual period ended May 31, 2012, failed to file, on a timely basis, reports
required by Section 16(a) of the Securities Exchange Act of 1934.
54
Code of Ethics
The Company adopted a Code of Business Conduct & Ethics on June 13, 2012 and amended on
December 10, 2012, within the meaning of Item 406(b) of Regulation S-K of the Securities Exchange Act
of 1934, a copy of which is attached hereto as Exhibit 14 to this Form 10-K. Further, our Code of
Business Conduct & Ethics is available in print, at no charge, to any security holder who requests such
information by contacting us. Our Code of Business Conduct and Ethics applies to directors and senior
officers, such as our principal executive officer, principal financial officer, controller, persons performing
similar functions and employees.
Board of Directors Committees
Audit Committee
The board of directors established an Audit Committee on June 25, 2012, comprised solely of
independent members to act on and report to the board of directors with respect to various auditing and
accounting matters, including the recommendations and performance of independent auditors, the scope
of the annual audits, fees to be paid to the independent auditors, and internal accounting and financial
control policies and procedures. Certain stock exchanges currently require companies to adopt a formal
written charter that establishes an audit committee that specifies the scope of an audit committee’s
responsibilities and the means by which it carries out those responsibilities.
Compensation Committee
The board of directors established a Compensation Committee on June 25, 2012, comprised solely of
independent members to help the board of directors discharge its responsibilities with respect to the
compensation of our Chief Executive Officer and other executive officers, the administration of the
Company's executive compensation and benefits programs and the production of an annual report on
executive compensation for inclusion in the Company's proxy statement.
Nominating Committee
The board of directors has established a Nominating & Corporate Governance Committee on June 25,
2012, comprised solely of independent members to assist the board of directors in connection with
nominations and corporate governance practices related to serving on the Company’s board of directors,
including candidates that may be referred by the Company’s stockholders. Stockholders who desire to
recommend candidates for evaluation may do so by contacting the Company in writing, identifying the
potential candidate and providing background information. Candidates may also come to the attention of
the board of directors through current members of the board of directors, professional search firms and
other persons. In evaluating potential candidates, the Nominating & Corporate Governance Committee
takes into account a number of factors, including among others, the following:
§ independence from management;
§ whether the candidate has relevant business experience;
§ judgment, skill, integrity and reputation;
§ existing commitments to other businesses;
§ corporate governance background;
§ financial and accounting background, to enable the board of directors to determine whether the
candidate would be suitable for audit committee membership; and
§ the size and composition of the board.
55
Compliance
The board of directors established a Compliance and Ethics Committee on June 25, 2012, comprised
solely of independent members to assist the board of directors in connection with overseeing the
Company’s compliance program with respect to the laws and regulations applicable to the Company’s
business and compliance with Company’s Code of Business Conduct & Ethics and related policies by
employees, officers, directors and other agents or associates of the Company.
Director Compensation
Directors currently are reimbursed for out-of-pocket costs incurred in attending meetings, awarded stock
compensation, granted stock options pursuant to our 2009 Stock Option Plan and reimbursed for expenses
related to their service. The Company has entered into board of director’s compensation agreements with
each of its independent directors and employment agreements with its dependent directors which
compensation is not tied to their service to the board of directors.
The following table provides summary information for the fiscal year ended May 31, 2013 concerning
cash and non-cash compensation paid or accrued by the Company to or on behalf of our directors.
Director Compensation Table
Name
Fees
Stock
Option
Non-Equity
Nonqualified
All Other
Total
Earned
Awards
Awards
Incentive Plan
Deferred
Compensation
($)
Paid in
($)
($)
Compensation Compensation
($)
Cash ($)
($)
Earnings
($)
Robert H.
$0
$0
$0
$0
$0
$120,000 $120,000
Miller
Andrew J.
$0
$0
$0
$0
$0
$144,000 $144,000
Sherman
Stephen Goss
$20,250
$54,000 $147,000
$0
$0
$0 $221,250
David
$19,000
$20,000 $317,991
$0
$0
$0 $356,991
Charbonneau(1)
Jeffrey Webb
$0
$19,000 $243,920
$0
$0
$0 $262,920
Herman
$0
$0 $324,519
$0
$0
$55,000 $384,519
Buschor(2)
Theodore
$0
$0 $182,304
$0
$0
$0 $182,304
Sarniak III (3)
Raymond
$0
$0 $463,937
$0
$0
$0 $463,937
Tellini
(1) David Charbonneau was appointed on June 15, 2012 and resigned on December 5, 2012 after accepting the position of Chief
Financial Officer and Principal Accounting Officer for the Company.
(2) Herman Buschor resigned on June 14, 2012
(3) Theodore Sarniak III’s death was acknowledged on August 7, 2012 with the appointment of Jeffrey Webb.
56
Key Advisors
Reg Allen was most recently Chief Executive Officer of Vortek, a Canadian technology company that had
developed the world’s most powerful arc lamp. In 2004, Mr. Allen successfully sold Vortek to a public
U.S. semiconductor equipment manufacturer. Mr. Allen is considered a leading authority on applications
of the focused arc lamp system that is employed by the Company. At Vortek, Mr. Allen assembled an
international team of top-caliber staff and executed an ambitious business plan to commercialize the
application of arc lamp technology in advanced semiconductor equipment manufacturing. Mr. Allen has
over 30 years of experience working with engineering related solutions.
James Rodriguez de Castro's most recent professional background includes 14 years spent with Merrill
Lynch based in Japan and Hong Kong. His numerous senior executive roles there included Head of
Global Markets, New Initiatives and Advisory, Pacific Rim; Head of Trading, Equity Derivatives, CBs
and Index Arbitrage, Asia; and Head Trader, Japanese Equity Derivatives. His experience in the oil and
gas sector began with Bankers Trust during the 1992 Gulf War. He remains a very active investor in this
sector in Asia, and maintains active interests in mining and offshore equipment rental.
Sam Thomas is a professor of Banking and Finance at the Weatherhead School of Management of Case
Western Reserve University. He teaches in the Weatherhead MBA, MS, and Undergraduate programs.
His research and consulting activities focus on the practice of investment science, valuation, and
corporate strategy. His notable expertise is in integrating the global macro business cycle with practices in
corporate finance strategy and investments strategy. Dr. Thomas is active in the research and development
activities of corporate strategists, institutional investors, financial advisors and money managers and is
known for his ability to materially integrate academic research with product development. His recent
projects incorporate innovations in the design of corporate strategy and life-long portfolio construction in
a manner that is compatible with phases of the business cycle. Dr. Thomas recently played a very
important role at BluFin to develop India’s first comprehensive monthly Consumer Confidence Index
(CCI) to assess the pulse rate of the consumer that is expected to become the de facto standard for
measuring consumer sentiment in India. Other projects include business cycle indicators and the design
of a comprehensive suite of stock market indices for India.
Damian Kotecki brings 43 years of welding expertise as well as his extensive technical and business
network to the Company. Dr. Kotecki’s extensive experience in welding research, pipeline failure
analyses, welding training and specifications, welding procedure development, quality assurance and
stainless/high alloy welding filler metal and product development will help assure the company’s
CermaCladtm products incorporate the highest levels of technical excellence. In addition to co-authoring
the leading textbook on stainless steel welding, Dr. Kotecki conducted welding research projects and
pipeline failure analyses for the Battelle Memorial Institute, was the Director of Research for Teledyne
McKay (today part of Illinois Tool Works) and retired as the Technical Director for Stainless and High
Alloy Product Development for the world’s largest welding company, The Lincoln Electric Company. Dr.
Kotecki is past president of the American Welding Society (AWS), where he currently chairs the A5D
subcommittee on stainless steel welding and the International Standards Activities Committee. He is also
past chair of the International Institute of Welding Commission II Arc Welding and Filler Metals. Dr.
Kotecki holds a BS and MS in Mechanical Engineering, and a Ph.D. in Mechanical Engineering with a
minor in Metallurgical Engineering.
Andrew Hall is the founder and managing partner of Hall, Lamb and Hall, P.A. based in Miami, Florida
where he specializes in complex commercial litigation, professional negligence, securities litigation and
arbitration and international cases. From the Watergate trials and the Ohio savings and loan crisis, to the
2000 terrorist attack on the USS Cole, Hall’s trial skills have earned him national recognition, including
being named one of “The Best Lawyers in America” by Best Lawyers for the past decade.
57
Vinod Gupta is currently the chairman of the Ohio Board of Regents, where he also chairs the
Commercialization Tasks Force and serves on the Shared Services Task Force. He also serves as an
Entrepreneur-In Residence (EIR) for the Cleveland-based venture development non-profit organization,
Jumpstart Entrepreneurial Network (JEN) Advisors, where he helps to grow the northeast Ohio
technology ecosystem by using his 15 years of materials sector experience to coach entrepreneurs.
ITEM 11.
