Exhibit 99.2
MESOCOAT, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
May 31, 2010
TABLE OF CONTENTS
Page
Report of Independent Registered Public Accounting Firm F-2
Audited Balance Sheets as at May 31, 2010 and 2009 F-3
Audited Statements of Operations for the years ended May 31, 2010 and 2009
and cumulative from inception on May 18, 2007 through May 31, 2010 F-4
Audited Statements of Shareholder Equity for the period from inception on May
18, 2007 through May 31, 2010 F-5
Audited Statements of Cash Flows for the years ended May 31, 2010 and 2009
and cumulative from inception on May 18, 2007 through May 31, 2010 F-6
Notes to Financial Statements F-7
F-1
SEALE AND BEERS, CPAs
PCAOB & CPAB REGISTERED AUDITORS
www.sealebeers.com
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
MesoCoat, Inc
(A Development Stage Enterprise)
We have audited the accompanying balance sheets of MesoCoat, Inc. (A Development Stage Enterprise) as of May 31, 2010 and 2009 and the related statements of operations, stockholders’ equity (deficit) and cash flows for the years ended May 31, 2010 and 2009, and since inception on May 18, 2007 through May 31, 2010. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conduct our audits in accordance with 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. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of MesoCoat, Inc. (A Development Stage Enterprise) as of May 31, 2010 and 2009 and the related statements of operations, stockholders’ equity (deficit) and cash flows for the years ended May 31, 2010 and 2009, and since inception on May 18, 2007 through May 31, 2010, in conformity with accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note A to the financial statements, the Company has incurred recurring losses and recurring negative cash flow from operating activities, and has an accumulated deficit which raises substantial doubt about its ability to continue as a going concern. Management’s plans concerning these matters are also described in Note A. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ Seale and Beers, CPAs
Seale and Beers, CPAs
Las Vegas, Nevada
May 12, 2011
50 S. Jones Blvd. Suite 202 Las Vegas, NV 89107 Phone: (888)727-8251 Fax: (888)782-2351
F-2
MESOCOAT, INC. | ||||||||
(A DEVELOPMENT STAGE ENTERPRISE) | ||||||||
BALANCE SHEETS | ||||||||
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| May 31, |
| May 31, |
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| 2010 |
| 2009 |
ASSETS |
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CURRENT ASSETS |
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Cash in bank |
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| $ 941,076 |
| $ 75,779 | |
Accounts receivable |
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| 36,791 |
| 62,902 | ||
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| Total Current Assets |
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| 977,867 |
| 138,681 | |
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PROPERTY & EQUIPMENT, net (Note C) |
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| 282,776 |
| 210,485 | |||
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OTHER ASSETS |
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Patents and licenses, net (Note D) |
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| 93,798 |
| 58,726 | |||
Financing fees, net |
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| 5,506 |
| 7,259 | ||
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| 99,304 |
| 65,984 |
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| $ 1,359,948 |
| $ 415,151 |
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LIABILITIES AND STOCKHOLDERS' EQUITY |
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CURRENT LIABILITIES |
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Accounts payable |
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| $ 72,924 |
| $ 23,024 | ||
Current portion - capital lease obligation (Note G) |
| 10,950 |
| 9,417 | ||||
Accrued liabilities |
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| 46,351 |
| 11,323 | ||
Short term debt and accrued interest (Note E) |
| 274,126 |
| 209,015 | ||||
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Total Current Liabilities |
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| 404,351 |
| 252,779 | ||
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LONG TERM LIABILITIES |
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Long term debt, net of discount (Note F) |
| 65,626 |
| 39,173 | ||||
Capital lease obligation, net of current portion (Note G) | 22,353 |
| 33,303 | |||||
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Total Long Term Liabilities |
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| 87,979 |
| 72,476 | ||
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TOTAL LIABILITIES |
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| 492,330 |
| 325,256 | ||
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STOCKHOLDERS' EQUITY (Note I) |
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Common stock, $.01 par value, 2,000,000 and |
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200,000 shares authorized, 229,334 and 150,000 |
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issued and outstanding as of May 31, 2010 |
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and 2009, respectively |
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| 2,293 |
| 1,500 | ||
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Paid in capital |
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| 1,518,903 |
| 152,617 | |
Retained (deficit) accumulated during the |
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development stage |
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| (653,578) |
| (64,222) | ||
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Total Stockholders' Equity |
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| 867,617 |
| 89,895 | ||
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| $ 1,359,948 |
| $ 415,151 |
The accompanying condensed notes are an integral part of these financial statements.
