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, 2014.
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from
_to
.
Commission file number: 000-52784
ABAKAN INC.
(Exact name of registrant as specified in its charter)
Nevada
98-0507522
(State or other jurisdiction of
(I.R.S. Employer
incorporation or organization)
Identification No.)
2665 S. Bayshore Drive, Suite 450, Miami, Florida 33133
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code: (786) 206-5368
Securities registered under Section 12(b) of the Act: None.
Securities registered under Section 12(g) of the Act: common stock (title of class), $0.0001 par value.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes o No þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every
Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter)
during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes þ No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not
contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller
reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule
12b-2 of the Exchange Act. Smaller reporting company þ
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No þ
The aggregate market value of the registrant’s common stock, $0.0001 par value (the only class of voting stock), held by non-
affiliates (44,173,615 shares) was $30,479,794 based on the average of the bid and ask price ($0.69) for the common stock on
September 30, 2014.
On September 30, 2014, the number of shares outstanding of the registrant’s common stock, $0.0001 par value (the only class of
voting stock), was 68,418,615.
1
TABLE OF CONTENTS
PART I
Item1.
Business
3
Item 1A.
Risk Factors
31
Item 1B.
Unresolved Staff Comments
36
Item 2.
Properties
36
Item 3.
Legal Proceedings
36
Item 4.
Mine Safety Disclosure
37
PART II
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of
38
Equity Securities
Item 6.
Selected Financial Data
43
Item 7.
Management's Discussion and Analysis of Financial Condition and Results of Operations
44
Item 7A.
Quantitative and Qualitative Disclosures about Market Risk
52
Item 8.
Financial Statements and Supplementary Data
52
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
53
Item 9A.
Controls and Procedures
53
Item 9B.
Other Information
54
PART III
Item 10.
Directors, Executive Officers, and Corporate Governance
55
Item 11.
Executive Compensation
63
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
67
Matters
Item 13.
Certain Relationships and Related Transactions, and Director Independence
68
Item 14.
Principal Accountant Fees and Services
68
PART IV
Item 15.
Exhibits, Financial Statement Schedules
69
Signatures
70
2
As used herein the terms “Company,” “we,” “our,” and “us” refer to Abakan Inc. unless context
indicates otherwise.
ITEM 1.
BUSINESS
Corporate History
The Company was incorporated in the State of Nevada on June 27, 2006.
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 nano-composite 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 includes high-speed, large-area metal
cladding technology, long-life nano-composite anti-corrosion and-wear coating materials, high-strength,
lightweight metal composites, and energetic materials. Operations are conducted through our subsidiary,
MesoCoat, Inc. (“MesoCoat”) and an affiliated entity, Powdermet, Inc. (“Powdermet”).
The Company owns an 87.5% controlling interest in MesoCoat and a 24.1% non-controlling interest in
Powdermet. Powdermet owns a 12.5% interest in MesoCoat. The Company’s interest in Powdermet
represents an additional 3.0% indirect interest in MesoCoat. The Company’s combined direct and
indirect interest in MesoCoat is equal to 90.5% ownership.
MesoCoat, Inc. and Powdermet, Inc.
On December 11, 2009, the Company entered into an Investment Agreement, dated December 9, 2009,
with MesoCoat and Powdermet, in order to purchase 79,334 shares of MesoCoat, to acquire a fully
diluted 34% interest in MesoCoat for $1,400,030. Prior to the execution of the Investment Agreement,
MesoCoat was owned 100% by Powdermet. Powdermet was in turn owned 52% by Andrew Sherman,
41% by Kennametal, Inc. (an unrelated company) and 7% by other unrelated parties. On March 21, 2011,
the Company purchased 596,813 shares of Powdermet from Kennametal, Inc. equal to a 41% interest in
Powdermet.
On July 13, 2011, the Company placed MesoCoat and Powdermet 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.
3
On May 31, 2014, the Company, MesoCoat and Powdermet, entered into an Accord and Satisfaction of
Investment Agreement (“Investment Accord and Satisfaction”), in order to terminate the Investment
Agreement and accelerate the plan to increase the Company’s direct ownership of MesoCoat. The
Investment Accord and Satisfaction permitted the Company to convert its additional investment in
MesoCoat of $6,169,236 to equity, and exchange a portion of its Powdermet shares for a portion of
Powdermet’s MesoCoat shares and 2,000,000 of the Company’s shares. The effect of the transaction was
that the Company increased its ownership position in MesoCoat to 88.08% direct and 90.5% direct and
indirect ownership, in exchange it decreased its ownership position in Powdermet to 24.9% from 40.5%.
The Company intends to acquire Powdermet’s remaining shares of MesoCoat in exchange for its
remaining shares of Powdermet and additional shares of the Company, on receipt of independent business
valuations for MesoCoat and Powdermet.
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 nano-composite 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.
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 while the PComP™ 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 4 PComP™ product
families (PComP™W, PComP™T, PComP™ S and PComP™ M) that have either undergone extensive
testing, or are being tested by oil and gas majors, pipe manufacturers, oil field equipment manufacturing
and service companies, original equipment manufacturers (OEMs) and other end users.
MesoCoat’s revenues are comprised of sales of the PComP™ powder and thermal spray applications in
addition to grants that are awarded to further the development of various products. New grants from U.S.
government agencies are to develop new uses for PComP™ powders and to develop new solutions to
critical problems, including certain applications for NASA. CermaCladTM clad products, which will
include the cladding of the inside of a full length pipe for the oil and gas industries, are in the
development and qualification stage. Meanwhile, MesoCoat has expanded its technical team and
transitioned staff from Powdermet to MesoCoat, in line with the requirements of various development
projects and the expansion of the PComP™ powder and coating services.
4
PComP™.
PComP™ is a family of nano-composite cermet coating materials 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 nano-engineered 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.
On 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 revolutionary 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.
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:
5
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. Grinding and finishing of PComP™ T coatings 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.
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.
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™ -M has demonstrated, in
laboratory and initial field testing, vastly improved molten metal corrosion resistance, combined with
increased durability and reliability, in the rapidly changing environment encountered in molten metal
contact when compared to conventional materials. MesoCoat believes that its PComP™ -M will be able
to provide significant cost savings to industrial customers and generate a new revenue stream within the
$150+ million primary metals production equipment coatings market. We expect to focus PComP™ -M
initially on zinc pot stabilizer roll and pot bearing roll refurbishment market.
Thermal Barrier Coatings
ZComP™ is MesoCoat’s nano-composite 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 received interest from
multiple companies in multiple industries needing improved thermal barrier materials, but to date the
Company has not formed any partnership with such entities. The Company initially wants to introduce
ZComP™ materials into the turbine engine market.
6
Recent Developments - PComP™
MesoCoat is expanding its production capacity for PComP™ powders to meet the demand from current
customers with plans to further expand the PComP™ production capacity to serve the anticipated demand
of prospective customers. The process of installing the equipment necessary to meet this objective is
underway in MesoCoat’s Euclid, Ohio plant. The expansion from a1-cell thermal spray coating facility
for coating mid-sized components to qualify coatings for early adopters, to a 3- cell thermal spray coating
facility that will be able to provide a full coating service for large components like mandrels, plungers,
valves, rods, stabilizer rolls and other equipment is expected to be a leap forward in efforts to increase the
demand for our powders. The initial ramp up of powder production and the spray coating facility is
expected to be completed this fiscal year.
Ohio Department of Development’s Third Frontier Commission Loan
On February 12, 2014, MesoCoat was awarded a match loan of up to $1,500,000 by the Ohio Department
of Development’s Ohio Third Frontier Commission to fund the scale up PComP™ production and expand
PComP™ coating services. The loan will assist MesoCoat to increase PComP™ production from 18 tons
to 160 tons per year and to set-up two additional thermal spray coating stations. MesoCoat’s Euclid
facility could then support projected powder sales revenues of $1,600,000 a month and thermal spray
revenues of $1,000,000 per month over the next few years. The terms and conditions of the loan require
MesoCoat to make an even contribution to fund the scale up of which MesoCoat has contributed a
significant portion to date.
OEM Powder Sales
MesoCoat is selling PComP™ advance coating materials through different channels that are appropriate
to the specific market. As an example OEM’s and government agencies including the Department of
Defense and their manufacturing industrial base, 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. The FY 15 House Defense
Appropriation bill contains language that directs the Department of Defense to make better use of its
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.
Expansion of Coating Services
MesoCoat is expanding the market for its coating services by qualifying licensed application partners that
have an existing customer bases. Our efforts to increase the geographic reach of PComP™ advance
coating materials based on our partner model have been focused in areas which MesoCoat cannot service
directly, such as Houston, Alberta and Los Angeles. We believe that this strategy is a cost effective way
to initially garner market acceptance and market share, while supporting economies of scale for the
powder production needed to meet product cost targets. Eventually, we expect that a majority of our
commercial sector accounts will be able to order coating application services from us on a regional basis.
MesoCoat has also incorporated a wholly owned subsidiary, MesoCoat Coating Services in June 2013 to
build, acquire, integrate, and manage thermal spray coating shops to directly serve regional markets.
7
MesoCoat’s PComP™ coatings are applied using thermal spray coating application systems. Currently
MesoCoat produces and sells PComP™ thermal spray coating materials to end users and end user
qualified coating application shops. However, since PComP™ thermal spray coating materials are easier
and faster to apply, have higher deposition efficiencies, and are much easier and faster to grind and finish
than competitive products, there is a significant amount of value to be captured by providing coating
services directly instead of merely selling PComP™ thermal spray coating powder. In addition, coating
services account for over 75% of the global thermal spray coating market, whereas selling coating
materials accounts for only 20% of the overall market. MesoCoat’s intends to transform the productivity
of the metal coatings industry through the introduction of our scalable, productivity and performance-
leading PComP™ nano-composite materials. Execution of this strategy requires that we build our own
and potentially acquire third party metal finishing shops.
MesoCoat is in the process of fulfilling two recent NASA grants. In one of the grants, MesoCoat is going
to design PComPTM S coatings for components designated by NASA and to test for efficacy in space
applications. This NASA grant also includes the testing of PComPTM T low friction and wear resistant
coatings on certain designated components. MesoCoat expects to complete the testing phase of this grant
in December of 2014.
CermaClad™
CermaClad™ is a multiple award winning technology 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 based alloys and wear resistant materials 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.
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 2 to 10 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.
8
Clad steel, and CermaClad™ in particular, offer a competing, lower cost solution to these 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 products have gained wide acceptance and continually increased its market share in oil
and gas exploration and production, mining, petrochemical processing and refining, nuclear, 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,
hydrogen disulfide content, etc.) of these new reserves are resulting in a significantly increased demand
for corrosion resistant alloys.
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 40 feet in length by 5
feet in width (less than 20 inch diameter), limiting the size of pipe that can be fabricated. 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 $400M compared to similar capacity
from an 8-line CermaClad™ large diameter pipe production facility budgeted to cost $43 million.
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 strength 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 pipe 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 approximately
$2 billion per year currently, to $4 billion to $8 billion within 2 to 4 years.
9
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 kilometers of product. Currently, typical requirements are for tens of kilometres with growing
numbers of projects needing hundreds of kilometers 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™ 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 much faster 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.
10
The CermaClad™ clad steel product lines under development include:
§ CermaClad™ CRA (Corrosion Resistant Alloys). 1-3mm 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 one millimeter claddings that should
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.
Recent Developments - CermaClad™
MesoCoat has made significant progress in quality control and the reliability of the pipe cladding process,
including the development of correlations between control variables, dependant variables, and cladding
quality. Our work has generated detailed analytical models of the fusion process that enable us to predict,
measure, control, and understand the fusion cladding process, and how that process relates to cladding
and base metal quality and performance. Most recently, these efforts have enabled the controlled
production of fully clad short sections of pipe with strong metallurgical bond, uniform quality, and good
surface finish. In line with these efforts, it has become necessary to make modifications to our full sized
production equipment that will enable a reliable process and reduce total process costs. We expect to
implement these modifications and upgrades over the next few months, which when completed will allow
us to increase the size of pipe sections to be clad. Samples of coated pipe sections that have been
produced on our full size production equipment are now being released for evaluation by potential end
users. Longer pipe sections will be produced in the same manner. When MesoCoat can demonstrate the
abililty to clad the inside surface of a full length of pipe, we expect that a major corporation, negatively
affected by the unavailability of clad pipe, will express an interest in accelerating our readiness for
commercial production.
MesoCoat is currently working with NASA to combine high temperature materials with CermaClad™
application technology. Meeting the objectives of this project would enable MesoCoat to develop and
commercialize CermaClad™ coatings that can withstand extreme heat and permit high heat transfer that
might enable NASA’s long duration missions within extreme wide temperature and cosmic radiation
infused environments. The first feasibility results are expected by the end of December 2014.
MesoCoat is also currently working with US Environmental Protection Agency (EPA) to evaluate the use
of CermaClad™ LT processes to reduce the CO2 and wastewater emissions from galvanizing operations.
The objective is to determine whether the use of CermaClad™-LT, metallic powder coating technology
can end the use of the large, energy intensive molten metal baths and associated acid pickling lines used
to prepare corrosion resistant coated steels. Initial test results have been very positive, so MesoCoat will
be preparing new grant requests and business plans associated with this potential new line of business.
11
Mattson Exclusivity Agreement
Due to ongoing supply and support issues with our arc lamp component supplier, Mattson Technology
Inc. (“Mattson”), on October 16, 2013, MesoCoat elected to exit the mutual exclusivity agreement with
Mattson and initiated projects to solve the supply and reliability issues associated with the use of full
scale production equipment that have been hindering and limiting commercialization efforts. Management
has been evaluating the assets acquired from Mattson in order to determine to what extent the assets have
been impaired.
Meanwhile, MesoCoat determined to design a new HDIR (High Density Infrared) plasma lamp system in-
house. In support of this effort, NASA Glenn was awarded a GLIDE contract in addition to the ongoing
MesoCoat-funded space act agreement to support lamp components and controls development.
MesoCoat’s efforts and those of NASA Glenn have to date produced a new reflector design that is better
than the previous designs at managing and delivering the amount of heat generated by the CermaClad™
process. We are also testing anode prototype designs which are exhibiting the same or better anode
lifetime properties without the cost and delivery problems associated with our previous supplier. Our first
MesoCoat design working prototype lamp head is expected to be ready for testing in October, 2014.
LIMO/LILAS Agreement
On November 21, 2013, the Company entered into a memorandum of understanding with Lissotschenko
Mikrooptic GmbH (“LIMO”) to support CermaClad-LT (low thickness) product commercialization, and
to extend the application of our cladding technology to smaller diameter pipes. The LIMO technology
creates a new type of thermal micro-climate that delivers superior performance in accuracy and process
control compared to the plasma arc lamp. Highly efficient semiconductor laser technology would extend
Abakan´s capabilities to provide portable systems for covering smaller diameter pipes while still
providing significant productivity.
On April 4, 2014, the parties to the memorandum of understanding was replaced in its entirety with an
agreement, to assign those obligations of LIMO to its sister company LILAS GmbH (“LILAS). The
execution of the agreement remains subject to the execution of a shareholder agreement between the
principal of LIMO and LILAS with a third party that would fund the objectives of the agreement with the
Company to the tune of €3,000,000 in exchange for the exclusive rights to all coating applications
developed for the LILAS laser systems, except those rights associated with thin 50 -500 micron coating of
the internal diameter of pipe for which rights the Company would pay the third party €1,500,000 within
twelve months of the third party’s initial payment to LILAS. Abakan would also retain a right of first
refusal to joint venture all of the other applications with the third party.
Sales Agency Agreement for Mexico and Central America
On September 16, 2013, the Company entered into an exclusive sales agent agreement with Metallurgic
Solutions, S.A. de CV (“MetalSol”) intended to facilitate the introduction of MesoCoat’s products into
Mexico and Central America. MetalSol is working with MesoCoat’s to identify prospective production
and service operations in Mexico for PComP™ long-life metal coatings, CermaClad™ clad steel.
12
MetalSol has been working on establishing large scale operations in Mexico to provide locally produced
products of the highest quality while creating skilled employment opportunities. MetalSol is currently in
discussions with several regional economic development departments in order to finalize the best location
for building PComP™ and CermaClad™ operating facilities in Mexico. MetalSol has also secured initial
sales and test orders for PComP™ coatings from some of Mexico’s largest steel manufacturers. MetalSol
has also made significant progress in driving the oil and gas industry in Mexico towards early commercial
adoption of the Company’s CermaClad™ pipe cladding products. Mexico’s energy sector is in the
process of expanding its offshore developments to greater depths in the Gulf of Mexico exacerbating the
acute need for superior cladding products.
The Company expects that if an accelerated qualification process can be determined and met, that Mexico
may well prove to be the commercial entry point for CermaClad™ pipe cladding products worldwide.
Northern Alberta Institute of Technology
MesoCoat has been approved to receive a $2.75 million funding commitment from certain Canadian
federal and provincial agencies for an 18 month collaborative effort with the Northern Alberta Institute of
Technology (“NAIT”) to develop wear-resistant clad pipes to transport the abrasive oil sands from mining
sites to processing/refining facilities. The total project cost for setting-up a R&D facility within NAIT's
Souch campus, and related activities is $4,260,000, of which $1,500,000 is being funded by Western
Economic Diversification' Canada; $1,250,000 is being funded by Enterprise and Advanced Education,
Alberta; $1,200,000 is being funded by the Company; and $310,000 being funded by NAIT.
The $1,200,000 to be funded by the Company will be offset by $500,000 to be received for the lease of
one of the Company’s lamp systems. The space we are located in at the NAIT facility has been renovated
with appropriate power, ventilation and other safety measures to allow for the operation of our lamp
system.
Anticipated Product Development Timeline
The anticipated product development timeline detailed below is based on management’s estimate of the
time requisite to bring the respective products to market, all of which products are subject to uncertainties
surrounding the actual completion date of any number of items as is normal in product development.
Note, certain of the anticipated commercial timelines presented have not advanced since the end of our
last reporting period. Unless otherwise explained below in respect to specific products, the unanticipated
delays are attributed, in large part, to ongoing supply and support issues with our arc lamp component
supplier, Mattson, personnel changes, the need to replace aging equipment associated with PComP™ and
availability of financing.
13
TIME TO
PRODUCT
COMMERCIAL STATUS
COMMERCIALIZE
(MONTHS)
PComP™ W
Growth and Expansion
Current
PComP™ T
Market Entry
Current
PComP™ M
Field Testing
Current
PComP™ S
Prototype Qualification
12
PComP™ Coating Services
Market Entry
Current
ZComP™
Development
18
CermaClad™ CRA Euclid, Ohio
Full scale product API qualification
9 for small scale orders
CermaClad™ CRA 4 line plant
Full scale product API qualification
28 full scale production
CermaClad™ WR
Development
8 plate sales from OH
CermaClad™ LT
Development Delayed
24
CermaClad™ HT
Incubation
36
Product Commercial Expansion Timeline
The Company’s near term plan is to expand the presence of its products in North America and the Asia-
Pacific market. Our attempts to negotiate reasonable terms for a “build to suit” agreement to construct a
manufacturing plant in the Recife, Brazil free trade zone have been abandoned. We continue to consider
the best strategy to secure direct access for our products to Brazilian markets. Meanwhile, our wholly
owned Asian subsidiary, PT MesoCoat Indonesia, is 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 this project is yet to be finalized.
In Mexico our sales agent Metallurgic Solutions, S.A. de CV has been working to get financial support
from government and corporate entities to build a production facility in Mexico.
