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, 2015.
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. o
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 (55,256,088 shares) was $11,051,218 based on the average of the bid and ask price ($0.20) for the common stock on
September 11, 2015.
On September 14, 2015, the number of shares outstanding of the registrant’s common stock, $0.0001 par value (the only class of
voting stock), was 79,501,088.
1
TABLE OF CONTENTS
PART I
Item1.
Business
3
Item 1A.
Risk Factors
30
Item 1B.
Unresolved Staff Comments
34
Item 2.
Properties
35
Item 3.
Legal Proceedings
35
Item 4.
Mine Safety Disclosure
37
PART II
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of 37
Equity Securities
Item 6.
Selected Financial Data
41
Item 7.
Management's Discussion and Analysis of Financial Condition and Results of Operations
42
Item 7A.
Quantitative and Qualitative Disclosures about Market Risk
51
Item 8.
Financial Statements and Supplementary Data
51
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
52
Item 9A.
Controls and Procedures
52
Item 9B.
Other Information
53
PART III
Item 10.
Directors, Executive Officers, and Corporate Governance
54
Item 11.
Executive Compensation
61
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
66
Matters
Item 13.
Certain Relationships and Related Transactions, and Director Independence
67
Item 14.
Principal Accountant Fees and Services
67
PART IV
Item 15.
Exhibits, Financial Statement Schedules
68
Signatures
69
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 high-strength dissolvable materials. Operations are conducted through our subsidiary, MesoCoat, Inc. ("MesoCoat").
The Company owned an 88.08% controlling interest in MesoCoat and a 24.1% non-controlling interest in Powdermet as of May 31, 2015. Powdermet owned an 11.92% interest in MesoCoat, and 84.5% interest in Terves Inc. (82.2% on a fully diluted basis). The Company’s interest in Powdermet represented an additional 2.87% indirect interest in MesoCoat. The Company’s combined direct and indirect interest in MesoCoat was 90.95% as of May 31, 2015. On July 23, 2015, the Company increased its interest in MesoCoat to 100% of MesoCoat and decreased its interest in Powdermet to 4.53%.
On August 18, 2015, the United States District Court for the Southern District of New York granted summary judgment against the Company and MesoCoat in favor of George Town Associates S.A. in the amount of $1,770,932 in connection with a default on amounts owed pursuant to a secured promissory note. The Court further appointed a receiver over MesoCoat to administer the collection of the judgment. The effect of the Court’s decision is that currently substantially all of MesoCoat’s assets are now subject to determination by the Court appointed receiver. The Company does not have the funds to satisfy the default judgment and although efforts remain underway to secure financing sufficient to satisfy the obligation no financing for this purpose has yet been secured.
.
MesoCoat, Inc.
On December 11, 2009, the Company entered into an Investment Agreement with MesoCoat and
Powdermet, in order to initially acquire a fully diluted 34% interest in MesoCoat for $1,400,030, with the
intention to increase its ownership of MesoCoat to 75%, before exchanging Company shares for
Powdermet’s Mesocoat shares to acquire 100% of MesoCoat. 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 completed purchased an additional 86,156 newly issued shares of
MesoCoat under the Investment Agreement, equal to a fully diluted 18.5% equity interest in MesoCoat
for $2,800,000, 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”) that terminated any further obligation of
the parties to the Investment Agreement and accelerated 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 into MesoCoat equity, exchange a portion of its
Powdermet shares for a portion of Powdermet’s MesoCoat shares and 2,000,000 of the Company’s
shares, reduce lease obligations, and modify an acquisition and license agreement to secure additional IP,
equipment, and manufacturing rights. 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
the Company decreased its ownership position in Powdermet to 24.9% from 40.5%.
On July 23, 2015, the Company acquired from Powdermet: the remaining 11.9% of MesoCoat, land and
equipment worth $550,000, the extinguishment of existing inter-company debt of $486,000, the return of
400,000 outstanding Company common shares to authorized capital, and $1,000,000 in cash to increase
its ownership MesoCoat Inc. to 100%. in exchange for 240,000 shares of the Company's minority
ownership in Powdermet Inc. (decreasing its issued and outstanding [not fully diluted] ownership
percentage of Powdermet from 24.1% to 4.53% after returning shares to Powdermet for cancellation),
The decision to divest a significant portion of the Company’s ownership of Powdermet, was unanimously
agreed upon by the respective boards of directors of the Company and Powdermet, and is the culmination
of the staged acquisition of MesoCoat which was planned on the Company’s initial investment in 2009.
The price per share of the July 2015 equity conversion of the Company’s investment in MesoCoat is
equal to the last price at which the Company converted invested capital to equity in May 2014. The
Company originally purchased Kennametal’s 41% interest in Powdermet specifically to acquire its
minority interest in MesoCoat. The 41% interest was purchased from Kennametal Inc., in March, 2011
for $1,700,000, (including a $300,000 late payment fee), of which 37.4% has now been returned to
Powdermet in two separate transactions for an approximate value to the Company of $10,000,000, based
on the same value per share calculated in the valuation of MesoCoat that was relied upon in the
Company's May 31, 2014 year-end audit, translating into an effective return on investment of around
500%.
MesoCoat’s Business
MesoCoat is an Ohio based materials science company intent on becoming a technology leader in metal
protection and repair based on its metal composite coating and metal cladding technologies. These
technologies are designed to address specific industry needs related to conventional oil and gas, oil sands,
mining, aerospace, defense, infrastructure, and shipbuilding. MesoCoat was originally formed by
Powdermet to focus on the further development and commercialization of Powdermet’s nano-composite
coatings technologies. The coating assets of Powdermet were licensed to MesoCoat in July of 2008, along
with transfer of outstanding contracts and key personnel.
4
MesoCoat has exclusively licensed and further developed a proprietary metal cladding application process
known as CermaClad, and a family of advanced nano-composite thermal spray coating materials known
as PComP. CermaClad and PComP combine corrosion and wear resistant alloys, and nano-engineered
cermet materials with proprietary high-speed coating or cladding application systems. Ten of MesoCoat’s
products; 3 Corrosion Resistant Alloy (CRA) materials (625, 825 and 316L), 3 Wear Resistant Alloy
(WRA) materials (Tungsten Carbide (WC), Chrome Carbide (CRC)and Structurally Amorphous Metal
(SAM) Alloys) and 4 PComP product families (PComP-W, PComP-T, PComP-S and PComP-M) have
either undergone extensive laboratory and independent testing, are in the development and qualification
stage, or are being used in the field or 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 PComP powder along with thermal spray application
services, research and development grants and equipment sale and lease income. Current grants from U.S.
government agencies are to develop new uses for CermaClad to solve critical problems, including certain
projects for the Department of Energy and the National Institute of Health. Lease income is generated
from a 24 month CermaClad equipment lease as part of a Contribution Agreement with the Northern
Alberta Institute of Technology to establish a prototype demonstration facility for developing, testing and
commercializing wear-resistant clad pipe and components in Alberta, Canada. One CermaClad unit was
also sold to a local university to help establish a nationwide corrosion and coating center of excellence,
and support Mesocoat’s R&D and company workforce development needs via access to graduate and
undergraduate students and staff at the University of Akron.
Although the oil and gas industry is important to the Company, it is not the only industry that could
benefit from our low life-cycle cost products. The U.S. Department of Commerce counts 800 industry
classifications that face problems with corrosion and wear, which is a growing issue faced by companies
worldwide. The Company’s advanced metal coating solutions addresses the concerns of several other
large industries including steel, mining, aerospace and defense, chemical, petrochemical, infrastructure,
nuclear, desalination, and others. For example, the U.S. military alone spends over $40 billion annually to
address wear and corrosion of its assets (Source: The U.S. Army’s SBIR Commercialization Brochure,
2010). 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. The global market for products and services to
combat wear and corrosion is estimated at over $200 billion, which includes more than $103 billion
annually in paints and coatings, and a forecasted $100 billion in specialty steel, alloys, and metal
composites (Sources: Data Monitor and BCC Research).
The Company is also developing solutions for the nuclear, healthcare, medical, and other industries,
primary funded by government agencies.
PComP
PComP is an award-winning family of nano-composite cermet coating materials used to impart wear and
corrosion resistance and to restore dimensions of worn metal components. Named after 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 plating and
thermal spray carbide coatings. Note that PComP is a manufacturing and materials science platform, and
not a product, which means that with the PComP manufacturing methodology we can combine a variety
of materials with precision control at the nano-level, creating best-in-class corrosion- and wear-protection.
PComP technology has been awarded the globally recognized R&D100 award, along with multiple
additional awards.
5
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 significant improvements in head to head wear and corrosion
performance tests, while offering a significantly better value proposition over hard chrome alternatives.
Using the proprietary PComP technology 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. In conventional materials
science toughness normally decreases as hardness and wear resistance increases. However, by combining
nano-level structure control with 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, and
limit the efficiency and rate at which it can be applied as a coating. 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, and which can be applied at much higher rates and
efficiencies. The speed and efficiency of the coating application, and faster final machining results in
higher productivity and lower costs in metal finishing operations, enabling these higher performance
coatings to be applied with lower capital cost, space, and applications costs than competing overlay
products, and without the regulatory and worker exposure liabilities of competing operations.
The revolutionary nano-structure of the PComP coatings produces a coating that offers significant
benefits being exploited by our value chain partners. PComP is self-polishing when in use, resulting in
extremely low fluid leakage, and friction properties approaching those of diamond-like carbon (DLC)
films and solid lubricants. Unlike DLC and other vapor deposited films, PComP has the ability to be
applied to large components without expensive vacuum equipment, at substantially lower capital and
application cost than coatings such as diamond-like carbon. The low friction properties 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.
When MesoCoat began operations in 2008, the primarily focus was to commercialize a customized,
silicon nitride (PComP-S) thermal spray coating material in the aerospace industry as it provided
improved performance compared ,to the conventionally used tungsten carbide coating (most viable
alternative for toxic chrome plating which is regulated by the Department of Defense) at 1/3rd the density
which could reduce the weight of coatings by up to 200 lbs. on a single aircraft thereby saving over $1
million a year in fuel costs. The transition plan was through the Department of Defense on legacy
aircraft, based on life extension and reduced operating costs. In 2009, due to sequestration, rescission of
the executive order directing the elimination of all DOD chrome use, and changes in the Air Force facility
engineering support value chain, this legacy aircraft insertion effort was defunded and delayed
indefinitely after the initial component scale validation efforts.
6
However, when MesoCoat forayed into the oil and gas industry, it learned more about that industry’s
thermal spray coating needs which relies heavily on conventional tungsten carbide thermal spray
powders. Even though these powders provide coatings that are very hard (can withstand significant
impact), the higher hardness leads to lower toughness (cannot withstand stress, flexing, or vibrations) that
leads to spallation (flaking). Since most components used in the oil and gas industry such as rolls,
mandrels, and drilling tools, vibrate and flex in high-pressure environments, conventional tungsten
carbide based coatings tend to flake causing failure. In early 2010, MesoCoat began development work on
a replacement by integrating its PComP manufacturing process to produce a tungsten carbide coating
material that is both hard and tough. The result was the PComP-W family of coating materials, which
produce coatings that are both hard and tough, enabling them to withstand both impact and stress.
PComP-W coatings can enable most oilfield and industrial components to operate 3-10X longer than
conventional coatings potentially saving millions of dollars in early replacement, downtime, and
maintenance costs ordinarily associated with flaking of the coatings. PComP-W coatings are now field-
proven in multiple applications, and are gaining traction in life-limiting components in a number of
applications.
A further result of this work was the development and commercialization of titanium nitride based
PComP-T coatings. MesoCoat is the only company that has been able to develop titanium-nitride
(PComP-T) and silicon-nitride (PComP-S) based thermal spray coatings. Researchers and scientists have
been trying to develop titanium-nitride and silicon-nitride based thermal spray coatings for several
decades with no success. Nonetheless, MesoCoat has not just been able to develop these thermal spray
coatings, but has also demonstrated the value proposition for these coatings. Both the PComP-S and
PComP-T families of thermal spray powders have lower density and in testing have offered at least 10X
higher resistance to sliding wear compared to the widely used tungsten carbide coatings.
In 2010, MesoCoat with support from funds provided by Department of Energy, set its sight on
developing a non-stick corrosion-resistant coating for molten metal applications using the PComP
manufacturing methodology, which led to the development and commercialization of patent pending,
proprietary moly-boride based PComP-M coating materials. PComP-M is like an industrial Teflon non-
stick coating which protects metal components from liquid metal corrosion; which means in any
application where metal components are submersed or exposed to liquid metals PComP-M coatings can
protect the metal component. PComP-M has shown more than a 3X life extension compared to the current
state of art moly-boride based powder in lab testing, and is currently being sold at a cost comparable to
the current state-of-art moly- boride based thermal spray powder. Rolls used in galvanizing, nozzles used
in steel processing, dies and trays used in aluminum production, and several other applications where
liquid metal is used would see a significant reduction in early-replacement, downtime, and the
maintenance usually associated with the early failure of conventional used moly-boride based coatings.
Unique to PComP-M, is the ability of these hard coated components to be repeatedly immersed into
molten metals, a process which causes catastrophic spallation (coating removal) of competing coatings.
The PComP family of nano-composite coatings currently consists of five product families, 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 previous state of the art. These product families are described above, and
summarized as follows:
7
Wear and Corrosion Resistance and Dimensional Restoration
PComP-W is MesoCoat’s “nano-engineered” tungsten carbide based coating solution 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 is a replacement for 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.
PComP-T is a titanium nitride based high corrosion/wear resistant, low friction thermal spray 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-T 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-T provide life multiples over
chrome (80X in sliding wear 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.
Liquid Metal Corrosion
PComP-M is a hierarchically structured molybdenum boride based thermal spray coating material
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, improved thermal shock resistance, combined with increased durability and
reliability encountered in molten metal environments when compared to competitive coatings. 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 that the bulk of initial sales will be for sink rolls and other components used in the
galvanizing bath, and for molds, dies and other components used in aluminum and steel production.
8
Thermal Barrier Coatings
ZComP nano-composite thermal barrier coating, that in testing has shown 50% lower thermal
conductivity, has an improved toughness, improved thermal resistance, and improved cyclic thermal life
compared to conventional thermal barrier coatings in the $500 million thermal barrier coatings market.
These coatings were lab-qualified at NASA under an Air Force subcontract to general dynamics
information technologies (GDIT) for insertion into Air Force turbine repair and F100 engine life
extension programs, but due to sequestration and changes in the depo support contracts, depo-level
insertion efforts were not completed. MesoCoat has received ongoing 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 wanted to introduce ZComP materials
into the turbine engine market, but given the long qualification cycles associated and limited supplier
power in aerospace applications, has reduced priority for this market sector. The Company is currently
evaluating the next steps to accelerate qualification and commercialization of ZComP, including external
financing via partnerships and licensing routes.
Recent Developments - PComP
Hundreds of PComP-W coated pumps have now been used in the field for over three years by one of the
largest oil field and industrial equipment manufacturer operating in western Canada. Use of the PComP
W product has demonstrated a minimum 3X life extension over existing products. The same customer is
now using PComP-W coated mandrels, plungers and other oil field components in field tests which also
have demonstrated a 3X life extension and are yet to fail. Field testing and efforts to secure a long term
sales contract continues. Meanwhile, the Company has begun the testing and marketing of its powder and
coating services in Canada, Mexico, India, and China and is communicating with several entities in South
Korea, Japan, Thailand, Russia, and Nigeria.
The Company’s Mexican subsidiary MesoCoat De Mexico secured its first commercial PComP order in
June of 2015 for the coating of certain large roller screens from one of the largest steel manufacturing and
iron ore processing companies in Mexico. The initial order has been followed up with repeat orders and
the company expects an annual contract to coat all of the rolls used at this facility as we earn their
confidence with outstanding material results in critical areas. MesoCoat De Mexico has also received
orders for coating lances which are used heavily in iron ore production and anticipates trial orders for
coating tuyeres, pumps, clad plates, turbines and other components. In August, MesoCoat De Mexico
secured a new order from one of the largest steel producers in Mexico for coating sink rolls. Sink rolls are
used in the process of galvanizing steel sheets for major appliances or white goods, infrastructure, and
automotive applications. MesoCoat De Mexico will be spraying the face of the sink rolls with PComP-M
liquid-metal corrosion-resistant coating, and the caps that protect each end of the roller shafts with
PComP-W tungsten carbide coatings, to increase the useful life of the rolls by an expected 2-4 times.