F-3
MESOCOAT, INC. | ||||||||
(A DEVELOPMENT STAGE ENTERPRISE) | ||||||||
STATEMENTS OF OPERATIONS | ||||||||
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| Cumulative |
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| from | ||
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| For the Years Ended |
| May 18, 2007 | ||
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| May 31, |
| (Inception) to | ||
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| 2010 |
| 2009 |
| May 31, 2010 |
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REVENUES |
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| Commercial |
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| $ 5,543 |
| $ 12,965 |
| $ 18,508 |
| Contract and grants (Note H) |
| 596,999 |
| 206,530 |
| 803,529 | |
| Other income |
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| 5,414 |
| 0 |
| 5,414 |
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| 607,956 |
| 219,496 |
| 827,452 |
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COST OF REVENUES |
| 677,008 |
| 125,077 |
| 802,085 | ||
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GROSS PROFIT |
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| (69,052) |
| 94,419 |
| 25,367 | |
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EXPENSES |
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| General and Administrative |
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| Salaries & wages |
| 110,870 |
| 18,023 |
| 128,893 | |
| Payroll taxes |
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| 38,534 |
| 11,462 |
| 49,996 |
| Recruiting |
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| 116,938 |
| 39,247 |
| 156,185 |
| Other |
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| 149,694 |
| 17,819 |
| 167,513 |
| Interest expense |
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| 22,578 |
| 14,861 |
| 37,440 |
| Depreciation and amortization |
| 28,105 |
| 5,535 |
| 33,641 | |
| Amortization Note Discount |
| 53,584 |
| 45,694 |
| 99,277 | |
| Disposal of assets |
| 0 |
| 6,000 |
| 6,000 | |
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Total expenses |
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| 520,304 |
| 158,640 |
| 678,944 | |
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NET (LOSS) |
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| $ (589,356) |
| $ (64,222) |
| $ (653,578) | |
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NET (LOSS) PER SHARE |
| $ (3.14) |
| $ (0.43) |
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WEIGHTED AVERAGE NUMBER OF |
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COMMON SHARES OUTSTANDING |
| 187,819 |
| 150,000 |
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The accompanying condensed notes are an integral part of these financial statements.
F-4
MESOCOAT, INC. | ||||||||||||
(A DEVELOPMENT STAGE ENTERPRISE) | ||||||||||||
STATEMENTS OF STOCKHOLDER'S EQUITY | ||||||||||||
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| Retained Deficit |
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| Accumulated |
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| Transaction |
| Common Stock |
| Additional |
| Development |
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| Shares |
| Par Value |
| Paid-in Capital |
| Stage |
| Total |
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Initial capitalization - issuance of common stock to founder in |
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exchange for $1,500 in cash, $35,000 |
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in property and $50,000 in intellectual property |
| 4/24/2008 |
| 150,000 |
| $ 1,500 |
| $ 85,000 |
| $ - |
| $ 86,500 |
Discount on debt for Jumpstart Note |
| 7/22/2008 |
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| 66,000 |
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| 66,000 |
Stock based compensation |
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| 1,616 |
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| 1,616 |
Net income |
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| (64,222) |
| (64,222) |
Balance, May 31, 2009 |
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| 150,000 |
| 1,500 |
| 152,617 |
| (64,222) |
| 89,895 |
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Issuance of common stock, net of |
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issuance costs of $35,040 |
| 12/9/2009 |
| 79,334 |
| 793 |
| 1,364,197 |
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| 1,364,990 |
Stock based compensation |
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| 2,089 |
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| 2,089 |
Net income |
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| (589,356) |
| (589,356) |
Balance, May 31, 2010 |
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| 229,334 |
| $ 2,293 |
| $ 1,518,903 |
| $ (653,578) |
| $ 867,617 |
The accompanying condensed notes are an integral part of these financial statements.