EXECUTIVE COMPENSATION
The objective of the Company’s compensation program is to provide compensation for services rendered
by our executive officers. The Company’s salaries and stock option awards are designed to retain the
services of our executive officers. Salary and stock option awards are currently the only type of
compensation used in our compensation program. We use these forms of compensation because we feel
that they are adequate to retain and motivate our executive officers. The amount we deem appropriate to
compensate our executive officers is determined in accordance with market forces as we have no specific
formula to determine compensatory amounts at this time. While we have deemed that our current
compensatory program and the decisions regarding compensation are easy to administer and are
appropriately suited for our objectives, we may expand our compensation program to additional future
employees to include other compensatory elements.
For the year ended May 31, 2013, $537,692 was paid in salary, stock option awards and separation
amounts to retain our chief executive officer and chief financial officer. For the year ended May 31, 2012,
$288,976 was paid in salary and stock option awards to retain said executive officers. We expect that the
amount paid to retain executive officers will increase over the next twelve months.
During the annual periods ended May 31, 2013 and May 31, 2012 our chief executive officer received
compensation of $10,000 per month pursuant to his existing consulting agreement with the Company.
Management believes that the executive compensation paid to our chief executive officer will increase
over the next twelve months as its business develops as in a higher salary and the grant of stock options.
On December 5, 2012 the company entered into an employment agreement with our current chief
financial officer. During the annual period ended May 31, 2013, our chief financial officer received
compensation of $16,000 per month pursuant to an employment agreement dated December 5, 2012. Also
included was the grant of 125,000 stock options at an exercise price of $2.61 per share for a period of ten
years from the date of grant valued at $331,384, as part of his agreement.
During the annual period ended May 31, 2012, our former chief financial officer received compensation
of $10,000 per month pursuant to an employment agreement and on his resignation dated October 24,
2011, a separation amount which included the grant of 100,000 stock options to purchase shares of the
Company’s common stock for $1.20 a share for a period of five years from the date of grant valued at
$112,714, as part of his agreement to cancel the 400,000 stock options granted pursuant to his
employment agreement.
58
Summary Compensation
The following table provides summary information for the fiscal years ended May 31, 2013 and 2012
concerning cash and non-cash compensation paid or accrued by the Company to or on behalf of (i) the
chief executive officer, (ii) the two most highly compensated executive officers other than the chief
executive officer if compensated at over $100,000 and (iii) additional individuals if compensated at over
$100,000.
Executive Compensation Table
Name and
Year
Annual
Bonus
Stock
Option
Non-Equity
Nonqualified
All Other
Total
Principal
(ended
Salary
($)
Awards
Awards
Incentive Plan
Deferred
Compensation
($)
Position
May
($)
($)
($)
Compensation
Compensation
($)
31)
($)
Earnings
($)
Robert Miller:
2013
$120,000
$0
$0
$0
$0
$0
$0
$120,000
CEO, director(1)
2012
$120,000
$0
$0
$0
$0
$0
$0
$120,000
David
2013
$86,308
$0
$0 $331,384
$0
$0
$0
$417,692
Charbonneau:
CFO, PAO(4)
David
2013
$0
$0
$20,000 $317,991
$0
$0
$19,000
$356,991
Charbonneau
Director(4)
Mark W.
Sullivan: CFO,
2012
$56,262
$0
$0 $112,714
$0
$0
$0
$168,976
PAO(2)
Hermann
2013
$55,000
$0
$0
$0
$0
$0
$0
$55,000
Buschor:
2012
$60,000
$0
$0
$0
$0
$0
$6,000
$66,000
director, VP Bus.
Development
Andrew J.
2013
$144,000
$0
$0
$0
$0
$0
$0
$144,000
Sherman(3)
2012
$144,000
$0
$0
$0
$0
$0
$0
$144,000
Director
Stephen Goss:
2013
$0
$0
$54,000
$0
$0
$0
$20,250
$74,250
director
2012
$0
$0
$0 $147,044
$0
$0
$0
$147,044
Jeffrey Webb
2013
$0
$0
$19,000 $243,920
$0
$0
$0
$262,920
director
Raymond Tellini: 2013
$0
$0
$0 $463,937
$0
$0
$0
$463,937
director(5)
(1) Mr. Miller as appointed as chief executive officer and director on December 8, 2009.
(2) Mr. Sullivan entered into an employment agreement with the Company in connection with his appointment as chief financial
officer and principal accounting officer on May 11, 2011. Terms of the agreement included a signing bonus of 60,000
shares, options to purchase 400,000 shares, and a salary of $120,000 per annum. He resigned on October 24, 2011.
(3) Andrew J. Sherman was appointed as a director on August 20, 2010 and also serves as the president of both MesoCoat and
Powdermet.
(4) David Charbonneau was appointed on June 15, 2012 and resigned on December 5, 2012 after accepting the position of Chief
Financial Officer and Principal Accounting Officer for the Company.
(5) Raymond Tellini was appointed on director on December 5, 2012
.
59
Outstanding Equity Awards
The following table provides summary information for the period ended May 31, 2013 concerning
unexercised options, stock that has not vested, and equity incentive plan awards by the Company to or on
behalf of (i) the chief executive officer and chief financial officer and (ii) the three most highly
compensated individuals whose total compensation exceeds $100,000:
Outstanding Equity Awards at Fiscal Year-End
Option awards
Stock awards
Equity
Equity
incentive
Equity
incentive plan
plan
Market incentive plan awards: market
awards:
Number
value of
awards:
or payout
Number of
Number of
number of
of shares
shares
number of
value of
securities
securities
securities
or units
or units
unearned
unearned
underlying
underlying
underlying
of stock
of stock shares, units shares, units or
unexercised
unexercised
unexercised
Option
that have
that
or other rights other rights
options
options
unearned
exercise
Option
not
have not that have not that have not
(#)
(#)
options
price
expiration
vested
vested
vested
vested
Name
exercisable unexercisable
(#)
($)
date
(#)
(#)
(#)
($)
Robert H.
Miller(1)
-
-
-
-
-
-
-
-
-
Robert H.
Miller(1)
-
-
-
-
-
-
-
-
-
Andrew J.
Sherman
1,000,000
-
-
0.60 December
11, 2019
-
-
-
-
Stephen Goss
-
150,000
-
1.00 January 4,
2022
-
-
-
-
Jeffrey Webb
150,000
-
1.20 August 7,
2022
-
-
-
-
David
Charbonneau
50,000
100,000
2.30
June 15,
2022
-
-
-
-
David
Charbonneau
125,000
2.61 December 5,
2022
Ray Tellini
25,000
155,000
2.61 December 5,
2022
(1) Mr. Miller was the indirect, beneficial owner of 1 million and 500,000 options. The previously granted options
dated December 11, 2009 and October 19, 2010 were cancelled per mutual agreement on December 4, 2012.
.
2009 Stock Option Plan
Our board of directors adopted and approved our 2009 Stock option Plan (“Plan”) on December 14,
2009, which provides for the granting and issuance of up to 10 million shares of our common stock. As
of August 16, 2013, 3,880,000 shares of common stock were outstanding at exercise prices of $0.60,
$0.65, $0.75, $1.00, $1.02, $1.03, $1.05, $1.07, $1.20, $1.25, $1.30, $1,90, $1.95, $2.30, $2.61, $2.70,
$2.80 and $2.94 per share, which options vest up to three years. The Stock Option Plan has 6,120,000
options available for future grant.
Our board of directors administers our Plan, however, they may delegate this authority to a committee
formed to perform the administration function of the Plan. The board of directors or a committee of the
board has the authority to construe and interpret provisions of the Plan as well as to determine the terms
of an award. Our board of directors may amend or modify Plan at any time. However, no amendment or
modification shall adversely affect the rights and obligations with respect to outstanding awards unless
the holder consents to that amendment or modification.
60
The Plan permits us to grant non-statutory stock options to our employees, directors and consultants.
The options issued under this Plan are intended to be non-statutory stock options exempt from Code
Section 409A. The duration of a stock option granted under our Plan cannot exceed ten years. The
exercise price of an incentive stock option cannot be less than 100% of the fair market value of the
common stock on the date of grant.
The Plan administrator determines the term of stock options granted under our Plan, up to a maximum
of ten years, except in the case of certain events, as described below. Unless the terms of an optionee's
stock option agreement provide otherwise, if an optionee's relationship with us ceases for any reason
other than disability or death, the optionee may exercise any vested options for a period of ninety days
following the cessation of service. If an optionee's service relationship with us ceases due to disability or
death the optionee or a beneficiary may exercise any vested options for a period of 12 months in the
event of disability or death.
Unless the Plan administrator provides otherwise, options generally are not transferable except by will,
the laws of descent and distribution, or pursuant to a domestic relations order. An optionee may
designate a beneficiary, however, who may exercise the option following the optionee's death.
Long Term Incentive Plan Awards.
We have no long-term incentive plans.
Termination of Employment and Change in Control Arrangements
The Company has no plans that provides for the payment of retirement benefits, or benefits that will be
paid primarily following retirement.
The Company has no agreement that provides for payment to any executive officer at, following, or in
connection with the resignation, retirement or other termination, or a change in control of Company or a
change in our executive officers’ responsibilities following a change in control except for employment
agreement with Mr. David Charbonneau, Chief Financial Officer, dated December 5, 2012. The 3 year
employment agreement requires severance payment between $100,000 to $200,000 for early termination
without cause, change in responsibilities or upon completion of initial term if not extended by mutual
agreement.