License agreement with Powdermet, Inc.
On July 22, 2008, MesoCoat entered into a license agreement with Powdermet. The agreement granted to
MesoCoat a royalty-free, exclusive, perpetual license to PComP™ and CermaClad™ intellectual
property, certain equipment, contracts and business lists, including supporting patents, trademarks, in
addition to supporting confidential and trade secret information, including formulations, processes,
customer lists and contracts, in the field of wear and corrosion resistant coatings. The license agreement
also included Powdermet’s commitment to provide manufacturing expertise and technical capabilities
supporting PComP™ powders. MesoCoat was at the time of licensing a wholly owned subsidiary of
Powdermet. The license agreement between MesoCoat and Powdermet was amended and restated in its
entirety on May 31, 2014, in connection with the Company increasing its majority interest in MesoCoat.
The amended and restated license agreement includes the grant of intellectual property provided in the
earlier license agreement taking into account developments subsequent to the earlier license agreement.
The amended and restated license agreement will end upon the last valid claim of licensed patents to
expire unless terminated earlier with the terms of the agreement.
14
MesoCoat’s exclusive patent license agreement with UT-Battelle LLC.
MesoCoat has 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. MesoCoat is $10,000 in arrears on the
$15,000 annual payment.
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 agreement was initially for 18 months during which time MesoCoat,
with the assistance of Petrobras, carried out development work and a series of tests divided into two
phases with the prospect of a third phase. Phase I was 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.
The immediate objective of the agreement, in each of Phase I and II, was that the CermaClad™ product
and samples met 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 successfully completed
Phase I 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.
15
MesoCoat also accomplished 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 agreement
with Petrobras 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 completed the
expanded program in the 1st quarter of 2014. 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.
Cladding consistency (total area coverage) was linked to consistent and controlled pipe OD surface
temperature. 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.
Over the duration of this agreement, MesoCoat has been able to develop, test and qualify short pipe
sections cladded with 3mm thick 625 coating.
Outside of the cooperation agreement, in support of the Phase III manufacturing objectives of the
cooperative agreement, MesoCoat has expanded the scope of the design, procurement, installation, and
ramp up of a full-scale, 12-meter clad pipe manufacturing facility in Euclid, Ohio. Recently the Company
has prepared design drawing and comprehensive budgets to clad the inside of diameter of 24, 30 & 36
inch diameter, 12 meter pipe. This has been instigated by requests from numerous entities from both
inside and outside of the oil and gas industry. Our expanded scope will support further automation of the
cladding process while ensuring a high level of process control.
16
Powdermet’s Business
Powdermet was formed in 1996 when it licensed technology developed by its founder from Ultramet Inc.
Since then Powdermet has 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™ nano-composite 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 nano-composite 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 application was filed in the quarter ended May
31, 2014, on low density, mill product and method of manufacture.
(2) MComP™ - A family of hierarchically structured, rare earth free, nano-composite metal and
metal matrix composites that provide higher strength and temperature capability compared to
traditional aluminum 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. A nano-composite cermet bearing material, HybriMet™, was recently demonstrated
for large hybrid bearing applications utilizing the combined high toughness and strength of
hierarchically structured nano-composite materials platform.
17
(3) EnComP™ - A diverse family of nano-engineered particle based solutions for energy storage and
release. Current developments include record setting energy density nanoparticle filled films for
capacitors, structured nano-composite anode and cathode materials for thermal and lithium ion
batteries, and 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 Nano-composite capacitor films with 16X higher energy storage density
than state of the art biaxially oriented polypropylene (BOPP) have been demonstrated at the pilot
plant scale, and these films are currently being integrated into devices for eventual commercial
product launch. To this end, a new company, Cratus Energy, LLC has been formed as a potential
launch vehicle for the capacitor technology, but this has not yet been monetized or licensed.
(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 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 developmental products closest to commercialization are Hybrimet™ nano-composite
bearing materials and EnComP™ energetic nano-composites. Powdermet also produces custom-
engineered powders and nano-powders, provides advanced materials contract research and development
services, and derives significant revenues from development contracts and toll manufacturing services.
Powdermet’s MComP™ metal nano-composite development group continues to work on reducing the
cost of record-breaking light metal nano-composites. Nano-composite 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 nano-composite aluminum
approaching the strength of steel at 1/3rd the density/weight. These nano-engineered metals are highly
sought after for weight reduction and fuel economy benefits in transportation vehicles, including armored
military, high speed rail, and large truck applications. Powdermet has been collaborating in a joint
venture with Oshkosh defense, Eck industries, and the University of Wisconsin to develop a low cost
(compared to powder metallurgy routes) castable aluminum nano-composite 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.
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’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.
18
Terves, Inc.
On July 23, 2013, Powdermet announced the launch of its wholly owned subsidiary Terves Inc., to
commercialize proprietary reactive materials and light metals technology for the shale gas and oil
industry. Terves’ TervAlloy™ technology was initially based on Powdermet’s MComP™ metallic nano-
composite and EnComP™ structural energetics development group to build reactive warheads for the US
Department of Homeland Security and beryllium alternatives for missile defense systems. 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. Terves was granted an exclusive license for Powdermet light and reactive metals technology, and
the company has matched external economic grants to provide initial start-up capital.
TervAlloy™ is a class of patent pending, environmentally responsive, lightweight metallic materials
manufactured from magnesium and other light metals such as lithium and calcium 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.
Terves’s first generation disintegrating frac ball product was launched in August, 2014, and the second
generation disintegrating frac balls is scheduled for release in October, 2014. The company is developing
a suite of products including frac balls, completion tooling, proppants, energetic materials, and diagnostic
materials to meet industry needs in the well stimulation marketplace, and has formed development
partners with leading oilfield service companies to further develop the product for market insertion
towards the end of 2014.
Tervalloy™ products are designed to compete with dissolving polymeric frac balls, such as bioballs from
Fairmont Santrol, or those distributed by Magnum Oil Tools. The company is competing with new
product offerings from Baker Hughes (Intellifrac™), and several new players including Rockwell Tools
and several others. Terves is already working on gen-2 higher strength materials (30KSI versus 18KSI
shear), and surface engineering technologies to modify the response and triggering of the balls to leapfrog
ahead of emerging competitors in the metallic frac ball market.
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. An
office has 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 the corporate and tax structures of our
overseas subsidiaries, as well as potentially handling some international sales of MesoCoat's products.
19
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). Kariola Limited,
a consultancy organization, was commissioned and has fulfilled its agreement to assist it with technical
advice and entry into Asian markets.
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 The World Corrosion
Organization, 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.
§ Cost of failure.
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. It is estimated that every tonne of steel produced
leads to 2.4 tonnes of CO2 emission; and thus it is easy to compute the reduction in CO2 emissions that
could be achieved by making steel last longer. 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).
20
In order to properly select a coating alloy for a specific requirement, it is necessary to understand what
has caused the surface deterioration. The various types of wear can be categorized and defined as follows:
§ Abrasion is the wearing of surfaces by rubbing, grinding, or other types of friction that usually
occurs due to metal-to metal contact. It is a scraping, grinding wear that rubs away metal surfaces
and can be caused by the scouring action of sand, gravel, slag, earth, and other gritty material.
§ Cavitation wear results from turbulent flow of liquids that carry small suspended abrasive
particles.
§ Compression is a deformation type of wear caused by heavy static loads or by slowly increasing
pressure on metal surfaces. Compression wear causes metal to move and lose dimensional
accuracy.
§ Corrosion wear is the gradual deterioration of unprotected metal surfaces, caused by the effects
of the atmosphere, acids, gases, 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.
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Metal Coating – PComP™
MesoCoat’s PComP™ ceramic-metallic (cermet) thermal spray coatings replace electrolytic hard chrome,
electroplating, spray and fuse, and thermal spray carbides by imparting supreme wear and corrosion
resistance. Thermal spraying is generic term used to define a group of processes that deposit finely
divided metallic or nonmetallic materials onto a prepared substrate to form a coating. The coating
material may be in powder, rod or wire form. Thermal spray coatings are applied by means of special
devices / systems through which melted or molten spray material is propelled at high speed onto a cleaned
and prepared component.
In all sectors of industry today, the catch phrase “better, faster, cheaper” is common and valid, as it seems
that production demands are ever-increasing. Highly demanding requirements and aggressive service
conditions often lead to the premature loss of component or system function. Metal coatings are used
primarily to protect metal components and equipment from corrosion and wear. Thermal spray coatings
and electroplating are used in over 34 industrial sectors including aerospace, energy, automotive,
transportation, steel, textile, agriculture, pulp and paper, printing, petrochemical, electronics,
semiconductor, computer, defense and medical/dental industries, etc.
According to International Thermal Spray Society, the thermal spray industry was estimated to be around
$7.6 billion (for 2006), and with a modest 4.5% CAGR the market size is expected to be approximately
$11 billion per annum globally at the end of 2014. The thermal spray coatings market can be divided into
three primary segments; coating equipment, coating materials, and coating services. Industry reports and
experts estimate that thermal spray coating services accounts for the largest share at 75% of the market,
whereas coating materials at 20% and coating equipment at 5% of the market constitute the rest.
According to a BCC research report, the worldwide market for chromium electroplating grew at a low
CAGR of approximately 0.6% during 2005 to 2010, from approximately $3.2 billion in 2005 to
approximately $3.3 billion in 2010. This slow growth is attributed to the immense health and
environmental hazards caused by the waste generated in this process. Moreover, it is expected that
chromium electroplating will be largely replaced by electroless nickel plating. This anticipated change is
reflected in the decreasing percentage of chromium electroplating in the total electroplating market, from
approximately 33% in 2005 to approximately 26% in 2010. The electroplating of chromium is done for a
variety of applications and can be broadly categorized as hard chromium electroplating, decorative
chromium electroplating, and trivalent chromium electroplating. It is expected that thermal spray coatings
would continue to capture an increasing share of the electroplating market, driven primarily by
regulations that mandate the ban of toxic materials and waste streams.
Metal Cladding – CermaClad™
MesoCoat’s CermaClad™ metal cladding technology is used to produce corrosion- and wear-resistant
clad pipes and flat plates and sheets. MesoCoat’s development and qualification efforts are currently
focused on developing corrosion-resistant clad pipes for the oil and gas industry, and wear-resitant clad
pipes for the oil sands and the mining industry. Cladding refers to a process where a metal, corrosion
resistant alloy or composite (the cladding material ) is bonded electrically, mechanically or through some
other high pressure and temperature process onto another dissimilar metal (the substrate) to enhance its
durability, strength or appearance. The majority of clad products made today uses carbon steel as the
substrate and aluminum, nickel, nickel alloys, copper, copper alloys and stainless steel as the clad
materials to be bonded. Typically, the purpose of the clad is to protect the underlying steel substrate from
the environment it resides in.
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Estimates and industry experts suggest that metal cladding is a $4 billion market globally, which can be
further segmented as $2 billion for clad pipes and $2 billion for clad plates and components. Clad pipes
are primarily used to protect against corrosion and wear in offshore oil and gas, petrochemical, and
mining industries; whereas the clad plates are used to form equipment and components such as pressure
vessesl, reactors, tanks, etc. for a variety of industries including oil and gas, petrochemical, nuclear,
desalination, chemical, concrete, etc. It is estimated that over 50% of the clad products are used in the oil
and gas industry.
The International Energy Agency estimates that more than 70% of the remaining oil and gas reserves are
highly corrosive and an increasing share of global oil and gas production is now offshore. To explore
these corrosive reserves and especially the high-pressure high-temperature reserves found offshore, there
is a need for pipes and components that can withstand the assault of extremely corrosive constituents
present in these reserves.
Until the early 1990s, offshore exploration and drilling in deepwater areas was considered an
economically unattractive option for the production of hydrocarbons from offshore reserves due to
substantially higher development costs of drilling, the lack of heavy-duty equipment, technological
limitations, and high project risks making it commercially unviable. However, with recent advancements
in offshore drilling technology, offshore rigs, and vessels have helped exploration and production
companies to venture into deepwater and ultra-deepwater basins. Even governments across different
countries have been encouraging deepwater and ultra-deepwater E&P activity through favorable policies,
taxation systems, and concessions in order to achieve maximum possible energy self-reliance. Deepwater
activity is expected to grow substantially in the future, and is likely to witness aggressive steps by E&P
companies worldwide seeking to drill for new hydrocarbon reserves in deeper waters.
The global oil and gas capital expenditure (CapEx) is expected to increase from $1,036 billion in 2012 to
$1,201 billion in 2013, registering a growth of 15.9%. The trend of increasing capital expenditure is
expected to continue for the foreseeable future, especially driven by reserves that are deeper and farther
away from the shore. Infield Systems Deepwater and Ultradeepwater Market Report states that the largest
proportion of deepwater investment to be directed towards pipeline installations; comprising 39% of total
global deepwater expenditure - and clad pipes would constitute a healthy share of this offshore pipeline
investment.
Oil and gas companies have been exploring in progressively deeper fields. For example, Transocean Ltd
recently stated that it drilled the deepest well in its company’s history, at 10,385 feet underwater. Drilling
in deeper waters, along with the discoveries of new offshore oil and gas fields around the world, has led
to strong increases in offshore production equipment. Noble Corporation stated in its FY12 earnings
conference call that oil and gas E&P companies announced 52 oil and gas field discoveries that were at
least 4,000 feet underwater, breaking the previous record by 40%. Eighteen of these fields were at least
7,000 feet underwater and nine of these fields were at least 8,000 feet underwater. These numbers are
indicative of the trend toward producing oil and gas in deeper offshore fields. It is expected that this trend
will continue, which will create the need for increases in both the quality and quantity of clad pipe.
In addition, the high CO2 content witnessed in the reserves in the Asia-Pacific and MENA regions, and
high H2S content in Gulf of Mexico, Brazil, and West Africa which when coupled with higher pressure
and higher temperature of these deepwater reserves, make corrosion not just a concern but a challenge, a
substantial challenge. To encounter such corrosive assault, it has become imperative to use corrosion-
resistant clad pipes which perform the role of solid CRA pipes but at 1/5th cost thus making several of
these challenging reserves economically viable.
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Competition
MesoCoat and Powdermet can expect to face intense competition within their respective market segments
with product commercialization. The industrial coatings and engineered materials sectors are highly
fragmented by companies with competing technologies each seeking to develop standards for respective
industries. Industrial coatings research and development has been ongoing for some time and several
firms are perceived as the industry leaders. Despite, the prospect of intense competition, the Company is
confident that the growing demand for protective coatings and cladding, from the oil and gas sector alone,
has created an industry wide gap in availability into which its products can successfully compete.
MesoCoat
PComP™
PComP™ nanoengineered cermet products have few directly comparable competitors. Although there are
established thermal spray coating material manufacturers such as Deloro Stellite, Oerlikon 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.
24
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.
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, application rate - 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
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§ 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.
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 can access financing from public equity
markets which can provide liquidity and access to required capital.
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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 are expected to be ready for market in the next 2-3 years;
§ Strong research and development programs.
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 and federal grants) and subsequent quality certification of the facility
and its products represent significant steps towards introducing the Company’s pioneering
products 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 in the process of
establishing a research and development facility in Alberta, Canada to accelerate qualification of
its CermaClad™ WR clad pipe and components.
§ developing the best products with the best value and protecting proprietary technology.
Marketability
The ultimate success of any product will depend on market acceptance in its many forms, including cost,
efficiency, production capability, 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.
MesoCoat
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. A general trend exists across several industries of
operating in increasingly challenging environments where components and equipment have to withstand
the assault of high degree of corrosion and wear.
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The inorganic metal finishing industry currently is one of the largest industrial users of hazardous and
carcinogenic chemicals, and produces hundreds of millions of gallons of contaminated wastewater and
toxic by-products annually. Hazardous metals such as lead, cadmium, chromium, and to a lesser extent,
cobalt, tungsten carbide, and volatile organic compounds used to strip rust and repair large steel structures
are being phased out or subjected to increasingly strict environmental regulations, creating opportunities
for innovation. U.S. companies annually spend billions of dollars on coatings and surface treatments
made from hazardous materials. Private companies and government defense 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, and several equipment manufacturers from
the oil and gas industry for product insertion. In addition to these large clients which have long sell
cycles (2-5 years not atypical), MesoCoat has worked through certified application partners in Calgary,
and Houston to capture short cycle sales and gain initial market exposure. The company has established
relationships with several coating application shops, end users, and has sales representatives in Houston,
Midwest, and Canada to drive product adoption. 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 has a full-functional thermal spray coating facility with one large capacity spray booth,
completed with a Fanuc robot, DJ 2600, DJ 2700 and JP 5000 HVOF spray systems, and is setting-up two
additional thermal spray coating booths along with the associated surface preparation, component
handling, and finishing equipment. Our staff has over 50 years of thermal spray experience coating parts
for several industries including aerospace, chemical & plastics, oil & gas, mining, primary metals,
industrial, and paper. MesoCoat has also secured a $1.5 million match loan from the State of Ohio for
scaling-up powder production capability and setting-up two additional thermal spray coating cells in
Ohio. Meanwhile, MesoCoat will continue to work with several thermal spray coating facilities that are
pre-qualified with the largest OEM’s in the Gulf Coast, Midwest, and Canada.
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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 using high productivity CermaClad™
application technology. In this market, MesoCoat is qualifying CermaClad™ 625 to current industry
standards, working with Petrobras, other oil and gas majors, offshore pipe manufacturers, and
engineering, procurement, and construction (EPC) companies to ensure industry acceptance of
qualification data as the path to market acceptance. Due to the large order size for clad pipes, ranging
from $2-500+ million per project, successful introduction of CermaClad™ CRA clad pipes is expected to
result in an immediate market success. MesoCoat expects to send shorter section of clad pipe for
qualification to oil and gas majors within the next 6 months, and to begin commercial corrosion-resistant
clad pipe production at the Euclid plant in the second or third quarter of 2015.
In addition, MesoCoat along with its partner Northern Alberta Institute of Technology (NAIT) received a
$2.75 million dollar funding commitment from Alberta’s Ministry of Innovation and Advanced Education
(IAE) and Western Economic Diversification Canada (WD) for an 18-month collaborative effort to
establish a prototype demonstration facility for developing, testing and commercializing wear-resistant
clad pipe and components. Improvements in wear resistance are expected to make a significant impact in
reducing losses due to maintenance and downtime while increasing productivity in oil sands and other
mining applications. The development of Alberta’s oil sands has been slowed by the lack of resistant
materials for transport lines, and components that are subjected to corrosion from the highly abrasive
slurry. Currently, pipes that transport the highly abrasive oil sands slurry have to be rotated every three to
four months and are replaced every 12 to 15 months. The cost of maintenance and its associated
downtime in the Alberta Oil Sands industry is estimated at more than $10 billion annually. According to
the Materials and Reliability in Oil Sands (MARIOS) consortium in Alberta, this figure is expected to
increase significantly as production expands in the coming years. Improvements in wear resistance are
expected to make a significant impact in reducing losses due to maintenance and downtime while
increasing productivity in oil sands and other mining applications. This new facility will serve as a
platform for MesoCoat’s to introduce its products to the Alberta oil sands market, which, with proven
reserves estimated at more than 169 billion barrels, is one of the world’s largest oil resources. The oil
sands are a major source of oil for Canada, the United States and Asia. Alberta’s Energy Resources
Conservation Board expects output from the province’s oil sands to double to 3.8 million barrels per day
(bpd) by 2022, from the 1.9 million bpd in 2012. Producers are looking to extend the life of carbon steel
transport pipes with harder, tougher coatings that protect them from the abrasiveness and high acidity of
the tar-like bituminous oil sands. CermaClad™ wear-resistant clad products could provide that
economically viable, long-term solution. MesoCoat is collaborating with several oil sands majors and
expects to complete development and qualification of wear-resistant clad pipes within the next 18 months,
and commercial production within the next 24 months.