UP Scientech Materials Corp. (“UP Scientech”), the Company’s partner in Asia, has completed
evaluation of PComP coatings and is in the process of introducing these products through its existing
distribution channels to drive adoption in China, Taiwan, Australia and elsewhere.
The Company is currently working with two large coating shops in India to drive the adoption of PComP
coatings for the oilfield and industrial applications. Both of these coating shops have completed
independent evaluation of PComP coatings, and are about to commence field testing of PComP coatings
with their customers.
9
The Company exhibited its PComP thermal spray coating powders at the ITSC and OTC events held in
May, 2015, to educate thermal spray coating services providers, and oilfield, mining, and industrial
companies, as to the attractive value proposition offered by PComP thermal spray powders. The response
was very encouraging with test orders secured from industry majors in North America, Asia and Europe
for moly-boride based PComP-M and tungsten-carbide based PComP-W thermal spray powders. Several
of the companies that placed commercial and test orders consume tens of thousands of pounds of thermal
spray powders annually.
The ramp up of PComP powder production in the Company’s Ohio manufacturing facility is in line with
the anticipated demand. MesoCoat scaled the production of PComP powders from 3 tons/year to 6
tons/year by the end of 2014 and as of April of 2015 has scaled up that production to 30 tons/year. On
reaching this milestone, MesoCoat has scaled up production by 100% over a 12 month period, while
continuing to sell most of the powders that it has produced to date.
CermaClad
One of the limitations of the PComP product line was the limitation on application rate- 5-10 lbs/hr per
application system. To overcome this limitation, Mesocoat identified and acquired “High Density
Infrared, or HDIR” technology from technology partner Batelle/Oak Ridge National Lab. This
application technology enables the application of up to 100’s lbs/hr, adding high scalability to the
engineered coatings market. Further development of this application technology has led to the
CermaClad coating materials product portfolio.
Cermaclad is a multiple award winning product platform that changes the cost structure on high alloy
wear and corrosion resistant materials. The CermaClad platform enables 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 to be achieved at a fraction of the cost of solid alloy. CermaClad
does this by adding a permanent thin layer of the costly corrosion- or wear-resistant layer on the surface
of low-cost carbon steel. 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. For example,
nickel alloy pipe costs 20-40X base low alloy steel. Using the CermaClad process, this can be reduced up
to 10X, to 4-10X base alloy steel, (or less if thinner coatings can be qualified). This can enable projects
to be undertaken that are currently cost-prohibitive, or save large capital projects 20-40% of their alloy
costs. CermaClad coatings compete with solid alloy, and weld-overlay and explosion- and roll-clad plate
in the specialty stainless steel and high alloy market. Applications include oil and gas pipelines,
chemical process plant equipment, shipbuilding, energy production, and water treatment including
desalination. Emerging applications in infrastructure and medical equipment have also been verified as
potential large markets.
MesoCoat is utilizing a unique, patented, “High Density Infrared (HDIR)” or ‘Plasma Arc Lamp’
technology, exclusively licensed from Oak Ridge National Laboratory (“ORNL”) to produce clad steel.
Testing by ORNL and the Company has shown that the plasma arc lamp is capable of applying a very
high quality cladding at 5 to 40 times higher productivity (100’s of Kg’s versus 3-20Kg/hr.) than
traditional laser bead or weld cladding techniques which are widely used commercially. MesoCoat
believes that this plasma arc lamp represents the first truly scalable, large area cladding technology.
Scalable, low capital cost cladding technology enables the production of large volumes of customized,
premium, high margin clad steel products.
10
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 and
sheets. CermaClad has been used for melting, fusing, and metallurgical bonding nickel based alloys,
stainless steel, copper based alloys, niobium, tungsten and chrome carbides, structurally amorphous
materials, and several other materials including titanium on metal substrates – so there is no limitation on
the materials that we can clad using CermaClad. 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 micro-structural and compositional
modifications. The CermaClad process melts and fuses material 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 expected to be easier to inspect and install (reel) irrespective of the size and
thickness of the pipe compared to current alternatives.
CermaClad clad steel is a 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 unprocessed crude
oil that contains water, sulfides, and carbon dioxide, seawater, road salt, mining slurry transport lines,
chemical processing and transportation equipment, metals production, and other large industrial
applications, asset owners and operators either need to continually maintain and replace major assets, or
fabricate these assets using expensive, corrosion resistant alloy (CRA) materials, which substantially
increase capital costs. Clad steel offers 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 85% over the cost of using solid stainless or other CRA
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 one of the largest consumers 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 metallurgically clad pipes are primarily manufactured with roll-bonded
clad plate that is bent and welded to form a pipe. Though a higher productivity process, Roll-bonded
plate-to-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 produce sheets that are 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 a roll-bonded plate manufacturing facility to enable the production of larger
diameter pipe needed for large gas projects would require very large investments, estimated to be in
excess of $400 million compared to an 8-line CermaClad large diameter pipe production facility that we
budget would cost $38 million.
11
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
be commercially acceptable. The other 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 trees” used in oil and gas, although weld overlay is a dominant technology for
wear resistant overlays that cannot be produced by the other techniques. A significant demand for thicker-
walled clad pipes also exists driven by higher pressure oilfields in Gulf of Mexico, and for large-diameter
clad pipes driven by large gas filed in Asia-Pacific. The current cladding technologies have several
quality and supply concerns regarding thick-walled and large-diameter clad pipes, and CermaClad
provides the ideal solution for these clad pipes.
Clad steel is a specialized, profitable segment of the steel industry where demand has outstripped supply
and margins are high as a result. 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. Typical requirements today, even for
those projects that will be put on hold or reevaluated with the recent drop in energy prices, are for tens of
kilometers with a number of long term projects needing hundreds of kilometers per project. As a result the
clad pipe market has grown rapidly and the limitations of current solutions in terms of installation,
inspectability, quality, and availability are inhibiting growth. The expected commercialization of
CermaClad clad pipes should be able to 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, plasma arc lamp
compared to a 0.7cm wide laser beam or inert gas welding systems, 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 is the only cladding technology that we are aware of that allows metallurgical
cladding of layers as thin as 0.15mm that meets all the required metallurgical and mechanical
specifications. Conversely, CermaClad has also demonstrated cladding as thick as 15mm.
§ CermaClad products exceed the requirements of the defining API 5LD and DNV OS F101
standard requirements for clad pipes used in oil and gas applications.
§ CermaClad offers a smoother surface, minimal dilution, greater flexibility in materials, and the
ability to do thinner, lower cost claddings than current production technologies.
12
The CermaClad clad steel product lines under development include:
§ CermaCladCRA (Corrosion Resistant Alloys): 1-3mm thick CRA clad steel in a single pass, 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.
§ CermaCladWR (Wear Resistant): 1-15mm thick carbide, metal matrix composite, structurally
amorphous metal, and nano-composite wear resistant clad steel that extends the life of steel
structures such as hydro-transport slurry lines, pump components, valve components, spools, T’s,
and elbows for oil sands, heavy oil, mining and mineral processing.
§ CermaClad LT (Low Thickness): Lower cost thin-clad (0.15-1mm) steel that exploits the unique
high purity capabilities of the CermaClad application process to provide thin claddings that
should provide 50-200 year corrosion free life for steel components exposed to atmospheric and
seawater corrosion environments.
§ CermaCladHT (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.
§ CermaCladAM (antimicrobial). Durable antimicrobial clad steel for medical devices,
institutional architecture, and touch surfaces. Enables 30-50 year life, sterilizable and durable
antimicrobial clad steel structures at a fraction of the cost of copper and silver alloys.
Recent Developments -CermaClad
MesoCoat continues to receive significant interest from oil and gas majors, national oil companies,
engineering firms, and steel companies globally due to quality and delivery concerns associated with the
current manufacturers of clad pipes. Meanwhile MesoCoat’s continues to progress towards the
development and qualification of its CermaClad clad pipes. MesoCoat expects to ship clad pipe sections
to prospective end users for testing by the end of fiscal year 2016, and expects to have full-length clad
pipe ready for qualification by the end of calendar year 2016, subject to the MesoCoat realizing adequate
funding.
Since announcing its partnership with UP Scientech, MesoCoat has accelerated development of its clad
plate products. MesoCoat has been cladding small clad plates/samples since 2010 and is now scaling-up
to larger plates to eventually clad plates that are 3 meter X 2.5 meter (which is the largest clad plate being
sold at high volume in the industry currently). MesoCoat expects to have mid-sized clad plates ready for
sale within the next 6-9 months. MesoCoat has also decided to take commercial orders for smaller clad
plates and flat components and has already delivered wear-resistant clad plates that are currently being
field tested at one of the largest steel manufacturing plants in Mexico.
13
MesoCoat Inc., along with the lead project partner, Northern Alberta Institute of Technology (NAIT)
embarked on an 18 month collaborative effort to establish a prototype demonstration facility for
developing, testing and commercializing wear-resistant clad pipe and components. Western Economic
Diversification Canada is also supporting this initiative through a $1.5 million investment toward NAIT.
Improvements in wear resistance are expected to make a significant impact in reducing maintenance and
downtime costs while increasing productivity in oil sands and other mining applications. The Edmonton
facility is intended to serve as a pilot-scale wear-resistant clad pipe manufacturing facility for the
development and qualification of wear-resistant clad pipes, and as a stepping stone for setting-up a full-
scale wear-resistant clad pipe manufacturing facility in Alberta. The new facility will also serve as a
platform for the Company's introduction to the Alberta oil sands market, which, with proven reserves
estimated at more than 169 billion barrels is one of the largest oil resources in the world and a major
source of oil for Canada, the United States and Asia. Since Alberta oil sands production is expected to
increase significantly over the next decade, producers want to extend the life of the carbon steel pipes
used for the hydro-transportation of tailings with harder, tougher coatings that protect pipes from the
abrasiveness of tar-like bituminous oil sands.
MesoCoat shipped its CermaClad high-speed large-area cladding system for installation at the Northern
Alberta Institute of Technology's (NAIT) campus in Edmonton, Alberta in early 2015. MesoCoat expects
the installation to be complete within the next 1-2 moths, and will then begin operations at this joint
development facility in Edmonton, Alberta.
The Company has received commitments from oil sands producers in Canada and mining companies in
Mexico and Brazil to field-test CermaClad wear-resistant clad pipe products as soon as our products are
ready for testing. Apart from our work with conventional less expensive chrome carbide and the more
expensive tungsten carbide wear-resistant cladding on pipes, the Company also expects to introduce new
iron-based structurally amorphous metal (SAM) alloy cladding that in testing has exhibited performance
similar to tungsten carbide cladding, but at a fraction of the cost. Although more expensive than the more
widely used chrome carbide cladding, the new SAM alloy cladding is expected to be a significantly better
value proposition when you consider an estimated life of three times that of chrome carbide cladding and
those cost efficiencies that correspond to less downtime revenue losses, and lower maintenance and
replacement costs.
Current Grants
MesoCoat has consistently received highly-competitive funding from several federal and state agencies,
which has significantly assisted it in developing a robust product pipeline. MesoCoat’s PComP family of
nano-composite thermal spray coating materials was incubated and developed using federal funding.
Below is a brief summary of recently completed and ongoing federally funded projects that also provide
an overview of the product pipeline.
Joining Dissimilar Metals
MesoCoat and Oak Ridge National Laboratory (ORNL), have been awarded $1 million by the
Department of Energy (DOE) to develop a process to join dissimilar metal alloys. The $1 million award is
shared equally by ORNL and MesoCoat. The primary objective of this project is to develop functional
gradient transition joints between carbon steel and austenitic stainless steel for nuclear reactors. The
research will directly address the needs described in development of advanced joining techniques for
materials for nuclear fission reactor applications. This collaborative project capitalizes on recent advances
made by each organization in the field of dissimilar metal joining and application of high-energy density
plasma arc lamp processing. This project will use our CermaClad plasma arc lamp to build gradient
transition joint for dissimilar metal welding.
14
In order to add new design and functionalities to metal components, equipment, and structures; it is
essential that engineers are provided with the tools to join dissimilar metals. For example, on the inside
the reactor may need corrosion or wear protection and on the outside heat-resistance or toughness. By
providing the technology to join dissimilar metals, MesoCoat is providing designers and engineers the
capabilities to explore, design, and develop new material systems. The uniqueness of MesoCoat’s
CermaClad process is the ability to melt, fuse, and metallurgically bond dissimilar materials.
Improving the ability to join dissimilar materials with engineered properties is enabling new approaches
to add limitless functionalities to metals, light-weighting automotive structures, improving methods for
energy production, creating next generation medical products and consumer devices, and many other
manufacturing and industrial uses. CermaClad technology is ideally-suited for additive manufacturing,
the newest trend in manufacturing to add layers of metals one upon the other for dimensional restoration
and extending the useable life of metal assets. Not many are aware of the problems caused by metal
components, equipment, and structures that do not last long enough. Apart from the massive cost
involved with infant failure of metals which includes downtime, maintenance, and replacement costs; it is
estimated that every tonne of metal production leads to 2.4 tonnes of CO2 emission. The impact of metals
that could last three to six times longer would be significant development that could lead to a paradigm
shift in metal asset protection and life extension.
Antimicrobial Coating for Healthcare
The National Institute of Health (NIH) provided $150,000 funding to MesoCoat to develop copper-based
antimicrobial coatings primarily for contact surfaces like door knobs, handles, rails, carts, poles, sinks,
etc. In addition to hospital use, these coatings could also be applied to many other public areas such as
airports, bus and railway stations, schools, restaurants and work places. Antimicrobial coatings could
have a significant positive impact on public health by preventing the onset of infections and diseases.
Under this program, MesoCoat intends to demonstrate the technical and manufacturing feasibility and
capabilities of producing durable, aesthetically pleasing and cost-effective, antimicrobial touch surfaces
for hospitals and public places. This development combines known antimicrobial copper alloys with a
low cost high volume process such as CermaClad capable of achieving touch surface market penetration
by offering a corrosion resistant aesthetically pleasing solution that is lower cost than stainless steel
components currently used with the known benefit of being anti-microbial. The project is designed to
provide the evidence and experience to verify the technical and economic feasibility of producing and
using copper-alloy cladded steel as a cost-effective, visually attractive antimicrobial material for touch
surfaces in the medical and healthcare and other industries.
Our initial test results have shown that after exposure to 1.25 x 108 colonies forming unit (CFU) of
Staphylococcus aureus bacteria, there was an 83% reduction in CFUs on the copper-based cladded
surfaces compared to the stainless steel surface actually used in hospitals.
Based on the extremely promising test results from Phase I of the development program and the huge
market need, the Company expects to receive a Phase II funding of $1,000,000 from NIH to complete
development and commercialize this application.
15
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, personnel changes, the need to replace aging equipment associated with PComP and the
availability of financing.
TIME TO
PRODUCT
COMMERCIAL STATUS
COMMERCIALIZE
(MONTHS)
PComP W
Growth and Expansion
Current
PComP T
Market Entry
Current
PComP M
Market Entry
Current
PComP S
Prototype Qualification
12 to 24
PComP Coating Services
Market Entry
Current
ZComP
Development
On Hold
CermaClad CRA
Development
12 for qualification 18
for full scale production
CermaClad WR
Development
6 for plate sales from
Ohio plant
CermaClad LT
Development
12 to 24
CermaClad HT
Incubation
36
Product Commercial Expansion Timeline
The Company has announced plans to set-up a 160 tons/year PComP powder production facility which
would enable it to meet the growing demand for PComP’s. The Company expects to begin construction of
this facility in November, 2015 and dependent on adequate funding the facility could be fully operational
in May, 2016. The Company also plans to expand the presence of its products in North and South
America and the Asia-Pacific market in the near term. MesoCoat De Mexico has been working to get
financial support from local government and corporate entities to build a PComP coating services and
clad pipe production facility in Mexico. The Company also expects to set-up sales, distribution, and
manufacturing in the Asian market with UP Scientech and other prospective partners.