F-5
MESOCOAT, INC. | ||||||||
(A DEVELOPMENT STAGE ENTERPRISE) | ||||||||
STATEMENTS OF CASH FLOWS | ||||||||
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| Cumulative |
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| from | ||
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| For the Years Ended |
| May 18, 2007 | ||
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| May 31, |
| (Inception) to | ||
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| 2010 |
| 2009 |
| May 31, 2010 |
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OPERATING ACTIVITIES |
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| Net (loss) income | $ (589,356) |
| $ (64,222) |
| $ (653,578) | ||
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| Adjustments to reconcile net (loss) income to net cash |
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| provided by (used in) operating activities: |
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| Depreciation and amortization | 76,968 |
| 50,325 |
| 127,292 | |
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| Amortization of deferred finance fees | 1,753 |
| 1,314 |
| 3,067 | |
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| Loss on disposal of equipment | - |
| 6,000 |
| 6,000 | |
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| Stock based compensation | 2,089 |
| 1,616 |
| 3,706 | |
| Changes in operating assets and liabilities: |
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| Decrease (increase) in accounts receivable | 26,110 |
| (62,902) |
| (36,792) | |
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| Increase (decrease) in accounts payable | 49,900 |
| 23,026 |
| 72,926 | |
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| Interest accrued on long term debt | 16,250 |
| 10,225 |
| 26,475 | |
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| Increase (decrease) in accrued liabilities | 35,027 |
| 11,323 |
| 46,350 | |
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| NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES | (381,259) |
| (23,295) |
| (404,554) | ||
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INVESTING ACTIVITIES: |
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| Purchases of machinery and equipment | (96,128) |
| (184,121) |
| (315,249) | ||
| Capitalized patents and licenses | (39,341) |
| (11,625) |
| (100,966) | ||
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| NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES | (135,469) |
| (195,746) |
| (416,215) | ||
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FINANCING ACTIVITIES |
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| Proceeds from convertible notes | - |
| 220,000 |
| 220,000 | ||
| Borrowings of long term debt | 27,986 |
| 39,173 |
| 67,159 | ||
| Borrowing on capital lease obligations | - |
| 46,700 |
| 46,700 | ||
| Payment on capital lease obligations | (10,950) |
| (3,980) |
| (14,930) | ||
| Payments of financing fees | - |
| (8,574) |
| (8,574) | ||
| Net proceeds from sale of common stock | 1,364,990 |
| - |
| 1,451,490 | ||
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| NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES | 1,382,026 |
| 293,319 |
| 1,761,845 | ||
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| NET INCREASE (DECREASE) IN CASH | 865,298 |
| 74,278 |
| 941,076 | ||
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| CASH, BEGINNING OF PERIOD | 75,779 |
| 1,500 |
| - | ||
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| CASH, END OF PERIOD | $ 941,076 |
| $ 75,779 |
| $ 941,076 | ||
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SUPPLEMENTAL CASH INFORMATION |
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| Cash paid during the year for interest | $ 5,306 |
| $ 2,252 |
| $ 7,558 | ||
SUPPLEMENTAL NON-CASH TRANSACTIONS |
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| Assets contributed for capital | $ - |
| $ - |
| $ 85,000 | ||
| Equipment purchased through a capital lease arrangement | $ - |
| $ 46,950 |
| $ 46,950 |
The accompanying condensed notes are an integral part of these financial statements.
F-6
Exhibit 99.2
NOTE A - Summary of significant accounting policies
Nature of operations
MesoCoat, Inc. (the Company, we, our, or us) is in the business of developing commercialization coating solutions using nanotechnology, is in the development stage as defined under FASB ASC 915-10, "Development Stage Entities".. The financial statements presented include the operations of the Company since inception. The Company is currently in the development stage, as operations consist primarily of research and development expenditures, and revenues from planned principal operations have not yet been realized. The company has invested heavily in intellectual property and machinery and equipment to initiate the research and development of the core technology. Currently, our revenue consists almost entirely of government grants and cooperative reimbursement agreements.
Background
The Company was incorporated as a wholly owned subsidiary of Powdermet, Inc. on May 18, 2007 as Powdermet Coating Technologies, Inc (a Nevada corporation). Operations began in 2008 and effective March 31, 2008 the Company was renamed 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 the Company's products and the Company's continued ability to obtain future funding.
Cash and cash equivalents
The Company considers all highly liquid investments purchased with a maturity of three months or less to be cash equivalents.
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 quoted prices for identical assets or liabilities;
- Level 2 – Inputs other than quoted prices included within Level 1 that are either directly or indirectly observable with market data; and
- Level 3 – Unobservable inputs that are supported by little or no market activity, therefore requiring an entity to develop its own assumptions about the assumptions that market participants would use in pricing.
NOTE A - Summary of significant accounting policies, continued
Fair Value of Financial Instruments, continued
F-7
Fair value estimates discussed herein are based upon certain market assumptions and pertinent information available to management as of May 31, 2010. 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.
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, capital leases, 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 or Level 3 assets.
Income Taxes
Income taxes are provided for using the liability method of accounting. A deferred tax asset or liability is recorded for all temporary difference between financial and tax reporting. Deferred tax expense (benefit) results from the net change during the year of 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.
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 income statement. 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. There have been no potentially dilutive common shares issued from inception.