Management has made sizeable investments in redesigning and miniaturizing the technology to commit to
this initial market solution. The initial CermaClad™ system has a very large footprint, 4 feet cube, and
MesoCoat and partners had to make substantial modifications to the system to make it fit inside a 10”
inner diameter pipe. The new inside diameter CermaClad™ lamp head has now been operating for over
three years integrated into a subscale 6-ft CermaClad™ pipe coating system, and for close to 2 years in a
production-scale 40 feet CermaClad™ pipe cladding system. The 6-feet prototype cladding system was
used for initial product demonstration, sub-scale prototype development, and industry-standard product
qualification milestones. In April, 2013, MesoCoat completed the installation of a 11,000 sq.ft
production-scale cladding set-up to demonstrate full scale manufacturing, develop clad pipe sections for
product and process qualification, and get certified for supplying clad pipes to oil and gas majors.
Completion of the full scale product facility followed by subsequent product certifications will enable
MesoCoat to begin market roll-out and sales of clad pipe to the oil and gas industry.
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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
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 UT Battelle LLC 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.
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.
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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 research and development 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 research and development 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 research
and development projects 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 research
and development.
Employees
As of September 30, 2014, the Company and its subsidiary, MesoCoat have 30 employees. We use
additional consultants, attorneys, and accountants as necessary to assist in the development of our
business.
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.
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The Company has a history of significant operating losses and such losses may continue in the future.
The Company incurred net losses of $19,502,097 for the period from June 27, 2006 (inception) to May
31, 2014. Since we have been without significant revenue since inception and have only recently
transitioned to producing revenue that is insufficient to support operations, losses may likely continue for
the foreseeable future.
The Company has a history of uncertainty about continuing as a going concern.
The Company’s audits for the periods ended May 31, 2014 and 2013 expressed an opinion as to its ability
to continue as a going concern as a result of net losses since inception and a working capital deficit of
$7,927,372 as of May 31, 2014. Until the Company is able to produce net income over successive future
periods its ability to continue as a going concern will remain in jeopardy.
The Company requires capital funding.
The Company must raise additional funds, either through equity offerings, debt placements or joint
ventures, to maintain operations and meet our long term financial commitments. Additional capital, if in
the form of equity, will result in dilution to our current shareholders. Should the Company be unable to
realized future income it ability to continue as a going concern will remain in jeopardy.
The Company has defaulted on certain unsecured debt obligations
The Company has defaulted on certain significant unsecured debt obligations due prior to or subsequent
to the end of this annual reporting period, which defaults have caused the original obligations to increase
due to higher interest and penalties. Despite discussions with the holders of the debt, the Company has
been unable to resolve amounts due. The Company does intend to fulfill its obligations but without
additional capital funding it may be unable to satisfy the debt holders which in turn may subject the
Company to legal action.
MesoCoat has secured its assets against the payment of certain loan amounts due in April of 2015.
Should MesoCoat be unable to repay amounts due to a third party creditor of approximately $1,340,000
on April 29, 2015, all of its assets, with limited exceptions, absent any change in certain loan documents,
will become the property of a third party creditor on declaration of default. The Company is in the process
of securing a financing sufficient to repay said creditor and is confident that MesoCoat’s obligations will
be satisfied or otherwise amended to avert any default. However, neither the financing to satisfy
MesoCoat’s loan obligations nor any changes to the terms and conditions of the loan documents have yet
been agreed.
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
financial condition through debt or equity offerings, the ability to successfully advance its business plan
will be severely challenged.
32
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.
33
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.
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.
34
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 each develops, 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 deemed to be “penny stock”, which determination may make 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
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.
35
ITEM 1B.
UNRESOLVED STAFF COMMENTS
None.
ITEM 2.
PROPERTIES
The Company maintains 800 sq. ft. of executive office space at 2665 S. Bayshore Drive, Suite 450,
Miami, Florida, 33133 on a month to month basis at a cost of $2,419 a month paid to Grand Bay Property
Management. 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.
MesoCoat maintains 22,000 sq. feet of the research and development space and a11,000 sq. feet clad pipe
manufacturing facility located at 24112 Rockwell Drive, Euclid, Ohio 44117 each of which is 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.
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 $6,800 per month, adjustable on an annual basis, paid to
Sherman Properties LLC., a related party. The term of the lease runs through October 31, 2020 with the
right to sub-lease the premises to MesoCoat.
ITEM 3.
LEGAL PROCEEDINGS
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 was
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 sought the return
of its 60,000 shares delivered which were subsequently sold or in the alternative a judgment in an amount
to be ascertained for damages in addition to reasonable attorney’s fees and court costs. The parties settled
the legal proceedings on April 1, 2014, pursuant to which settlement the parties agreed to hold each other
harmless and to each pay their own legal and other expenses.
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 no longer intends to proceed with its complaint and expects that the legal proceedings will be
dismissed without prejudice.
36
Joe T. Eberhard
Joe T. Eberhard initiated legal proceedings against the Company on August 29, 2014, in the United States
District Southern District of Florida. The claim is based on the Company’s failure to repay amounts due
on certain promissory notes. The complaint seeks $720,698.72 plus interest. The Company has obtained
an extension of time in which to respond to the complaint and will respond in due course.
ITEM 4.
MINE SAFETY DISCLOSURE
Not applicable.
37
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 OTC Pink Limited Information electronic quotation
system under the symbol “ABKI” due to the late filing of this annual periodic report. On the filing of this
report, the Company expects to resume trading on the OTCQB. 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
2014
May 31
$1.21
$0.60
2014
February 28
$1.36
$0.86
2013
November 30
$2.57
$0.86
2013
August 31
$3.20
$2.16
2013
May 31
$3.50
$2.52
2013
February 28
$2.85
$2.55
2012
November 30
$2.93
$1.46
2012
August 31
$2.45
$1.55
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 September 30, 2014, there were approximately 1,200 shareholders of record holding a total of
68,418,615 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.
38
Preferred Stock
As of September 30, 2014, there were 50,000,000 shares of preferred stock, par value $0.0001 authorized
of which none were outstanding. The Company’s preferred stock may have such rights, preferences and
designations and may be issued in such series as determined by the board of directors.
Dividends
The Company has not declared any cash dividends since inception and does not anticipate paying any
dividends in the near future. The payment of dividends is within the discretion of the board of directors
and will depend on our earnings, capital requirements, financial condition, and other relevant factors.
There are no restrictions that currently limit the Company’s ability to pay dividends on its common stock
other than those generally imposed by applicable state law.
Warrants
As of September 30, 2014, there were 1,889,566 warrants outstanding to purchase shares of the
Company’s common stock.
Stock Options
As of September 30, 2014, there were 3,419,994 stock options outstanding to purchase shares of our
common stock.
Convertible Debt Securities
As of September 30, 2014, there were four convertible debt securities convertible into the shares of its
common stock for an aggregate principal amount of $3,541,963 plus accrued interest and penalties.
One convertible debt security, in the principal amount of $500,000, due on or before July 14, 2014,
accrued interest at 5% per annum, convertible at $1.00 per conversion unit, which unit consists of one
share of our common stock and one half share warrant to purchase an additional share of our common
stock at $1.50 per share, for a period of two years following the conversion date. The Company did not
satisfy this unsecured obligation as of the stated maturity date subjecting the amount due thereunder to
additional interest charges and penalties.
Two convertible debt securities, in the aggregate principal amount of $1,700,000, due on or before
September 15, 2014, accrued interest at 5% per annum, convertible at $1.00 per conversion unit, which
unit consists of one share of our common stock and one half share warrant to purchase an additional share
of our common stock at $1.50 per share, for a period of two years following the conversion date. The
Company has not satisfied this unsecured obligation as of the stated maturity date subjecting the amount
due hereunder to additional interest charges and penalties.
One secured convertible debt security, in the principal amount of $1,341,963, due on or before April 27,
2015, bears no interest and is convertible at $0.80 per conversion unit (subject to decrease in the event of
dilutive issuances), which unit consists of one share of our common stock and one half share warrant to
purchase an additional share of our common stock at $1.20 per share for a period of two years following
the conversion date.
39
Debt Securities
As of September 30, 2014, there were two debt securities for an aggregate principal amount of $455,000
plus accrued interest and penalties.
One debt security, in the principal amount of $50,000, due on or before September 15, 2013, that accrued
interest at 5% per annum. The Company has not satisfied this unsecured obligation as of the stated
maturity date subjecting the amount due hereunder to additional interest charges and penalties.
One debt security, in the principal amount of $405,000, due on or before September 15, 2014, that
accrued interest at 8% per annum. The Company has not satisfied this unsecured obligation as of the
stated maturity date subjecting the amount due hereunder to additional interest charges and penalties.
Securities Authorized for Issuance Under Equity Compensation Plans
As of September 30, 2014, the Company has issued 82,941 restricted common shares under equity
compensation plans to the MesoCoat, Inc. Supplemental Discretionary Tax Qualified Profit Sharing and
Trust (57,242) and the Powdermet, Inc. Supplemental Discretionary Tax Qualified Profit Sharing and
Trust (25,699).
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,
2014 or since that date through September 30, 2014.
Recent Sales of Unregistered Securities; Use of Proceeds from Registered Securities
On April 9, 2014 our board of directors authorized the issuance of 25,000 restricted shares at $1.00 per
share to Crystal Research Associates, LLC in accordance with the signed acceptance letter dated
February 11, 2012 representing payment for year two of this agreement pursuant to the exemption from
registration provided by Section (4) 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 9, 2014 our board of directors authorized the issuance of 15,000 restricted shares at $1.00 per
share to Financial Insights in accordance with the terms of the agreement dated September 1, 2013,
pursuant to the exemption from registration provided by Section (4) 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 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.
40
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 9, 2014, our board of directors authorized the issuance of 256,000 restricted shares of its
common stock and 128,000 warrants to purchase 128,000 shares of our common stock at an exercise price
of $2.70 until February 27, 2016 to the following entities and individuals for $1.00 each, or an aggregate
of $256,000 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
Warren D. Lydon $20,000
Subscription
20,000
20,000
Sec. 4(2)/Reg D
Steven R. Ferris
$216,000
Services
216,000
216,000
Sec. 4(2)/Reg D
Chris T. Bennett
$20,000
Subscription
20,000
20,000
Sec. 4(2)/Reg D
The Company complied with the exemption requirements of Section 4(2) of the Securities Act based on
the following factors: (1) the issuances 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 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.
On April 9, 2014, our board of directors authorized the issuance of 1,439,268 restricted shares of its
common stock and 719,635 warrants to purchase 719,635 shares of our common stock at an exercise price
of $1.20 until April 9, 2016 to the following entities and individuals for $0.80 each, or an aggregate of
$1,151,414 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
Units
Warrants Exemption
Ammon & Associates, Inc.
$400,000
Subscription 500,000 250,000
Sec. 4(2)Reg D
Orsa & Company
$40,000
Services
50,000
25.,000
Sec. 4(2)Reg D
Hermann Buschor
$72,236
Services
90,295
45,148
Sec. 4(2)Reg D
Stratton SA
$ 164,792
Subscription 205,990 102,995
Sec. 4(2)Reg S
Green Chip SA
$394,386
Subscription 492,983 246,492
Sec. 4(2)Reg S
Steven R. Ferris
$80,000
Services
100,000 50,000
Sec. 4(2)Reg D
The Company complied with the exemption requirements of Section 4(2) of the Securities Act based on
the following factors: (1) the issuances 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 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.
41
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 April 22, 2014 our board of directors authorized the issuance of 30,000 restricted shares at $0.80 per
share to Avid Advertising, Inc. Dba Stockblogs.com in accordance with the signed letter of agreement
dated April 16, 2014 representing payment commencing April 15, 2014 for a period of seven months,
pursuant to the exemption from registration provided by Section (4) 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 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 May 6, 2014 our board of directors authorized the grant of 150,000 stock options with an exercise
price of $1.00 per share that expire ten years from the date of vesting in equal one-third increments
annually beginning on April 30, 2015, to Ryan Owen and authorized the issuance of 20,000 restricted
shares valued at $0.1 per share in accordance with his Board of Directors Compensation Agreement dated
May 6, 2014 in reliance upon the exemptions from registration provided by Section 4(2) 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 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.
On May 30, 2014 our board of directors authorized the grant of 20,000 stock options with an exercise
price of $1.14 per share that expire ten years from the date of vesting in equal one-third increments
annually beginning on May 30, 2015, to Milena Ordenes in consideration for her position with Abakan
Inc. as Executive Assistant to the President as an incentive in reliance upon the exemptions from
registration provided by Section 4(2) 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 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.
On May 30, 2014 our board of directors authorized the grant of 100,000 stock options with an exercise
price of $1.14 per share that expire ten years from the date of vesting in equal one-third increments
annually beginning on May 30, 2015, to Evelina Vogli in consideration for her position with Abakan Inc.
as Executive Assistant to the President as an incentive in reliance upon the exemptions from registration
provided by Section 4(2) of the Securities Act.
42
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.
On May 30, 2014, our board of directors authorized the issuance of 60,000 restricted shares of its
common stock and 60,000 warrants to purchase 60,000 shares of our common stock at an exercise price
of $1.20 until May 29, 2016 to the following entities and individuals for $0.80 each, or an aggregate of
$48,000 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
Units
Warrants Exemption
Warren D. Lydon
$20,000
Subscription 25,000
25,000
Sec. 4(2)/Reg D
Susan S. Almendinger
$20,000
Subscription 25,000
25,000
Sec. 4(2)/Reg D
Kevin McDonnell
$8,000
Subscription 10,000
10,000
Sec. 4(2)/Reg D
The Company complied with the exemption requirements of Section 4(2) of the Securities Act based on
the following factors: (1) the issuances 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 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.
On May 31, 2014, our board of directors authorized the issuance of 2,000,000 restricted shares of its
common stock to Powdermet, as part of an exchange for 98,000 restricted shares of MesoCoat made in
accordance with the terms and conditions of an accord and satisfaction of investment agreement, pursuant
to the exemption from registration provided by Section 4(2) 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 issuance was an isolated private transaction 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.
Trading Information
The Company’s common stock is quoted under the symbol “ABKI”.
The information for our transfer agent is as follows:
Island Stock Transfer
100 Second Avenue South, Suite 300
St. Petersburg, Florida 33701
Tel: (727) 289-0010.
ITEM 6.
SELECTED FINANCIAL DATA
Not required.
43
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 scale-up production and accelerate market
entry for our PComP™ products and to complete the development and qualification of our CermaClad™
products. Meanwhile, the Company will continue research and development efforts to ensure the
continuity of our product pipeline. Mentioned below are a few key efforts and milestones accomplished
by the Company and its subsidiaries during the twelve month period ended May 31, 2014, in pursuing the
fulfillment of our plan:
§
The Company completed debt and equity financings in the amount of $3,992,422.
§
2,000,000 shares of common stock, valued at $2,580,000, were issued in exchange for shares in
Powdermet.
§
The Company announced expansion plans for PComP™ coatings that will involve scaling-up
PComP™ powder production to 160 tons/year and set-up and potentially acquiring up to 5 US
based thermal spray production businesses, with 12 to spray booths over the next 3 years.
§
The Company signed an exclusive agreement with LIMO Lissotschenko Mikrooptik GmbH
("LIMO'), based in Dortmund, Germany for the development of a laser based system for the
production of wear and corrosion resistant cladding to supply the multi-billion dollar coating
market for 3 to 8 inch diameter pipe used extensively in the oil and gas industry.
§
The Company appointed oil and gas industry veteran, Dr. Ryan Owen, PhD, to its board of
directors
§
MesoCoat along with the lead project partner, Northern Alberta Institute of Technology (NAIT)
received a $2.75 million dollar funding commitment from Alberta’s Ministry of Innovation and
Advanced Education (IAE) and Western Economic Diversification Canada (WD) for an 18-
month collaborative effort to establish a prototype demonstration facility for developing, testing
and commercializing wear-resistant clad pipe and components.
§
MesoCoat was awarded a $1.5 million dollar match loan from the Ohio Department of
Development’s Ohio Third Frontier Commission to scale up PComP™ production and expand
PComP™ coating services.
§
MesoCoat signed an exclusive sales agreement with Metallurgic Solutions, S.A. de CV
(“MetalSol”) to introduce MesoCoat’s products into Mexico, Guatemala, El Salvador, Honduras,
Nicaragua, Costa Rica, and Panama.
§
MesoCoat received a Phase One SBIR Grant from the Environmental Protection Agency (EPA)
for a six month project to develop CermaClad™ environmentally friendly high-speed large-area
metal cladding technology, as a replacement alternative for the highly toxic galvanizing process
currently in use.
44
§
MesoCoat received two awards from NASA under its Small Business Innovation Research
(SBIR) program to develop advanced coatings that self-lubricate to minimize friction and wear in
extreme environments, and for developing advanced nanocomposite coatings that can withstand
extreme heat and facilitate high heat transfer for an extended period of time.
§
MesoCoat incorporated a wholly owned subsidiary, MesoCoat Coating Services, to accelerate
entry into the high-value coating services market for its PComP™ nano-composite thermal spray
coatings.
§
MesoCoat won the American Metal Market Steel Excellence Awards for the Best Innovation in
Process for its CermaClad™ technology.
§
MesoCoat was ranked #15 fastest-growing manufacturing company in the Annual Inc. 500|5000
list of fastest-growing companies in the U.S.
§
MesoCoat’s CermaClad™ clad pipe product received the highly prestigious National Association
of Corrosion Engineers (NACE) Materials Performance (MP) Corrosion Innovation of the Year
Award in the Coatings and Linings category.
§
Powdermet spun out a wholly-owned subsidiary, Terves Inc., to commercialize engineered
reactive materials and other technology platforms for the oil and gas industry.
§
Terves secured a Phase I Small Business Innovation Research award from U.S. Navy to develop
controlled deflagration of metals.
§
Terves secured non-dilutive financing from local economic agencies and development financing
from a leading oilfield completions company to accelerate commercialization of its products.
§
Terves began initial test sales of its disintegrating frac-ball products.
§
The Company increased its direct ownership in MesoCoat to 87.5% through conversion of
additional investment, a partial disposition of itsPowdermet interest, and the issuance of
2,000,000 restricted common shares.
§
The Company announced its intention to acquire the remaining 12.5% shares of MesoCoat held
by Powdermet in exchange for those remaining shares of Powdermet which it holds and the
issuance of additional shares of Abakan, to the extent necessary, on receipt of independent
business valuations of MesoCoat and Powdermet.
Subsequent to the twelve month period ended May 31, 2014:
§
The Company initiated a private placement of up to eighteen million seven hundred and fifty
thousand (18,750,000) shares of its restricted common stock, at a price of $0.40 a share, to
realize and extinguish debt of up to seven million five hundred thousand dollars ($7,500,000), to
support ongoing operations, retire outstanding debt and bolster product development. The
placement has realized $427,800 in cash proceeds as of the filing date of this report and
subsequent to the filing date of this report, is expected to include the extinguishment of debt in
the amount of $764,000, in proceeds realized since the annual period end, and an additional
$1,700,000 in proceeds realized prior to the annual period end. The Company has further
allocated $4 to $5 million dollars of the private placement to secure an industry partner, which
expectation, if realized, will occur subsequent to the filing date of this report. The Company
does not intend to close this private placement prior to realizing the aforementioned
expectations.