16
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 all manufacturing rights, and the direct assignment of additional
grants of intellectual property provided in the earlier license agreement taking into account subsequent
developments. 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.
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
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 CermClad process and resultant coatings 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.
17
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.
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.
18
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.
AMP SEZC and AMP FL will also be tasked with acquiring equipment and coating materials for the
Company’s international transactions. AMP SEZC has secured the services of a qualified individual to act
as General Manager of AMP. As a long term resident of the Cayman Islands, he is already in possession
the required Work Certificate and local health insurance. The new General Manager has many years of
experience in project management in Latin America and other jurisdictions.
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.
19
External Environment: Wear
Corrosion is not the only concern of engineers and material scientists. In most industries, the deterioration
of surfaces is also a huge problem. Wear is often distinct from corrosion and describes the deterioration of
parts or machinery due to use. The effects of wear can generally be repaired. However, it is also usually
very expensive. Prevention and wear protection is the most economical way to offset the high costs
associated with component repair or replacement. To accomplish this, hard-face coatings are applied to
problematic wear surfaces for the purpose of reducing wear and/or the loss of material through abrasion,
cavitation, compaction, corrosion, erosion, impact, metal-to-metal, and oxidation. Some companies focus
on the prevention side of the business (applying coatings to prevent wear) while others focus on the repair
side of the business (reforming metal or applying coatings to fix metal substrate problems).
In order to properly select a coating alloy for a specific requirement, it is necessary to understand what
has caused the surface deterioration. The various types of wear can be categorized and defined as follows:
§ Abrasion is the wearing of surfaces by rubbing, grinding, or other types of friction that usually
occurs due to metal-to metal contact. It is a scraping, grinding wear that rubs away metal surfaces
and can be caused by the scouring action of sand, gravel, slag, earth, and other gritty material.
§ Cavitation wear results from turbulent flow of liquids that carry small suspended abrasive
particles.
§ Compression is a deformation type of wear caused by heavy static loads or by slowly increasing
pressure on metal surfaces. Compression wear causes metal to move and lose dimensional
accuracy.
§ Corrosion wear is the gradual deterioration of unprotected metal surfaces, caused by the effects
of the atmosphere, acids, gases, 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.
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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.
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 surface.
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. . 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. to protect metal components and
equipment from corrosion and wear
According to International Thermal Spray Society, the thermal spray industry was estimated to be around
$7.6 billion (for 2006), and with a modest 5% CAGR the market size is expected to be approximately $12
billion per annum globally at the end of 2015. 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.
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Metal Cladding – CermaClad
MesoCoat’s CermaClad metal cladding technology is used to produce corrosion- and wear-resistant clad
pipes, 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, wear-resistant clad pipes for the oil
sands and the mining industry and wear-resistant plates. 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 in which it resides. 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 vessels, 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.
Recently we have seen rapid adoption of some of the unconventional and extremely challenging resources
such as oil sands, shale, pre-salts, along with increased adoption of enhanced oil and gas recovery
processes. Significant technical advancements have enabled us to not only explore some of these
resources that have been known for decades, but also to make exploration and production from these
reserves economical thus propelling massive adoption and growth. However, all these unconventional
resources pose a serious challenge in corrosion and wear. For example, hydro-transportation of very
abrasive slurry from the mining site to the processing facility leads to such massive wear that the pipes
carrying these abrasive slurries have to be rotated 1/3rd every 3-4 months and then replaced every 15-18
months; leading to massive maintenance, downtime, and repair costs. In 2011, the estimated cost of
downtime and losses to oil sands industry was estimated to be $11 billion; almost 40% of these losses can
be attributed to maintenance, repair, and replacement of pipes. The demand for clad pipes is expected to
grow by 3-5X in the Canadian oil sands market spearheaded by 3X increase in production of oil sands
through the mining process. On the other hand enhanced oil recovery processes involve injecting
corrosive chemicals and CO2 at high pressures which leads to accelerated corrosion. Also many of the
larger shale reserves with tighter formations have higher levels of sulfur, creating hydrogen sulfide (H2S),
a corrosive gas. The adoption of unconventional energy sources substantiates the need for corrosion- and
wear-resistant clad pipes and components for safe and efficient production from these reserves.
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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.
About a few years ago, the average requirement for clad pipes was for 3 to 5 kilometers whereas the
largest requirement was 20 to 30 kilometers for each project. Today, we are seeing the average
requirement being in the tens of kilometers and the higher end to be hundreds of kilometers for single
projects, approximately $1.6 billion worth of corrosion-resistant clad pipe was ordered for the Kashagan
project. The clad pipe market is growing at a rapid pace and the current solutions have several limitations
in terms of inspectability, installation, quality, and productivity.
Competition
MesoCoat 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.
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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 based replacement solution. PComP-W
exhibits high deposition efficiency and at a Vickers hardness similar to that of conventional tungsten
carbide based coatings while being stronger than the conventional carbide coatings. High toughness
tolerates more flexing of the part than other HVOF WC-based coatings without the usual cracking of the
coating. The structure of the PComP coatings generally also allow for conventional grinding techniques.
PComP thermal spray powders are the only thermal spray powders that lead to coatings that are both hard
and tough, and hence despite the high hardness the coatings do not flake when bent. Additionally,
MesoCoat is the only company in the world that manufactures titanium nitride and silicon nitride based
PComP thermal spray powders; despite decades of research no other company has been able to make
titanium nitride and silicon nitride based powders that can be sprayed using thermal spray coating
systems.
The PComP family of products are expected to fare well among existing competitors on market entry.
CermaClad
A handful of large companies cater to this market segment – JSW Steel Co., Voest Alpine and Eisenbau
Kramer are heavily involved in the clad plate market with a significant portion of the market share,
Butting GmbH and Cladtek International Pty Ltd. are large participants in the mechanically clad pipe
market, and ProClad Group is important in the metallurgically clad pipe market. Most of the large
companies participating in the cladding market have very similar technologies and impact the market
mostly on their scale of production (availability), relationships, and price.
Several smaller companies spread across the globe are also involved in this market segment, like Arc
Energy Resources, IODS, High Energy Metals, and Kladarc LLC (acquired by PCC), all of which offer
weld overlay services for the oil and gas industry which we believe generate less than $25 million in
annual revenues. Other examples include Matrix Wear Technologies, Cladtech Canada, Brospec LP,
Almac, and Clearwater Welding and Fabrication LP all of which offer weld overlay processes to those
working in the Canadian oil sands which we believe generate between $15-50 million in revenues. The
higher revenues for the Canadian weld overlay companies is primarily due to their presence in Canada
where oil sands operations require large amounts of clad pipe and components, and the emphasis is on
local shops and faster turnaround times.
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.
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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
§ CermaClad enables superior thermal treatment, preventing underlying substrate damage of
sensitive materials such as white iron. CermaClad has proven capable of cladding limited
ductility materials without cracking or coating spallation.
§ Better properties than weld overlay due to lower dilution or dissolution.
§ CermaClad enables improved metallurgy, including the ability to retain amorphous and
nanocrystalline content in overlay coatings in addition to low dilution with base metal for
improved wear and corrosion resistance.
§ 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.
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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 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’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.
The Company has also constructed the following barriers for potential competitors:
§ Product development expertise in MesoCoat;
§ 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 products in the development 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’s 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 CermaCladWR 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..
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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.
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 a sales representative in Houston,
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 intends to set-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 commitment for 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 Cermaclad625 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 $2-1,500+ million per project, successful introduction of CermaCladCRA 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 before the end of calendar year 2016.
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.
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.
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 is 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 is in
compliance in all material respects with all laws, rules, regulations and requirements that affect their
respective businesses and that such compliance does not impose a material impediment on either entities
ability to conduct business.
Climate Change Legislation and Greenhouse Gas Regulation
A majority of the climate change related studies over the past couple decades have indicated that
emissions of certain gases contribute to warming of the Earth’s atmosphere. In response to these studies,
many nations have agreed to limit emissions of “greenhouse gases” or “GHGs” pursuant to the United
Nations Framework Convention on Climate Change, and the “Kyoto Protocol.” Although the United
States did not adopt the Kyoto Protocol, several states have adopted legislation and regulations to reduce
emissions of greenhouse gases.
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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 has 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 has adopted this approach because it believes 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 is 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 product
line is the end result of federally funded research and development.
Employees
As of May 31, 2015, the Company and its subsidiary, MesoCoat has 25 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.
The Company is the subject of a formal inquiry by the Commission which inquiry may harm our business
and results of operations.
On or about November 21, 2014, the Company received a subpoena related to a non-public fact finding
inquiry from the Securities and Exchange Commission (“Commission”). The Company responded to the
formal order of investigation and subpoena by collecting, preserving and producing documentation to the
Commission. Although the Commission does not explain the motivation or focus of an enforcement
investigation, we believe that the Commission seeks to determine whether there have been any violations
of federal securities laws. The mere existence of an inquiry does not mean that the Commission has
concluded that the Company or anyone associated with the Company has violated federal securities laws
or that the Commission has a negative opinion of any Company related person, entity or security.
Furthermore, it is impossible at this stage of the inquiry to assess the likelihood of an action being
threatened or filed against the Company or any Company related person or entity. Therefore, it is
impracticable to formulate any opinion about the likelihood of an unfavorable outcome or estimate of the
amount or range of potential losses. The Company is cooperating with the Commission’s investigation.
30
The Company and MesoCoat failed to satisfy certain loan amounts due to a secured creditor as of April
of 2015, pursuant to which failure a court appointed receiver has been designated to administer
repayment.
Since MesoCoat was unable to repay amounts due to a secured third party creditor of approximately
$1,341,963 that was due on April 27, 2015, a court order was issued on August 18, 2015, in which the
control over substantially all of MesoCoat’s assets became subject to the determination of a court
appointed receiver designated to administer the repayment of a default amount of $1,770,932.03. The
Company is in the process of securing a financing sufficient to repay said creditor though as of yet no
financing for this purpose has been secured nor can any commitment for such financing be assured.
The Company has a history of significant operating losses and such losses may continue in the future.
The Company incurred net losses of $26,954,336 for the period from June 27, 2006 (inception) to May
31, 2015. Since we have been without significant revenue since inception and have only recently started
to producing revenue, such revenue being insufficient to support operations, losses will 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, 2015 and 2014 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
$11,203,578 as of May 31, 2015. 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 and secured 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
and creditors to seek satisfaction of amounts owed. The Company does intend to address its obligations
but without additional capital funding it may be unable to satisfy the debt holders which in turn
potentially subjects the Company to additional legal actions.
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. However the Company’s financial resources are limited, which limitation may slow the pace at
which proprietary technologies can become commercial. 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.
31
We face significant commercialization risks related to technological businesses.
The industries in which MesoCoat operates and plans 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 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 good 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 us.
Market acceptance of the products and processes produced by MesoCoat is critical to our growth.
We expect to generate revenue and realize a gain on our interest in MesoCoat from the development and
sale of products and processes produced by MesoCoat. Market acceptance of those products is therefore
critical to our growth. If our customers do not accept or purchase those products o processes produced by
MesoCoat, then our revenue, cash flow and operating results will be negatively impacted.
MesoCoat competes with larger and better financed corporations.
Competition within the industrial coatings industry and other high technology industries is intense. While
each of MesoCoat’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 competitive
entities may enter the market in the future. Some of MesoCoat’s existing and potential competitors have
longer operating histories, greater name recognition, large customer bases and significantly greater
financial, technical and marketing resources than we do, including well known multi-national
corporations. Accordingly, MesoCoat’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 research and development, or be more successful at marketing new products, any of
which factors may hurt our prospects for success.
General economic conditions will affect our operations.
Changes in the general domestic and international climate may adversely affect the financial performance
of the Company. 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.
32
MesoCoat relies upon patents and other intellectual property.
MesoCoat relies 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 MesoCoat 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 expects to prepare patent applications in accordance with their respective worldwide
intellectual property strategies on acquiring new technologies. However, neither it nor the Company can
be certain that any patents will be issued with respect to future patents pending or future patent
applications. Further, neither it 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 has 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
Environmental laws and other governmental legislation may affect our business.
Should the technologies which MesoCoat has 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.
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.
The Company and those entities in which it holds an interest may face liability claims.
Although MesoCoat intends 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.
33
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 the
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 additional contractual indemnification obligations under employment agreements with its
executive officers and indemnification obligations to its directors. 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. Although the
Company does carry Director’s & Officers liability insurance, which coverage may mitigate the financial
expense associated with indemnification claims, 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 us and our stockholders.
ITEM 1B.
UNRESOLVED STAFF COMMENTS
None.
34
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 $2,491 a month paid to Cool Grove Realty.
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 16,000 sq. feet of the research and
development space located at 24112 Rockwell Drive, Euclid, Ohio 44117 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 $4,500 paid to Powdermet per month.
The Company owns an 11,000 sq ft custom-engineered CermaClad manufacturing facility located at
24220 Rockwell Drive, Euclid Ohio, 44060. The facility includes 3 CermaClad arc lamps, one for plate
and development work, and one prototype pipe cladding system, and has 3MW of power available to
support CermaClad development and production. MesoCoat entered into a ground lease with Sherman
properties for $3,000/month for the land underlying the facility, for a 12 year lease with a purchase
option. As part of the Settlement and Exchange Agreement with Powdermet dated July 23, 2015,
Powdermet agreed to purchase the land under the purchase contract for $410,000 and convey title free
and clear to MesoCoat. MesoCoat has several obligations to separate utilities from Powdermet and
provide additional access prior to title transfer, agreed to be completed before November 30, 2015.
The Company maintains approximately 4000 sq ft of powder production and support facilities operated
on the Powdermet shop floor under a “use and services agreement” finalized May 31, 2014, and
extending through May 2016. Under the use and services agreement, MesoCoat continues to have
exclusive access to all PComP powder production and support equipment, floor space, most utilities, and
other support from Powdermet along with the right to purchase PComP production and analytical
equipment and liquidation (ebay) value at any time. The use and services agreement is set at
$8000/month. Under the settlement and stock repurchase agreement with Powdermet, title to all PComP
manufacturing and analytical support equipment with an estimated liquidation value of $120,000 was
transferred to MesoCoat on July 23, 2015.
ITEM 3.
LEGAL PROCEEDINGS
George Town Associates S.A.
On May 4, 2015, George Town Associates, S.A. (“George Town”) initiated legal proceedings against the
Company and MesoCoat, Inc. in the United States District Court for the Southern District of New York
alleging that they had defaulted on a secured promissory note due to George Town in the original
principal amount of $1,341,963.34. The complaint sought recovery of the principal amount of the loan in
addition to default interest, attorney’s fees and costs of collection.
On August 14, 2015, further to a hearing on a motion filed by George Town asserting that the Company
and MesoCoat had violated a temporary injunction entered previously in the case, the Court announced
that it would appoint a receiver for Mesocoat. On August 18, 2015, the Court appointed a receiver for
MesoCoat, granted George Town summary judgment on its claims, and denied the Company’s
counterclaims with leave to file a third party complaint. The Court entered a final judgment against the
Company and MesoCoat for $1,770,932.03.
On August 28, 2015, George Town filed a motion seeking an award of attorney’s fees in the amount of
$27,918.04. The Company and MesoCoat intend to oppose this motion. The Company and MesoCoat also
intend to appeal the Court’s order and final judgment along with all previously issued Court orders in this
case. The Company has until September 17, 2015 to file a notice of appeal.
35
Sonoro Invest S.A.
On October 2, 2014, Sonoro Invest, S.A. (“Sonoro”) initiated legal proceedings against the Company
alleging that it defaulted on two convertible debt obligations and a promissory note due to Sonoro in the
principal aggregate amount of $2,105,000. The complaint sought $3,187,057 which amount included
interest, penalties and legal fees.
On May 15, 2015, Sonoro and the Company entered into a settlement agreement resolving the litigation.
The settlement agreement included execution of a new senior convertible promissory note and related
loan documents which provided that the Company would pay Sonoro $2,915,000 on or before February
29, 2016. In the event that the promissory note is not paid on a timely basis, the amount due to Sonoro
would increase to $3,215,000 plus interest at 5.0% per annum. The litigation was dismissed with
prejudice.