NOTE A - Summary of significant accounting policies, continued
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 thatcollection is not probable. As of May 31, 2010 and 2009, management has determined that no allowance for doubtful accounts is required, but we did write-off two accounts receivable invoices, in the year ended May 31, 2010, for a total of $7,897, there are no other questionable invoices, so no further allowance of bad debt was required.
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F-8
Property and equipment
Property and equipment are stated at cost less accumulated depreciation and amortization. Maintenance and repairs are charged to operations as incurred. Depreciation and amortization are based on the straight-line method over the estimated useful lives of the related assets. When assets are retired or otherwise disposed of, the cost and accumulated depreciation and amortization are removed from the accounts, and any resulting gain or loss is reflected in operations in the period realized.
Asset construction in progress
Construction in progress assets, represent assets that are in process of construction and rehabilitation in order to bring them to operational status. All costs are captured in a separate Construction in Progress account, and are included in the “Property 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 5 years
Office furniture and equipment 5 years
Machinery and equipment 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 15 years.
NOTE A - Summary of significant accounting policies, continued
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
F-9
Research and development costs are charged to expense as incurred and are included in operating expenses. Total research and development costs were $13,748 and $9,734 for the years ended May 31, 2010 and 2009, respectively.
Advertising Expenses
Advertising costs are expensed as incurred. Advertising expenses are $19,522 and $2,385 for the years ended May 31, 2010 and 2009, respectively, and are included in general and administrative expense in the accompanying statement of operations.
Stock-based compensation
The Company adopted FASB ASC 718-10 and valued our employee stock based awards based on the grant-date fair value estimated in accordance with the provisions of FASB ASC 718-10. The Company accounts for equity instruments issued in exchange for the receipt of goods or services from other than employees in accordance with FASB ASC 718-10 and the conclusions reached in FASB ASC 505-10. Costs are measured at the estimated fair market value of the consideration received or the estimated fair value of the equity instruments issued, whichever is more reliably measurable. The value of equity instruments issued for consideration other than employee services is determined on the earliest of a performance commitment or completion of performance by the provider of goods or services as defined by FASB ASC 505-10.
Concentrations of credit risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents and accounts receivables. Cash and cash equivalents, as reflected in the banks' records, are insured by the Federal Deposit Insurance Corporation up to limits as proscribed.We maintain our cash balances at two financial institutions and had balances in excess of FDIC insurance of $679,716 and $0 as of May 31, 2010 and 2009, respectively.With regards to accounts receivable, the Company received funding from three grants that comprised 70% of its revenues for the year ended May 31, 2010. Related party sales for contracted services represented 30% of revenues for the year ended May 31, 2010 and 2% of accounts receivable as of May 31, 2010. At May 31, 2010, the Company had no other significant concentrations of credit risk.
NOTE A - Summary of significant accounting policies, continued
Use of estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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. Actual results could differ from those estimates and assumptions.
Evaluation of subsequent events
In accordance with Accounting Standards Codification (ASC) topic 855-10 “Subsequent Events”,the Company has evaluated subsequent events through the date which the financial statements were available to be issued on May 12, 2011. The Company has determined that there were no such events that warrant disclosure or recognition in the financial statements.
F-10
Going Concern
Our financial statements have been presented on the basis that we are a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. We have sustained operating losses since our inception.
As of May 31, 2010 we have an accumulated deficit of $653,578, a working capital surplus of $573,516 and a stockholders’ surplus of $867,617, but these will not be sufficient to fund our business plan for the next twelve months. During the fiscal year ended May 31, 2010 we had a net loss of $589,356 and cash used in operating activities of $381,259. The Company’s ability to continue in existence 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 preferred and common stock and related party loans and advances, and 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 B – 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 our company.
NOTE C - Property and equipment
Property and equipment consists of the following at May 31:
|
| 2010 |
| 2009 |
| Machinery and equipment | $ 274,194 |
| $ 210,032 |
| Computer equipment and office furniture | 9,514 |
| 1,007 |
| Leasehold improvements | 25,541 |
| 2,082 |
|
| 309,249 |
| 213,121 |
| Less accumulated depreciation | (26,473) |
| (2,636) |
| $ 282,776 |
| $ 210,485 |
Depreciation expense was $23,823 and $2,603 for the years ended May 31, 2010 and 2009, respectively.
Property and equipment under capital leases totaled $41,082 and $45,777, net of accumulatedamortization, at May 31, 2010 and 2009, respectively. Amortization of assets held under capital leases is included within depreciation and amortization expense.