§
MesoCoat and Metasol secured initial sales and test orders for PComP™ coatings from some of
Mexico’s largest steel manufacturers.
§
MesoCoat began initial field-testing, on full-sized production equipment, of its proprietary nano-
composite liquid metal corrosion-resistant coating, PComP™ M, with a leading steel producer.
§
Terves secured two Phase I Small Business Innovation Research award from NASA to develop
rocket fuels, and high strength magnesium for radiators.
45
Results of Operations
(000)
For the years ended
May 31,
Change
Revenues
2014
2013
$
%
Commercial
$
553 $
190 $
363
191
Contract and grants
284
1,657
(1,373)
(83)
Other income
17
-
17
100
854
1,847
(993)
(54)
Cost of revenues
298
739
(441)
(60)
Gross profit
556
1,108
(552)
(50)
General and administrative
6,329
6,080
249
4
Stock options expense
1,120
1,827
(707)
(39)
Operation Loss
(6,893)
(6,800)
93
1
Interest exp & amortization of discount on
debt
(449)
(1,061)
(612)
(58)
Other income (expense)
(237)
(476)
239
50
Loss before non-controlling interest
(7,579)
(8,337)
(758)
(9)
Non-controlling interest in MesoCoat loss
1,623
1,114
509
46
Loss before income taxes
(5,956)
(7,223)
1,267
18
Income taxes
-
-
-
-
Net Income
$ (5,956) $ (7,223) $ 1,267
18
Revenues
Revenues for the year ended May 31, 2014 were $853,566, as compared to $1,846,862 for the year ended
May 31, 2013, a decrease of 54%. 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 $552,952 as compared to $190,362
in the prior year, contract and grant revenues of $283,748 in the current year as compared to $1,656,500
in the prior year, and other income of $16,866 as compared to zero in the prior year. Commercial revenue
increased by 190% as MesoCoat continues implementation of its commercial products. The 83% 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.
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.
46
Gross Profit
Gross profit for the twelve month period ended May 31, 2014 was $556,009 compared to $1,107,789 for
the twelve month period ended May 31, 2013, a decrease of 50%. 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 contract and grants revenue offset partly by the increase
in commercial revenue.
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
Net losses for the year ended May 31, 2014, were $5,956,310 compared to a net loss of $7,223,423 for the
year ended May 31, 2013, a decrease of 17.5%.
The change in 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 $551,780 decrease in gross profit. In addition, operating
expenses decreased by $459,111 while we to continue the development and implementation of
commercial applications. Other income (expense) changed by $851,121 resulting in an additional
reduction to net losses when compared to the prior year. Other income included among other categories a
loss associated with our equity interest in Powdermet of $126,519 versus a loss in the prior year of
$260,877 and a loss on intangible impairment of $110,600 compared to zero in the prior year.
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 a manufacturing plant.
Despite management’s focus on ensuring operating efficiencies, we expect to continue to operate at a loss
through fiscal 2015.
Expenses
Operating expenses for the year ended May 31, 2014 were $7,448,754 compared to $7,907,865 for the
year ended May 31, 2013, a decrease of 5.8%. The decrease in operating expenses over the prior year can
be attributed to decreases in administrative costs, consulting fees, consulting fees to related parties, and
stock option expenses offset partly by increases in professional fees, professional fees to related parties
and a significant increase in depreciation and amortization. Stock option expense decreased by $707,119
during the current year as the Company refines its management team, directors and advisors. General &
administrative expense, payroll and professional fees increased by $248,008 as the Company continues its
efforts to develop and commercialize its products that included the 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.
47
Other Expense
Other expense for the year ended May 31, 2014 was $686,158 as compared to $1,537,279 for the year
ended May 31, 2013. The decrease in other expense of $851,121 in the current year over the prior year
can be primarily attributed to the amortization of discount on debt which decreased by $700,925 in the
current year. The Company also recorded a loss associated with our equity interest in Powdermet of
$126,519 in the current year versus a loss in the prior year of $260,877. Other significant transactions
include a loss on intangible impairment of $110,600 compared to zero in the prior year and a zero gain on
debt settlement compared to $235,794 in the prior year.
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, 2014, which amounted to $9,222,925. 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.
Liquidity and Capital Resources
The Company has experienced significant changes in liquidity, capital resources, and stockholders’
equity.
As of May 31, 2014, the Company had current assets of $336,003 consisting of cash and cash equivalents
of $31,111, accounts receivable of $119,122, prepaid expenses of $185,770. The Company had total
assets of $14,683,564 consisting of current assets, net property, plant and equipment of $5,539,549,
patents and licenses of $6,106,686, an assignment agreement of $171,055, an investment in Powdermet of
$2,151,817, goodwill of $364,384 and net deferred financing fees of $14,070.
As of May 31, 2014, the Company had current liabilities of $8,263,375, consisting of accounts payable of
$1,552,402, accounts payable to related parties of $675,041, capital leases of $31,465, loans payable of
$4,820,816, accrued interest of $306,160, loan payable to related parties of $224,799, accrued interest to a
related party of $480 and accrued liabilities of $652,212. The Company had total liabilities of $9,373,521
consisting of current liabilities of $8,263,375 and long-term liabilities of $1,110,146. Long-term liabilities
consist of loans payable of $1,056,106 and capital leases of $54,040.
The Company had stockholders’ equity of $5,310,043 and a working capital deficit of $7,927,372 at May
31, 2014.
48
Net cash used in operating activities for the year ended May 31, 2014 was $2,808,037 as compared to
$2,940,182 for the year ended May 31, 2013. Net cash used in operating 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.
Net cash used in investing activities for the year ended May 31, 2014, was $698,040 as compared to net
cash used in investing activities of $2,719,490 for the year ended May 31, 2013. 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.
Net cash provided by financing activities for the year ended May 31, 2014 was $3,304,147 as compared
to $5,033,146 the year ended May 31, 2013. Net cash provided by financing activities in the current
period is attributable to proceeds from the sale of common stock and loans payable, offset by payments on
loans payable, 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, debt financing and debt settlements prior to
period end pursuant to which the Company had raised $3,992,422 during the twelve month period ended
May 31, 2014. 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, 2014, 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, 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 initiated a private placement of common stock subsequent to period end that has realized of
$427,800 in cash proceeds and is expected to include the extinguishment of debt of $764,000, realized
since the annual period end, and an additional $1,700,000 realized prior to the annual period end. The
Company has further allocated $4 to $5 million dollars of the placement to secure an industry partner. The
Company does not intend to close this placement prior to meeting the aforementioned expectations.
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.
49
The Company has plans for the purchase of plant or equipment in connection with expansion of the
PComP™ powder production commercial line.
The Company intends to increase the number of employees engaged by MesoCoat on completion on the
PComP™ product line expansion and commercialization of the CermaClad™ product at the new Euclid,
Ohio manufacturing facility.
Off Balance Sheet Arrangements
As of May 31, 2014, 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 since inception and a working capital deficit of $7,927,372 as of May 31,
2014. Our ability to continue as a going concern is dependent on realizing net income from operations,
gains on investment, obtaining funding from outside sources or realizing some combination of these
objectives. Management’s plan to address the Company’s ability to continue as a going concern includes:
(i) obtaining funding from the private placement of debt or equity; (ii) 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.
50
Critical Accounting Policies
The notes to the audited financial statements for the Company for the years ended May 31, 2014 and
2013, included in this Form 10-K, discusses those accounting policies that are considered to be significant
in determining the results of operations and financial position. Our management believes that their
accounting principles conform to accounting principles generally (GAAP) accepted in the United States
of America.
The preparation of financial statements in conformity with GAAP requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the year. The more significant areas requiring the use of estimates include
asset impairment, stock-based compensation, beneficial conversion features on debt instruments, and
future income tax amounts. Management bases its estimates on historical experience and on other
assumptions considered to be reasonable under the circumstances. Actual results may differ from the
estimates.
Stock-Based Compensation
We have adopted Accounting Standards Codification Topic (“ASC”) 718, Share-Based Payment, which
addresses the accounting for stock-based payment transactions in which an enterprise receives employee
services in exchange for (a) equity instruments of the enterprise or (b) liabilities that are based on the fair
value of the enterprise’s equity instruments or that may be settled by the issuance of such equity
instruments.
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
In June 2014, the FASB released ASU 2014-10 — Accounting Standards Update 2014-10, Income Taxes
Topic 915: Elimination of Certain Financial Reporting Requirements, Including an Amendment to
Variable Interest Entities Guidance in Topic 810, Consolidation. The amendments in this Update
eliminate the concept of a development stage entity (DSE) from US GAAP. This change rescinds
financial reporting requirements that have historically applied by DSEs such as labeling financial
statements as those of a DSE, providing inception to date information in the statements of income, cash-
flows and shareholder equity and certain specific disclosures. This ASU has been early adopted by the
Company as of April 1, 2014 and therefore for the current period ended May 31, 2014 as such early
adoption is permitted for all financial statements that have not been issued or made available for issuance.
This ASU had impact to the Company’s consolidated financial statements, as the corresponding inception
to date information, labeling financial statements as those of a DSE, etc. will no longer be provided.
51
In May 2014, the FASB released ASU 2014-9 - Accounting Standards Update 2014-9, Topic 606:
Revenue from Contracts with Customers that outlines a single comprehensive model for entities to use in
accounting for revenue arising from contracts with customers and supersedes most current revenue
recognition guidance, including industry-specific guidance. The guidance is based on the principle that an
entity should recognize revenue to depict the transfer of goods or services to customers in an amount that
reflects the consideration to which the entity expects to be entitled in exchange for those goods or
services. The guidance also requires additional disclosure about the nature, amount, timing and
uncertainty of revenue and cash flows arising from customer contracts, including significant judgments
and changes in judgments and assets recognized from costs incurred to fulfill a contract. Entities have the
option of using either a full retrospective or a modified retrospective approach for the adoption of the new
standard. This guidance becomes effective for annual reporting periods beginning after December 15,
2016 and early adoption is not permitted. The Company is currently assessing the impact that this
standard will have on its financial statements.
ASU 2014-15, Presentation of Financial Statements Going Concern (Subtopic 205-40) (ASU 2014-15), is
effective for fiscal years, and interim periods within those years, beginning after December 15, 2016.
ASU 2014-15 requires management to assess an entity's ability to continue as a going concern by
incorporating and expanding upon certain principles that are currently in U.S. auditing standards.
Specifically, ASU 2014-15 provides a definition of the term substantial doubt and requires an assessment
for a period of one year after the date that the financial statements are issued (or available to be issued). It
also requires certain disclosures when substantial doubt is alleviated as a result of consideration of
management's plans and requires an express statement and other disclosures when substantial doubt is not
alleviated. We do not expect the adoption of ASU 2014-15 to have material impact on our consolidated
financial statements, although there may be additional disclosures upon adoption.
Other pronouncements issued by the FASB or other authoritative accounting standards groups with future
effective dates are either not applicable or are not expected to be significant to the financial statements of
the Company.
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
Not required.
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our audited financial statements for the years ended May 31, 2014 and 2013 are attached hereto as F-1
through F-55.
52
Abakan Inc.
Index to Financial Statements
Report of Independent Registered Public Accounting Firm
F-2
Consolidated Balance Sheets for the years ended May 31, 2014 and 2013
F-3
Consolidated Statements of Operations for the years ended May 31, 2014 and 2013
F-4
Consolidated Statements of Stockholders' Equity (Deficit) for the years ended May 31, 2014 and 2013
F-5
Consolidated Statements of Cash Flows for the years ended May 31, 2014 and 2013
F-10
Notes to the Consolidated Financial Statements
F-12
F-1
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of
Abakan, Inc.
We have audited the accompanying consolidated balance sheets of Abakan, Inc. and Subsidiaries
(together the “Company”) as of May 31, 2014 and 2013, and the related consolidated statements of
operations, stockholders’ equity (deficit) and cash flows for the years then ended. These financial
statements are the responsibility of the Company’s management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audits to obtain reasonable
assurance about whether the financial statements are free of material misstatement. The Company is not
required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.
Our audits included consideration of internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion of
the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no
such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinions.
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, 2014 and 2013
and the consolidated 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.
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 $19,502,097 and a working capital deficiency of $7,927,372.
Management’s plans concerning these matters are also described in Note 3. The accompanying financial
statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ Skoda Minotti
Skoda Minotti
Cleveland, Ohio
September 30, 2014
F-2
ABAKAN INC.
CONSOLIDATED BALANCE SHEETS
May 31,
May 31,
2014
2013
ASSETS
Current assets
Cash and cash equivalents
$
31,111 $
233,040
Accounts receivable
119,122
105,523
Note receivable - related parties
-
4,500
Prepaid expenses
185,770
117,028
Total current assets
336,003
460,091
Noncurrent assets
Deferred finance fees, net
14,070
15,799
Property, plant and equipment, net
5,539,549
5,595,007
Patents and licenses, net
6,106,686
7,545,163
Assignment agreement - MesoCoat
171,055
210,528
Investment - Powdermet
2,151,817
2,449,312
Goodwill
364,384
364,384
Total assets
$
14,683,564 $
16,640,284
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable
$
1,552,402 $
890,791
Accounts payable - related parties
675,041
251,004
Capital leases - current portion
31,465
28,006
Loans payable, net of discounts of $0 and $137,364
4,820,816
965,555
Accrued interest - loans payable
306,160
153,825
Loan payable- related parties
224,799
30,000
Accrued interest - related parties
480
1,987
Accrued liabilities
652,212
377,392
Total current liabilities
8,263,375
2,698,560
Non-current liabilities
Loans payable
1,056,106
4,241,278
Capital leases - non-current portion
54,040
63,875
Total liabilities
$
9,373,521 $
7,003,713
Commitments and contingencies (Note 13)
Stockholders' equity
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, 68,374,815 issued and outstanding - May 31, 2014,
64,284,855 issued and outstanding - May 31, 2013
6,840
6,430
Paid-in capital
24,530,074
20,833,426
Subscription receivable
(28,000)
(76,244)
Contributed capital
5,050
5,050
Accumulated deficit
(19,502,097)
(13,545,788)
5,011,867
7,222,874
Non-controlling interest
298,176
2,413,697
Total stockholders' equity
5,310,043
9,636,571
Total liabilities and stockholders' equity
$
14,683,564 $
16,640,284
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
F-3
ABAKAN INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended
May 31,
2014
2013
Revenues
Commercial
$
552,952 $
190,362
Contract and grants
283,748
1,656,500
Other income
16,866
-
853,566
1,846,862
Cost of Revenues
297,557
739,073
Gross profit
556,009
1,107,789
Expenses
General and administrative
General and administrative
749,001
831,387
Professional fees
667,540
513,068
Professional fees - related parties
63,028
60,000
Consulting
989,952
1,382,484
Consulting - related parties
237,397
441,250
Payroll and benefits expense
1,263,364
848,798
Depreciation and amortization
784,057
417,072
Research and development
1,327,648
1,347,190
Stock expense on note conversion
246,390
239,120
Stock options expense
1,120,377
1,827,496
Total expenses
7,448,754
7,907,865
Loss from operations
(6,892,745)
(6,800,076)
Other (expense) income
Interest expense:
Interest - loans
(310,067)
(222,134)
Interest - related parties
(1,113)
(773)
Amortization of discount on debt
(137,364)
(838,289)
Total interest expense
(448,544)
(1,061,196)
Interest income
15
3,794
Loss on intangible impairment
(110,600)
-
Creditor Fee
-
(235,794)
Gain on debt settlement
-
17,715
Loss on sale of assets
(510)
(921)
Equity in Powdermet (loss)
(126,519)
(260,877)
Total Other (expense) income
(686,158)
(1,537,279)
Net (loss) before noncontrolling interest
(7,578,903)
(8,337,355)
Non-controlling interest in MesoCoat Loss
1,622,593
1,113,932
Net (loss) attributable to Abakan Inc.