Sonoro Demand Derivative Demand
On July 31, 2015, the Company received notice that Sonoro had filed a statement of claim for arbitration
through JAMS in New York, New York. Sonoro alleges that the Company breached the senior
convertible promissory note and related loan documents as a result of its transaction with Powdermet as
described in Abakan’s press release dated July 27, 2015. Sonoro claims damages in the default amount of
the senior convertible promissory note of $3,215,000, interest at 10% in addition to an award of attorney’s
fees and costs in an unspecified amount. The Company has filed a response to Sonoro’s statement of
claim and has asserted defenses. No final hearing date has been set as of this date.
Joe T. Eberhard
On August 28, 2014, Joe Eberhard (“Eberhard”) filed a complaint in the United States District Southern
District of Florida alleging that the Company defaulted on a convertible note and promissory note in the
principal aggregate amount of $550,000. The complaint sought $720,699 plus interest, penalties and legal
fees. On September 11, 2015, the parties entered into a settlement agreement resolving the litigation. The
Company agreed pursuant to the settlement agreement to pay Eberhard $550,000 on December 31, 2015
and $100,000 on April 30, 2016, in addition to providing a consent judgment in the amount of $750,000
and a consent judgment in the amount of $100,000, to be filed with the court in the event that Abakan
fails to satisfy the agreed payments..
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 was based on Paloma’s failure to perform
according to the terms of a consulting agreement dated May 2, 2011. The Company no longer intends to
proceed with its complaint and expects that the legal proceedings will be dismissed without prejudice.
36
Securities and Exchange Commission
On or about November 21, 2014, the Company received a subpoena related to a non-public fact finding
inquiry from the Commission. The Company responded to the formal order of investigation and subpoena
by collecting, preserving and producing documentation to the Commission. Although the Commission
does not explain the motivation or focus of an enforcement investigation, we believe that the Commission
seeks to determine whether there have been any violations of federal securities laws. The mere existence
of an inquiry does not mean that the Commission has concluded that the Company or anyone associated
with the Company has violated federal securities laws or that the Commission has a negative opinion of
any Abakan related person, entity or security. Furthermore, it is impossible at this stage of the inquiry to
assess the likelihood of an action being threatened or filed against the Company or any Company related
person or entity. Therefore, it is impracticable to formulate any opinion about the likelihood of an
unfavorable outcome or estimate of the amount or range of potential losses. The Company is cooperating
with the Commission’s investigation.
ITEM 4.
MINE SAFETY DISCLOSURE
Not applicable.
ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED
STOCKHOLDER MATTERS, AND BUSINESS ISSUER PURCHASES OF
EQUITY SECURITIES
The Company’s common stock is quoted on the OTCQB electronic quotation system under the symbol
“ABKI”. These prices reflect inter-dealer prices without retail mark-up, mark-down, or commission, and
may not necessarily reflect actual transactions. The following table sets forth the high and low bid prices
for the common stock as reported for each quarterly period over the last two fiscal years.
High and Low Bid Prices
Year
Quarter Ended
High
Low
2015
May 31
$0.57
$0.31
2015
February 28
$0.58
$0.25
2014
November 30
$1.21
$0.60
2014
August 31
$1.36
$0.86
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
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.
37
Common Stock
As of September 14, 2015, there were approximately 1,200 shareholders of record holding a total of
80,391,088 shares of fully paid and non-assessable common stock of the 2,500,000,000 shares of
common stock, par value $0.0001, authorized. The board of directors believes that the number of
beneficial owners is greater than the number of record holders because a portion of our outstanding
common stock is held in broker “street names” for the benefit of individual investors. The holders of the
common stock are entitled to one vote for each share held of record on all matters submitted to a vote of
stockholders. Holders of the common stock have no pre-emptive rights and no right to convert their
common stock into any other securities. There are no redemption or sinking fund provisions applicable to
the common stock.
Preferred Stock
As of September 14, 2015, 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 14, 2015, there were zero warrants outstanding to purchase shares of the Company’s
common stock.
Stock Options
As of September 14, 2015, there were 3,725,000 stock options outstanding to purchase shares of our
common stock.
Convertible Debt Securities
As of September 14, 2015, there were ten convertible debt securities convertible into the shares of its
common stock for an aggregate principal amount of $5,614,713 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.
38
One convertible debt security, in the principal amount of $2,915,000, due on or before February 29, 2016,
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.
One secured convertible debt security, in the principal amount of $1,341,963, due on or before April 27,
2015, bore no interest and was convertible at $0.80 per conversion unit (subject to decrease in the event of
dilutive issuances), which unit consisted 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. 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. On August 18, 2015, a
summary judgment was entered in favor of the holder in the amount of $1,770,932.03.
One convertible debt security, in the principal amount of $78,750, due on or before June 1, 2016, accrued
interest at 6% per annum, convertible at 60% of the lowest trading price for 20 prior trading day from the
date of conversion per conversion unit, which unit consists of one share of our common stock. The
Company shall pay interest in common stock “interest shares”. The Company has reserved 1,458,000
shares in the name of the holder for conversion.
One convertible debt security, in the principal amount of $52,500, due on or before June 3, 2016, accrued
interest at 6% per annum, convertible at 60% of the lowest trading price for 20 prior trading day from the
date of conversion per conversion unit, which unit consists of one share of our common stock. The
Company shall pay interest in common stock “interest shares”. The Company has reserved 1,053,000
shares in the name of the holder for conversion.
One convertible debt security, in the principal amount of $52,500, due on or before June 3, 2016, accrued
interest at 6% per annum, convertible at 60% of the lowest trading price for 20 prior trading day from the
date of conversion per conversion unit, which unit consists of one share of our common stock. The
Company shall pay interest in common stock “interest shares”. The Company has reserved 1,053,000
shares in the name of the holder for conversion.
One convertible debt security, in the principal amount of $125,000 due on or before December 10, 2016,
carries an original issue discount of $20,000, bears no interest and is convertible at 60% of the lowest
trading price for 20 prior trading day from the date of conversion per conversion unit, which unit consists
of one share of our common stock. The Company has reserved 2,000,000 shares in the name of the
holder for conversion.
One convertible debt security, in the principal amount of $50,000 due on or before June 15, 2016,
extendable for 9 month, accrued interest at 10% per annum, and has a variable conversion price,
convertible at 60% of the three lowest closing bid price for 20 prior trading day from the date of
conversion per conversion unit, which unit consists of one share of our common stock. The note contains
certain restrictive covenants. The Company has reserved 1,000,000 shares in the name of the holder for
conversion.
39
One convertible debt security, in the principal amount of $60,000 due on or before July 7, 2017, carries an
original issue discount of $6,000, bears no interest and is convertible at the lessor of $0.55 or 60% of the
lowest trading price for 25 prior trading day from the date of conversion and can convert all or any part of
the outstanding and unpaid principal sum and accrued interest into fully paid and non-assessable shares of
common stock as per the conversion formula, which consists of a number of shares receivable upon
conversion equals the dollar conversion amount divided by the conversion price. The holder may advance
additional consideration under the agreement to the Company up to aggregate principal amount of
$400,000. The Company has reserved 5,000,000 shares in the name of the holder for conversion.
One convertible debt security, in the principal amount of $100,000 due on or before February 6, 2016,
accrued interest at 12% per annum, and is convertible at a 42% discount to the average of the 5 lowest
closing bid prices for 10 prior trading day from the date of conversion into fully paid and non-assessable
shares of common stock as per the conversion unit, which unit consists of one share of common stock.
The note contains certain restrictive covenants. The Company has reserved 2,500,000 shares in the name
of the holder for conversion.
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). There were no additional shares issued as of May 31, 2015.
Purchases of Equity Securities made by the Issuer and Affiliated Purchasers
The Company did not repurchase any shares of its common stock during the fiscal year ended May 31,
2015.
On July 23, 2015, the Company and Powdermet, its minority owned subsidiary, entered into a settlement
and exchange agreement, pursuant to which agreement the Company increased its ownership of
MesoCoat to 100%. The settlement and exchange agreement also caused the Company to decrease its
minority ownership in Powdermet from 24.1% to 3.6% in exchange for the remaining 11.9% of
MesoCoat owned by Powdermet, $1,000,000 in cash payment in one payment of $250,000 and five
monthly installments of $150,000, land and equipment worth $600,000, the extinguishment of existing
intercompany debt of $486,000, and the return of 400,000 outstanding Company common shares to
authorized capital for cancellation.
Recent Sales of Unregistered Securities; Use of Proceeds from Registered Securities
On August 13, 2015, our board of directors authorized the issuance of 361,875 shares of its common
stock with a one year downside protection such that if the Company completes any form of equity or
convertible debt financing at a sale price or conversion price that is lower than the per share purchase
price, which additional shares would be provided to decrease the investor’s cost basis in the shares to
equal that of the lower priced equity or convertible debt financing:
40
Name
Consideration
Basis
Shares
Exemption
Lorenza Barroso Rivera
$50,000 Subscription
125,000 Sec. 4(2)/Reg D
Alejandra Barroso Rivera
$50,000 Subscription
125,000 Sec. 4(2)/Reg D
Jose Vicente Estevez Barroso
$11,250 Subscription
28,125 Sec. 4(2)/Reg S
Guillermo Espinosa Barroso
$22,500 Subscription
56,250 Sec. 4(2)/Reg S
Fernando Estevez Barroso
$11,000 Subscription
27,500 Sec. 4(2)/Reg S
The Company complied with the exemption requirements of Section 4(2) of the Securities Act based on
the following factors: (1) the issuances were isolated private transactions by the Company which did not
involve a public offering; (2) the offerees had access to the kind of information which registration would
disclose; and (3) the offerees are financially sophisticated.
The Company complied with the requirements of Regulation D of the Securities Act by: (i) foregoing any
general solicitation or advertising to market the securities; (ii) offering only to accredited offerees; (iii)
having not violated antifraud prohibitions with the information provided to the offerees; (iv) being
available to answer questions by the offerees; and (v) providing restricted common shares and warrants to
the offeree.
On August 13, 2015 our board of directors authorized the issuance of 260,000 shares of its common stock
in reliance upon the exemptions from registration provided by Section 4(2), of the Securities Act:
Name
Value
Consideration
Shares
Exemption
Ryan Owen
$32,000
Accounts Payable
100,000 Sec. 4(2)
Anupam Ghildyal
$32,000
Bonus
100,000 Sec. 4(2)
Financial Insights
$19.200
Service
60,000 Sec. 4(2)
The Company complied with the exemption requirements of Section 4(2) of the Securities Act based on
the following factors: (1) the issuances were isolated private transactions by the Company which did not
involve a public offering; (2) the offerees had access to the kind of information which registration would
disclose; and (3) the offerees are financially sophisticated.
Trading Information
The Company’s common stock is quoted on the OTCQB 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.
41
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 increase sales for our
PComP products and to complete the development and qualification of our CermaClad clad pipe products
and begin sales of our CermaClad wear-resistant clad plate products. Meanwhile, the Company will
continue internal research and development efforts and collaborate with development partners 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, 2015,
in pursuing the fulfillment of our plan:
§ The Company secured a $3 million strategic investment from one of the world’s largest wear-
resistant clad plate manufacturer, UP Scientech . In addition to the investment, UP Scientech have
entered into an agreement to develop, manufacture, and sell the Company’s PComP thermal spray
coating and CermaClad clad metal products in Taiwan, China, Japan, and Korea on a joint
venture basis.
§ MesoCoat along with Oak Ridge National Laboratory won a $1 million award from the
Department of Energy to develop a process to join dissimilar metal alloys. The primary objectives
of the DOE project are to develop functional gradient transition joints between carbon steel and
austenitic stainless steel for nuclear reactors, and to develop advanced joining techniques for
dissimilar materials used in nuclear fission reactors.
§ MesoCoat won a $150,000 SBIR (Small Business Innovation Research), award from the National
Institute of Health (NIH) to develop antimicrobial coatings using its high-speed large-area metal
cladding technology CermaClad. The primary objective of the NIH project is to develop copper-
based antimicrobial coatings primarily for contact surfaces in hospitals that could also be applied
to many other public areas such as airports, bus and railway stations, schools, restaurants and
work places. Antimicrobial coatings could have a significant impact on public health by
preventing the outbreak of infections and diseases. MesoCoat has demonstrated exceptional initial
results and expects follow-on funding from NIH to further develop and commercialize this
product.
§ The Company appointed Mr. Stephen Goss as its Chief Operating Officer
§ The Company appointed Mr. Robert Miller as its interim Chief Financial Officer
§ MesoCoat incorporated a wholly owned subsidiary in Mexico, MesoCoat de Mexico S.A. de
C.V., and appointed Mr. Jose Maria Ribot Barroso as its President and CEO.
§ The Company entered into a Settlement Agreement with Sonoro in connection with a dispute
regarding promissory notes for an aggregate principal amount of $2,105,000, which caused
Sonoro to file a lawsuit against the Company on October 1, 2014, in the United States District
Court for the Southern District of Florida.
§ The Company completed initial field-testing, on full-sized production equipment, of its
proprietary nanocomposite liquid metal corrosion-resistant coating, PComP-M, with a leading
42
steel producer. The Company is also working with several of the world’s largest steel and
aluminum companies to validate component life extension on zinc pot rolls used extensively in
the continuous hot dip galvanizing process, as well as other components used in the handling and
processing of molten metals.
§ The Company secured initial sales and test orders for PComP coatings from some of Mexico’s
largest steel manufacturers. The Company also made significant progress in driving the oil and
gas industry in Mexico towards early commercial adoption of its CermaClad pipe cladding
products.
§ The Company completed field testing of a PComP coating at one of the largest steel companies in
Mexico and as a result anticipates repeat commercial order of the product. The Company is also
testing its PComP coatings in Taiwan in cooperation with its partner in Asia, UP Scientech.
Furthermore, The Company has received its first repeat orders from an international oil field
services customer in Canada.
§ The Company’s partner in Asia, one of the largest international wear-plate manufacturers, UP
Scientech has completed initial testing of CermaClad wear-resistant clad plates. The outstanding
metallurgical and mechanical properties of CermaClad wear-resistant clad plates, coupled with
UP Scientech’s sales and marketing channels in 35 countries, is expected to accelerate market
adoption and drive growth for the Company’s CermaClad wear-resistant clad plate products.
§ The Company has surpassed the initial goal for Phase I scale-up of its PComP thermal spray
powder production, from 6,000 pounds/year to 36,000 pounds/year and has actually increased its
PComP production capacity to 60,000 pounds/year. At the current sales price, the Company's
60,000 pounds/year production could translate to approximately $5 million in annual thermal
spray powder sales and help facilitate the Company's expansion of its PComP thermal spray
coating services business, which could add an additional $1.5 million in annual revenues by fully
utilizing our existing thermal spray cell and adding another eight hour shift.
§ The Company exhibited at the largest thermal spray conference and trade show, International
Thermal Spray Conference and Exposition, and secured over 15 trial and test orders from
industry leaders for PComP powders and coatings from the exposition
43
Subsequent to the twelve month period ended May 31, 2015:
§ The Company increased its ownership of MesoCoat to 100% in exchange for decreasing the
Company's minority ownership in Powdermet from 24.1% to 4.5%. The Company acquired from
Powdermet the remaining 11.9% of MesoCoat, along with land and equipment worth $550,000,
the extinguishment of existing inter-company debt of $486,000, the return of 400,000 outstanding
Company common shares to authorized capital and $1,000,000 in cash.
§ The Company received its first commercial PComP order for the coating large roller screens from
one of the largest steel manufacturing and iron ore processing companies in Mexico. The initial
order is expected to be followed by repeat orders and an annual contract to coat all of the rolls
used at this facility as we earn their confidence with outstanding material results in critical areas.
The Company has also received orders for coating lances which are used heavily in iron ore
production and anticipates trial orders for coating tuyeres, pumps, clad plates, turbines and other
manufacturing components.