F-11
NOTE D - Patents and licenses
Patents and licenses consist of the following at May 31:
|
| 2010 |
| 2009 |
| Patents and Licenses | $ 100,965 |
| $ 61,625 |
|
| 100,965 |
| 61,625 |
| Less accumulated amortization | (7,167) |
| (2,899) |
| $ 93,798 |
| $ 58,726 |
Amortization expense was $4,268 and $2,899 for the years ended May 31, 2010 and 2009, respectively.
Estimated amortization expense at May 31,2010 for the next five years is approximately $4,435 each year.
NOTE E - Short-term debt
Convertible promissory notes
As of May 31, 2010 and 2009 the Company had a balance outstanding net of discount of debt of $69,344 and $20,482, respectively, of bridge funding from a non-profit organization specializing in venture development. This note was executed on July 22, 2008, and we received two payments of proceeds totaling $220,000. On the event of a change of control or a capital investment, the note holder has the option to convert the outstanding balance and the accrued interest owed to shares of our Common Stock at a price determined by a computation defined in the senior secured convertible promissory note agreement. The conversion feature contains a provision to take the total of the outstanding balance add the outstanding interest and multiply by a multiple of between, 1.3 and 2.0, depending upon the date of the closing of the investment, and divided by the purchase price of the closing equity transaction. We have analyzed these notes per “Debt with Conversion and other Options” (ASC 470-20), and have determined that this constitutes a beneficial conversion feature (BCF), accordingly, we have computed a BCF amount of $66,000 and have recorded this as a portion of the discount on debt. We used the multiple of 1.3 as the multiple to compute our BCF, since the discount is limited to the face value of the note, and after the following described acceleration multiple, only leaves available this amount to use. Based upon these assumptions and the equity transaction discussed in Note I, below, we will use the share price of $32.50 per share of common stock; this note would be convertible to approximately 9,859 shares of our common stock.
In addition to the above Conversion feature, there is an acceleration clause upon a business combination of greater than 50% of our company. On December 10, 2009, we entered into such an agreement to sell amajority of our company to an unrelated entity, as discussed in Note H, this stock transaction represents the first option of stock sale, the same entity is in process to close the next round of stock purchase that will bring their ownership over 50%, accordingly we have computed a Contingent loss liability of $178,308, and have recorded this as a discount on debt and are amortizing this and the additional amount of $66,000 from the above BCF over the life of the note, sixty months. Accordingly we will amortize $4,072 per month for the discount on debt. In the years ended May 31, 2010 and 2009, we amortized $48,862 and $44,790, respectively. As of May 31, 2010 and 2009, there remains a balance of discount on debt $150,656 and $199,518, respectively.
F-12
Exhibit 99.2
These notes rank senior to equity instruments of the Company in all respects including, but not limited to, liquidation, sale or merger preference, redemption, or dividend and interest rights. These notes are secured by the intellectual property and all assets of the company.
The notes accrue interest at 7.5% per annum, compounded quarterly. Interest expense for the years ended May 31, 2010 and 2009 was $16,250 and $10,225, respectively. Cumulative interest of $26,475 and $10,225 is accrued at May 31, 2010 and 2009, respectively, and is included in long-term debt. The Company has paid no interest related to these convertible debts. The notes mature July 22, 2013.
NOTE E - Short-term debt, continued
As of May 31, 2010 and 2009, short term consisted of the following:
|
| May 31, | ||
|
| 2010 |
| 2009 |
|
|
|
|
|
Jumpstart Principal | $ | 220,000 | $ | 220,000 |
Jumpstart Discount on Debt |
| (150,656) |
| (199,518) |
Jumpstart Contingent Loss on Debt |
| 178,308 |
| 178,308 |
Jumpstart accrued interest |
| 26,475 |
| 10,225 |
| $ | 274,126 | $ | 209,015 |
As of May 31, 2010 and 2009, we had no restrictive covenants attached to any of the above referenced notes.
NOTE F - Long-term debt
Term loan
The Company obtained a loan from the County of Cuyahoga, Ohio for $60,000 in July 2008. The loan bears interest at a rate of 0% per annum for the first three years and 3.5% per annum of the outstanding principal balance for the remaining seven years. The loan is collateralized by certain intellectual property of the Company. Principal and interest payments of approximately $800 are due monthly beginning August 2011. The loan matures July 10, 2018.
F-13
According to“Imputed Interest” (ASC 835-30-25), we have calculated imputed interest of 7.5% on the above note, and capitalized the amount of $42,250 with the principal amount of $60,000, and have recorded a debt discount of $42,250. As of May 31, 2010 and 2009, we amortized $4,345 and $904, respectively. As of May 31, 2010 and 2009, the balance of discount on debt is $36,624 and $-0-, respectively.