61
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following table sets forth certain information concerning the ownership of the Company’s 64,284,855
shares of common stock issued and outstanding as of August 28, 2013 with respect to: (i) all directors; (ii)
each person known by us to be the beneficial owner of more than five percent of our common stock; and
(iii) our directors and executive officers as a group.
Title of Class
Name and Address of Beneficial
Amount and nature
Percent of Class
Ownership
of Beneficial
Ownership1
Robert H. Miller
Common Stock
4801 Alhambra Circle
24,120,0002
35.5%
Coral Gables, Florida 33146
Andrew J. Sherman
Common Stock
9181 Boyer Lane
03
0%
Kirtland Hills, Ohio 44060
Stephen Goss
Common Stock
16373 Bridle Wood Circle
20,0004
<0.01%
Delray Beach, Florida 33445
David Charbonneau
Common Stock
9085 Ledgemont Drive
10,0005
<0.01%
Cleveland, Ohio 44147
Jeffrey Webb
Common Stock
44 Oak Drive, Grand Cayman
10,0006
<0.01%
Cayman Islands KY1 1107
Ray Tellini
Common Stock
2665 South Bayshore Drive, Suite 450
07
0%
Miami, Florida 33133
Common Stock
All Executive Officers and Directors as
a Group
24,160,000
35.5%
Maria Maz
Common Stock
4801 Alhambra Circle
17,420,0008
27.1%
Coral Gables, Florida 33146
Common Stock
Thomas and Mario Miller Family
Irrevocable Trust u/a/d 12/01/2009
5,250,000
8.2%
(1) Beneficial ownership is determined in accordance with Commission rules and generally includes voting or investment power with
respect to securities. Shares of common stock subject to options, warrants and convertible preferred stock currently exercisable or
convertible, or exercisable or convertible within sixty (60) days, would be counted as outstanding for computing the percentage of the
person holding such options or warrants but not counted as outstanding for computing the percentage of any other person.
(2) Mr. Miller is a beneficial owner of 17,420,000 shares held by Ms. Maria Maz, to whom Mr. Miller is married, Ms Maz was the
previous chief executive officer of the Company from September 2008 until Mr. Miller assumed the position in Dec 2009 and the
beneficial owner of 5,250,000 shares held by the Thomas and Mario Miller Family Irrevocable Trust u/a/d 12/01/2009, which trust’s
beneficiaries are Mr. Miller’s children, and 1,450,000 shares held by the Tarija Foundation for which Mr. Miller serves as a director.
(3) Mr. Sherman was granted 1,000,000 options that vest in equal increments over three years to purchase shares of common stock at
$0.60 per share on or before December 14, 2019.
(4) Mr. Goss was granted 150,000 options that vest in equal increments beginning on January 5, 2013 over three years to purchase shares
of common stock at $1.00 per share on or before January 4, 2023.
(5) David Charbonneau was issued 10,000 common shares and granted 150,000 options as director that vest in equal increments
beginning on September 15, 2012 over three years to purchase common stock at $2.30 per share on or before September 14, 2022. Mr.
Charbonneau was granted 125,000 options as chief financial officer that vest in equal increments beginning on December 5, 2013.
(6) Jeffrey Webb was issued 10,000 common shares and granted 150,000 options that vest in equal increments beginning on August 7,
2013 over three years to purchase common stock at $1.90 per share on or before August 6, 2023.
(7) Ms. Maz directly owns 17,420,000 shares, and beneficially owns 5,250,000 shares held by the Thomas and Mario Miller Family
Irrevocable Trust u/a/d 12/01/2009, which trust’s beneficiaries are Ms. Maz’s children and 1,450,000 shares held by the Tariji
Foundation for which Mr. Miller serves as a director.
(8) Mr. Tellini was granted 175,000 options that vest in equal increments beginning on December 5, 2012 and thereafter in equal parts
over three years to purchase shares of common stock at $2.61 per share on or before December 4, 2022.
62
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND
DIRECTOR INDEPENDENCE
Neither our director or executive officer, nor any proposed nominee for election as a director, nor any
person who beneficially owns, directly or indirectly, shares carrying more than 5% of the voting rights
attached to all of our outstanding shares, nor any members of the immediate family (including spouse,
parents, children, siblings, and in-laws) of any of the foregoing persons has any material interest, direct or
indirect, in any transaction in the period covered by this report or in any presently proposed transaction
which, in either case, has or will materially affect us, except as follows:
On December 5, 2012, we entered into a board of director’s compensation agreement with Raymond
Tellini, pursuant to which agreement Mr. Tellini was granted 175,000 stock options at an exercise price
of $2.61 per share for a period of ten years with 25,000 vesting on the day of the grant and the
remaining vest in equal amounts over three years from the date of grant.
On December 5, 2012, we entered into a employment agreement with David Charbonneau as Chief
Financial Officer pursuant to which agreement Mr. Charbonneau was granted 125,000 stock options at
an exercise price of $2.61 per share for a period of ten years that vest in equal amounts over three years
beginning on December 5, 2013.
On August 7, 2012, we entered into a board of director’s compensation agreement with Jeffrey Webb,
pursuant to which agreement Mr. Webb was issued 10,000 shares of common stock and granted 150,000
stock options at an exercise price of $1.90 per share for a period of ten years that vest in equal amounts
over three years from the date of grant.
On June 15, 2012, we entered into a board of director’s compensation agreement with David
Charbonneau pursuant to which agreement Mr. Charbonneau was issued 10,000 shares of common
stock, granted 150,000 stock options at an exercise price of $2.30 per share for a period of ten years that
vest in equal amounts over three years beginning on September 15, 2012, an annual fee of $15,000 paid
in four installments and up to $4,500 in 2012 for continuing education expenses in accountancy. Mr.
Charbonneau resigned on December 5, 2012 after accepting the position of Chief Financial Officer for
the Company.
On January 5, 2012, we entered into a stock option agreement with Stephen Goss in connection with his
service as a director, pursuant to which agreement Mr. Goss was granted 150,000 stock options at an
exercise price of $1.00 per share for a period of ten years that vest in equal amounts over three years
from the date of grant.
On June 1, 2011, we entered into a consulting agreement with Robert Miller to provide services as our
Chief Executive Officer. The terms of the consulting agreement included a fee of $10,000 per month for
a term to expire on June 1, 2012. We also agreed to reimburse Mr. Miller for all reasonable business
expenses incurred by him in the performance of his duties. The agreement also has a provision to
automatically renew for subsequent annual terms unless terminated in writing by either party. Mr.
Miller’s agreement was renewed for an additional annual term on June 1, 2012 and for another on June
13, 2013.
63
Director Independence
Our common stock is quoted on the OTCQB electronic quotation system, which does not have director
independence requirements. Nonetheless, for the purposes of determining director independence, we have
applied the definitions set out in NASDAQ Rule 4200(a) (15), pursuant to which rule a director is not
considered independent if he or she is also an executive officer or employee of the corporation.
Accordingly, the Company deems Mr. Goss, Mr. Webb and Mr. Tellini to be independent directors.
ITEM 14.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
The following is a summary of the fees that are billed to us by our auditors for professional services
rendered for the past two fiscal years:
Fee Category
Fiscal 2013 Fees ($) Fiscal 2012 Fees ($)
Audit Fees
80,500
69,000
Audit-Related Fees
7,690
15,739
Tax Fees
7,210
5,430
All Other Fees
0
0
Audit fees consist of fees billed for professional services rendered for the audit of our financial statements
and review of the interim financial statements included in quarterly reports and services that are normally
provided by Skoda Minotti & Co., Certified Public Accountants (“Skoda”), since July 19, 2011 in
connection with statutory and regulatory filings or engagements.
Audit Committee Pre-Approval
The audit committee pre-approved all services provided to us by Skoda Minotti for the year ending May
31, 2013. The Company did not have a standing audit committee at the time of the engagement of Skoda
for the year ending May 31, 2012. Therefore, all services provided to us by Skoda for year ending May
31, 2012, were pre-approved by our board of directors. Skoda performed all work only with their
permanent full time employees.
64
PART IV
ITEM 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Financial Statements
The following documents are filed under Item 8. Financial Statements and Supplementary Data, pages
F-1 through F-66, and are included as part of this Form 10-K:
Financial Statements of the Company for the years ended May 31, 2013 and 2012:
Report of Independent Registered Public Accounting Firm
Balance Sheets
Statements of Operations
Statements of Stockholders’ Equity
Statements of Cash Flows
Notes to Financial Statements
(b) Exhibits
The exhibits required to be attached by Item 601 of Regulation S-K are listed in the Index to Exhibits on
page 67 of this Form 10-K, and are incorporated herein by this reference.
(c) Financial Statement Schedules
We are not filing any financial statement schedules as part of this Form 10-K because such schedules are
either not applicable or the required information is included in the financial statements or notes thereto.
65
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant
has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Abakan Inc.