§ The Company and its technology development partner, Northern Alberta Institute of Technology,
begun operations at the prototype demonstration facility for developing, testing and
commercializing wear-resistant clad pipe and components. This facility is intended to serve as a
pilot-scale wear-resistant clad pipe manufacturing facility for the development and qualification
of wear-resistant clad pipes, and as a stepping stone for setting-up a full-scale wear-resistant clad
pipe manufacturing facility in Alberta. The new facility will also serve as a platform for the
Company's introduction to the Alberta oil sands market, which, with proven reserves estimated at
more than 169 billion barrels, is one of the largest oil resources in the world and a major source of
oil for Canada, the United States and Asia. Since Alberta oil sands production is expected to
increase significantly over the next decade, producers want to extend the life of the carbon steel
pipes used for the hydro-transportation of tailings with harder, tougher coatings that protect pipes
from the abrasiveness of tar-like bituminous oil sands.
§ The United States District Court of the Southern District of New York granted a summary
judgment motion in favor of George Town against the Company and MesoCoat. The Court's
ruling focused on the contractual basis of the loan obligation, and declined to consider the
Company's wider defenses. The Court issued an order finding the Company and MesoCoat liable
for the full principal and interest due in the amount of $1,770,932. On August 19, 2015, the Court
appointed a receiver over MesoCoat to administer payment of the judgment. The Company is
seeking to refinance all of its outstanding debt, and if unsuccessful, will on appeal seek relief
from the judgment and the order appointing a receiver.
§ The Company secured $518,750 in convertible debt financing from multiple lenders to finance
ongoing operations and growth at MesoCoat.
§ The Company received a notice of default from the Ohio Development Services Agency in
respect to amounts due to the Innovation Ohio Loan Fund in connection with a Loan Agreement
dated July 20, 2012. The loan is secured by certain equipment owned by MesoCoat.
§ MesoCoat and Metalsol 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.
§ The Company settled a complaint lodged by Eberhard.
44
Results of Operations
(000’s)
For the years ended
May 31,
Change
Revenues
2015
2014
$
%
Commercial
$
296 $
553 $
(257)
(46)
Contract and grants
642
284
358
126
Other income
102
17
85
500
1,040
854
186
22
Cost of revenues
563
298
265
89
Gross profit
477
556
(79)
(14)
General and administrative
5,916
6,329
(413)
(7)
Stock options expense
1,052
1,120
(68)
(6)
Operation Loss
(6,491)
(6,893)
402
5
Interest exp & amortization of discount on debt
(594)
(449)
(145)
32
Other income (expense)
(708)
(237)
(471)
199
Loss before non-controlling interest
(7,793)
(7,579)
(214)
3
Non-controlling interest in MesoCoat loss
341
1,623
(1,282)
(79)
Loss before income taxes
(7,452)
(5,956)
(1,496)
25
Income taxes
-
-
-
-
Net Income
$ (7,452) $ (5,956) $
(1,496)
25
Revenues
Revenues for the year ended May 31, 2015, were $1,040,069 as compared to $853,566 for the year ended
May 31, 2014, a increase of 22%. 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 $296,135 as compared to $552,952
in the prior year, contract and grant revenues of $642,228 in the current year as compared to $283,748 in
the prior year, and other income of $101,706 as compared to $16,866 in the prior year. Commercial
revenue in the current year decreased by 46% when compared to the prior year due to the expiration of
the Petrobras contract in fiscal year end 2014. However, after taking into consideration the expiration of
the Petrobras contract in 2014, commercial revenue otherwise increased by 14% in 2015. Commercial
revenue in 2015 was also hindered by the temporary closure of the Ohio manufacturing facility in fiscal
2015, while equipment was installed and reconfigured to increase the production capacity of PComP.
Meanwhile, contract and grant revenue increased 126% in the current year over the prior year is due in
part to an increase in grant applications.
We expect commercial revenue to increase over the next twelve months as MesoCoat’s implements its
PComP expansion plan while continuing to focus on the development of existing and anticipated
products.
45
Gross Profit
Gross profit for the twelve month period ended May 31, 2015 was $477,060 or 46% of revenue compared
to $556,009 or 65% of revenue for the twelve month period ended May 31, 2014, a decrease of 14%.
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 when compared to the prior period, much of the
decrease can be attributed to the expiration of the Petrobras contract which contract realized a higher
gross margin in 2014. With the exclusion of this revenue, the gross profit margin percentage remained at
46% for both periods. The increase in gross profit dollar amount as compared to the prior period was the
direct result of increased grant revenue.
We expect gross profit to decrease over the next twelve months as a 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 attributed to the Company for the year ended May 31, 2015, were $7,452,239 compared to a
net loss of $5,956,310 for the year ended May 31, 2014, an increase loss of $1,492,929 or 25%.
This change in net losses in the current year as compared to net losses in the prior year can be attributed
to the minority interest allocation of the MesoCoat loss. The increase ownership of MesoCoat by the
Company on May 31, 2014, resulted in a lower percentage of the MesoCoat loss being allocated to the
minority interest. The allocation for the year ending May 31, 2015 was $341,302 compared to
$1,622,593 for the period ending May 31, 2014, a $1,281,291 difference. The remaining differences
relate to the increased costs attributed to other expenses/income which accounted for $616,000 in
additional expense in large part due to a $815,853 penalty expense recorded on two loans for the period
ending May 31, 2015, net of a gain from our ownership of Powdermet. In addition, general and
administrative expenses decreased by $480,311 while we continue the development and implementation
of commercial applications.
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, 2015 were $6,968,443 compared to $7,448,754 for the
year ended May 31, 2014, a decrease of $480,311 or 6.4%. The decrease in operating expenses over the
prior year can be attributed to decreases in administrative costs, professional fees – related party, payroll
and benefits, research & development and stock option expenses. These reduction where largely offset
by higher professional fees, consulting, consulting related party and depreciation and amortization. Stock
option expense and stock expense on note conversion also decreased during the current year. The
professional fees increased by $590,834 as result of litigation expenses related to loans and the
Commission inquiry. These expenses were offset by $578,039 in lower payroll,$678,802 in lower
research & development costs and cash contracts.
46
We expect that operating expenses will continue to pursue our growth strategy over the next five years
will require significant increases in personnel and facilities along with significant research and
development to ensure that products nearing commercialization are brought to market as quickly and as
effectively as possible.
Other Expense
Other expense for the year ended May 31, 2015 was $1,302,158 as compared to $686,158 for the year
ended May 31, 2014. The increase in other expense of $616,000 in the current year over the prior year
can be primarily attributed to a penalty recorded on a loan settlement of $480,363 in the current year. The
Company also accrued $335,490 loan default penalty for the current year relating to an August 2015
default judgment against the company. The Company also recorded a profit associated with our equity
interest in Powdermet of $140,735 in the current year versus a loss in the prior year of $126,519. Other
significant transactions include a loss on intangible impairment of $110,600 in the prior year compared to
zero for the current year and a zero gain.
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, 2015, which amounted to $9,693,815. 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 changes in liquidity, capital resources, and stockholders’ equity.
As of May 31, 2015, the Company had current assets of $160,949 and total assets of $14,220,770.
As of May 31, 2014, the Company had current liabilities of $11,364,527 and total liabilities of
$11,411,239.
The Company had stockholders’ equity of $2,809,531 and a working capital deficit of $11,203,578 at
May 31, 2015.
Net cash used in operating activities for the year ended May 31, 2015 was $3,478,862 as compared to
$2,808,036 for the year ended May 31, 2014. 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.
47
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, 2015, was $487,486 as compared to net
cash used in investing activities of $698,040 for the year ended May 31, 2014. 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, 2015 was $3,959,983 as compared
to $3,304,147 the year ended May 31, 2014. 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 $4,728,385 during the twelve month period ended
May 31, 2015. 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, 2015, 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 does not expect to pay cash dividends in the foreseeable future.
The Company has a defined stock option plan titled “The Abakan Inc., 2009 Stock Option Plan” and
contractual commitments with all of its officers and directors.
The Company has plans for the purchase of plant or equipment in connection with expansion of the
PComP powder production commercial line.
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, 2015, 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.
48
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 $11,203,578 as of May
31, 2015. 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. 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 and the satisfaction
of outstanding debt;
§ the volatility of the stock market; and
§ general economic conditions.
We wish to caution readers that our operating results are subject to various risks and uncertainties that
could cause our actual results to differ materially from those discussed or anticipated including the factors
set forth in the section entitled Risk Factors included elsewhere in this report. We also wish to advise
readers not to place any undue reliance on the forward looking statements contained in this report, which
reflect our beliefs and expectations only as of the date of this report. We assume no obligation to update
or revise these forward looking statements to reflect new events or circumstances or any changes in our
beliefs or expectations, other that is required by law.
Critical Accounting Policies
The notes to the audited financial statements for the Company for the years ended May 31, 2015 and
2014, 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.
49
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 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
New Accounting Standards
In April 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update
(“ASU”) No. 2015-03, Simplifying the Presentation of Debt Issuance Costs. The new standard requires
that debt issuance costs be presented in the balance sheet as a direct reduction from the carrying value of
the associated debt liability, consistent with the presentation of a debt discount. The standard is effective
for public entities for annual and interim periods beginning after December 15, 2015. Early adoption is
permitted. The Company is currently assessing the impact that these standards will have on its financial
statements.
In August 2015, FASB issued ASU No. 2015-15, Presentation and Subsequent Measurement of Debt
Issuance Costs Associated with Line-of Credit Arrangements. This standard stated that the SEC staff
would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently
amortizing these costs. The Company is currently assessing the impact that these standards will have on
its financial statements.
In August 2014, FASB issued ASU No. 2014-15, Disclosure of Uncertainties about an Entity’s Ability to
Continue as a Going Concern. 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.
50
In May 2014, FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-
09”). ASU 2014-09 will supersede nearly all existing revenue recognition guidance. The standard’s core
principle is that a company will recognize revenue when it transfers promised goods or services to
customers in an amount that reflects the consideration to which the company expects to be entitled in
exchange for those goods or services. In doing so, the standard creates a five-step model that requires a
company to exercise judgment when considering the terms of the contracts and all relevant facts and
circumstances. The five steps require a company to identify customer contracts, identify the separate
performance obligations, determine the transaction price, allocate the transaction price to the separate
performance obligations and recognize revenue when each performance obligation is satisfied. In August,
FASB issued ASU 2015-14 to defer the effective date so that the standard is effective for public entities
for annual and interim periods beginning after December 15, 2017. The standard allows for either full
retrospective adoption, where the standard is applied to all periods presented, or modified retrospective
adoption where the standard is applied only to the most current period presented in the financial
statements. Early adoption is permitted. The Company is currently assessing the impact that these
standards will have on its financial statements.
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, 2015 and 2014 are attached hereto as F-1
through F-50.
51
Abakan Inc.
Index to Financial Statements
Reports of Independent Registered Public Accounting Firms
F-2
Consolidated Balance Sheets for the years ended May 31, 2015 and 2014
F-4
Consolidated Statements of Operations for the years ended May 31, 2015 and 2014
F-5
Consolidated Statements of Stockholders' Equity (Deficit) for the years ended May 31, 2015 and 2014
F-6
Consolidated Statements of Cash Flows for the years ended May 31, 2015 and 2014
F-8
Notes to the Consolidated Financial Statements
F-10
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
(the "Company") as of May 31, 2015, and the related consolidated statements of operations, stockholders'
equity (deficit), and cash flows for the year then ended. These consolidated 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 audit.
We conducted our audit in accordance with standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated 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 audit 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 on 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 consolidated financial statements. An
audit also includes assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall consolidated financial statement presentation. We believe
that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Abakan Inc. and Subsidiaries as of May 31, 2015, and the
results of their operations and their cash flows for the year then ended, in conformity with accounting
principles generally accepted in the United States of America.
The accompanying consolidated 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 $26,954,336 and a working capital
deficit of $11,203,578. 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/ Maloney Novotny LLC
Cleveland, Ohio
September 15, 2015
F-2
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, Inc. and Subsidiaries (together the
“Company”) as of May 31, 2014 and the related consolidated statement of operations, stockholders’ equity
(deficit) and cash flows for the year 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 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 the 2014 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 the 2014 financial statements. 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-3
ABAKAN INC.
CONSOLIDATED BALANCE SHEETS
May 31,
May 31,
2015
2014
ASSETS
Current assets
Cash and cash equivalents
$
23,487 $
31,111
Accounts receivable
66,749
119,122
Inventory
34,560
-
Prepaid expenses
36,153
185,770
Total current assets
160,949
336,003
Non-current assets
Deferred finance fees, net
15,865
14,070
Property, plant and equipment, net (Note 4)
5,139,803
5,539,549
Patents and licenses, net (Note 5)
6,115,636
6,106,686
Assignment agreement - MesoCoat (Note 6)
131,581
171,055
Investment – Powdermet (Note 7)
2,292,552
2,151,817
Goodwill (Note 2)
364,384
364,384
Total Assets
$
14,220,770 $
14,683,564
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable
$
1,603,670 $
1,552,402
Accounts payable - related parties
506,808
675,041
Capital leases - current portion (Note 13)
31,994
31,465
Loans payable (Note 8)
6,743,456
4,820,816
Accrued interest - loans payable
331,470
306,160
Loan payable- related parties
369,468
224,799
Accrued interest - related parties
29,094
480
Deferred rental revenue
167,272
-
Accrued liabilities
1,581,295
652,212
Total current liabilities
11,364,527
8,263,375
Non-current liabilities
Loans payable (Note 8)
-
1,056,106
Capital leases - non-current portion (Note 13)
46,712
54,040
Total liabilities
11,411,239
9,373,521
Commitments and contingencies
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
79,501,088 issued and outstanding – May 31, 2015,
68,374,815 issued and outstanding - May 31, 2014
7,952
6,840
Subscription receivable
-
(28,000)
Paid-in capital
29,738,682
24,530,074
Contributed capital
5,050
5,050
Accumulated deficit
(26,954,336)
(19,502,097)
Accumulated other comprehensive income
(1,259)
-
2,796,089
5,011,867
Non-controlling interest
13,442
298,176
Total stockholders' equity
2,809,531
5,310,043
Total liabilities and stockholders' equity
$
14,220,770 $
14,683,564
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
F-4
ABAKAN INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended May 31,
Revenues
2015
2014
Commercial
$
296,135
$
552,952
Contract and grants
642,228
283,748
Rental revenue and other income
,
101,706
16,866
1,040,069
853,566
Cost of revenues
563,009
297,557
Gross profit
477,060
556,009
Expenses
General and administrative
General and administrative
995,302
749,001
Professional fees
1,258,374
667,540
Professional fees - related parties
47,572
63,028
Consulting
1,038,249
989,952
Consulting - related parties
286,503
237,397
Payroll and benefits expense
685,325
1,263,364
Depreciation and amortization
879,414
784,057
Research and development
648,846
1,327,648
Stock expense on debt conversion
76,500
246,390
Stock options expense
1,052,358
1,120,377
Total operating expenses
6,968,443
7,448,754
Loss from operations
(6,491,383)
(6,892,745)
Other (expense) income
Interest expense:
Interest – loans
(440,885)
(310,067)
Interest - related parties
(29,991)
(1,113)
Amortization of discount on debt
(123,387)
(137,364)
Total interest expense
(594,263)
(448,544)
Interest income
6
15
Loss on intangible impairment
-
(110,600)
Loss on sale of assets
(32,783)
(510)
Loan default penalty
(815,853)
-
Equity in Powdermet gain (loss)
140,735
(126,519)
Total other (expense) income
(1,302,158)
(686,158)
Net loss before non-controlling interest
(7,793,541)
(7,578,903)
Non-controlling interest in MesoCoat loss
341,302
1,622,593
Net loss attributable to Abakan Inc.
(7,452,239)
(5,956,310)
Provision for income taxes
-
-
Net loss
$ (7,452,239) $
(5,956,310)
Net loss per share - basic
(.10)
(.09)
Net loss per share - diluted
(.10)
(.09)
Weighted average number of common
shares outstanding - basic
74,797,346
64,663,650
Weighted average number of common
shares outstanding - diluted
74,797,346
64,663,650
Net loss attributable to Abakan Inc.
$ (7,452,239)
$ (5,956,310)
Other comprehensive income (loss)
Change in foreign currency translation, net
of tax effects of $0 and $0, respectively
(1,259)
-
Total comprehensive income (loss)
attributable to Abakan Inc.