(5,956,310)
(7,223,423)
Provision for income taxes
-
-
Net (loss)
$
(5,956,310) $
(7,223,423)
Net (loss) per share - basic
$
(0.09) $
(0.12)
Net (loss) per share - diluted
$
(0.09) $
(0.12)
Weighted average number of common
shares outstanding – basic
64,663,650
62,443,108
Weighted average number of common
shares outstanding – diluted
65,663,650
62,443,108
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
F-4
ABAKAN INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
Total
Paid - in
Contributed
Subscription
Subscription
Non-controlling
Accumulated
Stockholders’
Shares
Amount
Capital
Capital
Receivable
Payable
Interest
Deficit
Equity
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
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 per share
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 share including
costs of $5,217
25,000
3
62,715
-
-
-
-
-
62,718
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
3,058
1
8,255
-
-
-
-
-
8,256
May 31, 2013 continued on following page
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
F-5
ABAKAN INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) – CONTINUED
Total
Paid-in
Contributed
Subscription
Subscription
Non-controlling
Accumulated
Stockholders’
Shares
Amount
Capital
Capital
Receivable
Payable
Interest
Deficit
Equity
May 31, 2013 continued from previous page
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, 8,
2012 for $2.30
22,000
2
50,598
-
-
(12,000)
-
-
38,600
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
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
May 31, 2013 continued on following page
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
F-6
ABAKAN INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) – CONTINUED
Total
Paid-in
Contributed
Subscription
Subscription
Non-controlling
Accumulated
Stockholders’
Shares
Amount
Capital
Capital
Receivable
Payable
Interest
Deficit
Equity
May 31, 2013 continued from previous page
Accounts payable debt of $25,000 converted
into stock and $96,000 prepaid expenses
March 18, 2013 for $2.30 per share,
including costs of $12,100
55,000
$
6
$
138,595
$
-
$
-
$
-
$
-
$
-
$
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
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
-
-
-
-
-
49,100
May 31, 2013 continued on following page
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
F-7
ABAKAN INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) – CONTINUED
Total
Paid-in
Contributed
Subscription
Subscription
Non-controlling
Accumulated
Stockholders’
Shares
Amount
Capital
Capital
Receivable
Payable
Interest
Deficit
Equity
May 31, 2013 continued from previous page
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)
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) $
9,636,572
Subscription receivables received from May 29,
2013 and December 20, 2012
-
-
-
-
76,244
-
-
-
76,244
Common shares issued for services on October
25, 2013 at $3.03 per share
19,802
2
59,998
-
-
-
-
-
60,000
Common shares issued for services on October
25, 2013 at $2.94 per share
25,000
3
73,498
-
-
-
-
-
73,501
Shares issued for retirement plan on October 25,
2013 at $2.83 per share
82,941
8
234,715
-
-
-
-
-
234,723
Non-cash exercise of warrants on December 4,
2013 at $0.65 per share including costs of
$30,500
50,000
5
62,995
-
-
-
-
-
63,000
Common shares issued for services on
December 4, 2013 at $1.20 per share
10,000
1
11,999
-
-
-
-
-
12,000
May 31, 2014 continued on following page
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
F-8
ABAKAN INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) – CONTINUED
Total
Paid-in
Contributed
Subscription
Subscription
Non-controlling
Accumulated
Stockholders’
Shares
Amount
Capital
Capital
Receivable
Payable
Interest
Deficit
Equity
May 31, 2014 continued from previous page
Common shares issued for services on January
3, 2014 at $1.18 per share
16,949
$
2
$
19,998
$
-
$
-
$
-
$
-
$
-
$
20,000
Subscription payable deposit payable stock
subscription on February 21, 2014
-
-
-
-
-
20,000
-
-
20,000
Subscription payable deposit payable stock
subscription on February 24, 2014
-
-
-
-
-
216,000
-
-
216,000
Private placement for cash, closed April 9, 2014
at $1.00 per share
40,000
4
39,996
-
-
(20,000)
-
-
20,000
Common shares issued for services on April 9,
2014 at $1.00 per share
70,000
7
69,993
-
-
-
-
-
70,000
Accounts payable debt converted into stock
April 9, 2014 for $1.00 per share including
costs of $0.00
216,000
22
215,978
-
-
(216,000)
-
-
-
Accounts payable debt converted into stock
April 9, 2014 for $0.80 per share, including
costs of $7,500
50,000
5
47,495
-
-
-
-
-
47,500
Accounts payable debt converted into stock
April 9, 2014 for $0.80 per share including
costs of $208,390
1,389,268
139
1,319,666
-
-
-
-
-
1,319,805
Common shares issued for services on April 22,
2014 at $0.80 per share
30,000
3
23,997
-
-
-
-
-
24,000
Common shares issued for services on May 6,
2014 at $0.71 per share
20,000
2
14,198
-
-
-
-
-
14,200
Private placement for cash, closed May 30,
2014 for $0.80 per share
60,000
6
47,994
-
(28,000)
-
-
-
20,000
Common shares issued for services on May 30,
2014 at $1.20 per share
10,000
1
11,999
-
-
-
-
-
12,000
Common shares issued for share exchange
agreement with Powdermet on May 31, 2014
2,000,000
200
2,579,800
-
-
-
-
-
2,580,000
Effect of share exchange with Powdermet on
May 31, 2014
-
-
(2,189,032)
-
-
-
(561,944)
-
(2,750,976)
Stock option expense
-
-
1,120,377
-
-
-
-
-
1,120,377
MesoCoat stock option expense allocated to
minimum interest
-
-
(69,016)
-
-
-
69,016
-
-
Net loss for the year
-
-
-
-
-
-
(1,622,593)
(5,956,310)
(7,578,903)
Balance, May 31, 2014
68,374,815 $
6,840
$ 24,530,074 $
5,050
$
(28,000)
$
-
$
298,176
$ (19,502,097) $
5,310,043
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
F-9
ABAKAN INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended
May 31,
2014
2013
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) before non-controlling interest
$
(7,578,903) $
(8,337,355)
Adjustments to reconcile net (loss) to net
cash (used in) operating activities:
Depreciation and amortization
784,057
417,072
Amortization of discount on debt
137,364
838,289
Imputed Interest on debt
-
59,343
Amortization of deferred financing fees
1,729
-
Stock options expense
1,120,377
1,827,496
Stock expense on note conversion
246,390
239,120
Stock issued for services
285,700
415,791
Stock issued for retirement plan expense
234,723
-
Equity in investee (profit)/ loss
126,519
260,877
Loss on intangible impairment
110,600
-
Loss on sale of capital asset
510
-
Changes in operating assets and liabilities:
Accounts receivable
(13,599)
(82,669)
Prepaid expenses
(68,742)
66,106
Prepaid expenses - related parties
-
(16,676)
Accounts payable
1,133,234
1,150,049
Accounts payable - related parties
424,037
170,231
Accrued interest - loans payable
213,759
(14,251)
Accrued liabilities
34,209
66,395
Total adjustments
4,770,866
5,397,173
NET CASH (USED IN) OPERATING ACTIVITIES
(2,808,037)
(2,940,182)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property, plant, equipment and website
(662,703)
(2,675,328)
Proceeds from sale of capital assets
-
921
Capitalized patents and licenses
(35,337)
(45,083)
NET CASH (USED) IN INVESTING ACTIVITIES
(698,040)
(2,719,490)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from sale of common stock
110,000
3,126,964
Proceeds from loans payable
3,144,692
2,107,292
Payments on loans payable
(161,591)
(207,816)
Proceeds from loans payable - related parties
185,648
66,200
Payments on loans payable - related parties
(44,470)
(36,200)
Repayments of capital leases
(6,376)
(23,294)
Stock issuable
76,244
-
NET CASH PROVIDED BY FINANCING ACTIVITIES
3,304,147
5,033,146
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(201,929)
(626,526)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
233,040
859,566
CASH AND CASH EQUIVALENTS, END OF PERIOD
$
31,111 $
233,040
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
F-10
ABAKAN INC
CONSOLIDATED STATEMENT OF CASH FLOWS – CONTINUED
For the years ended
May 31,
2014
2013
Supplemental Disclosures:
Cash paid for income taxes
$
- $
-
Cash paid for interest
$
57,119 $
-
Supplemental Non-cash Disclosures:
Notes and accounts payable converted to stock
Accounts payable - related parties
$
(288,500) $
(279,255)
Loans payable
(1,048,483)
(1,607,595)
Accrued interest
(10,694)
(13,044)
Accrued interest - related parties
(2,236)
-
Common stock
1,349,914
1,976,138
Subscription receivable
-
(76,244)
-
-
Write off of assets acquired in MesoCoat acquisition
Patents and licenses
$
1,336,281 $
-
Long term debt
(1,576,892)
-
Accrued liabilities
240,611
-
$
- $
-
Share exchange agreement with Powdermet and MesoCoat
Investment - Powdermet
$
170,976 $
-
Common stock
390,968
-
Noncontrolling interest - MesoCoat
(561,944)
-
$
- $
-
Accounts payable converted to notes payable
Accounts payable
$
233,121 $
155,161
Notes payable
(233,121)
(155,161)
$
- $
-
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
F-11
ABAKAN INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDING MAY 31, 2014 AND 2013
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.
On December 10, 2009 the Company purchased a thirty-four percent (34.59%) interest in MesoCoat,
Inc. ("MesoCoat"), and on July 13, 2011 purchased an additional eighteen percent (17.86%), and on
May 31, 2014 (please see Note 7) purchased an additional thirty-five percent (35.63%), for an aggregate
total of eighty-eight percent (88.08%) 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. On May 31, 2014, we participated
in a share exchange agreement in which we exchanged 310,000 shares of Powdermet’s common stock
in exchange for 98,000 shares of common stock of MesoCoat and 2,000,000 shares of the Company’s
common stock. Because of this transaction our interest is now a fully diluted 24.9% interest in
Powdermet.
F-12
ABAKAN INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDING MAY 31, 2014 AND 2013
NOTE 1 – BUSINESS - continued
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 owned 47.50% of MesoCoat, on May 31,
2014, we completed a share exchange agreement that we exchanged shares of Powdermet for shares of
Mesocoat reducing Powdermet’s interest in MesoCoat to twelve percent (11.92%).
On June 8, 2011, the Company formed a wholly owned subsidiary company named, AMP Distributors,
Ltd. (“AMP Distributors”), a Grand Cayman corporation. AMP Distributors was formed to distribute
MesoCoat products to consumer markets.
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.
On May 15, 2012, MesoCoat formed a wholly owned subsidiary company named, MesoCoat
Technologies (“MST TECH”), a Alberta Canada corporation. MesoCoat Technologies was formed to
develop, market, and sell wear-resistant clad pipes and components in Canada.
On June 13, 2013, MesoCoat formed a wholly owned subsidiary company named, MesoCoat Coating
Services (“MSTC”), a Nevada corporation. MesoCoat Coatings was formed to extract maximum value
from the PComP™ family by offering high margin coating services.
On October 23, 2013, MesoCoat formed a wholly owned subsidiary company named, PT. MesoCoat
Indonesia (“MSTIND”), an Indonesian corporation. PT. MesoCoat Indonesia was formed to
manufacture and sell wear-resistant clad pipes and components in Indonesia.
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.
F-13
ABAKAN INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDING MAY 31, 2014 AND 2013
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Accounting Basis
These financial statements are prepared on the accrual basis of accounting in conformity with
accounting principles generally accepted in the United States of America (GAAP).
We follow accounting standards set by the Financial Accounting Standards Board, commonly referred
to as the FASB. The FASB sets GAAP that we follow to ensure we consistently report our financial
condition, results of operations, and cash flows. References to GAAP issued by the FASB in these
footnotes are to the FASB Accounting Standards Codification, sometimes referred to as the Codification
or ASC.
Cash and Cash Equivalents
For the purposes of the statements of cash flows, cash equivalents include all highly liquid investments
with a maturity of three months or less.
Concentration in Sales to Few Customers
In the year ended May 31, 2014 and 2013, our government contracts accounted for 33% and 90% of our
revenues, respectively.
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, 2014 and 2013, we had approximately none and none, respectively, in excess of FDIC insured
limits. We have not experienced any losses in such accounts.
Consolidation Policy
The accompanying May 31, 2014 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, 2014, is as follows:
Name of Subsidiary
Percentage of Ownership
AMP Distributors (Cayman)
100.00%
AMP Distributors (Florida)
100.00%
MesoCoat, Inc.
88.08%
MesoCoat’s ownership of its subsidiaries as of May 31, 2014, is as follows:
Name of Subsidiary
Percentage of Ownership
MesoCoat Technologies (Canada)
100.00%
MesoCoat Coating Services, Inc. (Nevada) 100.00%
PT MesoCoat Indonesia
100.00%
F-14
ABAKAN INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDING MAY 31, 2014 AND 2013
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
Fair Value of Financial Instruments
In January 2008, the Company adopted FASB ASC 820, Fair Value Measurements and Disclosures
(“ASC 820”) (Formerly referenced as SFAS No. 157, Fair Value Measurements), to value its financial
assets and liabilities. The adoption of ASC 820 did not have a significant impact on the Company’s
results of operations, financial position or cash flows. ASC 820 defines fair value, establishes a
framework for measuring fair value under GAAP and expands disclosures about fair value
measurements. ASC 820 defines fair value as the exchange price that would be paid by an external party
for an asset or liability (exit price).
ASC 820 also establishes a fair value hierarchy which requires an entity to maximize the use of
observable inputs and minimize the use of unobservable inputs when measuring fair value. Three levels
of inputs may be used to measure fair value:
·
Level 1 – Active market provides unadjusted quoted prices for identical assets or liabilities that the
company has the ability to access;
·
Level 2 – Quoted prices for similar assets or liabilities in active markets or quoted prices for identical
or similar assets or liabilities in inactive markets. Level 2 inputs include those other than quoted
prices that are observable for the asset or liability and that are derived principally from, or
corroborated by, observable market data by correlation of other means. If the asset or liability has a
specified term the Level 2 input must be observable for substantially the full term of the asset or
liability; and
·
Level 3 – Inputs to the valuation methodology are unobservable and significant to the fair value
measurement.
Fair value estimates discussed herein are based upon certain market assumptions and pertinent
information available to management as of May 31, 2014. 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, 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.
F-15
ABAKAN INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDING MAY 31, 2014 AND 2013
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
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.
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, 2014, 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. The Company has
also Adopted Early the FASB released ASU 2014-10 concerning our development stage enterprise
financial statement presentation.
F-16
ABAKAN INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDING MAY 31, 2014 AND 2013
NOTE 2 – 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 that
collection is not probable. As of May 31, 2014 and 2013 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. On April 22, 2014, the associated notes receivable had been
assigned to our chief executive officer for settlement of the accounts. As of May 31, 2013, management
determined that no occurrence of default exists.
Property, Plant and Equipment
Property, plant and equipment are stated at cost less accumulated depreciation and amortization.
Maintenance and repairs are charged to operations as incurred. Depreciation and amortization are based
on the straight-line method over the estimated useful lives of the related assets. When assets are retired or
otherwise disposed of, the cost and accumulated depreciation and amortization are removed from the
accounts, and any resulting gain or loss is reflected in operations in the period realized.
Asset Construction in Progress
Construction in progress assets, represent assets that are in process of construction and rehabilitation in
order to bring them to operational status. All costs are captured in a separate Construction in Progress
account, and are included in the “Property, plant and equipment – net” amounts, and when the asset is
ready to enter service, the total costs are capitalized and depreciation commences per the schedule below.
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.
F-17
ABAKAN INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDING MAY 31, 2014 AND 2013
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
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. As of May 31, 2014, the Company has reviewed this
intellectual property and has determined that a write off of $110,600 is appropriate due to market conditions, and
is reflected in the accompanying Statements of Operations. Please see Note 5 for further transactions. As of the
year ended May 31, 2013, no impairment charges were necessary.
Goodwill
In accordance with GAAP, goodwill in the amount of $364,384 related to the acquisition of MesoCoat will be
evaluated for impairment on an annual basis starting fiscal year ending May 31, 2013. We evaluated our
goodwill for impairment and found that no adjustment is necessary for the years ended May 31, 2014 and 2013.
Dividends
The Company has not adopted any policy regarding payment of dividends. No dividends have been
paid during the periods shown.
Income Taxes
Income taxes are provided for using the liability method of accounting. A deferred tax asset or liability
is recorded for all temporary differences between financial and tax reporting. Deferred tax expense
(benefit) results from the net change during the year in deferred tax assets and liabilities. Valuation
allowances are established when necessary to reduce deferred tax assets to the amount expected to more
likely than not be realized in future tax returns. Tax law and rate changes are reflected in income in the
period such changes are enacted.
Revenue Recognition
The Company recognizes revenue when there is persuasive evidence of an arrangement, delivery has
occurred or services have been rendered, the sales price if fixed or determinable, and collectability is
reasonably assured.
Grant Revenue
Revenue from grants is generally recorded when earned as defined under the terms of the agreements. Each
grant document sets the timing of amounts that are allowed to be billed and how to bill those amounts. We generally
look at a two week time period to bill from and work on the incurred costs for the same time period and bill according
to preset amounts that are allowed to be billed for per the grant documents. This is then billed through a government
billing system, reviewed by the government department, and then payment is sent to us.
F-18
ABAKAN INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDING MAY 31, 2014 AND 2013
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
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 $1,327,648 and $1,347,190 for the years ended May 31, 2014 and 2013,
respectively.
Advertising Expenses
Advertising costs are expensed as incurred. Advertising expenses are included in general and
administrative expense in the accompanying statement of operations. Total advertising expenses were none
and $6,875 for the years ended May 31, 2014 and 2013, respectively.
Shipping and Handling Costs
The Company’s shipping and handling costs are included in cost of sales for all periods presented.
Stock-Based Compensation
The Company adopted FASB ASC 718-10 and valued our employee stock based awards based on the
grant-date fair value estimated in accordance with the provisions of FASB ASC 718-10. The Company
accounts for equity instruments issued in exchange for the receipt of goods or services from other than
employees in accordance with FASB ASC 718-10 and the conclusions reached in FASB ASC 505-10.
Costs are measured at the estimated fair market value of the consideration received or the estimated fair
value of the equity instruments issued, whichever is more reliably measurable. The value of equity
instruments issued for consideration other than employee services is determined on the earliest of a
performance commitment or completion of performance by the provider of goods or services as defined
by FASB ASC 505-10.
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.
F-19
ABAKAN INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDING MAY 31, 2014 AND 2013
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
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. In the year
ended May 31, 2014 the Company recorded an impairment (please see Note 5).
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, 2014 and 2013, 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.
F-20
ABAKAN INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDING MAY 31, 2014 AND 2013
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
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).
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, 2014, of $19,502,097, and a working capital deficit of $7,927,372. 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, 2014
May 31, 2013
Machinery and equipment
$
4,298,705
$
4,227,464
Construction in progress
1,282,370
692,655
Computer equipment and office furniture
54,139
47,032
Leasehold improvements
835,593
840,953
6,470,807
5,808,104
Less accumulated depreciation and amortization
(931,258)
(213,097)
$
5,539,549
$
5,595,007
Depreciation and amortization expense was $718,161 and $100,488 for the years ended May 31, 2014 and
2013, respectively. The Company recognized a gain of $510 and $921 for equipment sold the years
ending May 31, 2014 and 2013, respectively.
F-21
ABAKAN INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDING MAY 31, 2014 AND 2013
NOTE 5 – PATENTS AND LICENSES
Patents and licenses consist of the following:
May 31, 2014
May 31, 2013
Patents
$
171,720 $
157,546
Website
21,000
21,000
Intellectual Property Research and Development
6,009,600
6,120,200
Licenses
--0--
1,843,200
6,202,320
8,141,946
Less accumulated amortization
(95,634)
(596,783)
$
6,106,686 $
7,545,163
Amortization expense was $26,423 and $276,235 for the years ended May 31, 2014 and 2013,
respectively. In the years ended May 31, 2014 and 2013, we have capitalized an additional $35,337 and
$45,083, respectively, on patents and licenses, and have begun amortizing those according to our policy.
In August 2013, we wrote off the value of a license agreement that is no longer in use. Accordingly, we
adjusted out in intangibles – licenses by the carrying value of $1,917,748, and the accompanying
accumulated amortization of $581,467, and we have discontinued amortization also.
On May 31, 2014, we analyzed our long lived intangibles for impairment and found that an adjustment of
$110,600 in our Intellectual Property – Research and Development was needed in order to reflect the true
value of our intangibles.
Future amortization patents and licenses are presented in the table below:
For the years ended May 31,
2015
29,321
2016
22,785
2017
19,561
2018
19,561
2019 and beyond
5,858
$ 97,086
Patent license agreement
The Company has an exclusive commercial patent license agreement with a third party which requires the
Company to invest in the research and development of technology and the market for products by
committing to a certain level of personnel hours and $350,000 of expenditures.
The patent license agreement required a total of $50,000 in execution fees which are included in
intangible assets. The patent license agreements requires royalty payments equal to 2.5% of net sales of
the product sold by the Company beginning after the first commercial sale. For the first calendar year
after the achievement of a certain milestone and the following two calendar years during the term of the
agreement, the Company will pay a minimum annual royalty payment of $10,000, $15,000 and $20,000
respectively. During the years ended May 31, 2014 and 2013, none and $19,742 of royalty payments were
made, respectively.
F-22
ABAKAN INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDING MAY 31, 2014 AND 2013
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 $39,474 and $39,472 in amortization expense as of the years ended May 31, 2014 and
2013, 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).
On May 31, 2014, we participated in a share exchange agreement in which we exchanged 310,000
shares of Powdermet’s common stock in exchange for 98,000 shares of common stock of MesoCoat and
2,000,000 shares of Abakan’s restricted common shares. Because of this transaction our interest is now
a fully diluted 24.9% interest in Powdermet.
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 Powdermet, 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. On June 13, 2013,
Powdermet formed a wholly owned subsidiary, Terves Inc. The results for Terves Inc. have been
consolidated in the results of Powdermet.
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 24% 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.
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
Equity in loss for year ended May 31, 2014
(126,519)
Reduction in Investment for Share Exchange
(170,976)
Investment balance, May 31, 2014
$
2,151,817
Powdermet’s ownership in MesoCoat was diluted when the Company exercised its initial option to
purchase 86,156 shares of common stock from MesoCoat, and was further diluted when the Company
completed the additional purchase of 120,710 shares of MesoCoat on May 31, 2014. Powdermet’s
ownership in MesoCoat as of May 31, 2013 is 47.50% and as of May 31, 2014 is 11.92%.