As of May 31, 2010 and 2009, long term debt consisted of the following:
|
| May 31, | ||
|
| 2010 |
| 2009 |
|
|
|
|
|
Magnet – CUY Note Principal | $ | 102,250 | $ | 39,173 |
Magnet Discount on Debt |
| (36,624) |
| - |
| $ | 65,626 | $ | 39,173 |
As of May 31, 2010 and 2009, we had no restrictive covenants attached to any of the above referenced notes.
NOTE G – Leases
The Company leases machinery and equipment under a capital lease arrangement, which expires December 2012.
The Company leases its office and laboratory space from a related party. The lease expires June 30, 2010 and has subsequently been extended on a month to month basis. In March 2010, the Company entered into noncancellable operating leases covering a corporate apartment and vehicle, which expire March 2011 and March 2012, respectively.
Total expense related to the operating lease was $2,400 and $2,200 for the years ended May 31, 2010 and 2009.
Minimum annual rental commitments are as follows at May 31, 2010:
| CapitalLeases | Operating |
2011 | $ 15,264 | $ 11,448 |
2012 | 15,264 | 1,190 |
2013 | 10,554 | 0 |
|
|
|
Total minimum lease payments | 41,082 | 12,638 |
Less amount representing interest | 7,779 |
|
Present value of net minimum capital lease payments | 33,303 |
|
Less current maturities | 10,950 |
|
Long-term obligations under capital leases | $ 22,353 |
|
NOTE H – Grants
F-14
The Company has applied for and received certain grants since inception as a funding source for its operation. In general, the Company incurs various research and development costs and administrative costs and recovers a portion of these costs from the grantor. Revenue associated with grants is as follows for the years ended May 31:
|
|
| Total since |
| 2010 | 2009 | inception |
Department of Energy | $ 519,098 | $ 194,000 | $ 713,098 |
Edison Material Technology Center | 77,901 | 12,530 | 90,431 |
Total grants | $ 596,999 | $ 206,530 | $ 803,529 |
NOTE I – Capitalization
Common Shares – Authorized
The Company has 2,000,000 common shares authorized at a par value of $0.01 per share as of May 31, 2010, and 200,000 common shares authorized at a par value of $0.01 per share as of May 31, 2009. 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
For the years ended May 31, 2010 and 2009, we had outstanding 229,334 and 150,000 shares of our common stock, respectively. For the years ended May 31, 2010 and 2009, we issued the following shares:
During December 2009, the Company issued 79,334 shares of Common Stock at a price of $17.65 per share resulting in cash proceeds of $1,364,990 net of issuance costs of $35,040. The stockholder agreement, described below, allows for future issuance of shares of the Common Stock at a fixed price.
On April 24, 2008, Powdermet, Inc. purchased 150,000 shares of the Company's Common Stock for $1,500 in cash and $85,000 of contributed property as the initial investment in the Company.
Share Purchase – Investment Agreement
On December 11, 2009 we entered into an Investment Agreement (“Agreement”) with Abakan Inc., (“Abakan”) and Powdermet Inc., our majority shareholder. Pursuant to the Agreement, Abakan subscribed to a fully diluted thirty four percent (34%) equity interest in our common stock in exchange for $1,400,000 and a series of options to acquire up to one hundred percent (100%) of our common stock on the satisfaction of certain conditions. The closing of the Agreement also entitled the Company to appoint two directors to our Company’s five person board of directors.
F-15
NOTE I – Capitalization, continued
Share Purchase – Investment Agreement, continued
The initial option entitles us to subscribe to an additional seventeen percent (17%) equity interest in our common stock in exchange for two million eight hundred thousand dollars ($2,800,000) within twelve (12) months of the closing date of the Agreement. Exercise of the initial option would increase the Company’s holdings to a fully diluted fifty one percent (51%) of our common stock and entitle Abakan to offer an independent director to serve as one of the five appointed to our board of directors. Further, the exercise of the initial option would cause the Shareholders Agreement, executed concurrently with the Agreement, to become effective. The Shareholders Agreement governs the actions of our shareholders in certain aspects of corporate action and creates an obligation for existing shareholders and any new shareholders to be bound in like manner. The second option entitles Abakan to subscribe to an additional twenty four percent (24%) equity interest in our common stock in exchange for sixteen million dollars ($16,000,000) within twelve (12) months of the exercise of the initial option. Exercise of the second option would increase Abakan’s holdings to a fully diluted seventy five percent (75%) of our common stock and entitle Abakan’s management to appoint a fourth director to our five person board of directors. The third option entitles outside shareholders of our common stock, for a period of twelve (12) months after the exercise of the second option, to cause Abakan to pay an aggregate amount of fourteen million six hundred thousand dollars ($14,600,000) payable in shares of the Abakan’s common stock or a combination of cash and stock, as provided in the Agreement, in exchange for all remaining shares of our common stock, on a fully diluted basis, not then held by Abakan. As of the year ended, May 31, 2010, Abakan made the initial investment of $1,400,000 less offering costs of $35,040 for a thirty – four (34) percentage ownership of MesoCoat.