$ (7,453,498)
$ (5,956,310)
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
F-5
ABAKAN INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
Non-controlling
Other
Total
Paid-in
Contributed
Subscription
Subscription
Accumulated
Comprehensive
Stockholders’
Shares
Amount
Capital
Capital
Receivable
Payable
Interest
Deficit
Income (loss)
Equity
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
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
May 31, 2014 continued on following
page
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
F-6
ABAKAN INC.
1CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) – CONTINUED
Non-controlling
Other
Total
Paid-in
Contributed
Subscription
Subscription
Accumulated
Comprehensive
Stockholders’
Shares
Amount
Capital
Capital
Receivable
Payable
Interest
Deficit
Income (loss)
Equity
May 31, 2014 continued from previous
page
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
Subscription receivables received from
May 30, 2014
-
$
-
$
-
$
-
$
28,000 $
-
$
-
$
-
$
-
$
28,000
Common shares issued for services on July
29, 2014 at $0.71 per share
43,800
4
31,094
-
-
-
-
-
-
31,094
Private placements for cash, closed
October 6, 2014 at $0.40 per share
1,069,500
107
427,693
-
-
-
-
-
-
427,800
Common shares issued for downside
protection on October 6, 2014
1,792,973
179
(179)
-
-
-
-
-
-
-
Private placement for cash, closed
November 11, 2014 at $0.40 per share
7,500,000
750
2,999,250
-
-
-
-
-
-
3,000,000
Private placement for cash, closed
November 16, 2014 at $0.40 per share
270,000
27
107,973
-
-
-
-
-
-
108,000
Accounts payable debt converted into
stock, November 26, 2014 for $0.40 per
share including costs of $17,000
100,000
10
56,988
-
-
-
-
-
-
56,998
Note payable converted into stock,
November 26, 2014 for $0.40 per share
including costs of $59,500
350,000
35
199,465
-
-
-
-
-
-
199,500
Beneficial warrant conversion valuation
for convertible debt
-
-
390,534
-
-
-
-
-
-
390,534
Stock option expense
-
-
1,052,358
-
-
-
-
-
-
1,052,358
MesoCoat stock option expense allocated
to minimum interest
-
-
(56,568)
-
-
-
56,568
-
-
-
Comprehensive loss for the year
-
-
-
-
-
-
-
-
(1,259)
(1,259)
Net loss for the year
-
-
-
-
-
-
(341,302)
(7,452,239)
-
(7,793,541)
Balance, May 31, 2015
79,501,088 $
7,952
$
29,738,682
$
5,050
-
-
13,442
(26,954,336)
(1,259)
2,809,532
F-7
ABAKAN INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended
May 31,
2015
2014
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) before non-controlling interest
$
(7,793,541) $
(7,578,903)
Adjustments to reconcile net (loss) to net
cash (used in) operating activities:
Depreciation and amortization
879,414
784,057
Amortization of discount on debt
123,387
137,364
Amortization of deferred financing fees
3,764
1,729
Stock options expense
1,052,359
1,120,377
Stock expense on note conversion
76,500
246,390
Stock issued for services
31,099
285,700
Stock issued for retirement plan expense
-
234,723
Equity in investee (profit)/ loss
(140,735)
126,519
Loss on intangible impairment
-
110,600
Loan default penalty
815,853
-
Loss on sale of capital asset
32,783
510
Changes in operating assets and liabilities:
Accounts receivable
52,373
(13,599)
Inventory
(34,560)
-
Prepaid expenses
149,617
(68,742)
Accounts payable
292,084
1,133,234
Accounts payable - related parties
(168,233)
424,037
Accrued interest – related parties
28,614
-
Accrued interest - loans payable
359,496
213,759
Deferred rental revenue
167,272
-
Accrued liabilities
593,592
34,209
Total adjustments
4,314,679
4,770,867
NET CASH (USED IN) OPERATING ACTIVITIES
(3,478,862)
(2,808,036)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property, plant, equipment and website
(470,890)
(662,703)
Proceeds from sale of capital assets
18,000
-
Capitalized patents and licenses
(34,596)
(35,337)
NET CASH (USED IN) INVESTING ACTIVITIES
(487,486)
(698,040)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from sale of common stock
3,535,800
110,000
Proceeds from loans payable
1,153,084
3,144,692
Payments on loans payable
(696,603)
(161,591)
Proceeds from loans payable - related parties
11,501
185,648
Payments on loans payable - related parties
(65,000)
(44,470)
Repayments of capital leases
(6,799)
(6,376)
Stock issuable
28,000
76,244
NET CASH PROVIDED BY FINANCING ACTIVITIES
3,959,983
3,304,147
EFFECT OF EXCHANGE RATE CHANGES ON CASH
(1,259)
-
NET DECREASE IN CASH AND CASH EQUIVALENTS
(7,624)
(201,929)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
31,111
233,040
CASH AND CASH EQUIVALENTS, END OF PERIOD
$
23,487 $
31,111
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
F-8
ABAKAN INC
CONSOLIDATED STATEMENTS OF CASH FLOWS – CONTINUED
For the years ended
May 31,
2015
2014
Supplemental Disclosures:
Cash paid for income taxes
$
- $
-
Cash paid for interest
$
79,750 $
57,119
Supplemental Non-cash Disclosures:
Notes and accounts payable converted to stock
Accounts payable
$
(42,650) $
-
Accounts payable - related parties
-
(288,500)
Loans payable
(132,800)
(1,048,483)
Accrued interest
(4,548)
(10,694)
Accrued interest - related parties
-
(2,237)
Common stock
179,998
1,349,914
Subscription receivable
-
-
$
- $
-
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 & accrued interest converted to notes payable
Accounts payable
$
- $
233,121
Accounts payable - related parties
(198,168)
-
Accrued interest and penalty
(357,315)
-
Notes payable
357,315
-
Notes payable - related parties
198,168
(233,121)
$
- $
-
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
F-9
ABAKAN INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDING MAY 31, 2015 AND 2014
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-six 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 24.1% interest in
Powdermet.
F-10
ABAKAN INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDING MAY 31, 2015 AND 2014
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 Canada Corporation (“MST TECH”), an 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 Inc. (“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.
On July 29, 2014, MesoCoat formed a wholly owned subsidiary company named MesoCoat de Mexico
S.A. de C.V., a Mexican corporation. MesoCoat de Mexico S.A. de C.V. was formed to generate sales
in Mexico.
The Company’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”). The Company is actively involved in supporting their research and
development “R&D”, market development, and commercialization efforts. Since the Company is in the
pre-commercialization phase for the majority of its products, the Company will need successive rounds
of financing to fund R&D, lengthy qualification periods, sales and marketing efforts.
F-11
ABAKAN INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDING MAY 31, 2015 AND 2014
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
For the year ended May 31, 2015 and 2014, our government contracts accounted for 62% and 33% 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. As of
May 31, 2015 and 2014, we had no amounts in excess of FDIC insured limits. We have not experienced
any losses in such accounts.
Consolidation Policy
The accompanying May 31, 2015 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, 2015, 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, 2015, is as follows:
Name of Subsidiary
Percentage of Ownership
MesoCoat Technologies Canada Corporation
100.00%
MesoCoat Coating Services, Inc. (Nevada)
100.00%
PT. MesoCoat Indonesia
100.00%
MesoCoat de Mexico S.A. de C.V.
100.00%
F-12
ABAKAN INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDING MAY 31, 2015 AND 2014
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, 2015. 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-13
ABAKAN INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDING MAY 31, 2015 AND 2014
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 Operation; 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 Operation. 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 earnings (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 Statements of Operation. Basic EPS is computed by dividing net earnings (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, 2015, 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-14
ABAKAN INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDING MAY 31, 2015 AND 2014
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, 2015 and 2014 management has determined that no allowance
for doubtful accounts is required.
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.
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 determined that no adjustment is necessary as of May 31, 2015 or 2014.
F-15
ABAKAN INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDING MAY 31, 2015 AND 2014
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
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.
Revenue Recognition – Rental Revenue
Operating leases arise from leasing of the Company’s equipment to a customer in Canada. The initial
lease term is 24 months. The Company recognizes revenue ratably over the lease term. Amounts
received in excess of the leasing revenue recognized are reported as a deferred rental revenue liability on
the balance sheet. Depreciation expense for assets subject to operating leases is provided on a straight-
line method.
Grant Revenue
Revenue from grants is generally recorded when earned as defined under the terms of the agreements. Each
grant document sets the timing of amounts that are allowed to be billed and how to bill those amounts. We generally
look at a two week time period to bill from and work on the incurred costs for the same time period and bill according
to preset amounts that are allowed to be billed for per the grant documents. This is then billed through a government
billing system, reviewed by the government department, and then payment is sent to us.
Research and Development Costs
Research and development costs are charged to expense as incurred and are included in operating expenses. Total
research and development costs were $648,846 and $1,327,648 for the years ended May 31, 2015 and 2014,
respectively.
Advertising Expenses
Advertising costs are expensed as incurred. Advertising expenses are included in general and
administrative expense in the Statements of Operation. For both the years ended May 31, 2015 and 2014
no advertising expenses was incurred.
F-16
ABAKAN INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDING MAY 31, 2015 AND 2014
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
Shipping and Handling Costs
The Company’s shipping and handling costs are included in cost of revenues 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.
Foreign Currency Translation
Assets and liabilities of non-U.S. subsidiaries that operate in a local currency environment are translated
to U.S. dollars at exchange rates in effect at the balance sheet date with the resulting translation
adjustments recorded directly to a separate component of shareholders' equity. Income and expense
accounts are translated at average exchange rates during the year. Where the U.S. dollar is the functional
currency, translation adjustments are recorded in income.
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-17
ABAKAN INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDING MAY 31, 2015 AND 2014
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 is reviewed annually for impairment due to its
indefinite life.
Impairment of Long Lived Assets
We evaluate whether events and circumstances have occurred which indicate the remaining estimated
useful life of long lived assets, including other intangible assets, may warrant revision or the remaining
balance of an asset may not be recoverable. The measurement of possible impairment is based on a
comparison of the fair value of the related assets to the carrying value using discount rates that reflect the
inherent risk of the underlying business. Impairment losses, if any, would be recorded to the extent the
carrying value of the assets exceeds the implied fair value resulting from this calculation. As of May 31,
2015, the Company determined there was no impairment and at May 31, 2014, the Company recorded an
impairment (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, 2015 and 2014, the Company’s management believes that there are certain outstanding
legal proceedings which could have a material adverse effect on the financial position of the Company.
F-18
ABAKAN INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDING MAY 31, 2015 AND 2014
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
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.
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, 2015, of $26,954,336, and a working capital deficit of $11,203,578. 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, 2015
May 31, 2014
Machinery and equipment
$
5,031,635
$
4,298,705
Construction in progress
942,782
1,282,370
Computer equipment and office furniture
54,139
54,139
Leasehold improvements
835,593
835,593
6,864,149
6,470,807
Less accumulated depreciation and amortization
(1,724,346)
(931,258)
$
5,139,803
$
5,539,549
Depreciation and amortization expense was $819,853 and $718,161 for the years ended May 31, 2015 and
2014, respectively. The Company recognized a loss of $32,783 and $510 for equipment sold during the
years ending May 31, 2015 and 2014, respectively.
F-19
ABAKAN INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDING MAY 31, 2015 AND 2014
NOTE 5 – PATENTS AND L ICENSES
Patents and licenses consist of the following:
May 31, 2015
May 31, 2014
Patents
$
206,316 $
171,720
Website
21,000
21,000
Intellectual property - research and development
6,009,600
6,009,600
6,236,916
6,202,320
Less accumulated amortization
(121,280)
(95,634)
$
6,115,636 $
6,106,686
Amortization expense was $25,646 and $26,423 for the years ended May 31, 2015 and 2014,
respectively. In the years ended May 31, 2015 and 2014, we have capitalized an additional $34,596 and
$35,337, respectively, on patents and licenses, and have begun amortizing those according to our policy.
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,
2016
13,754
2017
13,754
2018
13,754
2019
13,754
2020 and beyond
51,020
$ 106,036
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 year ended May 31, 2015 and 2014, no royalty payments were made.
F-20
ABAKAN INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDING MAY 31, 2015 AND 2014
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 in amortization expense for both of the years ended May 31, 2015 and 2014.
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 the Company’s restricted common shares. Because of this transaction our interest is
now a fully diluted 24.1% 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, 2013
$
2,449,312
Equity in loss for the year ended May 31, 2014
(126,519)
Reduction in Investment for Share Exchange
$
(170,976)
Investment balance, May 31, 2014
2,151,817
Equity in gain for year ended May 31, 2015
140,735
Investment balance, May 31, 2015
$
2,292,552
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, 2014 and May 31, 2015 is 11.92%.
F-21
ABAKAN INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDING MAY 31, 2015 AND 2014
Below is a table with summary financial results of operations and financial position of Powdermet:
NOTE 7 – INVESTMENT IN NON-CONTROLLING INTEREST - continued
Powdermet Inc. and Subsidiary
For the year ended
For the year ended
May 31, 2015
May 31, 2014
Equity Percentage
24.1%
24.1%
Condensed income statement information:
$
Total revenues
$
4,594,761
1,952,591
Total cost of revenues
2,130,308
975,149
Gross margin
2,464,453
977,442
Total expenses
(1,469,383)
(995,945)
Other (expense)
(518)
(1,584,970)
Non-controlling interest in Terves
(109,760)
(Provision) for/benefit from income taxes
(300,829)
1,294,889
Net income (loss)
$
583,963
$
(308,584)
Company’s equity in net profit
$
140,735
$
(126,519)
Condensed balance sheet information:
May 31, 2015
May 31, 2014
Total current assets
$
2,759,756
$
624,299
Total non-current assets
3,435,558
2,884,479
Total assets
$
6,195,314
$
3,508,778
Total current liabilities
$
2,192,461
$
426,849
Total non-current liabilities
1,248,565
925,521
Total equity
2,754,288
2,156,408
Total liabilities and equity
$
6,195,314
$
3,508,778
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 24.1%
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-22
ABAKAN INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDING MAY 31, 2015 AND 2014
NOTE 8 – LOANS PAYABLE
As of May 31, 2015 and 2014, the loans payable balance comprised of:
Description
May 31, 2015
May 31, 2014
Convertible demand note to an unrelated entity bearing 5% interest per annum which matured $
- $
1,500,000
on September 14, 2014, which converted to a senior promissory note on May 15, 2015.
Convertible demand note to an unrelated entity bearing 5% interest per annum which matured
-
200,000
on September 14, 2014, which converted to a senior promissory note on May 15, 2015.
Convertible demand note to an unrelated entity bearing 5% interest per annum which matured
500,000
500,000
on July 14, 2014
Senior convertible promissory note to an unrelated entity bearing 5% interest per annum
2,647,853
-
which matures on February 29, 2016. The note is shown net of a discount of $267,147,
attributable to the beneficial conversion feature, and an effective interest rate of 18.33%.
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
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
15,000
Uncollateralized demand note to an unrelated entity bearing 8% interest per annum
43,600
43,600
Uncollateralized demand note to a related entity bearing 8% interest per annum
26,685
26,685
Uncollateralized demand note to a related entity bearing 8% interest per annum
80,994
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
20,000
Uncollateralized demand note to an unrelated entity bearing 8% interest per annum
30,867
30,867
Uncollateralized demand note to an unrelated entity bearing 5% interest per annum
250,000
250,000
Uncollateralized demand note to an unrelated entity bearing 5% interest per annum
406,766
130,000
Uncollateralized demand note to an unrelated entity bearing 6% interest per annum
59,950
-
Uncollateralized demand note to an unrelated entity bearing 6% interest per annum
24,950
-
Secured convertible promissory note to an unrelated entity bearing 18% default interest per
1,341,963
1,341,963
annum which matured on April 27, 2015
Collateralized term note to an unrelated entity bearing 5.15% interest per annum which
104,250
132,157
matures on September 7, 2018.
Uncollateralized demand note to a related entity bearing 8% interest per annum
21,308
21,308
Uncollateralized demand note to a related entity bearing 7% interest per annum
32,313
32,313
Uncollateralized demand note to an unrelated entity bearing 8% interest per annum
33,201
35,000
Uncollateralized demand note to an unrelated entity bearing 7% interest per annum
-
20,000
Uncollateralized term note to a related entity bearing 5% interest per annum which matured
198,168
-
on February 28, 2015
Collateralized note to an unrelated entity bearing 1% interest for the first year and then 7%
920,103
1,000,000
per annum for years two – seven.