F-23
ABAKAN INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDING MAY 31, 2014 AND 2013
NOTE 7 – INVESTMENT IN NON-CONTROLLING INTEREST - continued
Below is a table with summary financial results of operations and financial position of Powdermet:
Powdermet Inc. and Subsidiary
For the year ended
For the year ended
May 31, 2014
May 31, 2013
Equity Percentage
24.9%
41%
Condensed income statement information:
Total revenues
$
1,952,591 $
2,178,117
Total cost of revenues
975,149
1,188,988
Gross margin
977,442
989,129
Total expenses
(995,945)
(946,873)
Other (expense)
(1,584,970)
(1,057,278)
Benefit from income taxes
1,294,889
378,737
Net (loss)
$
(308,584) $ $
(636,285)
Company’s equity in net profit
$
(126,519) $ $
(260,877)
Condensed balance sheet information:
May 31, 2014
May 31, 2013
Total current assets
$
822,467 $ $
533,168
Total non-current assets
3,088,733
3,080,248
Total assets
$
3,911,200 $ $
3,613,416
Total current liabilities
$
424,085 $ $
260,897
Total non-current liabilities
924,286
1,676,463
Total equity
2,562,829
1,676,056
Total liabilities and equity
$
3,911,200 $ $
3,613,416
Share Exchange and Purchase Transaction
On May 31, 2014, the Company, MesoCoat and Powdermet, entered into an Accord and Satisfaction of
Investment Agreement (“Investment Accord and Satisfaction”), in order to terminate the Investment
Agreement and accelerate the plan to increase the Company’s direct ownership of MesoCoat. The
Investment Accord and Satisfaction permitted the Company to convert its additional investment in
MesoCoat of $6,169,236 to equity, and exchange a portion of its Powdermet shares and 2,000,000 of the
Company’s shares for a portion of Powdermet’s MesoCoat shares. The effect of the transaction was that
the Company increased its ownership position in MesoCoat to 88.08% direct and 90.5% direct and
indirect ownership, respectively, in exchange it decreased its ownership position in Powdermet to 24.9%
from 40.5%.
In accordance with ASC 810-10, whenever a parent who has control of a subsidiary increases their
ownership in the subsidiary, any difference between the consideration paid over the adjustment to the
carrying amount of the Non-Controlling Interest is recognized as a change directly into Paid In Capital.
As a result, we reduced the non-controlling interest in our balance sheet by $561,944 and also recorded a
direct charge against paid in capital of $2,189,032.
F-24
ABAKAN INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDING MAY 31, 2014 AND 2013
NOTE 8 – LOANS PAYABLE
As of May 31, 2014 and 2013, the loans payable balance comprised of:
Description
May 31, 2014
May 31, 2013
Convertible demand note to an unrelated entity bearing 5% interest per annum which matures
$
1,500,000 $
1,500,000
on September 15, 2014.
Convertible demand note to an unrelated entity bearing 5% interest per annum which matures
200,000
175,163
on September 15, 2014. The note is shown net of a discount of $-0- and $24,837, respectively,
attributable to the beneficial conversion feature, and an effective interest rate of 176% due to
attached warrants.
Convertible demand note to an unrelated entity bearing 5% interest per annum which matured
500,000
387,473
on July 14, 2014. The note is shown net of a discount of $-0- and $112,527, respectively,
attributable to the beneficial conversion feature, and an effective interest rate of 143% due to
attached warrants.
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
50,000
--
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
Uncollateralized demand note to a related entity bearing 8% interest per annum
65,000
--
Uncollateralized demand note to an unrelated entity bearing 8% interest per annum
15,000
--
Uncollateralized demand note to an unrelated entity bearing 8% interest per annum
43,600
--
Uncollateralized demand note to a related entity bearing 8% interest per annum
26,685
--
Uncollateralized demand note to a related entity bearing 8% interest per annum
79,494
--
Uncollateralized demand note to an unrelated entity bearing 5% interest per annum
50,000
--
Uncollateralized demand note to an unrelated entity bearing 6% interest per annum
20,000
--
Uncollateralized demand note to an unrelated entity bearing 8% interest per annum
30,867
--
Uncollateralized demand note to an unrelated entity bearing 5% interest per annum
250,000
--
Uncollateralized demand note to an unrelated entity bearing 5% interest per annum
130,000
--
Collateralized demand note to an unrelated entity bearing 5% interest per annum
1,341,963
--
Collateralized term note to an unrelated entity bearing 5.15% interest per annum which
132,158
--
matures on September 7, 2018.
Uncollateralized demand note to a related entity bearing 8% interest per annum
21,308
--
Uncollateralized demand note to a related entity bearing 7% interest per annum
32,313
--
Uncollateralized demand note to an unrelated entity bearing 8% interest per annum
35,000
--
Uncollateralized demand note to an unrelated entity bearing 7% interest per annum
20,000
--
Collateralized note to an unrelated entity bearing 1% interest for the first year and then 7%
1,000,000
1,000,000
per annum for years two – seven.
Uncollateralized demand note to a related entity bearing 8% interest per annum
-0-
30,000
Convertible demand note to an unrelated entity bearing 7.5% imputed interest per annum
40,134
48,228
which matures on July 10, 2018.
Uncollateralized demand notes to an unrelated entity bearing 5% interest per annum
405,000
405,877
Capital leases payable to various vendors expiring in various years through September 2016;
85,505
91,881
collateralized by certain equipment with a cost of $205,157.
Uncollateralized demand note to an unrelated entity for royalties shown net of discount of $-
-0-
1,576,892
0- and $23,108, respectively
6,187,226 $
5,328,714
Less current liabilities
5,077,080
1,020,956
Total long term liabilities
$
1,110,146 $
4,307,758
We also owed $306,040 and $155,812 in accrued interest for the above notes as of May 31, 2014 and
2013, respectively. We also amortized $137,364 and $838,289 in discount on debt for the years ended
May 31, 2014 and 2013, respectively.
F-25
ABAKAN INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDING MAY 31, 2014 AND 2013
NOTE 8 – LOANS PAYABLE - continued
As of May 31, 2014 and 2013, 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 maintain by such date, the interest rate will increase from 7% to 10% per annum.
Future maturity of our notes payable is presented in the table below:
For the years ended May 31,
2015
$ 5,077,080
2016
213,277
2017
218,790
2018
208,391
2019 and beyond
469,688
$ 6,187,226
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.
Promissory notes
The Company extended a $1,500,000 and $200,000 note to September 14, 2014 that was 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 $405,000 note bearing interest at 8% and will mature on September 14, 2014. In
addition to the extension date, certain force conversion options were modified on each of the original
notes.
On October 30, 2013, Abakan and MesoCoat entered into an agreement with an unrelated entity in which
$680,000 of uncollateralized demand notes and $9,000 in accrued interest were exchanged for a
$689,000, 5% secured promissory note maturing on April 29, 2014. The agreement also includes the
commitment by the unrelated entity to loan MesoCoat $80,000 on closing and three loans of $180,000
loans on November 11, 2013, December 10, 2013 and January 10, 2014 under the same terms of the
$689,000 note. As of February 28, 2014, the Company had received the additional $180,000 tranches
dated December 10, 2013, and January 10, 2014. On April 27, 2014, the aggregate total of these notes,
$1,309,000, and accrued outstanding interest of $32,963 were combined into a new note having the same
terms of the original notes above, and will mature on April 27, 2015.
F-26
ABAKAN INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDING MAY 31, 2014 AND 2013
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, 2014 and 2013, we issued the following shares:
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.
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 $62,715.
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.
F-27
ABAKAN INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDING MAY 31, 2014 AND 2013
NOTE 9 – STOCKHOLDERS' EQUITY - continued
Common Stock Issuances - continued
Private placements - continued
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 19, 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 $176,000.
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.
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.
F-28
ABAKAN INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDING MAY 31, 2014 AND 2013
NOTE 9 – STOCKHOLDERS' EQUITY - continued
Common Stock Issuances - continued
Private placements – continued
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.
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.
F-29
ABAKAN INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDING MAY 31, 2014 AND 2013
NOTE 9 – STOCKHOLDERS' EQUITY - continued
Common Stock Issuances - continued
Private placements – continued
On April 9, 2014, we closed a private placement for $40,000, 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 $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 $40,000.
On May 30, 2014, we closed several private placements for an aggregate $48,000, or 60,000 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 $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 $48,000.
Conversion of debt to shares
For the years ended May 31, 2014 and 2013, we issued the following shares for conversion of debt to
shares:
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.
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.
F-30
ABAKAN INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDING MAY 31, 2014 AND 2013
NOTE 9 – STOCKHOLDERS' EQUITY - continued
Common Stock Issuances - continued
Conversion of debt to shares - continued
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.
On December 4, 2013, we issued 50,000 shares of our common stock for exercise of stock warrants
converted valued at $32,500, and paid for by an outstanding balance of accounts payable. In connection
with this placement we incurred stock expense on conversion of $30,500.
On April 9, 2014, we agreed to issue $216,000 or 216,000 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 $1.50 per share and an expiration date of two years from the closing for services to be
rendered. In connection with this placement we had no offering costs for a net of $216,000.
On April 9, 2014, we converted several debt obligations for an aggregate total of $751,414, or 939,268
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 $1.20 per share and an expiration date of
two years from the closing. In connection with these placements we incurred stock expense on conversion
of $140,890.
F-31
ABAKAN INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDING MAY 31, 2014 AND 2013
NOTE 9 – STOCKHOLDERS' EQUITY - continued
Common Stock Issuances - continued
Conversion of debt to shares - continued
On April 9, 2014, we converted a note for $400,000, or 500,000 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 $1.20 per share and an expiration date of two years from the closing. In
connection with this placement we incurred stock expense on conversion of $75,000.
Share based compensation
For the years ended May 31, 2014 and 2013, Abakan issued the following shares for services and
compensation:
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.
F-32
ABAKAN INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDING MAY 31, 2014 AND 2013
NOTE 9 – STOCKHOLDERS' EQUITY - continued
Common Stock Issuances - continued
Share based compensation - continued
On April 2, 2013, we issued 23,600 shares of our common stock for future services performed valued at
$63,720.
On October 25, 2013, we issued 19,802 shares of our common stock for services performed valued at
$60,000.
On October 25, 2013, we issued 25,000 shares of our common stock for services performed valued at
$73,500.
On October 25, 2013, we issued 57,242 shares of our common stock to the MesoCoat Inc. Supplemental
Discretionary Tax-Qualified Profit Sharing Plan and Trust valued at $161,995.
On October 25, 2013, we issued 25,699 shares of our common stock to the Powdermet, Inc. Supplemental
Discretionary Tax-Qualified Profit Sharing Plan and Trust valued at $72,728.
On December 4, 2013, we issued 10,000 shares of our common stock for services performed valued at
$12,000.
On January 3, 2014, we issued 16,649 shares of our common stock per the terms of his
employment agreement valued at $20,000.
On April 9, 2014, we agreed to issue, and aggregate amount of $70,000 or 70,000 share of our
restricted common stock, debt owed to two unrelated vendors. In connection with this placement we had
no offering costs for a net of $70,000.
On April 22, 2014, we issued 30,000 shares of our common stock for services performed valued at
$24,000.
On May 6, 2014, we issued 20,000 shares of our common stock for services performed valued at $14,200.
On May 30, 2014, we issued 10,000 shares of our common stock for services performed valued at
$12,000.
Shares 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.
F-33
ABAKAN INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDING MAY 31, 2014 AND 2013
NOTE 9 – STOCKHOLDERS' EQUITY - continued
Common Stock Warrants
In connection with the above private placement we valued the common stock warrants granted during
the years ended May 31, 2014 and 2013, using the Black-Scholes model with the following
assumptions:
July 30,
September
October
November
November
December
2012
28, 2012
18, 2012
26, 2012
30, 2012
3, 2012
Expected volatility (based
102.68%
89.29%
89.62%
81.57%
81.63%
81.48%
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
March
April 4, 7,
May 5,8,
7, 8, 18,
30, 2012
18,22,25
10, 23, 29,
9, 10,
19, and 20,
, 2013
2013
15, 31,
2012
2013
Expected volatility (based
81.34%
81.46%
79.48% -
79.45% -
73.16 -
on historical volatility)
79.53%
79.63%
79.45%
Expected dividends
0.00
0.00
0.00
0.00
0.00
Expected term in years
2.00
2.00
2.00
2.00
2.00
Risk-free rate
0.25 –
0.25%
0.24-
0.20 –
0.20% -
.28%
.26%
0.24%
0.30%
April 9,
May 30,
2014
2014
Expected volatility (based
135.66%
135.39%
on historical volatility)
Expected dividends
0.00
0.00
Expected term in years
2.00
2.00
Risk-free rate
0.37%
0.37%
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-34
ABAKAN INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDING MAY 31, 2014 AND 2013
NOTE 9 – STOCKHOLDERS' EQUITY - continued
Common Stock Warrants
A summary of the common stock warrants granted during the years ended May 31, 2014 and 2013 is
presented below:
Weighted
Weighted
Average
Average
Remaining
Aggregate
Number of
Exercise
Contractual
Intrinsic
Options
Price
Terms (In Years)
Value
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
1.00 years
$
--
Exercisable at May 31, 2013
2,842,992
$
1.80
1.00 years
$
--
Weighted average fair value of
Warrants granted during the year
ended May 31, 2013
$
2.35
Balance at June 1, 2013
2,842,992
$
1.80
Granted
877,634
1.41
Exercised
-
-
Forfeited or expired
(1,681,058)
1.89
Balance at May 31, 2014
2,039,568
$
1.89
1.15 years
$
--
Exercisable at May 31, 2014
2,039,568
$
1.89
1.15 years
$
--
Weighted average fair value of
warrants granted during the year
ended May 31, 2014
$
1.89
The following table summarizes information about the common stock warrants outstanding at May 31,
2014:
Warrants Exercisable
Weighted
Weighted
Weighted
Range of
Average
Average
Average
Exercise
Number
Remaining
Exercise
Number
Exercise
Price
Outstanding
Contractual Life
Price
Exercisable
Price
$
1.20
724,634
1.89 Years
$
1.20
724,634 $
1.20
$
1.50
378,000
1.19 Years
$
1.50
378,000 $
1.50
$
2.00
225,000
.22 Years
$
2.00
225,000 $
2.00
$
2.70
576,272
.63 Years
$
2.70
576,272 $
2.70
$
3.00
135,662
.88 Years
$
3.00
135,662 $
3.00
2,039,568
1.15 Years
$
1.89
2,039,568 $
1.89
F-35
ABAKAN INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDING MAY 31, 2014 AND 2013
NOTE 10 – EARNINGS-PER-SHARE CALCULATION
Basic earnings per common share for the years ended May 31, 2014 and 2013 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, 2014 and 2013 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, 2014
May 31, 2013
Net earnings from operations
$
(5,956,310) $
(7,223,423)
Weighted-average common shares
64,663,650
62,443,108
Warrants
-
-
Options to purchase common stock
-
-
Dilutive potential common shares
64,663,650
62,443,108
Net earnings per share from operations:
Basic
$
(0.09) $
(0.12)
Diluted
$
(0.09) $
(0.12)
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
For the year ended
May 31, 2014
May 31, 2013
Common Stock Equivalents:
Warrants
2,039,568
2,842,992
Options to purchase common stock
3,419,994
3,800,000
Total of Common Stock Equivalents:
5,459,562
6,642,992
F-36
ABAKAN INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDING MAY 31, 2014 AND 2013
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 their service. The stock options have an exercise price of $2.30 per share of common stock,
and expire ten years from the date of grant. These options vest in equal one-third parts beginning on June
1, 2013, and every grant date anniversary for the next two years. The term of the Board of Advisors
Agreement will be in force until June 1, 2013, and shall renew automatically on an annual basis unless
terminated in writing. We also agreed to reimburse the advisor for all reasonable business expenses.
On June 20, 2012, we appointed a new member to our Board of Advisors and agreed to pay him $5,000
per month for his services beginning July 1, 2012. We also granted him 50,000 stock options for their
service. The stock options have an exercise price of $2.05 per share of common stock, and expire ten
years from the date of grant. These options vest in equal one-third parts beginning on June 20, 2013, and
every grant date anniversary for the next two years. The term of the Board of Advisors Agreement will be
in force until May 31, 2013, and shall renew automatically on an annual basis unless terminated in
writing. 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.
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.
F-37
ABAKAN INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDING MAY 31, 2014 AND 2013
NOTE 11 – RELATED PARTY TRANSACTIONS - continued
Board of Directors
On June 15, 2012, we appointed a new member to our Board of Directors. We agreed to pay him $15,000
per annum, payable in four equal payments. We also agreed to issue him 10,000 restricted shares of our
common stock and granted him 150,000 stock options for their service. The stock options have an
exercise price of $2.30 per share of common stock, and expire ten years from the date of grant. These
options vest in equal one-third parts beginning on September 15, 2012, and every September 15 after that.
We also agreed to pay for continuing education classes and related travel expenses, for a maximum of
$4,500. This agreement will be in force until May 31, 2015, unless terminated with a sixty day notice. We
also agreed to reimburse the 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 their service.
The stock options have an exercise price of $1.90 per share of common stock, and expire ten years from
the date of grant. These options vest in equal one-third parts beginning on August 7, 2013 and every
August 7 after that. This agreement will be in force until August 7, 2015, unless terminated with a sixty
day notice. We also agreed to reimburse the new director for all reasonable business expenses.
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 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.
On May 6, 2014, we appointed a new member to our Board of Directors. We agreed compensation
agreement provides for the issuance of 20,000 restricted shares authorized as of his appointment to the
Board of Directors and the grant of 150,000 stock options that vest equally over three years, to purchase
shares of the Corporation’s common stock in accordance with the Abakan Inc. 2009 Stock Option Plan, at
an exercise price of $1.00 per share.
.
F-38
ABAKAN INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDING MAY 31, 2014 AND 2013
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 and 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. On February 10, 2014, the
employee resigned from his position and terminated his contract with us. For the year ended May 31,
2014 and 2013, we expensed $40,000 and $19,000, respectively, in connection with these contracts and
are included in professional fees – related party, and $109,948 and $86,308 in Payroll and benefits
expense, respectively. As of May 31, 2014 and 2013 we owed $12,896 and $11,064 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 on April 21, 2014 we assigned the balance of this note to our
President of $4,500 and as of May 31, 2014 and 2013 we are owed a balance remaining of none and
$4,500, respectively.
F-39
ABAKAN INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDING MAY 31, 2014 AND 2013
NOTE 11 – RELATED PARTY TRANSACTIONS - Continued
Consulting Agreements
On December 1, 2009 we entered into an agreement with a related individual to provide bookkeeping
services. The terms of the consulting agreement are $2,500 per month payable in consulting fees and
reimbursement to the consultant for all reasonable business expenses incurred by her in the performance
of her duties, and was in effect until December 1, 2010. The consultant was also granted 100,000 stock
options with an exercise price of $0.60 per share; they will vest equally over 2 years and the first third
was vested upon signing (see Note 124). 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, 2014 and 2013, we expensed $71,057 and $60,000,
respectively, in connection with these contracts and are included in professional fees – related party. As
of May 31, 2014 and 2013, we owed $30,000 and $5,000, respectively, and is included in accounts
payable - related party.
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. On February 10, 2014, we re-appointed this individual again as our Chief Financial Officer,
we did not make any changes to the existing agreement, and it remains in force. 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
was in effect until July 31, 2012. The agreement also had a provision to automatically renew for
subsequent annual terms unless terminated in writing by either party. 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, 2014 and 2013, we expensed $96,000 and $96,000, respectively,
in connection with this contract and are included in consulting – related party. As of May 31, 2014 and
2013, we owed $188,978 and $63,310, respectively, and is included in accounts payable - related party.