NOTE J- License agreement — related party
The Company has a license agreement with Powdermet, Inc, a shareholder, 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 earlier within the terms of the agreement.
As part of the agreement, the Company has a commitment to purchase consumable powders from Powdermet, Inc. through July 1, 2013. Also, as part of the agreement the Company will receive technology transition, maintenance, installation and facility support on a cost reimbursement basis. Total expense related to the cost reimbursement was $115,705 and $19,202 for the years ended May 31, 2010 and 2009, respectively. At May 31, 2010 and 2009, $18,455 and $1,852, respectively, of reimbursement costs are included in accounts payable.
F-16
NOTE K - 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 $10,000 execution fee in 2009 and requires a $40,000 execution fee upon the achievement of a certain milestone as defined in the agreement.
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. No royalty payments have been made through May 31, 2010.
NOTE L - Stock option plan
The Company's stock option plan is intended to advance the interest of the Company and its shareholders by enhancing the Company's ability to attract and retain employees, directors and consultants, to provide such individuals with a proprietary interest in the Company and to stimulate the interest of those individuals in the development and financial success of the Company. The plan is administered by the Board of Directors of the Company. Options granted under the plan can be either incentive stock options or non-qualified stock options. The Plan authorizes the issuance of a maximum of 9,000 shares of the Company's Common Stock. The weighted average remaining contractual life of all currently outstanding options is 4.6 years. These options have a term of 6 years and will expire beginning August 2014 through November 2014.
The fair value of options at the date of grant was estimated using the Black-Scholes option-pricing model with the following principal assumptions:
Risk-free interest rate 2.56% - 3.23%
Expected life (years) 6 years
Expected volatility 225.0%
Expected dividends None
The risk-free interest rates are based on the U.S. Treasury yield curve in effect at the time ofgrant for periods corresponding with the approximate expected life of the option. The expectedstock price volatility rates are based on comparable companies.
F-17
NOTE L - Stock option plan - continued
On August 14, 2008, we granted to one of our employees 3,200 stock options with an exercise price of $2.00 per share. The options will expire six years from the grant date, and the options will vest 25% on the first anniversary of the grant date, and the remaining 75% will vest in prorate shares equally over the next three years after the first anniversary of the grant date. On November 7, 2008, we granted to another of our employees 1,000 stock options with an exercise price of $1.00 per share. The options will expire six years from the grant date, and the options will vest 25% on the first anniversary of the grant date, and the remaining 75% will vest in prorate shares equally over the next three years after the first anniversary of the grant date.