Uncollateralized demand note to a related entity bearing 6% interest per annum
60,000
-
Convertible demand note to an unrelated entity bearing 7.5% imputed interest per annum
31,753
40,134
which matures on July 10, 2018.
Uncollateralized demand note to an unrelated entity bearing 8% interest per annum
30,000
-
Uncollateralized demand note to an unrelated entity bearing 6% interest per annum
15,000
-
Uncollateralized demand note to an unrelated entity bearing 6% interest per annum
20,000
-
Uncollateralized demand note to an unrelated entity bearing 6% interest per annum
25,000
-
Uncollateralized demand note to a related entity bearing 6% interest per annum
10,000
-
Uncollateralized demand notes to an unrelated entity bearing 5% interest per annum
-
405,000
Capital leases payable to various vendors expiring in various years through September 2016;
78,706
85,505
collateralized by certain equipment with a cost of $205,157.
7,191,630
6,187,226
Less current liabilities
7,144,918
5,077,080
Total long term liabilities
$
46,712 $
1,110,146
F-23
ABAKAN INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDING MAY 31, 2015 AND 2014
NOTE 8 – LOANS PAYABLE -continued
We owed $360,564 and $306,540 in accrued interest for the above notes as of May 31, 2015 and 2014,
respectively. We also amortized $123,387 and $137,364 in discount on debt for the years ended May 31,
2015 and 2014, respectively. All long-term maturities represent capitalized leases and will be due in
fiscal year 2017. The collateralized notes are secured by the MesoCoat assets per their respective loan
agreements.
As of May 31, 2015 and 2014, we had no restrictive covenants attached to any of the above referenced
notes except for the $1,000,000 ($920, 103 as of May 31, 2015) IOLF 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.
The Company recorded $815,853 default penalty expense during the period ending May 31, 2015. The
penalty is related to a settlement with Sonoro Invest S.A. (“Sonora”) and default judgment entered by the
court on the George Town Associates, S.A loan. The additional penalty recorded for Sonoro above the
accrued interest was $480,362 and is financed in the new $2,915,000 note as discussed below. The
Company accrued $335,490 penalty as of May 31, 2015 as result of the default judgment entered into by
the court on August 19, 2015 on the George Town Associates, S.A.
On May 19, 2015, the Company entered into a settlement agreement (“Settlement”) with Sonoro Invest
S.A. (“Sonoro”), in connection with a dispute that arose under certain amended convertible promissory
notes and a promissory note for an aggregate principal amount of $2,105,000, which caused Sonoro to file
a lawsuit against the Company on October 1, 2014 in the United States District Court for the Southern
District of Florida, alleging defaults on the promissory notes. The Settlement provides that all existing
promissory notes between the parties be cancelled and replaced with a new senior convertible promissory
note in the amount of $2,915,000 with interest at 5% payable in full on February 29, 2016 (“Note”). The
Note is convertible, at the sole option of Sonoro, for each dollar converted into one share of the
Company’s common stock and a ½ warrant that entitles the holder of one full warrant to purchase an
additional share of the Company at $1.50 until repayment. The Note ranks senior to any other
indebtedness, except with respect to existing secured creditors including George Town Associates S.A.
(“George Town”). Nevertheless, the Settlement allows the Company to enter into additional secured
indebtedness, on substantially the same terms as it has with George Town, for the purpose of satisfying
amounts due to George Town, if such indebtedness is secured from certain lenders or from within a
certain classification of lenders.
F-24
ABAKAN INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDING MAY 31, 2015 AND 2014
NOTE 8 – LOANS PAYABLE -continued
On May 4, 2015, George Town initiated legal proceedings against the Company and MesoCoat, Inc. in
the United States District Court for the Southern District of New York alleging that they had defaulted on
a secured promissory note due to George Town in the original principal amount of $1,341,963.34. The
complaint sought recovery of the principal amount of the loan in addition to default interest, attorney’s
fees and costs of collection. On August 14, 2015, at a hearing on a motion filed by George Town asserting
that the Company and MesoCoat had violated a temporary injunction entered previously in the case, the
Court announced that it was appointing a receiver for MesoCoat. On August 18, 2015, the Court entered
a written order appointing a receiver for MesoCoat. On August 18, 2015, the Court entered an order
granting George Town summary judgment on its claims, granting summary judgment in favor of George
Town on the Company and MesoCoat’s counterclaim and denying the Company and MesoCoat leave to
file a third party complaint. On August 18, 2015, the Court entered a final judgment against the Company
and MesoCoat for $1,770,932.03. The Company and MesoCoat intend to appeal this order and judgment
(and all prior orders). The Company has until September 17, 2015 to file its notice of appeal.
As result of a receiver being appointed on August 18, 2015, the Company reviewed MesoCoat’s loan
agreements with their lenders. The appointment would be considered a default under other loan
agreements. Thereof, the Company has reclassified three loans totaling $1,057,554 as current liabilities
for the period ending May 31, 2015. The Company is discussing methods to cure the default with the
largest lender of the three.
F-25
ABAKAN INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDING MAY 31, 2015 AND 2014
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, 2015 and 2014, we issued the following shares:
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.
On October 7, 2014, we issued 557,000 shares of our common stock for private placement valued at
$222,800. The Company also issued 512,500 shares of our common stock for subscription payable
valued at $205,000. In connection with this placement we had no offering costs.
On October 7, 2014, we issued 1,792,973 restricted shares due to a downside protection provision and the
placees agreed to cancel warrants to purchase 832,487 additional restricted share. The Company offered
downside stock price protection in two private placements that totaled 1,664,973 shares that closed in
April 2014 and May 2014. The down-side protection offered additional shares if new private placements
were offered within one year at a lower price. After receipt of these additional shares, the placees would
hold the same quantity of shares as if they would have had participated in any subsequent lower priced
private placement. As of the date of the issuance of this report, all private placements with downside
protection discussed in this paragraph are past the one year anniversary.
On November 11, 2014, we issued 7,500,000 shares of our common stock for private placement valued at
$3,000,000. In connection with this placement we had no offering costs.
On November 26, 2014, we issued 270,000 shares of our common stock for private placement valued at
$108,000. In connection with this placement we had no offering costs.
F-26
ABAKAN INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDING MAY 31, 2015 AND 2014
NOTE 9 – STOCKHOLDERS' EQUITY - continued
Conversion of debt to shares
For the years ended May 31, 2015 and 2014, we issued the following shares for conversion of debt to
shares:
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.
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.
On November 26, 2014, we converted a debt obligation of $140,000, for 350,000 shares of our restricted
common stock. In connection with this placement we incurred stock expense on conversion of $59,500.
On November 26, 2014, we converted accounts payable obligations for $40,000, or 100,000 shares of our
restricted common stock. In connection with this placement we incurred stock expense on conversion of
$17,000.
F-27
ABAKAN INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDING MAY 31, 2015 AND 2014
NOTE 9 – STOCKHOLDERS' EQUITY - continued
Share based compensation
For the years ended May 31, 2015 and 2014, the Company issued the following shares for services and
compensation:
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 employee’s
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.
On July 31, 2014, we issued 43,800 shares of our common stock for services to be performed valued at
$31,098. In connection with this placement we had no offering costs.
F-28
ABAKAN INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDING MAY 31, 2015 AND 2014
NOTE 9 – STOCKHOLDERS' EQUITY - continued
Common Stock Warrants
In connection with the above private placements we valued the common stock warrants granted during
the years ended May 31, 2015 and 2014, using the Black-Scholes model with the following
assumptions:
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.
A summary of the common stock warrants granted, forfeited or expired during the year ended May 31,
2015 and the year ended May 31, 2014 is presented below:
Weighted
Average
Weighted
Remaining
Average
Contractual
Number of
Exercise
Terms (In
Warrants
Price
Years)
Balance at June 1, 2013
2,842,992
$
1.80
1.00 years
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
Granted
-
-
-
-
Exercised
Forfeited or expired
(2,039,568)
1.89
Balance at May 31, 2015
-
$
-
-
Exercisable at May 31, 2015
-
$
-
-
Weighted average fair value of
warranted granted during the three
months ended May 31, 2015
$
NA
F-29
ABAKAN INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDING MAY 31, 2015 AND 2014
NOTE 10 – EARNINGS-PER-SHARE CALCULATION
Basic earnings per common share for the years ended May 31, 2015 and 2014 are calculated by dividing
net income (loss) by weighted-average common shares outstanding during the period. Diluted earnings
per common share for the years ended May 31, 2015 and 2014 are calculated by dividing net income
(loss) 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, 2015
May 31, 2014
Net loss
$
(7,452,239) $
(5,956,310)
Weighted-average common shares
74,797,346
64,663,650
Warrants
-
-
Options to purchase common stock
-
-
Dilutive potential common shares
74,797,346
64,663,650
Net earnings per share from operations:
Basic
$
(0.10) $
(0.09)
Diluted
$
(0.10) $
(0.09)
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, 2015
May 31, 2014
Common Stock Equivalents:
Warrants
-
2,039,568
Options to purchase common stock
3,475,000
3,419,994
Total of Common Stock Equivalents:
3,475,000
5,459,562
F-30
ABAKAN INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDING MAY 31, 2015 AND 2014
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 Directors
On May 6, 2014, we appointed a new member to our Board of Directors. The new Director’s
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.
On November 11, 2014, we appointed a new member to our Board of Directors.
Employment agreement
On December 20, 2014, we entered into an employment agreement effective January 1, 2015, with a
related individual to perform duties as the Chief Operating Officer of the Company and to continue to
serve as the Chief Executive Officer of MesoCoat. The individual also serves as a director of the
Company and MesoCoat. The employee retains previously granted stock options for his service as a
director. The terms of the employment agreement include a $20,000 per month salary of which $7,500
is deferred until the Company raises $3,000,000 in aggregate debt and equity. In addition, the executive
received a 1,000,000 stock options grant with an exercise price of $0.60 per share that will expire ten
years from the option grant date that vest in equal parts on May 31, 2015 and May 31, 2016. The
employment agreement will end on December 31, 2016 and at which time it can be renewed for two one
year periods. In the event that this agreement is terminated early, the employee may be eligible for a
severance payment.
Consulting Agreements
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 as our Chief Financial Officer, we did
not make any changes to the existing agreement. On May 29, 2015, this individual was removed from
his position for cause. The terms of the consulting agreement were $8,000 per month payable in
consulting fees and reimbursement 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; that were to
vest equally over 3 years (see Note 12). For the years ended May 31, 2015 and 2014, we expensed
$96,000 and $96,000, respectively, in connection with this contract which amounts are included in
consulting – related party. As of May 31, 2015 and 2014, we owed $79,293 and $188,978, respectively,
and is included in accounts payable - related party.
F-31
ABAKAN INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDING MAY 31, 2015 AND 2014
NOTE 11 – RELATED PARTY TRANSACTIONS - continued
Consulting Agreements - continued
On June 1, 2010, we entered into a consulting agreement with a company controlled by the spouse of
our Chief Executive Officer. The terms of the consulting agreement were $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 continued until May 31, 2014. For the years ended May
31, 2014 we expensed $25,000, in connection with this contract and are included in consulting – related
party. As of May 31, 2015 and 2014, we owed none and $5,515, respectively, and is included in
accounts payable - related party.
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. This amount increased to $12,500 on June 1, 2014. 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, 2015 and 2014, we expensed $150,000 and $120,000, respectively, in connection
with this contract, which amount is included in consulting – related party. As of May 31, 2015 and
2014, we owed $96,863 and $85,660, respectively, which amounts are 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 was in effect until February 28, 2015. For the year ended May 31, 2015 and 2014, we
expensed $49,400 and none, respectively, in connection with this contract, which amount is included in
consulting – related party.
On February 1, 2015, we entered into a consulting agreement with a related individual to provide
services as a consultant on introducing the Company to key industry players in the oil and gas industry
and assisting the Company in the identification of areas of mutual interest and setup of joint
development agreements, joint venture agreements, funding or other associations. The terms of the
consulting agreement are the consultant will be paid $5,000 per month plus reasonable expenses. The
term of this agreement is until January 31, 2016, unless terminated early with a 30 day notice. As of
May 31, 2015 we owed $20,000, which amount is included in accounts payable - related party.
F-32
ABAKAN INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDING MAY 31, 2015 AND 2014
NOTE 11 – RELATED PARTY TRANSACTIONS - continued
Notes Payable – Related Party
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, 2015, and 2014, we owed $21,308 and
$21,308 of principal, and $4,166 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. For the periods ending May
31, 2015, and 2014, we repaid an aggregate total of $65, 000 and $25,000. As of May 31, 2015 and
2014, we owed none and $65,000 of principal, and none and $864 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 $106,179. During the year ended
May 31, 2015, $11,500 additional was loaned. As of May 31, 2015 and 2014, we owed $107,679 and
$106,178 of principal, and $12,183 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, 2015 and
2014 we owed $32,313 and $32,313 of principal and $2,837 and none of accrued interest.
During the year ended May 31, 2015, we converted $198,168 of accounts payable due to a related party
to an uncollateralized term note, bearing 5% interest per annum and due on February 28, 2015. As of
May 31, 2015 we owed $198,168 of principal and $9,908 of accrued interest.
License agreement – Related Party
The Company has a license agreement with Powdermet, Inc., a related party, which grants the
Company an exclusive license to the use of technical information, proprietary know-how, data and patent
rights assigned to and/or owned by Powdermet, Inc. The agreement will end upon the last to expire valid
claim of licensed patents, unless terminated within the terms of the agreement.
As part of the agreement, the Company had a commitment to purchase consumable powders from
Powdermet, Inc. through July 1, 2014. Also, as part of the agreement the Company receives 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 none and $181,457 for the
years ended May 31, 2015 and 2014, respectively.
F-33
ABAKAN INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDING MAY 31, 2015 AND 2014
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, 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
5, 2013
50,000
$
1.25
10.00
consultant
on 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, 1,163,328 stock options were forfeited or rescinded 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-34
ABAKAN INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDING MAY 31, 2015 AND 2014
NOTE 12 – STOCK – BASED COMPENSATION - continued
2009 Stock Option Plan – The Company – continued
For the year ended May 31, 2015, the Company granted the following stock options:
For the year ended May 31, 2015
Options
Exercise
Expiration
To Whom
Grant Date
Granted
Price
term in years
Granted
Vesting Terms
Will vest in equal one third parts on
December
Granted to a
the anniversary date of the option
11, 2014
100,000
$
0.65
10.00
consultant
grant date
January 1,
Granted to an
Will vest in equal one half parts on
2015
1,000,000
$
0.60
10.00
employee
May 31, 2015 and 2016
Total
Granted
1,100,000
From June 1, 2014 to May 31, 2015, 994,994 stock options either expired without exercise according to
the option agreement or were rescinded by mutual agreement between the Company and respective
holders. One respective shareholder exercised 50,000 in stock options. After these grants and
expirations there are 6,525,000 stock options available for future grant.
Our board of directors administers our Plan, however, they may delegate this authority to a committee
formed to perform the administration function of the Plan. The board of directors or a committee of the
board has the authority to construe and interpret provisions of the Plan as well as to determine the terms
of an award. Our board of directors may amend or modify the Plan at any time. However, no
amendment or modification shall adversely affect the rights and obligations with respect to outstanding
awards unless the holder consents to that amendment or modification.
The Plan permits us to grant Non-Statutory stock options to our employees, directors and consultants.
The options issued under this Plan are intended to be Non-Statutory Stock Options exempt from Code
Section 409A.
The duration of a stock option granted under our Plan cannot exceed ten years. The exercise price of an
incentive stock option cannot be less than 100% of the fair market value of the common stock on the
date of grant.
The Plan administrator determines the term of stock options granted under our Plan, up to a maximum
of ten years, except in the case of certain events, as described below. Unless the terms of an optionee's
stock option agreement provide otherwise, if an optionee's relationship with us ceases for any reason
other than disability or death, the optionee may exercise any vested options for a period of ninety days
following the cessation of service. If an optionee's service relationship with us ceases due to disability
or death the optionee or a beneficiary may exercise any vested options for a period of 12 months in the
event of disability or death.