Date
/s/ Robert H. Miller
August 29, 2013
By: Robert H. Miller
Its: Chief Executive Officer and Director
/s/ David Charbonneau
August 29, 2013
By: David Charbonneau
Its: Chief Financial Officer and Principal Accounting Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Date
/s/ Robert H. Miller
August 29, 2013
Robert H. Miller
Chief Executive Officer and Director
/s/ Andrew Sherman
August 29, 2013
Andrew Sherman
Director
/s/ Stephen Goss
August 29, 2013
Stephen Goss
Director
/s/ Jeffrey Webb
August 29, 2013
Jeffrey Webb
Director
/s/ Ray Tellini
August 29, 2013
Ray Tellini
Director
66
INDEX TO EXHIBITS
Exhibit No.
Exhibit Description
3.1*
Articles of Incorporation and Certificate of Amendment, incorporated hereto by reference to
the Form SB-2, filed with the Commission on June 19, 2007.
3.2*
Bylaws, incorporated hereto by reference to the Form SB-2, filed with the Commission on
June 19, 2007.
10.1*
Lease Agreement between Powdermet and Sherman Properties, LLC dated March 7, 2007,
incorporated hereto by reference to the Form 10-K filed with the Commission on September
13, 2011.
10.2*
License agreement between MesoCoat and Powdermet dated July 22, 2008, incorporated
hereto by reference to the Form 10-K/A-2 filed with the Commission on December 27, 2011.
10.3*
Exclusive license between MesoCoat and UT-Battelle, LLC, dated September 22, 2009,
incorporated hereto by reference to the Form 10-K/A-2 filed with the Commission on
December 27, 2011.
10.4*
Articles of Merger dated November 9, 2009, incorporated hereto by reference to the Form 8-
K filed with the Commission on December 9, 2009.
10.5*
Agreement and Plan of Merger dated November 9, 2009, incorporated hereto by reference to
the Form 8-K filed with the Commission on December 9, 2009.
10.5*
Consulting agreement dated December 1, 2009, between the Company and Mr. Greenbaum,
incorporated hereto by reference to the Form 8-K filed with the Commission on May 28,
2010.
10.7*
Employment agreement dated December 1, 2009, between MesoCoat and Andrew Sherman,
incorporated hereto by reference to the Form 10-K filed with the Commission on September
13, 2011.
10.8*
Consulting agreement date December 1, 2009 between the Company and Prosper Financial
Inc., incorporated hereto by reference to the Form 10-K filed with the Commission on
September 13, 2011.
10.9*
Consulting agreement dated December 8, 2009 between the Company and Robert Miller,
incorporated hereto by reference to the Form 10-K filed with the Commission on September
13, 2011.
10.10*
Investment Agreement dated December 9, 2009, between the Company, MesoCoat and
Powdermet, incorporated hereto by reference to the Form 8-K filed with the Commission on
December 17, 2009.
10.11*
Agreement date March 17, 2010 between the Company and Sonnen Corporation,
incorporated hereto by reference to the Form 10-K filed with the Commission on September
13, 2011.
10.12*
Agreement dated April 30, 2010 between the Company and Mr. Buschor, incorporated hereto
by reference to the Form 8-K filed with the Commission on May 11, 2010.
10.13*
Commercial lease agreement date June 1, 2010, between Powdermet and MesoCoat,
incorporated hereto by reference to the Form 10-K filed with the Commission on September
13, 2011.
10.14*
Stock Purchase Agreement dated June 29, 2010 between the Company and Kennametal,
incorporated hereto by reference to the Form 8-K filed with the Commission on September
15, 2010.
10.15*
Employment agreement dated August 20, 2010, between the Company and Mr. Takkas,
incorporated hereto by reference to the Form 8-K filed with the Commission on August 26,
2010.
67
10.16*
Amendment No. 1 to Stock Purchase Agreement between the Company and Kennametal
dated September 7, 2010, incorporated hereto by reference to the Form 8-K filed with the
Commission on September 15, 2010.
10.17*
Amendment to the Investment Agreement dated December 8, 2010, between the Company,
MesoCoat and Powdermet, incorporated hereto by reference to the Form 10-Q filed with the
Commission on January 19, 2011.
10.18*
Cooperation Agreement between MesoCoat and Petroleo Brasileiro S.A. dated January 11,
2011, incorporated by reference to the Form 8-K/A-3 filed with the Commission on March 6,
2012. (Portions of this exhibit have been omitted pursuant to a request for confidential
treatment.)
10.19*
Amendment No. 2 to Stock Purchase Agreement between the Company and Kennametal
dated January 19, 2011, incorporated hereto by reference to the Form 8-K filed with the
Commission on July 13, 2011.
10.20*
Accord and Satisfaction Agreement dated March 21, 2011 between the Company and
Kennametal, Inc., incorporated hereto by reference to the Form 8-K filed with the
Commission on March 25, 2011.
10.21*
Assignment Agreement dated March 25, 2011 with Polythermics LLC and MesoCoat,
incorporated hereto by reference to the Form 10-Q/A filed with the Commission on
September 27, 2011.
10.22*
Exclusivity Agreement between MesoCoat and Mattson Technology, Inc. dated April 7,
2011, incorporated hereto by reference to the Form 8-K/A-3 filed with the Commission on
March 6, 2012. (Portions of this exhibit have been omitted pursuant to a request for
confidential treatment.)
14*
Code of Business Conduct & Ethics adopted on June 13, 2012, and incorporated hereto by
reference to the Form 10-K filed with the Commission on September 13, 2013.
Subsidiaries of the Company, attached.
Certification of the Chief Executive Officer pursuant to Rule 13a-14 of the Exchange Act as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, attached.
Certification of the Chief Financial Officer pursuant to Rule 13a-14 of the Exchange Act as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, attached.
Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, attached.
Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, attached.
Powdermet audited financial statements for the period ended May 31, 2013, attached.
101. INS XBRL Instance Document†
101. PRE XBRL Taxonomy Extension Presentation Linkbase†
101. LAB XBRL Taxonomy Extension Label Linkbase†
101. DEF XBRL Taxonomy Extension Label Linkbase†
101. CAL XBRL Taxonomy Extension Label Linkbase†
101. SCH XBRL Taxonomy Extension Schema†
*
Incorporated by reference to previous filings of the Company.
†
Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed “furnished”
and not “filed” or part of a registration statement or prospectus for purposes of Section 11 or
12 of the Securities Act of 1933, or deemed “furnished” and not “filed” for purposes of
Section 18 of the Securities and Exchange Act of 1934, and otherwise is not subject to
liability under these sections.
68
Exhibit 31.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO RULE 13a-14 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, David Charbonneau certify that:
1. I have reviewed this report on Form 10-K of Abakan Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) and internal control over financial reporting (as defined in the Exchange Act Rules 13a-15(f) and 15d-15(f) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls over financial reporting.
Date: August 29, 2013
/s/ David Charbonneau__
David Charbonneau
Chief Financial Officer
Exhibit 32.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the report on Form 10-K of Abakan Inc., for the annual period ended May 31, 2013, as filed with the Securities and Exchange Commission on the date hereof, I, Robert Miller, do hereby certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge and belief:
(1) This report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in this report fairly represents, in all material respects, the financial condition of the registrant at the end of the period covered by this report and results of operations of the registrant for the period covered by this report.
Date: August 29, 2013
/s/ Robert H Miller____
Robert H. Miller
Chief Executive Officer
This certification accompanies this report pursuant to §906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the Sarbanes-Oxley Act of 2002, be deemed filed by the registrant for the purposes of §18 of the Securities Exchange Act of 1934, as amended. This certification shall not be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended (whether made before or after the date of this report), irrespective of any general incorporation language contained in such filing.
A signed original of this written statement required by §906 has been provided to the registrant and will be retained by the registrant and furnished to the Securities and Exchange Commission or its staff upon request.
![[exhibit991001.jpg]](exhibit991001.jpg)
POWDERMET, INC.
FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 2013 AND 2012
POWDERMET, INC.
YEARS ENDED MAY 31, 2013 AND 2012
TABLE OF CONTENTS
INDEPENDENT AUDITORS’ REPORT
PAGE NO. 2
BALANCE SHEETS
May 31, 2013 and 2012
3
STATEMENTS OF OPERATIONS
Years ended May 31, 2013 and 2012
4
STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
Years ended May 31, 2013 and 2012
5
STATEMENTS OF CASH FLOWS
Years ended May 31, 2013 and 2012
6
NOTES TO THE FINANCIAL STATEMENTS
7 – 21
SUPPLEMENTARY FINANCIAL INFORMATION
SCHEDULE OF COST OF REVENUES
Years ended May 31, 2013 and 2012
22
SCHEDULE OF GENERAL AND ADMINISTRATIVE EXPENSES
Years ended May 31, 2013 and 2012
22
INDEPENDENT AUDITORS’ REPORT
TO THE STOCKHOLDERS
POWDERMET, INC.
We have audited the accompanying financial statements of Powdermet, Inc., which comprise the balance
sheets as of May 31, 2013 and 2012, and the related statements of operations, stockholders' equity, and cash
flows for the years then ended, and the related notes to the financial statements.