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 was 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 was in effect until December 1, 2011 and continues in force. On March 31, 2014, this contract was
cancelled. For the years ended May 31, 2014 and 2013, we expensed $25,000 and $30,000, respectively,
in connection with this contract and are included in consulting – related party. As of May 31, 2014 and
2013, we owed $5,515 and $5,263, respectively, and is included in accounts payable - related party.
F-40
ABAKAN INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDING MAY 31, 2014 AND 2013
NOTE 11 – RELATED PARTY TRANSACTIONS - Continued
Consulting Agreements - continued
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 was in effect until
June 1, 2012. The agreement also had a provision to automatically renew for subsequent annual terms
unless terminated in writing by either party. For the year ended May 31, 2014 and 2013, 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, 2014 and 2013, we owed $85,660 and $53,673, respectively,
which amount is included in accounts payable - related party.
On May 31, 2014, we entered into a consulting agreement with a company owned by a related
individual to provide services as a consultant on business and grant matters. The terms of the consulting
agreement are the consultant will be paid $6,175 per month. We also agreed to compensate this
individual 5% of net proceeds secured from his efforts on behalf of the company. We also agreed to
reimburse the consultant for all reasonable business expenses incurred by him in the performance of his
duties, and is in effect until December 31, 2014. The agreement also has a provision for payments not
made within 30 days of due shall accrue interest at 1.5% per month until paid. The agreement also had a
provision to automatically renew for subsequent annual terms unless terminated in writing by either
party.
F-41
ABAKAN INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDING MAY 31, 2014 AND 2013
NOTE 11 – RELATED PARTY TRANSACTIONS – continued
Notes Payable – Related Party
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, 2013, this debt and accrued interest was converted
into shares 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. As of May 31, 2014 we owed none, and $1,987 of accrued interest.
On February 24, 2014, we entered into an uncollateralized demand note to a related individual, bearing
8% interest per annum for a total of $21,308. As of May 31, 2014 we owed $21,308 of principal, and
$445 of accrued interest.
On March 7, 2014 and April 17, 2014 we entered into two uncollateralized demand notes to a related
individual, bearing 8% interest per annum for an aggregate total of $90,000. On March 7, 2014 and
April 10, 2014, we repaid an aggregate total of $25,000. We also owed $834 in accrued interest for the
above note as of May 31, 2014. As of May 31, 2014 we owed $65,000 of principal, and $834 of accrued
interest.
During the year ended May 31, 2014, we entered into two uncollateralized demand notes to a related
individual, bearing 8% interest per annum for an aggregate total of $106,178. We also owed $779 in
accrued interest for the above note as of May 31, 2014. As of May 31, 2014 we owed $106,178 of
principal, and $779 of accrued interest.
During the year ended May 31, 2014, we entered into an uncollateralized demand note to a related
individual, bearing 7% interest per annum for an aggregate total of $32,313. As of May 31, 2014 we
owed $32,313 of principal.
License agreement – Related Party
The Company has a license agreement with Powdermet, Inc., a related party, which grants the
Company an exclusive license to the use of technical information, proprietary know-how, data and patent
rights assigned to and/or owned by Powdermet, Inc. The agreement will end upon the last to expire valid
claim of licensed patents, unless terminated within the terms of the agreement.
As part of the agreement, the Company has a commitment to purchase consumable powders from
Powdermet, Inc. through July 1, 2013. Also, as part of the agreement the Company will receive
technology transition and development service to support its research and development activities on a cost
reimbursement basis. Total expense related to the cost reimbursement was $181,457 and $369,184 for the
years ended May 31, 2014 and 2013, respectively.
F-42
ABAKAN INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDING MAY 31, 2014 AND 2013
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.
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
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
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
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
F-43
ABAKAN INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDING MAY 31, 2014 AND 2013
NOTE 12 – STOCK – BASED COMPENSATION - continued
2009 Stock Option Plan – The Company – continued
On December 4, 2012, we rescinded 1,500,000 stock options by mutual agreement between the Company
and the respective holder. From June 1, 2012 to May 31, 2013 945,000 stock options expired without
exercise according to the option agreement. After these grants and expirations there are 6,200,000 stock
options available for future grant.
For the year ended May 31, 2014, the Company granted the following stock options:
For the year ended May 31, 2014
Options
Exercise
Expiration
Grant Date
Granted
Price
term in years
To Whom Granted
Vesting Terms
Will vest in equal one third parts
June 14,
Granted to a
on the anniversary date of the
2013
80,000
$
2.94
10.00
consultant
option grant date
Will vest in equal one third parts
December
Granted to a
on the anniversary date of the
5, 2013
100,000
$
1.25
10.00
consultant
option grant date
Will vest in equal one third parts
December
Granted to a
on the anniversary date of the
5, 2013
50,000
$
1.25
10.00
consultant
option grant date
Granted to our new
Will vest in equal one third parts
December
Chief Financial
on the anniversary date of the
5, 2013
200,000
$
1.25
10.00
Officer
option grant date
Will vest in equal one third parts
December
Granted to a
on the anniversary date of the
5, 2013
100,000
$
1.25
10.00
consultant
option grant date
December
Granted to a
Will vest in equal one half parts on
5, 2013
50,000
$
1.25
10.00
consultant
December 5, 2013 and 2014
Will vest in equal one third parts
May 6,
Granted to a new
on the anniversary date of the
2014
150,000
$
1.00
10.00
Director
option grant date
Will vest in equal one third parts
May 30,
Granted to a
on the anniversary date of the
2014
20,000
$
1.14
10.00
consultant
option grant date
Will vest in equal one third parts
May 30,
Granted to a
on the anniversary date of the
2014
100,000
$
1.14
10.00
consultant
option grant date
Total
Granted
850,000
On May 31, 2014, we forfeited or rescinded 1,163,328 stock options by mutual agreement between the
Company and five respective holders. From June 1, 2013 to May 31, 2014, 66,678 stock options expired
without exercise according to the option agreement. After these grants and expirations there are
6,580,006 stock options available for future grant.
F-44
ABAKAN INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDING MAY 31, 2014 AND 2013
NOTE 12 – STOCK – BASED COMPENSATION - continued
2009 Stock Option Plan – The Company - continued
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 warrants granted during the year ended May 31, 2014
was estimated using the Black-Scholes model with the following assumptions:
June 14,
December 5,
May 6,
May 30,
2013
2013
2014
2014
Expected volatility (based on historical
143.64%
138.97%
134.49%
134.49%
volatility)
Expected dividends
0.00
0.00
0.00
0.00
Expected term in years
10
10
10
10
Risk-free rate
2.14%
2.87%
2.61%
2.48%
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.
F-45
ABAKAN INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDING MAY 31, 2014 AND 2013
NOTE 12 – STOCK – BASED COMPENSATION - continued
2009 Stock Option Plan – The Company - continued
A summary of the options granted to employees and non-employees under the plan and changes during
the years ended May 31, 2014 and 2013 is presented below:
Weighted
Average
Weighted
Remaining
Average
Contractual
Aggregate
Number of
Exercise
Terms
Intrinsic
Options
Price
(In Years)
Value
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
Balance at June 1, 2013
3,800,000
$
1.26
Granted
850,000
$
1.35
Exercised
-
$
-
Forfeited or expired
(1,230,006)
$
1.35
Balance at May 31, 2014
3,419,994
$
1.36
7.90 years
$
126,750
Exercisable at May 31, 2014
1,901,666
$
1.24
7.90 years
$
120,620
Weighted average fair value of
options granted during the year ended
May 31, 2014
$
1.35
F-46
ABAKAN INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDING MAY 31, 2014 AND 2013
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, 2014:
Options Outstanding
Options Exercisable
Weighted
Number
Average
Weighted
Number
Weighted
Range of
Outstanding
Remaining
Average
Exercisable
Average
Aggregate
Exercise
at May 31,
Contractual
Exercise
Intrinsic
at May 31,
Exercise
Intrinsic
Price
2014
Life
Price
Value
2014
Price
Value
$ 0.60
100,000
5.5 Years
$ 0.60
$
--
100,000 $ 0.60
$
--
$ 0.65
475,000
6.2 Years
$ 0.65
$
27,500
425,000 $ 0.65
$
24,605
$ 0.75
200,000
5.7 Years
$ 0.75
$
30,000
200,000 $ 0.75
$
30,000
$ 1.00
366,666
8.6 Years
$ 1.00
$
1,000
166,666 $ 1.00
$
455
$ 1.02
50,000
7.0 Years
$ 1.02
$
10,000
50,000 $ 1.02
$
50,000
$ 1.03
50,000
7.7 Years
$ 1.03
$
3,000
33,333 $ 1.03
$
2,000
$ 1.05
120,000
6.9 Years
$ 1.05
$
--
120,000 $ 1.05
$
--
$ 1.07
95,000
8.7 Years
$ 1.07
$
--
95,000 $ 1.07
$
--
$
-
$ 1.14
120,000
10.0 Years
$ 1.14
$
18,000
-- $ 1.14
-
$ 1.20
100,000
7.3 Years
$ 1.20
$
--
100,000 $ 1.20
$
--
$ 1.25
525,000
9.4 Years
$ 1.25
$
1,250
25,000 $ 1.25
$
60
$ 1.30
166,661
6.0 Years
$ 1.30
$
--
166,666 $ 1.30
$
--
$ 1.90
150,000
8.1 Years
$ 1.90
$
--
50,000 $ 1.90
$
--
$ 1.95
75,000
8.9 Years
$ 1.95
$
9,000
25,000 $ 1.95
$
3,000
$ 2.30
325,000
8.9 Years
$ 2.30
$
--
133,334 $ 2.30
$
--
$ 2.61
300,000
8.0 Years
$ 2.61
$
27,000
116,667
$ 2.61
$
10,500
$ 2.70
85,000
8.7 Years
$ 2,70
$
--
45,000 $ 2.70
$
--
$ 2.80
116,667
8.8 Years
$ 2.80
$
--
50,000 $ 2.80
$
--
3,419,994
7.9 Years
$ 1.36
$
126,750
1,901,666 $ 1.24
$
120,620
The total value of employee and non-employee stock options granted during the years ended May 31,
2014 and 2013, was $1,089,451 and $2,730,968, respectively. During years ended May 31, 2014 and
2013 the Company recorded $1,051,362 and $1,752,087, respectively, in stock-based compensation
expense relating to stock option grants.
F-47
ABAKAN INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDING MAY 31, 2014 AND 2013
NOTE 12 – STOCK – BASED COMPENSATION - continued
2009 Stock Option Plan – The Company - continued
At May 31, 2014 and 2013 there was $1,696,214 and $2,015,966, respectively, of total unrecognized
compensation cost related to stock options granted under the plan. That cost is expected to be
recognized pro-rata through May 30, 2017. 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
2015
$
1,022,803
2016
499,495
2017
173,916
$
1,696,214
Stock Option Plan - MesoCoat
MesoCoat accounts for equity awards using the grant-date fair value.
MesoCoat’s stock option plan (the Stock Option Plan) is intended to advance the interest of MesoCoat
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 MesoCoat’s common stock. These options have a term of six years and will expire beginning
August 2014 through November 2014.
The value of employee and non-employee stock warrants granted during the year ended May
31, 2013 was estimated using the Black-Scholes model with the following assumptions:
November 1,
2012
Expected volatility (based on historical
225.00%
volatility)
Expected dividends
0.00
Expected term in years
6
Risk-free rate
1.20%
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.
F-48
ABAKAN INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDING MAY 31, 2014 AND 2013
NOTE 12 – STOCK – BASED COMPENSATION - continued
Stock Option Plan – MesoCoat - continued
A summary of MesoCoat’s stock option plan as of May 31, 2014 and 2013, 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, 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
Number of
Weighted
Shares
Average Exercise
Price
Outstanding at May 31, 2013
5,520 $
24.78
Granted
-
Exercised
-
Forfeited
(2,620)
18.11
Outstanding at May 31, 2014
2,900 $
30.80
Options exercisable at May 31, 2014
1,450 $
30.80
The following table summarizes information about employee stock options under the MesoCoat Stock
Option Plan outstanding at May 31, 2014:
Options Outstanding
Options Exercisable
Weighted
Number
Average
Weighted
Number
Weighted
Range of
Outstanding
Remaining
Average
Exercisable
Average
Aggregate
Exercise
at May 31,
Contractual
Exercise
Intrinsic
at May 31,
Exercise
Intrinsic
Price
2014
Life
Price
Value
2014
Price
Value
$ 18.11
250
3.0 Years
$ 18.11
$
--
125 $ 18.11
$
--
$ 32.00
2,650
6.0 Years
$ 32.00
$
--
1,325 $ 32.00
$
--
2,900
5.74 Years
$ 30.80
$
--
1,450 $ 30.80
$
--
F-49
ABAKAN INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDING MAY 31, 2014 AND 2013
NOTE 12 – STOCK – BASED COMPENSATION - continued
Stock Option Plan – MesoCoat - continued
During years ended May 31, 2014 and 2013 MesoCoat recorded $69,015 and $75,408, respectively, in
stock-based compensation expense relating to stock option grants.
At May 31, 2014 and 2013 there was $134,168 and $211,239, 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
2015
$
56,568
2016
56,568
2017
21,032
$
134,168
NOTE 13 – COMMITMENTS
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, 2014 and 2013, the Company
completed none and 51 hours of service, respectively, with a fair value of none and $10,200, 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 $2,419 a month paid
to an unrelated party.
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 $4,500 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 $3,500 per month and expires on May 31, 2020.
MesoCoat also leases machinery and equipment under various capital lease arrangements, which expires
through September 2016. These leases are included in long-term and short-term debt and the related assets have
been capitalized.
Total expense related to the operating leases was $147,289 and $156,116 for the year ending May 31,
2014 and May 31, 2013, respectively. Interest expense for the capitalized leases for the year ending May 31,
2014 and May 31, 2013 was $619 and $5,357 respectively.
F-50
ABAKAN INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDING MAY 31, 2014 AND 2013
NOTE 13 – COMMITMENTS - continued
Leases - continued
Minimum annual rental commitments are as follows at May 31, 2014:
For the years ended May 31,
Capital Leases
Operating Leases
2015
$
32,214 $
122,400
2016
31,156
122,400
2017
24,311
122,400
2018
--
122,400
2019 and thereafter
--
244,800
Total minimum lease payments
$
87,682 $
734,400
Less amount representing interest
(2,177)
Present value of net minimum capital lease payments
85,505
Less current maturities
(31,465)
Long-term obligations under capital leases
$
54,040
NOTE 14 – INCOME TAXES
The following is an analysis of deferred tax assets as of May 31, 2014 and 2013:
Deferred Tax
Valuation
Assets
Allowance
Balance
Net deferred tax assets at May 31, 2012
$
2,282,292
$
(2,282,292)
$
-
Provision to tax return true ups
(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)
$
-
Provision to tax return true ups
333,123
(333,123)
-
Subtractions for the year
(179,899)
179,899
-
Deferred tax assets at May 31, 2014
$
3,662,026
$
(3,662,026)
$
-
F-51
ABAKAN INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDING MAY 31, 2014 AND 2013
NOTE 14 – INCOME TAXES – continued
Deferred income taxes are provided to recognize the effects of temporary differences between financial
reporting and income tax reporting. These differences arise principally from federal net operating losses,
stock compensation expense, basis differences in investments in affiliates and the use of accelerated
depreciation methods for tax purposes as opposed to the straight-line depreciation method for financial
reporting purposes and Federal net operating losses.
Temporary differences between financial statement carrying amounts and tax basis of assets and
liabilities that give rise to significant deferred tax assets and liabilities are presented below at May 31:
2014
2013
Deferred tax assets:
Current:
Compensation accruals
$
32,365
$
30,703
Non-current:
Deferred tax assets:
Net operating loss carry forward
4,037,738
3,733,957
Stock options
1,867,488
1,489,357
Research and Development Credit
443,659
114,246
Equity loss in affiliates, net
199,247
199,247
Impairment of intangibles
33,121
--
Other
7
7
Total non-current deferred tax assets
6,581,260
5,536,814
Deferred tax liabilities:
Fixed asset & intangible basis
(2,122,999)
(1,187,203)
Equity profit in affiliates, net
(228,854)
(271,766)
Book fair value adjustment in affiliate
(599,746)
(599,746)
Total non-current deferred tax liabilities
(2,951,599)
(2,058,715)
Net non-current deferred tax liabilities
3,629,661
3,478,099
Net deferred tax liability before valuation
3,662,026
3,508,802
allowance
Valuation allowance
(3,662,026)
(3,508,802)
Net deferred tax asset
$
-
$
-
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:
2014
2013
Expected income tax (benefit) at
Federal statutory tax rate – 34% and 34%
$
(2,015,099)
$
(2,455,949)
Gain on Exchange transaction
1,966,771
211,779
Other permanent differences
112,352
--
Research and Development Credit
(70,331)
--
Other adjustments
(146,917)
1,017,660
Change in valuation allowance
153,224
1,226,510
Income tax expense
$
-
$
-
F-52
ABAKAN INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDING MAY 31, 2014 AND 2013
NOTE 14 – INCOME TAXES – continued
We currently have three years of tax returns that are subject to examination, including the fiscal years
ended May 31, 2013, 2012 and 2011, 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 Company would recognize interest accrued related to unrecognized
tax benefits in interest expense and penalties in operating expenses. During the years ended May 31,
2014 and 2013, the Company did not recognize any interest and penalties related to uncertain tax
positions.
The net operating loss and research and development carry forward as of May 31, 2014 expires as
follows:
Abakan
MesoCoat Amount
Research and
Expiring
Amount
Development
Year
Combined Amount
Credit
2027
$
--
$
--
$
--
$
--
2028
--
--
--
1,189
2029
--
85,205
85,205
9,125
2030
--
1,228,813
1,228,813
96,472
2031
--
49,918
49,918
6,323
2032
1,145,098
--
1,145,098
78,562
2033
4,097,256
2,039,822
6,137,078
133,993
2034
--
3,229,588
3,229,588
117,995
Total
$ 5,242,354
$ 6,633,346
$ 11,875,700
$
443,659
These loss carryovers could be limited under the Internal Revenue Code should a significant change in
ownership occur. These net operating losses include 88.08% of losses related to MesoCoat. The entire
research and development credit is directly related to MesoCoat.
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, 2014 and 2013, the Company contributed $24,607 and $25,196, respectively.
MesoCoat established a “MESOCOAT, INC. SUPPLEMENTAL DISCRETIONARY TAX-QUALIFED
PROFIT SHARING PLAN AND TRUST” (Plan) on January 1, 2013. All employees are eligible to
participate after one thousand (1,000) service hours, including self-employed individuals performing
consulting services to MesoCoat. Excluded employees include those covered within a bargaining unit,
since they will be covered by separate benefits. All employees vest after their one thousand hours of
service, 100% of the employer contributions for their benefit. The Trustee of the Plan is A. Sherman, and
the maximum amount that can be contributed to the plan is $40,000 per year of service, or as updated to
the maximum allowable by Internal Revenue Code. For the year ended May 31, 2014, the Company
contributed 57,242 shares of its common stock to the Plan with a value of $161,995.