A summary of the options granted to employees and non-employees under the plan and changes during the period ended May 31, 2010 and 2009 is presented below:
| Number of Options |
| Weighted Average Exercise Price |
| Aggregate Intrinsic Value |
Balance at June 1, 2008 | - | $ | 0.00 | $ | - |
Granted | 4,200 |
| 1.95 |
| 8,358 |
Exercised | - |
| 0.00 |
| - |
Forfeited or Expired | - |
| 0.00 |
| - |
Balance at May 31, 2009 | 4,200 | $ | 1.95 |
| 8,358 |
Exercisable at May 31, 2009 | - | $ | 0.00 |
| - |
Weighted average fair value of options granted during the year |
| $ | 1.95 |
|
|
Balance at June 1, 2010 | 4,200 | $ | 1.95 | $ | 8,358 |
Granted | - |
| 0.00 |
| - |
Exercised | - |
| 0.00 |
| - |
Forfeited or Expired | - |
| 0.00 |
| - |
Balance at May 31, 2010 | 4,200 | $ | 1.95 |
| 8,221 |
Exercisable at May 31, 2010 | 1,050 | $ | 1.99 |
| 2,090 |
Weighted average fair value of options granted during the year |
| $ | 0.00 |
|
|
F-18
NOTE L - Stock option plan - continued
The following table summarizes information about employee stock options under the 2009 Plan outstanding at May 31, 2010:
Options Outstanding | Options Exercisable | |||||||||||||
| Range of Exercise Price |
| Number Outstanding at May 31, 2010 |
| Weighted Average Remaining Contractual Life |
| Weighted Average Exercise Price |
| Intrinsic Value | Number Exercisable at May 31, 2010 |
| Weighted Average Exercise Price |
| Aggregate Intrinsic Value |
$ | 1.00 |
| 1,000 |
| 4.00 Years | $ | 1.96 | $ | 1,992 | 250 | $ | 1.96 | $ | 498 |
$ | 2.00 |
| 3,200 |
| 4.00 Years | $ | 1.95 | $ | 6,366 | 800 | $ | 1.95 | $ | 1,592 |
|
|
| 4,200 |
| 4.00 Years | $ | 1.95 | $ | 8,358 | 1,050 | $ | 1.95 | $ | 2,090 |
On August 14, 2008, we granted to one of our employees 3,200 stock options with an exercise price of $2.00 per share. The options will expire six years from the grant date, and the options will vest 25% on the first anniversary of the grant date, and the remaining 75% will vest in prorate shares equally over the next three years after the first anniversary of the grant date. On November 7, 2008, we granted to another of our employees 1,000 stock options with an exercise price of $1.00 per share. The options will expire six years from the grant date, and the options will vest 25% on the first anniversary of the grant date, and the remaining 75% will vest in prorate shares equally over the next three years after the first anniversary of the grant date.
The total value of employee and non-employee stock options granted during the years ended May 31, 2010 and 2009, was $-0- and $8,358, respectively. During years ended May 31, 2010 and 2009, the Company recorded $2,089 and $1,616, respectively, in stock-based compensation expense relating to stock option grants.
At May 31, 2010 there was $4,653 of total unrecognized compensation cost related to stock options granted under the plan. That cost is expected to be recognized pro rata through January 25, 2014.
NOTE M – General and Administrative Expenses – other
For the year ended May 31, 2010 and 2009 other expenses – general and administrative included the following:
F-19
| For the years ended May 31, | |||
Description |
| 2010 |
| 2009 |
Employee Benefits | $ | 31,585 | $ | 8,078 |
Rent Expense |
| 2,400 |
| 2,200 |
Office Expense |
| 30,452 |
| 1,364 |
Utilities |
| 4,145 |
| 200 |
Travel |
| 17,614 |
| 863 |
Professional fees |
| 24,470 |
| 2,455 |
Repairs and maintenance |
| 10,382 |
| - |
Computer expenses |
| 8,394 |
| 1,725 |
Insurance |
| 7,569 |
| - |
Telephone |
| 2,912 |
| 281 |
Bad debt |
| 7,897 |
| - |
Taxes and License |
| 1,877 |
| 652 |
| $ | 149,695 | $ | 17,819 |
NOTE N – Income taxes
The net operating loss carryforward is the only component of deferred tax assets for income tax purposes as of May 31, 2010, of approximately $201,134 which was reduced to zero after considering the valuation allowance of $201,134, since there is no assurance of future taxable income.
The net operating loss carryforward as of May 31, 2010 expires as follows:
Expiring Year | Amount |
2029 | $ 51,282 |
2030 | 540,288 |
|
|
Total | $ 591,570 |
These loss carryovers could be limited under the Internal Revenue Code should a significant change in ownership occur.
The following is an analysis of deferred tax assets as of May 31, 2009 and 2010:
Deferred Valuation
Tax Assets Allowance Balance
Deferred tax assets at Inception (April 24, 2008) $ -0- $ -0- $ -0-
Additions for the year 17,436 ( 17,436) -0-
Deferred tax assets at May 31, 2009 $ 17,436 $ ( 17,436) $ -0-
Additions for the year 183,698 ( 183,698) -0-
Deferred tax assets at May 31, 2010 $ 201,134 $ ( 201,134) $ -0-
NOTE N – Income taxes - Continued
The following is reconciliation from the expected statutory federal income tax rate to the Company’s actual income tax rate for the years ended May 31:
F-20
| 2010 | 2009 |
Expected income tax (benefit) at Federal statutory tax rate -34% |
$ (200,381) |
$ (21,835) |
Permanent differences | 924 | 550 |
Timing differences | 15,759 | 3,850 |
Valuation allowance | 183,698 | 17,436 |
Income tax expense | $ - 0 - | $ - 0 - |
|
|
|
We currently have no uncertainty of the tax positions that we have taken and believe that we can defend them to any tax jurisdiction.
F-21