Management’s Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these financial statements in
accordance with accounting principles generally accepted in the United State of America; this includes the
design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of
financial statements that are free from material misstatement, whether due to fraud or error.
Auditor’s Responsibility
Our responsibility is to express an opinion on these financial statements based on our audits. We conducted
our audits in accordance with auditing standards generally accepted in the United States of America. Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the
financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of
the risks of material misstatement of the financial statements, whether due to fraud or error. In making those
risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair
presentation of the financial statements in order to design audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal
control. Accordingly, we express no such opinion. An audit also includes assessing the appropriateness of
accounting policies used and the reasonableness of significant accounting estimates made by management,
as well as evaluating the overall presentation of the financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our
audit opinion.
Opinion
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial
position of Powdermet, Inc. as May 31, 2013 and 2012, and the results of their operations and their cash flows
for the years then ended in conformity with accounting principles generally accepted in the United States of
America.
Report on Supplementary Information
Our audits were conducted for the purpose of forming an opinion on the financial statements taken as a
whole. The accompanying supplementary financial information is presented for the purpose of additional
analysis and is not a required part of the financial statements. Such information is the responsibility of
management and was derived from and relates directly to the underlying accounting and other records
used to prepare the financial statements. The information has been subjected to the auditing procedures
applied in the audits of the financial statements and certain additional procedures, including comparing and
reconciling such information directly to the underlying accounting and other records used to prepare the
financial statements or to the financial statements themselves, and other additional procedures in
accordance with auditing standards generally accepted in the United States of America. In our opinion, the
information is fairly stated in all material respects in relation to the financial statements taken as a whole.
SKODA MINOTTI
/s/ Skoda Minotti
Cleveland, Ohio
August 21, 2013
POWDERMET, INC.
BALANCE SHEETS
MAY 31, 2013 AND 2012
ASSETS
2013
2012
CURRENT ASSETS
Cash
$
287,793
$
273,533
Accounts receivable
245,061
304,844
Deferred income taxes
314
348
533,168
578,725
PROPERTY AND EQUIPMENT - NET
623,414
675,269
OTHER ASSETS
Intellectual property, net
113,513
102,078
Investment in non-controlling interest - MesoCoat, Inc.
2,340,378
3,454,310
Deposits and retainers
2,943
2,943
2,456,834
3,559,331
$ 3,613,416
$ 4,813,325
LIABILITIES
CURRENT LIABILITIES
Lines of credit
$
7,411
$
20,494
Current portion of long-term debt
53,091
51,940
Current portion of capital lease obligations
2,058
54,021
Accounts payable
56,602
76,866
Accrued and withheld taxes and expenses
141,735
192,293
260,897
395,614
LONG-TERM LIABILITIES
Long-term debt
710,363
756,398
Capital lease obligations
-
4,101
Deferred compensation
183,333
183,333
Deferred income taxes
782,767
1,161,538
1,676,463
2,105,370
1,937,360
2,500,984
STOCKHOLDERS' EQUITY
STOCKHOLDERS' EQUITY
1,676,056
2,312,341
$ 3,613,416
$ 4,813,325
The accompanying notes are an integral part of these financial statements.
-3-
POWDERMET, INC.
STATEMENTS OF OPERATIONS
YEARS ENDED MAY 31, 2013 AND 2012
2013
2012
PERCENTAGE
PERCENTAGE
OF REVENUES
OF REVENUES
REVENUES
Commercial
$ 363,961
16.7
%
$ 374,952
18.2 %
Government
1,522,333
69.9
1,377,565
67.1
Other
291,823
13.4
301,442
14.7
2,178,117
100.0
2,053,959
100.0
COST OF REVENUES
1,188,988
54.5
1,119,785
54.5
GROSS PROFIT
989,129
45.5
934,174
45.5
GENERAL AND
ADMINISTRATIVE EXPENSES
946,873
43.5
877,042
42.7
INCOME FROM OPERATIONS
42,256
2.0
57,132
2.8
OTHER INCOME (EXPENSES)
Interest expense (net of interest
income of $76 and $85,
respectively)
(38,746)
(1.8)
(48,467)
(2.4)
Equity in MesoCoat income (loss)
(1,113,932)
(51.1)
41,810
2.0
Gain on retained
non-controlling investment
-
-
3,412,500
166.2
Other income
95,400
4.4
109,270
5.3
(1,057,278)
(48.5)
3,515,113
171.1
INCOME (LOSS) BEFORE
INCOME TAXES
(1,015,022)
(46.5)
3,572,245
173.9
PROVISION FOR (BENEFIT FROM)
INCOME TAXES
Deferred
(378,737)
(17.4)
1,161,190
56.5
NET INCOME (LOSS)
$ (636,285)
(29.1)
%
$ 2,411,055
117.4 %
The accompanying notes are an integral part of these financial statements.
-4-
POWDERMET, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED MAY 31, 2013 AND 2012
COMMON STOCK
Par value, $0.001 per share
Authorized - 2,600,000 shares
ADDITIONAL
SHARES ISSUED
PAID-IN
ACCUMULATED
AND OUTSTANDING
AMOUNT
CAPITAL
DEFICIT
TOTAL
Balance at June 1, 2011
1,470,313
$1,471
$3,841,988
$(3,942,173)
$(98,714)
Net income
-
-
-
2,411,055
2,411,055
Balance at May 31, 2012
1,470,313
1,471
3,841,988
(1,531,118)
2,312,341
Net loss
-
-
-
(636,285)
(636,285)
Balance at May 31, 2013
1,470,313
$1,471
$3,841,988
$(2,167,403)
$1,676,056
The accompanying notes are an integral part of these financial statements.
-5-
POWDERMET, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED MAY 31, 2013 AND 2012
2013
2012
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)
$
(636,285)
$ 2,411,055
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Add back (deduct): Items not affecting cash
Depreciation and amortization
100,247
99,420
Equity in MesoCoat (income) loss
1,113,932
(41,810)
Gain on retained non-controlling investment
-
(3,412,500)
Deferred income taxes
(378,737)
1,161,190
Cash provided by (used in) changes in the following items:
(Increase) decrease in accounts receivable
59,783
(1,669)
Decrease in accounts payable
(20,264)
(4,601)
Increase (decrease) in accrued
and withheld taxes and expenses
(50,558)
22,286
Net cash provided by operating activities
188,118
233,371
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions of property and equipment
(49,683)
(14,442)
Investment in intellectual property
(19,421)
(5,958)
Net cash used in investing activities
(69,104)
(20,400)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net repayments on lines of credit
(13,083)
(326)
Principal payments on long-term debt
(35,607)
(20,806)
Principal payments on capital lease obligations
(56,064)
(51,057)
Net cash used in financing activities
(104,754)
(72,189)
NET INCREASE IN CASH
14,260
140,782
CASH - BEGINNING OF YEAR
273,533
132,751
CASH - END OF YEAR
$
287,793
$
273,533
The accompanying notes are an integral part of these financial statements.
-6-
POWDERMET, INC.
NOTES TO THE FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
Powdermet, Inc. (Powdermet, or, the Company) was founded in December 1996. The Company is a
manufacturer of nano-engineered metal and ceramic powders, and high value-added components
manufactured from these powders. The Company generates revenues from job shop toll processing
and contract research and design services, primarily through the Small Business Innovative
Research ("SBIR") program.
Accounting Period
The Company’s fiscal year ends on December 31. These financial statements cover the period June 1,
2012 through May 31, 2013, and June 1, 2011 through May 31, 2012.
Basis of Accounting
These financial statements are prepared on the accrual basis of accounting in conformity with U.S.
generally accepted accounting principles (GAAP).
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make
estimates and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Accordingly, actual results could differ from those estimates.
Reclassifications
Certain reclassifications have been made to the 2012 financial statements to conform with the 2013
financial statement presentation. Such reclassifications had no effect on net income as previously
reported.
Accounts Receivable
The Company’s accounts receivable are due from a variety of customers. Credit is extended based on
an evaluation of a customer’s financial condition. Accounts receivable are generally due within 30
days and are stated at amounts due from customers, net of an allowance for doubtful accounts.
Accounts that are outstanding longer than the contractual payment terms are considered past due.
The Company determines its allowance by considering a number of factors, including the length of
time trade receivables are past due, the Company’s previous loss history, the customer’s current
ability to pay its obligations to the Company, and the condition of the general economy and industry
as a whole. The Company writes off accounts receivable when they become uncollectible, and
payments subsequently received on such receivables are credited to an allowance for doubtful
accounts. As of May 31, 2013 and 2012, management has determined that no allowance for
doubtful accounts is required.
-7-
POWDERMET, INC.
NOTES TO THE FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation and amortization.
Depreciation and amortization of property and equipment is provided by use of the straight-line
method over the following estimated useful lives of the assets:
Machinery and equipment
7 years
Furniture and fixtures
7 years
Computer equipment
5 years
Vehicles
5 years
Leasehold improvements
Lesser of useful life of asset, or remaining
life of lease (15 years maximum)
Construction in progress represents assets that are in process of construction and rehabilitation in
order to bring them to operational status. All costs are captured in a separate Construction in
Progress account, and are included in the Property and Equipment – Net on the accompanying
balance sheets. Depreciation commences when the asset is ready to be placed into service.