F-53
ABAKAN INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDING MAY 31, 2014 AND 2013
NOTE 16 – RECENT ACCOUNTING PRONOUNCEMENTS
In June 2014, the FASB released ASU 2014-10 — Accounting Standards Update 2014-10, Income Taxes
Topic 915: Elimination of Certain Financial Reporting Requirements, Including an Amendment to
Variable Interest Entities Guidance in Topic 810, Consolidation. The amendments in this Update
eliminate the concept of a development stage entity (DSE) from US GAAP. This change rescinds
financial reporting requirements that have historically applied by DSEs such as labeling financial
statements as those of a DSE, providing inception to date information in the statements of income, cash-
flows and shareholder equity and certain specific disclosures. This ASU has been early adopted by the
Company as of April 1, 2014 and therefore for the current period ended May 31, 2014 as such early
adoption is permitted for all financial statements that have not been issued or made available for issuance.
This ASU had impact to the Company’s consolidated financial statements, as the corresponding inception
to date information, labeling financial statements as those of a DSE, etc. will no longer be provided.
In May 2014, the FASB released ASU 2014-9 - Accounting Standards Update 2014-9, Topic 606:
Revenue from Contracts with Customers that outlines a single comprehensive model for entities to use in
accounting for revenue arising from contracts with customers and supersedes most current revenue
recognition guidance, including industry-specific guidance. The guidance is based on the principle that an
entity should recognize revenue to depict the transfer of goods or services to customers in an amount that
reflects the consideration to which the entity expects to be entitled in exchange for those goods or
services. The guidance also requires additional disclosure about the nature, amount, timing and
uncertainty of revenue and cash flows arising from customer contracts, including significant judgments
and changes in judgments and assets recognized from costs incurred to fulfill a contract. Entities have the
option of using either a full retrospective or a modified retrospective approach for the adoption of the new
standard. This guidance becomes effective for annual reporting periods beginning after December 15,
2016 and early adoption is not permitted. The Company is currently assessing the impact that this
standard will have on its financial statements.
ASU 2014-15, Presentation of Financial Statements Going Concern (Subtopic 205-40) (ASU 2014-15), is
effective for fiscal years, and interim periods within those years, beginning after December 15, 2016.
ASU 2014-15 requires management to assess an entity's ability to continue as a going concern by
incorporating and expanding upon certain principles that are currently in U.S. auditing standards.
Specifically, ASU 2014-15 provides a definition of the term substantial doubt and requires an assessment
for a period of one year after the date that the financial statements are issued (or available to be issued). It
also requires certain disclosures when substantial doubt is alleviated as a result of consideration of
management's plans and requires an express statement and other disclosures when substantial doubt is not
alleviated. We do not expect the adoption of ASU 2014-15 to have material impact on our consolidated
financial statements, although there may be additional disclosures upon adoption.
Other pronouncements issued by the FASB or other authoritative accounting standards groups with future
effective dates are either not applicable or are not expected to be significant to the financial statements of
the Company.
F-54
ABAKAN INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDING MAY 31, 2014 AND 2013
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.
Default Joe T. Eberhard Notes
On July 14, 2014, the Company defaulted on a convertible debt obligation due to Joe T. Eberhard in the
principal amount of $500,000. The present default is in addition to a default on a promissory note due to
Mr. Eberhard on September 15, 2014, in the principal amount of $50,000. On August 28, 2014, Mr.
Eberhard filed a complaint in the United States District Southern District of Florida. The complaint seeks
$720,698.72 plus interest. The Company intends to respond in due course.
Default Sonoro Invest S.A. Notes
On September 15, 2014, the Company defaulted on convertible debt obligations and a debt obligation to
Sonoro Invest, S.A. (“Sonoro”) in the principal aggregate amount of $2,105,000. The Company received
a notice of default from Sonoro on September 16, 2014. The Company intends to respond in due course.
Private Placement
On August 19, 2014, the Company’s board of directors initiated a private placement of up to eighteen
million seven hundred and fifty thousand (18,750,000) shares of its restricted common stock, at a price of
$0.40 a share, for anticipated gross proceeds of seven million five hundred thousand dollars ($7,500,000),
to support ongoing operations, retire outstanding debt and bolster product development. The private
placement has realized $427,800 in cash proceeds as of the filing date of this report.
Debt Obligations
Subsequent to period end, as of the filing date of this report, the Company has realized debt financing in
the amount of $542,800.
F-55
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, 2014. Disclosure
controls and procedures are designed to ensure that information required to be disclosed in reports filed or
submitted under the Exchange Act is recorded, processed, summarized, and reported within the time
periods specified in the Commission’s rules and forms, and that such information is accumulated and
communicated to management, including the chief executive officer and the chief financial officer, to
allow timely decisions regarding required disclosures.
Based on that evaluation, the Company’s management concluded, as of the end of the period covered by
this report, that the Company’s disclosure controls and procedures were ineffective 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 not 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.
53
The Company’s management conducted an assessment of the effectiveness of our internal control over
financial reporting as of May 31, 2014, 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. Our assessment of the
effectiveness of our internal control over financial reporting identified certain material weaknesses,
therefore management considers its internal control over financial reporting to be in effective.
The matters involving internal control over financial reporting that our management considered to be
material weaknesses were:
Insufficient accounting resources. Management had insufficient accounting resources, which
insufficiency resulted in delays associated with our reporting of our operating results. Accordingly, we
determined as of May 31, 2014, that the insufficient accounting resources are part of the material
weaknesses as stated above.
US GAAP knowledge. Management has engaged an external consultant to counter the internal lack of US
GAAP knowledge. Nonetheless, internally there is a lack of internal US GAAP knowledge, therefore, the
work of the external consultant does not entirely compensate for this internal deficiency. Accordingly, we
determined as of May 31, 2014, that the internal lack of US GAAP knowledge is part of the material
weaknesses as stated above.
As a result of the material weaknesses in internal control over financial reporting described above, the
Company’s management has concluded that, as of May 31, 2014, that the Company’s internal control
over financial reporting was not effective based on the criteria in Internal Control – Integrated
Framework issued by the COSO. The Company intends to remedy its material weaknesses by:
— engaging a new accounting officer that has a working knowledge of GAAP accounting
This annual report does not include an attestation report of our independent registered public accounting
firm regarding internal control over financial reporting. We were not required to have, nor have we,
engaged our independent registered public accounting firm to perform an audit of internal control over
financial reporting pursuant to the rules of the Commission that permit us to provide only management’s
report in this annual report.
Changes in Internal Controls over Financial Reporting
During the period ended May 31, 2014, 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 identify material
weaknesses, which management intends to remedy.
ITEM 9B.
OTHER INFORMATION
None.
54
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
61
2009
President, Chief Executive Officer,
and Director
Andrew J. Sherman
51
2010
Director
Stephen Goss
71
2012
Director
Costas Takkas
57
2014
Chief Financial Officer
Raymond Tellini
48
2012
Director
Dr. Ryan Owen
43
2014
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.) 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.
55
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 from 2009 to 2013.
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.
56
Stephen Goss was appointed as a member of the board of directors on January 4, 2012.
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 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 continues to serve on the Company’s Audit Committee, Compensation Committee, Nominating
& Governance Committee and the Compliance & Ethics Committee, pending the appointment of an
independent member of the board of directors as required by each respective committee’s mandate.
Other Public Company Directorships in the Last Five Years:
None.
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.
57
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.
Dr. Ryan Owen was appointed as a member of the board of directors on May 6, 2014.
Business Experience:
Dr. Owen is recognized in the oil and gas industry as having expertise in delivery of major projects,
operations management, technology development as well as strategy consulting. From 2012 to 2014, Dr.
Owen was engaged in setting up operations and project development at Ping Petroleum, an oil and gas
start-up company based in Malaysia. Prior to joining Ping Petroleum, Dr. Owen worked with Wood
Mackenzie, Inc. as a Managing Consultant for a number of companies and government organizations
related to the energy sector. Dr. Owen came to Wood Mackenzie after working for BP plc from 1997 to
2010, in a broad range of international engineering and engineering management roles. His
responsibilities at BP included working as Lead Engineer on oil and gas assets in BP’s Gulf of Mexico
Business Unit, Executive Personal Advisor to the Vice President of Technology (Exploration and
Production), Lead Process/Project Engineer for BP’s Angola Gas Business Unit and Senior Process
Engineer for BP Upstream Technology Group based in Houston, Texas. During his tenure with BP, Dr.
Owen was awarded a number of technology awards in internal company wide competitions and speaks
English, Italian and German fluently with basic Spanish, French and Norwegian.
Director Responsibilities and Qualifications:
Dr. Owen earned his PhD at the University of Cambridge in Bio-Chemical Engineering and his MEng
(Masters) in Chemical Engineering at the Imperial College of Science, Technology and Medicine in
London, England. He is also a Chartered Engineer (U.K. equivalent of Professional Engineer).
Dr. Owen 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.
Costas Takkas was appointed the Chief Financial Officer and Principal Accounting Officer on February
7, 2014.
Business Experience:
Mr. Takkas brings to his new positions management skills and an expert accounting background with
over 30 years of accounting, management and consultancy experience. Mr. Takkas, a practicing Chartered
Accountant has acted as a director and officer of numerous development-stage public companies involved
with projects in the technology, mining, construction, gaming, drug development and medical equipment
industries.
58
Officer Responsibilities and Qualifications:
Mr. Takkas is a member of the Institute of Chartered Accountants in England & Wales (ACA) and
graduated with a B.Sc. (Honors) in Physics and an Associate Royal College of Science (ARCS) from the
Imperial College of Science and Technology, University of London in 1978.
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, 2014, failed to file, on a timely basis, reports
required by Section 16(a) of the Securities Exchange Act of 1934, except as follows:
§ Dr. Ryan Owen failed to file a Form 3 or Form 5 in connection with his appointment to the
Company’s board of directors on May 6, 2014.
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.
59
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.
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.
60
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, 2014 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.
Miller
-
-
-
-
-
120,000
120,000
Andrew J.
Sherman
144,000
-
-
-
-
-
144,000
Stephen Goss
-
-
-
-
-
75,500
75,500
Raymond
Tellini
-
-
-
-
-
-
-
Ryan Owen
-
14,200
150,000
-
-
-
164,200
Jeffrey Webb(1)
--
-
-
-
-
-
-
(1) Jeffrey Webb resigned from the Company’s Board of Directors on May 6, 2014.
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.
61
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.
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.
62
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.
During the annual periods ended May 31, 2014 and May 31, 2013 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.
During the annual periods ended May 31, 2014 and May 31, 2013, our chief financial officer received
compensation of $8,000 per month pursuant to an employment agreement dated August 20, 2010, and a
grant of 200,000 stock options at an exercise price of $0.65 per share for a period of ten years from the
date of grant valued at $130,000. The Company made an additional grant of 200,000 stock options at an
exercise price of $1.25 per share for a period of ten years from the date of grant as an incentive for his
continued advice and consultation.
During the annual periods ended May 31, 2014 and May 31, 2013, our former chief financial officer
received compensation of $16,000 per month pursuant to an employment agreement dated December 5,
2012, a 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 in addition to those 150,000 stock options at an exercise price
of $2.30 per share for a period of ten years from the date of grant valued at $317,991 granted in
connection with his appointment to the Company’s board of directors on December 5, 2012 (from which
position he resigned on accepting his appointment as the Company’s chief financial officer), stock awards
and a stock retention award.
During the annual periods ended May 31, 2014 and May 31, 2013, the chief executive officer of
MesoCoat, a Company subsidiary, was paid $12,000 per month pursuant to an employment agreement
dated December 1, 2009.
Summary Compensation
The following table provides summary information for the fiscal years ended May 31, 2014 and 2013
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
$100,000.
63
Executive Compensation Table
Name and
Year
Annual
Bonus Stock
Option
Non-Equity
Nonqualified
All Other
Total
Principal
(ended Salary
($)
Awards
Awards
Incentive Plan
Deferred
Compensation
($)
Position
May
($)
($)
($)
Compensation
Compensation
($)
31)
($)
Earnings
($)
Robert Miller:
2014
120,000
-
-
-
-
-
-
120,000
CEO, Director(1)
2013
120,000
-
-
-
-
-
-
120,000
Costas Takkas
2014
96,000
-
250,000
-
-
-
346,000
CFO, PAO(2)
2013
96,000
-
-
-
-
-
96,000
David
Charbonneau:
2014
153,600
-
20,000
-
-
-
-
173,600
CFO, PAO(3)
2013
86,308
-
20,000
649,375
-
-
19,000
774,683
Andrew J.
2014
144,000
-
-
-
-
-
-
$144,000
Sherman
2013
144,000
-
-
-
-
-
-
$144,000
CEO MesoCoat(4)
(1) Robert Miller was appointed as chief executive officer and director on December 8, 2009.
(2) Costas Takkas was appointed as Chief Financial Officer and Principal Accounting Officer on August 20, 2010 and
resigned on May 11, 2011. Costas Takkas was appointed Chief Financial Officer and Principal Account Officer on
February 7, 2014 on the resignation of David Charbonneau..
(3) David Charbonneau was appointed as Chief Financial Officer and Principal Accounting Officer on December 5, 2012
and resigned as Chief Financial Officer and Principal Accounting Officer on February 7, 2014.
(4) Andrew J. Sherman served as the Chief Executive Officer of MesoCoat, a Company subsidiary, until his resignation on
May 31, 2014..
Outstanding Equity Awards
The following table provides summary information for the period ended May 31, 2014 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) an executive of MesoCoat
whose total compensation exceeds $100,000:
64
Outstanding Equity Awards at Fiscal Year-End
Option awards
Stock awards
Equity
Equity
incentive
Equity
incentive plan
plan
Market incentive plan awards: market
awards:
Number
value of awards:
or payout
Number of
Number of
number of
of shares shares
number of
value of
securities
securities
securities
or units
or units unearned
unearned
underlying
underlying
underlying
of stock
of stock shares, units shares, units or
unexercised unexercised
unexercised Option
that have that
or other rights other rights
options
options
unearned
exercise
Option
not
have not that have not that have not
(#)
(#)
options
price
expiration vested
vested
vested
vested
Name
exercisable unexercisable (#)
($)
date
(#)
(#)
(#)
($)
Robert H.
Miller(1)
-
-
-
-
-
-
-
-
-
Andrew J.
Sherman
1,000,000
-
-
0.60
December
11, 2019
-
-
-
-
David
Charbonneau
100,000
50,000
-
2.30
June 15,
2022
-
-
-
-
David
Charbonneau
41,667
83,333
-
2.61
December 5,
2022
-
-
-
-
Costas
Takkas
200,000
-
-
.65
August 20,
2020
Costas
Takkas
-
200,000
-
1.25
December 5,
2023
(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.
(2) Mr. Sherman’s previously granted options dated December 11, 2009 were cancelled except for 350,000 on May
31, 2014.
.
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 17, 2014, 4,486,667 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, $2.05, $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.
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.
65
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. .
66
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 68,418,615
shares of common stock issued and outstanding as of September 30, 2014 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.
Name and Address of Beneficial
Title of Class
Ownership
Amount and nature of
Percent of
Beneficial Ownership1
Class
Robert H. Miller
Common Stock
4801 Alhambra Circle
24,120,0002
35.3%
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
Ray Tellini
Common Stock
15 Shoreby Drive
05
0%
Bratenahl, Ohio 44108
Ryan Owen
Common Stock
1025 S. Shepherd Drive #101
20,0006
<0.01%
Houston, TX 77019
Costas Takkas
Common Stock
2642 Collins Avenue, Suite 305
105,0007
<0.01%
Miami Beach, FL 33140
Common Stock
All Executive Officers and Directors
as a Group
24,245,000
35.4%
Maria Maz
Common Stock
4801 Alhambra Circle
17,420,0008
25.5%
Coral Gables, Florida 33146
Common Stock
Thomas and Mario Miller Family
Irrevocable Trust u/a/d 12/01/2009
5,250,000
7.7%
(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. 650,000 of Mr. Sherman’s options were cancelled on May 31, 2014.
(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. On February 1, 2013 Mr. Goss entered into a BOD Compensation
Agreement wherein he was compensated in part with the issuance of 20,000 restricted shares.
(5) 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.
(6) Mr. Owen was granted 150,000 options that vest in equal increments beginning on April 30, 2015 over three years to purchase
common stock at $1.00 per share on or before May 6, 2024. Mr. Owen entered into a BOD Compensation Agreement wherein he was
compensated in part with the issuance of 20,000 restricted shares.
(7) Mr. Takkas was granted 130,000 options that vest in equal increments beginning on August 1, 2011 over three years to purchase
common stock at $0.65 per share on or before August 20, 2020. Mr. Takkas was also granted 200,000 options that vest in equal
increments beginning on December 5, 2014 over three years at $1.25 per share on or before December 5, 2023.
(8) 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 Taraji
Foundation for which Mr. Miller serves as a director.
67
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 May 6, 2014, the Company entered into a board of director’s compensation agreement with Ryan
Owen, pursuant to which agreement Mr. Owen 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 beginning April 30,
2015. Mr. Owen was also issued 20,000 restricted common shares.
On May 31, 2014, the Company’s subsidiaries, entered into a consulting agreement with Energy
Management Consultants, LLC. , an entity owned and controlled by Andrew Sherman, one of our
directors, on the termination of his employment agreement with MesoCoat, pursuant to which
Management Consultant’s is paid a consulting fee of $6,175 per month through the end of the term on
December 31, 2014. The agreement further provides for additional compensation in the event
Management Consultants is involved in procuring Federal contracts and grants.
Director Independence
Our common stock is quoted on the OTCQB electronic quotation system, which does not have director
independence requirements. Nonetheless, for the purposes of determining director independence, we have
applied the definitions set out in NASDAQ Rule 4200(a) (15), pursuant to which rule a director is not
considered independent if he or she is also an executive officer or employee of the corporation.
Accordingly, the Company deems Mr. Tellini and Mr. Owen to be independent directors.
ITEM 14.
PRINCIPAL ACCOUNTANT FEES AND SERVICES CL
The following is a summary of the fees that are billed to us by our auditors for professional services
rendered for the past two fiscal years:
Fee Category
Fiscal 2014 Fees ($) Fiscal 2013 Fees ($)
Audit Fees
82,500
80,500
Audit-Related Fees
5,220
7,690
Tax Fees
12,210
7,210
All Other Fees
-
-
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, 2014. Skoda performed all work only with their permanent full time employees.
68
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-55, and are included as part of this Form 10-K:
Financial Statements of the Company for the years ended May 31, 2014 and 2013:
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 71 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.
69
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant
has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Abakan Inc.
Date
/s/ Robert H. Miller
By: Robert H. Miller
September 30, 2014
Its: Chief Executive Officer and Director
/s/ Costas Takkas
By: Costas Takkas
Its: Chief Financial Officer and Principal Accounting Officer
September 30, 2014
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
Robert H. Miller
Chief Executive Officer and Director
September 30, 2014
/s/ Andrew Sherman
Andrew Sherman
September 30, 2014
Director
/s/ Stephen Goss
Stephen Goss
September 30, 2014
Director
/s/ Ray Tellini
Ray Tellini
September 30, 2014
Director
/s/ Ryan Owen
Ryan Owen
September 30, 2014
Director
70
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.
71
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.)
10.23*
Accord and Satisfaction of Investment Agreement dated May 31, 2014, incorporated hereto
by reference to the Form 8-K filed with the Commission on June 3, 2014.
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.
21
Subsidiaries of the Company, attached.
31.1
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.
31.2
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.
32.1
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.
32.2
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.
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.
72
