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 May31, 2013 and 2012, and the related statements of operations, stockholders' equity, and cash
flowsfor theyearsthenended, andtherelatednotestothe financial statements.
Management’sResponsibilityfortheFinancial 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,andmaintenance of internalcontrol relevanttothepreparation andfair presentationof
financial statementsthat arefreefrom materialmisstatement, whether duetofraudor error.
Auditor’sResponsibility
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 statementsarefreeof materialmisstatement.
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 asevaluatingtheoverall presentationof thefinancialstatements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our
auditopinion.
Opinion
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial
position of Powdermet, Inc. asMay31, 2013 and 2012, and the results of their operations and their cashflows
for the years then ended in conformity with accounting principles generally accepted in the United States of
America.
Report on SupplementaryInformation
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.
SKODAMINOTTI
/s/SkodaMinotti
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
PROPERTYAND 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 propertyfor 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 equitymethod 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-