Routine expenditures for maintenance and repairs are expensed as incurred.
Intellectual Property
Intellectual property is recorded at cost and consists primarily of patents and licenses. Patent costs are
being amortized on a straight-line basis over their estimated useful lives, up to 15 years, beginning
when the patent is secured by the Company. License costs are recorded at the cost to obtain the
license and are amortized on a straight-line basis over the effective term of the license, up to 15
years.
Revenue and Cost Recognition
Revenue is generally recorded when earned as defined under the terms of their contractual
agreements. Each contract sets the timing of amounts that are allowed to be billed and how to bill
those amounts. Revenue from cost-plus fee contracts is recognized on the basis of costs incurred
during the year plus the fee earned. Revenue earned under the SBIR program is recognized in the
year in which the related costs are incurred so as to match the revenue against the research costs
being reimbursed.
Cost of revenues include all direct costs and allocations of indirect contract costs.
Shipping and Handling
The Company’s shipping and handling costs are included in cost of revenues as a component of other
direct costs.
-8-
POWDERMET, INC.
NOTES TO THE FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Stock-Based Compensation
The Company values its employee stock-based awards based on the grant-date fair value in
accordance with the provisions of Accounting Standards Codification (ASC) 718, Compensation –
Stock Compensation.
Income Taxes
Income taxes are provided for the tax effects of transactions reported in the financial statements
and consist of taxes currently due plus deferred taxes. Deferred income taxes reflect the net
tax effects of any temporary differences between the carrying amount of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes. Valuation allowances
are established when necessary to reduce deferred tax assets to the amount expected to more
likely than not be realized in future tax returns.
Advertising
Advertising costs are expensed as incurred. The Company did not incur any advertising related
expenses during the years ended May 31, 2013 and 2012.
Equity Method
The equity method of accounting is used when the Company has a 20% to 50% interest in other
entities. Under the equity method, original investments are recorded at cost and adjusted by the
Company’s share of undistributed earnings or losses of those entities.
2. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at May 31:
2013
2012
Machinery and equipment
$
1,291,426
$
1,271,556
Furniture and fixtures
24,422
24,422
Computer equipment
27,534
24,751
Vehicles
8,625
8,625
Leasehold improvements
642,974
625,221
Construction in progress
177,610
177,610
2,172,591
2,132,185
Less: Accumulated depreciation and amortization
(1,549,177)
(1,456,916)
$
623,414
$
675,269
Depreciation and amortization expense was $92,261 and $86,458 for the years ended May 31, 2013
and 2012, respectively.
-9-
POWDERMET, INC.
NOTES TO THE FINANCIAL STATEMENTS
3. INTELLECTUAL PROPERTY
The cost and net book value of finite-lived intangible assets consisted of the following at May 31:
2013
2012
Intellectual technology
$
246,301
$
226,880
Accumulated amortization
(132,788)
(124,802)
$
113,513
$
102,078
Amortization expense was $7,986 and $12,962 for the years ended May 31, 2013 and 2012,
respectively. The Company expects amortization expense related to intellectual property for the
next five years to be as follows:
YEAR ENDING
MAY 31,
2014
$
8,547
2015
8,547
2016
8,547
2017
8,547
2018
5,000
4. INVESTMENT IN NON-CONTROLLING INTEREST – MESOCOAT, INC.
On July 13, 2011, MesoCoat, Inc. (MesoCoat) authorized the release of newly issued common stock to
Abakan, Inc. (Abakan), a related party, in exchange for cash consideration. The effect of the
transaction diluted Powdermet's ownership of MesoCoat from 65.4% to 47.5% and Powdermet is
accounting for its remaining 47.5% investment using the equity method. The gain on the
remeasurement of the retained non-controlling investment in MesoCoat was $3,412,500 which is
the fair value of Powdermet's non-controlling interest in MesoCoat on the closing date. The fair
value of the investment was a Level 3 measurement (see Note 8) based upon the consideration
paid by Abakan for 86,156 new common shares of MesoCoat including a discount for Powdermet's
lack of marketability of its non-controlling interest.
Powdermet's investment in MesoCoat was $0 directly preceding the closing date. When the
Company's share of losses previously accounted for equaled the carrying value of its investment,
the Company suspended its investment accounting, and no additional losses were recognized since
the Company was not obligated to provide further financial support for MesoCoat. The Company's
unrecorded share of MesoCoat's losses was $236,458 directly preceding the closing date.
-10-
POWDERMET, INC.
NOTES TO THE FINANCIAL STATEMENTS
4. INVESTMENT IN NON-CONTROLLING INTEREST – MESOCOAT, INC. (continued)
The table below reconciles our investment amount and equity method amounts to the amount on the
accompanying balance sheets.
Investment balance, June 1, 2011
$
-
Remeasurement of retained investment, July 13, 2011
3,412,500
Equity in MesoCoat income
41,810
Investment balance, May 31, 2012
3,454,310
Equity in MesoCoat loss
(1,113,932)
Investment balance, May 31, 2013
$
2,340,378
The table below presents the effects of changes in Powdermet's ownership interest in MesoCoat on
Powdermet's equity for the year ended May 31, 2012:
Net loss attributable to Powdermet (at 65.4%)
$
(40,912)
Transfer from the non-controlling interest:
Dilution of Powdermet's interest resulting
from MesoCoat issuance of new shares
82,722
Change from net loss attributable to Powdermet
and transfer from the non-controlling interest (47.5%) $
41,810
5. LINES OF CREDIT
The Company has available for its use a secured line of credit with a bank totaling $50,000.
Outstanding borrowings bear interest at the bank's prime rate plus 3.00% (6.25% at May 31, 2013
and 2012) and are secured by the personal guarantee of the Company's majority stockholder.
Outstanding borrowings on the line of credit at May 31, 2013 and 2012 were $7,411 and $20,494,
respectively. The line of credit is renewed annually.
The Company also has available for its use a secured line of credit with another bank totaling $63,575.
Outstanding borrowings bear interest at 8.99% and are secured by the personal guarantee of the
Company's majority stockholder. There were no outstanding borrowings on the line of credit as of
May 31, 2013 and 2012. The line of credit is renewed annually.
-11-
POWDERMET, INC.
NOTES TO THE FINANCIAL STATEMENTS
6. LONG-TERM DEBT
Long-term debt consisted of the following at May 31:
2013
2012
Note, payable to an unrelated third-party
in monthly installments of $4,250, plus interest
at 7.00%, through July 2029; collateralized by
certain patents and contracts, agreements, and
know-how related to these patents; at any
time prior to the complete and final payment
on this note, the third-party has the right to exercise
stock warrants to purchase 200,000 shares of the
Company's common stock at an exercise price
of $1.65 per share.
$
493,466
$
508,074
Note, payable to a related party in interest-only
monthly installments bearing interest at 0.50% per
month through December 2016; with a balloon payment
of remaining outstanding principal due and any accrued
interest due on December 2016; collateralized by
substantially all assets of the Company
88,728
98,004
Obligation, payable to an unrelated third-party; no stated
interest rate; interest payment frequency and due date
for the obligation not specified
181,260
202,260
763,454
808,338
Less: Current portion
(53,091)
(51,940)
$
710,363
$
756,398
Future maturities of long-term debt are as follows:
YEAR ENDING
MAY 31,
2014
$
53,091
2015
54,327
2016
144,381
2017
21,072
2018
24,613
Thereafter
465,970
$
763,454
-12-
POWDERMET, INC.
NOTES TO THE FINANCIAL STATEMENTS
7. DEFERRED COMPENSATION
The Company has non-qualified deferred compensation arrangements with one key employee and one
former employee. The arrangements allowed the employees to defer payment of a portion of their
annual compensation. The amount accrued under such arrangements as of May 31, 2013 and
2012 was $183,333. The deferred compensation arrangements are unfunded; therefore, benefits
will be paid from the general assets of the Company.
8. FAIR VALUE MEASUREMENTS
As discussed in Note 4, on July 13, 2011, the Company revalued its retained non-controlling investment
in MesoCoat to fair value in accordance with ASC 805, Business Combinations. The
remeasurement to fair value only occurs on the date of the business combination event and is not
readjusted to fair value at the end of the reporting period.
GAAP establishes a framework for measuring fair value. That framework provides a fair value
hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. It applies to
fair value measurements already required or permitted by existing standards. The hierarchy gives
the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities
(Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements).
The three levels of the fair value hierarchy under GAAP are described as follows:
Level 1 - Inputs to the valuation methodology are unadjusted quoted prices for identical assets or
liabilities in active markets that the Company has the ability to access.
Level 2 - Quoted prices for similar assets or liabilities in active markets or quoted prices for
identical or similar assets or liabilities in inactive markets. Level 2 inputs include those
other than quoted prices that are observable for the asset or liability and that are
derived principally from, or corroborated by, observable market data by correlation or
other means. If the asset or liability has a specified term, the Level 2 input must be
observable for substantially the full term of the asset or liability.
Level 3 - Inputs to the valuation methodology are unobservable and significant to the fair value
measurement.
The asset’s or liability’s fair value measurement level within the fair value hierarchy is based on the
lowest level of any input that is significant to the fair value measurement. Valuation techniques
used should maximize the use of observable inputs and minimize the use of unobservable inputs.
The fair value of the retained non-controlling interest in MesoCoat, a private entity, was estimated
based on the purchase price of Abakan’s July 13, 2011 investment and corroborated by use of the
income approach. This fair value measurement is based on significant inputs that are not
observable in the market and, therefore, represents a Level 3 measurement as defined above.
Main assumptions include the following:
-13-
POWDERMET, INC.
NOTES TO THE FINANCIAL STATEMENTS
8. FAIR VALUE MEASUREMENTS (continued)
A value of $32.50 per share implied by the July 13, 2011 Abakan investment (prior to
consideration of adjustments for lack of control or lack of marketability).
A discount rate of approximately 38% and probability of achieving the projected cash flows
of 4% using the income approach.
Adjustments because of the lack of marketability that market participants would consider
when estimating the fair value of the retained non-controlling interest in MesoCoat.
The preceding methods described on the previous page may produce a fair value calculation that may
not be indicative of net realizable value or reflective of future fair values. Furthermore, although the
Company believes its valuation methods are appropriate and consistent with other market
participants, the use of different methodologies or assumptions to determine fair value of certain
financial instruments could result in a different fair value measurement at the reporting date.
The following table presents the changes in the Company’s Level 3 investment during the years ended
May 31, 2013 and 2012:
Investment
in
MesoCoat
Balance at June 1, 2011
$
-
Plus: Remeasurement of retained investment, July 13, 2011
3,412,500
Plus: Equity in MesoCoat income
41,810
Balance at May 31, 2012
3,454,310
Less: Equity in MesoCoat loss
(1,113,932)
Balance at May 31, 2013
$
2,340,378
9. INCOME TAXES
Deferred income taxes are provided to recognize the effects of temporary differences between financial
reporting and income tax reporting. These differences arise principally from Federal net operating
losses and the recognition of equity method investee income for book purposes as opposed to the
recognition of equity method investee income only upon the disposal of the investment for tax
purposes.
In assessing the realization of deferred tax assets, management considers whether it is more likely than
not that some portion or all of the deferred tax assets will be realized. The ultimate realization of
deferred tax assets is dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Management considers the scheduled
reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in
making this assessment. As of May 31, 2013 and 2012, management has recorded a valuation
allowance for its deferred tax assets relating to the net operating losses, fixed asset basis
differences, and other benefits arising prior to December 31, 2010, as management believes it is
more likely than not that it will be unable to utilize those deferred tax assets.
-14-
POWDERMET, INC.
NOTES TO THE FINANCIAL STATEMENTS
9. INCOME TAXES (continued)
The following reconciles the Company’s effective income tax rate with that which would be expected if
the Federal statutory rate of 34% were applied to income before income taxes for the year end May
31:
2013
2012
Income tax provision at
US Federal statutory rates
$
(345,107) $
1,214,563
Permanent differences
(5,091)
(53,373)
Change in valuation allowance
(28,539)
-
Income tax expense (benefit)
$
(378,737) $
1,161,190
Deferred tax assets and liabilities consisted of the following at May 31:
2013
2012
Current
Deferred tax asset:
Accrued vacation
$
18,094
$
20,790
Non-current
Deferred tax assets:
Net operating loss carryforward
$
649,126
$
680,271
Deferred compensation
62,334
62,334
Fixed asset basis difference
16,784
29,550
Loss contingency
18,068
-
Unremitted loss from subsidiary
364,522
-
Total non-current deferred tax assets
1,110,834
772,155
Deferred tax liabilities:
Unremitted income from subsidiary
-
(14,215)
Book fair market value adjustment of investment
(1,160,250)
(1,160,250)
Total non-current deferred tax liabilities
(1,160,250)
(1,174,465)
Net non-current deferred tax liability
(49,416)
(402,310)
Net deferred tax liability before valuation allowance
(31,322)
(381,520)
Valuation allowance
(751,131)
(779,670)
Net deferred tax liability
$
(782,453)
$
(1,161,190)
-15-
POWDERMET, INC.
NOTES TO THE FINANCIAL STATEMENTS
9. INCOME TAXES (continued)
GAAP requires the Company to evaluate tax positions taken and recognize a tax liability (or asset) if
the Company has taken an uncertain position that more likely than not would be sustained upon
examination by the IRS. The Company has analyzed the positions taken, and has concluded that
as of May 31, 2013, there are no uncertain positions taken or expected to be taken that would
require recognition of a liability (or asset) or disclosure in the financial statements.
The Company is subject to routine income tax audits by taxing jurisdictions; however, there are
currently no audits for any tax periods in progress. Management believes it is no longer subject to
income tax examinations for years prior to the year ended December 31, 2009.
The net operating loss carryforward as of May 31, 2013 expires as follows:
Expiring Year
2023
$
431,939
2024
563,441
2025
563,678
2029
150
2030
195,233
2033
154,757
Total
$
1,909,198
10. STOCK OPTIONS AND WARRANTS
The Company may grant incentive stock options to its directors and employees and nonstatutory stock
options to service providers under the provisions of its stock option plan (the Stock Plan). Under
the Stock Plan, 500,000 shares of common stock have been reserved for the granting of these
options. There were 50,000 and 90,000 outstanding options as of May 31, 2013 and 2012,
respectively. The Stock Plan provides that the exercise price of these options shall not be less than
85% of the fair market value of the common stock on the date granted, depending upon the
optionee and type of option. Options begin vesting after one year from date of grant at a rate of
25% per year and may not be exercised in fractional options. Options expire as stated in the
individual agreement, but may not exceed 10 years after date of grant. Options outstanding under
the Stock Plan had an exercise price ranging from $0.25 and $1.47 as of May 31, 2013 and $0.25
and $1.65 as of May 31, 2012.
-16-
POWDERMET, INC.
NOTES TO THE FINANCIAL STATEMENTS
10. STOCK OPTIONS AND WARRANTS (continued)
A summary of the status of the Company's stock option plan as of May 31 and changes during the
years then ended are as follows:
Weighted
Average
Exercise
Shares
Price
Outstanding at June 1, 2011
90,000 $
1.03
Exercised
-
-
Granted
-
-
Forfeited
-
-
Outstanding at May 31, 2012
90,000
1.03
Exercised
-
-
Granted
10,000
1.47
Expired
(50,000)
(1.65)
Forfeited
-
-
Outstanding at May 31, 2013
50,000 $
.49
Exercisable at May 31, 2013
39,375
The following table summarizes information about employee stock options under the Stock Plan
outstanding at May 31:
Options Outstanding
Options Exercisable
Range
Number
Weighted
of
Outstanding
Average
Weighted
Number
Weighted
Exercise
at May 31,
Remaining Average
Exercisable
Average
Price
2013
Contractual Exercise
at May 31,
Exercise
Life (years)
Price
2013
Price
$ 0.25
40,000
2.08
$ 0.25
39,375 $ 0.25
$ 1.47
10,000
3.42
$ 1.47
- $ 1.47
50,000
2.35
$
.49
39,375 $
.25
-17-
POWDERMET, INC.
NOTES TO THE FINANCIAL STATEMENTS
10. STOCK OPTIONS AND WARRANTS (continued)
As part of the Company's initial financing, lenders were granted warrants to purchase 215,000 shares
of the Company's common stock at an exercise price of $1.65 per share. The purchase rights are
exercisable at any time before or at the date of an initial public offering, or the sale of a majority
ownership interest in the Company. The Company determined that as of the date of the grant the
warrants had no significant fair market value.
The Company also granted each of its eight Advisory Board members warrants to purchase 2,000
shares each of the Company's common stock at an exercise price of $1.65 per share. The
purchase rights are exercisable at any time before the date of an initial public offering, or the sale of
a majority ownership interest in the Company.
No stock warrants have been exercised as of May 31, 2013 or 2012.
11. EMPLOYEE BENEFIT PLAN
The Company has a 401(k) Plan (the Plan) covering substantially all of its employees who are at least
age 21 and have completed three months of service. Participating employees may elect to
contribute, on a tax deferred basis, a portion of their compensation in accordance with Section
401(k) of the Internal Revenue Code. Additional matching contributions may be made to the Plan
at the discretion of the Company. For the years ended May 31, 2013 and 2012, the Company
contributed $18,932 and $12,905, respectively.
12. RELATED PARTIES
In June, 2010, the Company entered into a sublease of expanded office and manufacturing facilities
with a related party. The terms of the sublease agreement expire in May, 2020. The related party
is responsible for its prorated partial share of executor costs, such as insurance, real estate taxes,
maintenance and other related expenses. The Company has accounted for this sublease income in
Other Income in the accompanying statements of operations.
The Company has a license agreement (the Agreement) with MesoCoat, which grants MesoCoat an
exclusive license to the use of technical information, proprietary know-how, data and patent rights
assigned to and/or owned by the Company. The agreement will end upon the last to expire valid
claim of licensed patents, unless terminated within the terms of the agreement.
As part of the Agreement, MesoCoat has a commitment to purchase consumable powders from the
Company through July 1, 2014. Also, as part of the Agreement the Company will provide
technology transition and development services to MesoCoat to support their research and
development activities on a cost reimbursement basis. Total cost reimbursements were $369,184
and $275,365 for the years ended May 31, 2013 or 2012, respectively, and are included in
Revenues - Other in the accompanying statements of operations.
-18-
POWDERMET, INC.
NOTES TO THE FINANCIAL STATEMENTS
12. RELATED PARTIES (continued)
The following is a summary of transactions and balances with related parties as of and for the year
ended May 31:
2013
2012
Due from related parties (included in accounts
receivable in the accompanying balance sheets)
$
95,862
$
63,286
Due to related parties (included in accounts payable
and long-term debt in the accompanying balance $
102,228
$
98,319
sheets)
Revenues from related party
$
369,184
$
275,365
Purchases from related parties
$
1,629
$
33,384
Rent paid to related party (as described in Note 13)
$
162,000
$
162,000
Rental income from related party
$
80,400
$
80,800
13. COMMITMENTS AND CONTINGENCIES
In November 2005, the Company entered into a fifteen year lease agreement with Sherman Properties,
LLC (Sherman Properties) for its corporate office and manufacturing facilities located in Euclid,
Ohio, at the rate of $13,500 per month. The Company is liable for executor costs, such as
insurance, real estate taxes, maintenance, and other related expenses. Rental expense paid to
Sherman Properties during the years ended May 31, 2013 and 2012 was $162,000, which
management believes approximates a rental rate for comparable properties in the geographic area.
The Company's Chief Executive Officer and majority stockholder of the Company is a member of
Sherman Properties and, as more fully-described below, the Company guarantees the commercial
mortgage loan indebtedness of Sherman Properties.
The Company also leases equipment under capital lease arrangements, expiring at various times
through June 2013. These leases are payable in various monthly installments, including
interest between 6.50% and 14.75%, and are included as capital lease obligations in the
accompanying balance sheets. At May 31, 2013 and 2012, the related assets, with a net book
value of $73,516 and $161,761, respectively, have been capitalized and are included in
property and equipment in the accompanying balance sheets.
-19-
POWDERMET, INC.
NOTES TO THE FINANCIAL STATEMENTS
13. COMMITMENTS AND CONTINGENCIES (continued)
Total future minimum payments under the lease agreements at May 31, 2013 are as follows:
YEAR ENDING
Capital
Operating
MAY 31,
Leases
Leases
2014
$
2,071
$
162,000
2015
-
162,000
2016
-
162,000
2017
-
162,000
2018
-
162,000
Thereafter
-
391,500
2,071
$
1,201,500
Less: Interest component
(13)
2,058
Less: Current portion
(2,058)
$
-
The Company is contingently liable as guarantor with respect to $1,080,000 of commercial mortgage
loan indebtedness of Sherman Properties (an entity owned by the Company's majority stockholder
and related individuals) to Cuyahoga County, Ohio (the County) for property acquired and leased to
the Company. The guarantee was issued in November 2002 and provides that if at any time
Sherman Properties defaults on its obligation under the loan, the Company will be obligated to
perform under the guarantee by making the required payments. The value of the property
associated with the guarantee is estimated at $2,770,000 and the liabilities associated with the
guarantee are estimated to be $1,310,000 as of May 31, 2013.
The Company is involved in various matters and litigation in the normal course of business including
proceedings based on product liability claims and employment matters for which the Company
carries commercial insurance. Management regularly reviews the probable outcome of these
matters, the expenses expected to be incurred, the availability and limits of the insurance coverage,
and monitors the established accruals for liabilities. While the outcome of pending matters cannot
be predicted with certainty, management believes that any liabilities that may result from these
matters will not have a material adverse effect on the Company's liquidity, financial condition, or
results of operations.
14. CONCENTRATIONS
During the year ended May 31, 2013 and 2012, revenues from two third-party customers comprised
approximately 45% and 31%, respectively, of total revenues. At May 31, 2013 and 2012, accounts
receivable from these customers accounted for approximately 28% and 32%, respectively, of total
receivables.
As more fully-described in Note 1, a significant portion of the Company's revenue is generated through
government contracts under the Federal SBIR program. During the years ended May 31, 2013 and
2012, revenues from the SBIR program were approximately 70% and 67%, respectively.
-20-
POWDERMET, INC.
NOTES TO THE FINANCIAL STATEMENTS
15. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
CASH PAID DURING THE YEAR FOR:
2013
2012
INTEREST
$
38,298
$
42,538
NON-CASH INVESTING AND FINANCING ACTIVITIES:
During the year ended May 31, 2013, the Company made certain improvements to the building
leased from Sherman Properties, on behalf of Sherman properties. As a result, the Company
reduced its note payable balance due to Sherman Properties in the amount of $9,277.
During the year ended May 31, 2012, the Company wrote-off accounts receivable and allowance
for doubtful accounts of $31,265.
During the year ended May 31, 2012, the Company transferred $303,264 of accounts payable to
long-term debt.
During the year ended May 31, 2012, the Company transferred $53,913 of accrued interest to
long-term debt.
16. SUBSEQUENT EVENTS
In June 2013, the Company formed Terves, Inc. (Terves) and Powdermet Powder Production, Inc.
(PPP) as wholly-owned subsidiaries. Terves was formed to develop and sell "frac balls", a metallic
material designed to increase efficiencies for oil and gas extraction from shale rock formations.
PPP was formed to operate Powdermet's commercial business activity, while Powdermet will
maintain operations of the SBIR and other governmental programs. Neither Terves nor PPP have
conducted any business activities to date, other than their business formations. There were no
additional material subsequent events that required recognition or additional disclosure in these
financial statements through August 21, 2013, the date these financial statements were available to
be issued.
-21-
POWDERMET, INC.
SCHEDULES OF COST OF REVENUES AND GENERAL AND ADMINISTRATIVE EXPENSES
YEARS ENDED MAY 31, 2013 AND 2012
2013
2012
PERCENTAGE
PERCENTAGE
OF REVENUES
OF REVENUES
COST OF REVENUES
Consultants
$
6,405
.3 %
$
2,100
.1 %
Depreciation
45,490
2.1
41,353
2.0
Direct labor
562,432
25.8
545,937
26.6
Materials
180,162
8.2
153,226
7.4
Other direct costs
2,535
.1
9,745
.5
Payroll and payroll related taxes
146,724
6.7
178,344
8.7
Rent
119,431
5.5
119,431
5.8
Subcontract
65,051
3.0
22,165
1.1
Travel
13,360
.6
10,955
.5
Utilities
47,398
2.2
36,529
1.8
$ 1,188,988
54.5 %
$ 1,119,785
54.5 %
GENERAL AND
ADMINISTRATIVE EXPENSES
Consultants
$
26,967
1.2 %
$
29,734
1.4 %
Depreciation and amortization
54,757
2.5
58,067
2.8
Dues and subscriptions
10,788
.5
8,116
.4
Insurance
58,261
2.7
40,216
2.0
Late fees
829
.0
855
.0
Office and miscellaneous
195,977
9.0
135,616
6.6
Payroll and payroll related taxes
503,266
23.1
490,479
23.9
Professional fees
4,028
.2
21,997
1.1
Recruiting
6,391
.3
15,956
.8
Rent
42,569
2.0
42,569
2.1
Repairs and maintenance
10,390
.5
8,356
.4
Telephone and utilities
21,918
1.0
18,216
.9
Travel and entertainment
10,732
.5
6,865
.3
$ 946,873
43.5 %
$ 877,042
42.7 %
See the Independent Auditors' Report.
-22-
Exhibit 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO RULE 13a-14 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Robert H. Miller certify that:
1. I have reviewed this report on Form 10-K of Abakan Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) and internal control over financial reporting (as defined in the Exchange Act Rules 13a-15(f) and 15d-15(f) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls over financial reporting.
Date: August 29, 2013
/s/ Robert H. Miller___
Robert H. Miller
Chief Executive Officer
Exhibit 32.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the report on Form 10-K of Abakan Inc., for the annual period ended May 31, 2013, as filed with the Securities and Exchange Commission on the date hereof, I, David Charbonneau, do hereby certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge and belief:
(1) This report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in this report fairly represents, in all material respects, the financial condition of the registrant at the end of the period covered by this report and results of operations of the registrant for the period covered by this report.
Date: August 29, 2013
/s/ David Charbonneau__
David Charbonneau
Chief Financial Officer
This certification accompanies this report pursuant to §906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the Sarbanes-Oxley Act of 2002, be deemed filed by the registrant for the purposes of §18 of the Securities Exchange Act of 1934, as amended. This certification shall not be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended (whether made before or after the date of this report), irrespective of any general incorporation language contained in such filing.
A signed original of this written statement required by §906 has been provided to the registrant and will be retained by the registrant and furnished to the Securities and Exchange Commission or its staff upon request.