Unless the Plan administrator provides otherwise, options generally are not transferable except by will,
the laws of descent and distribution, or pursuant to a domestic relations order. An optionee may
designate a beneficiary, however, who may exercise the option following the optionee's death.
F-35
ABAKAN INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDING MAY 31, 2015 AND 2014
NOTE 12 – STOCK – BASED COMPENSATION - continued
2009 Stock Option Plan – The Company - continued
The value of employee and non-employee stock warrants granted during the year ended May 31, 2015
was estimated using the Black-Scholes model with the following assumptions:
May 6,
May 30,
December 11,
January 1,
2014
2013
2014
2015
Expected volatility (based on historical
134.49%
134.49%
135.46%
135.97%
volatility)
Expected dividends
0.00
0.00
0.00
0.00
Expected term in years
10
10
10
10
Risk-free rate
2.61%
2.48%
2.19%
2.12%
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-36
ABAKAN INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDING MAY 31, 2015 AND 2014
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, 2015 and 2014 is presented below:
Weighted
Average
Weighted
Remaining
Average
Contractual
Aggregate
Number of
Exercise
Terms
Intrinsic
Options
Price
(In Years)
Value
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
Balance at June 1, 2014
3,419,994
$
1.36
Granted
1,100,000
$
0.60
Exercised
(50,000)
$
0.65
Forfeited or expired
(994,994)
$
1.46
Balance at May 31, 2015
3,475,000
$
1.16
7.84 years
$
68,500
Exercisable at May 31, 2015
2,333,335
$
1.23
7.84 years
$
51,000
Weighted average fair value of
options granted during the year ended
May 31, 2015
$
0.60
F-37
ABAKAN INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDING MAY 31, 2015 AND 2014
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, 2015:
Options Outstanding
Options Exercisable
Weighted
Number
Average
Weighted
Number
Weighted
Range of
Outstanding
Remaining
Average
Exercisabl
Average
Aggregate
Exercise
at May 31,
Contractual
Exercise
Intrinsic
e at May
Exercise
Intrinsic
Price
2015
Life
Price
Value
31, 2015
Price
Value
$ 0.60
1,100,000
7.0 Years
$ 0.60
$
--
600,000 $ 0.60
$
--
$ 0.65
325,000
6.7 Years
$ 0.65
$
2,500
258,334 $ 0.65
$
2,500
$ 0.75
100,000
4.5 Years
$ 0.75
$
15,000
100,000 $ 0.75
$
15,000
$ 1.00
300,000
7.7 Years
$ 1.00
$
--
200,000 $ 1.00
$
--
$ 1.02
50,000
5.9 Years
$ 1.02
$
10,000
50,000 $ 1.02
$
10,000
$ 1.05
120,000
5.8 Years
$ 1.05
$
--
120,000 $ 1.05
$
--
$ 1.07
95,000
6.6 Years
$ 1.07
$
--
95,000 $ 1.07
$
--
$ 1.14
100,000
9.0 Years
$ 1.14
$
15,000
33,333 $ 1.14
$
5,000
$ 1.20
100,000
6.4 Years
$ 1.20
$
--
100,000 $ 1.20
$
--
$ 1.25
525,000
8.1 Years
$ 1.25
$
1,250
225,002 $ 1.25
$
1,250
$ 1.95
75,000
7.1 Years
$ 1.95
$
9,000
50,000 $ 1.95
$
6,000
$ 2.30
225,000
7.0 Years
$ 2.30
$
--
225,000 $ 2.30
$
--
$ 2.61
175,000
6.9 Years
$ 2.61
$
15,750
125,000
$ 2.61
$
11,250
$ 2.70
85,000
7.7 Years
$ 2.70
$
--
85,000 $ 2.70
$
--
$ 2.80
100,000
7.8 Years
$ 2.80
$
--
66,666 $ 2.80
$
--
3,475,000
7.8Years
$ 1.36
$
68,500
2,333,335 $ 1.24
$
51,000
The total value of employee and non-employee stock options granted during the years ended May 31,
2015 and 2014, was $424,623 and $1,089,451, respectively. During years ended May 31, 2015 and 2014
the Company recorded $1,052,358 and $1,120,377, respectively, in stock-based compensation expense
relating to stock option grants.
At May 31, 2015 and 2014 there was $898,692 and $1,696,214, 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 two fiscal years ended May 31:
For years ended May 31,
Expense
2016
$
601,240
2017
297,452
$
898,692
F-38
ABAKAN INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDING MAY 31, 2015 AND 2014
NOTE 12 – STOCK – BASED COMPENSATION - continued
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
July 2017 through November 2018.
There were no stock options granted for the years ending May 31, 2015 and 2014.
A summary of MesoCoat’s stock option plan as of May 31, 2015 and 2014, 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, 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
Number of
Weighted
Shares
Average Exercise
Price
Outstanding at May 31, 2014
2,900 $
30.98
Granted
-
-
Exercised
-
-
Forfeited
-
-
Outstanding at May 31, 2015
2,900 $
30.80
Options exercisable at May 31, 2015
1,896 $
30.24
F-39
ABAKAN INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDING MAY 31, 2015 AND 2014
NOTE 12 – STOCK – BASED COMPENSATION - continued
Stock Option Plan – MesoCoat - continued
The following table summarizes information about employee stock options under the MesoCoat Stock
Option Plan outstanding at May 31, 2015:
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
2015
Life
Price
Value
2015
Price
Value
$ 18.11
250
2.0 Years
$ 18.11
$
--
240 $ 18.11
$
--
$ 32.00
2,650
5.0 Years
$ 32.00
$
--
1,656 $ 32.00
$
--
2,900
4.74 Years
$ 30.80
$
--
1,896 $ 30.24
$
--
During years ended May 31, 2015 and 2014 MesoCoat recorded $56,568 and $69,015, respectively, in
stock-based compensation expense relating to stock option grants.
At May 31, 2015 and 2014 there was $82,143 and $134,168, 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 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
2016
$
54,875
2017
27,268
$
82,143
F-40
ABAKAN INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDING MAY 31, 2015 AND 2014
NOTE 13 –COMMITMENTS
Contribution Agreement
The Company and MesoCoat entered into a Contribution Agreement with Northern Alberta Institute of
Technology to establish a prototype demonstration facility for developing, testing and commercializing
wear-resistant clad pipe and components in Alberta, Canada. Out of the total project cost of $4,110,000;
CDN $2,750,000 is being provided by Alberta’s Ministry of Innovation and Advanced Education and
Western Economic Diversification Canada, CDN$160,000 by Northern Alberta Institute of Technology,
and the rest has been committed by MesoCoat and the Company. The agreement requires the Company
and MesoCoat to contribute cash of CDN$870,000 to the operating expenses and payroll of the facility
which will be invoiced quarterly with equal payments through January 2017. In addition, the Company
has committed to spend CDN$330,000, either by itself or with industry partners, for product testing,
qualification, and the hiring of a sales person in Canada during the two year term of this project. The
Company’s commitments in the agreement are a necessary precursor to commencing sales of CermaClad
wear resistant clad plate and pipe in Canada. MesoCoat has delivered equipment and will lease the
equipment over 24 months for a total rental value of CDN$500,000 of which CDN$333,333 has been
received as of May 31, 2015 and reflected in both rental revenue and deferred revenue liability. For the
year ending May 31, 2015 and 2014, the Company has recorded no operating expense reimbursement as
the facility is not yet commissioned. The amounts are to be settled in Canadian dollars and will be
converted from US dollars at the exchange rate in effect at the time of payment.
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
provided a total of 194 hours of service since inception. The Company has recorded this capital lease at
its fair value. During the years ended May 31, 2015 and 2014, the Company was not requested to
complete any of the required services.
The Company leases its office space in Florida on a month to month basis at a cost of $2,491 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
also leases from Powdermet a portion of Powdermet’s production facility for use of floor space and specialty
equipment for $8,000 per month through May 31, 2016. MesoCoat also rents land from a related party on which
the Company’s Cermaclad R&D and production facility is located for $3,500 per month through 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 $237,715 and $147,289 for the year ending May 31,
2015 and May 31, 2014, respectively. Interest expense for the capitalized leases for the year ending May 31,
2015 and May 31, 2014 was $906 and $619, respectively.
F-41
ABAKAN INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDING MAY 31, 2015 AND 2014
NOTE 13 –COMMITMENTS -continued
Minimum annual rental commitments are as follows at May 31, 2015:
For the years ended May 31,
Capital Leases
Operating Leases
2016
$
33,371 $
199,394
2017
56,659
103,394
2018
-
103,394
2019
-
96,000
2020 and thereafter
-
96,000
Total minimum lease payments
$
90,030 $
598,182
Less amount representing interest
( 11,324)
Present value of net minimum capital lease
payments
78,706
Less current maturities
(31,994)
Long-term obligations under capital leases
$
46,712
Operating Leases – Lessor
Future minimum rental payments as of May 31, 2015, to be received on non-cancelable operating lease in
Alberta, Canada are contractually due in Canadian dollars and will be converted to US dollars at the
exchange rate in effect at the time of payment are as follows:
Year Ending
May 31,
2016
CDN$
166,667
CDN$
166,667
F-42
ABAKAN INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDING MAY 31, 2015 AND 2014
NOTE 14 – INCOME TAXES
The following is an analysis of deferred tax assets as of May 31, 2015 and 2014:
Deferred Tax
Valuation
Assets
Allowance
Balance
Net 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)
$
-
Provision to tax return true ups
742,797
(742,797)
-
Additions for the year
2,468,782
(2,468,782)
-
Deferred tax assets at May 31, 2015
$
6,873,605
$
(6,873,605)
$
-
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.
F-43
ABAKAN INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDING MAY 31, 2015 AND 2014
NOTE 14 – INCOME TAXES – continued
Temporary differences between financial statement carrying amounts and tax basis of assets and
liabilities that give rise to significant deferred tax assets and liabilities are presented below at May 31:
2015
2014
Deferred tax assets:
Current:
Compensation accruals
$
18,893
$
32,365
Non-current:
Deferred tax assets:
Net operating loss carry forward
6,776,092
4,037,738
Stock options
2,212,970
1,867,488
Research and Development Credit
494,947
443,659
Equity loss in affiliates, net
199,247
199,247
Impairment of intangibles
13,379
33,121
Other
7
7
Total non-current deferred tax assets
9,696,642
6,581,260
Deferred tax liabilities:
Fixed asset & intangible basis
(2,052,503)
(2,122,999)
Equity profit in affiliates, net
(276,600)
(228,854)
Book fair value adjustment in affiliate
(512,527)
(599,746)
Total non-current deferred tax liabilities
(2,841,630)
(2,951,599)
Net non-current deferred tax assets
6,855,012
3,629,661
Net deferred tax assets before valuation
6,873,605
3,662,026
allowance
Valuation allowance
(6,873,605)
(3,662,026)
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:
2015
2014
Expected income tax (benefit) at
Federal statutory tax rate – 34% and 34%
$
(2,533,761) $
(2,155,099)
Gain on Exchange transaction
1,966,771
Other permanent differences
72,164
112,532
Research and Development Credit
(7,185)
(70,331)
Other adjustments
(742,797)
(146,917)
Change in valuation allowance
3,211,579
153,224
Income tax expense
$
-
$
-
F-44
ABAKAN INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDING MAY 31, 2015 AND 2014
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, 2014, 2013 and 2012, 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,
2015 and 2014, 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, 2015 expires as
follows:
Research and
Expiring
Abakan
Development
Year
Amount
MesoCoat Amount
Combined Amount
Credit
2027
$
--
$
--
$
--
$
--
2028
--
--
--
2029
--
96,736
96,736
10,360
2030
--
1,395,110
1,395,110
109,528
2031
27,101
56,673
83,774
7,179
2032
2,359,640
--
2,359,640
89,194
2033
4,097,256
2,315,874
6,413,130
152,127
2034
--
3,390,110
3,390,110
119,374
2035
3,318,736
2,872,445
6,191,181
7,185
Total
$ 9,802,733
$ 10,126,948
$
19,929,681
$
494,947
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.
F-45
ABAKAN INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDING MAY 31, 2015 AND 2014
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, 2015 and 2014, the Company contributed $13,230 and $24,607, 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, 2015 and 2014, the
Company contributed 0 and 57,242 shares of its common stock to the Plan with a value of $0 and
$161,995, respectively.
F-46
ABAKAN INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDING MAY 31, 2015 AND 2014
NOTE 16 – RECENT ACCOUNTING PRONOUNCEMENTS
In April 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update
(“ASU”) No. 2015-03, Simplifying the Presentation of Debt Issuance Costs. The new standard requires
that debt issuance costs be presented in the balance sheet as a direct reduction from the carrying value of
the associated debt liability, consistent with the presentation of a debt discount. The standard is effective
for public entities for annual and interim periods beginning after December 15, 2015. Early adoption is
permitted. The Company is currently assessing the impact that these standards will have on its financial
statements.
In August 2015, FASB issued ASU No. 2015-15, Presentation and Subsequent Measurement of Debt
Issuance Costs Associated with Line-of Credit Arrangements. This standard stated that the SEC staff
would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently
amortizing these costs. The Company is currently assessing the impact that these standards will have on
its financial statements.
In August 2014, FASB issued ASU No. 2014-15, Disclosure of Uncertainties about an Entity’s Ability to
Continue as a Going Concern. 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.
In May 2014, FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-
09”). ASU 2014-09 will supersede nearly all existing revenue recognition guidance. The standard’s core
principle is that a company will recognize revenue when it transfers promised goods or services to
customers in an amount that reflects the consideration to which the company expects to be entitled in
exchange for those goods or services. In doing so, the standard creates a five-step model that requires a
company to exercise judgment when considering the terms of the contracts and all relevant facts and
circumstances. The five steps require a company to identify customer contracts, identify the separate
performance obligations, determine the transaction price, allocate the transaction price to the separate
performance obligations and recognize revenue when each performance obligation is satisfied. In August,
FASB issued ASU 2015-14 to defer the effective date so that the standard is effective for public entities
for annual and interim periods beginning after December 15, 2017. The standard allows for either full
retrospective adoption, where the standard is applied to all periods presented, or modified retrospective
adoption where the standard is applied only to the most current period presented in the financial
statements. Early adoption is permitted. The Company is currently assessing the impact that these
standards will have on its financial statements.
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-47
ABAKAN INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDING MAY 31, 2015 AND 2014
NOTE 17 – COMPREHENSIVE INCOME
Comprehensive income consists of two components, net income and OCI. OCI refers to revenue,
expenses, and gains and losses that under GAAP are recorded as an element of shareholders’ equity but
are excluded from net income. Abakan’s OCI consists of foreign currency translation adjustments from
its Canadian subsidiary not using the U.S. dollar as their functional currency.
There was no OCI prior to November 30, 2014. The comprehensive loss from the Company’s foreign
currency translation adjustment for the year ended May 31, 2015 was $1,259, with no tax effect.
NOTE 18– SUBSEQUENT EVENTS
Management has evaluated subsequent events after the balance sheet date, through the issuance of the
financial statements, for appropriate accounting and disclosure. The Company has determined that there
were no such events that warrant disclosure or recognition in the financial statements, except for the
below.
Stock Options Granted
On June 1, 2015, we granted 250,000 stock options to an officer of a subsidiary at an exercise price of
$0.60 per share, and these options will expire ten years from the grant date, and will vest in equal one
third parts on the anniversary of the option grant date, beginning on June 1, 2016.
Settlement and Exchange Agreement
On July 23, 2015, the Company and Powdermet, its minority owned subsidiary, entered into a Settlement
and Exchange Agreement, pursuant to which the agreement the Company increased its ownership of
MesoCoat to 100%. The Settlement and Exchange caused the Company to decrease its minority
ownership in Powdermet from 24.1% to 3.6%. in exchange for the remaining 11.9% of MesoCoat owned
by Powdermet, $1,000,000 in cash payment in one payment of $250,000 and five monthly installments of
$150,000, land and equipment worth $600,000, the extinguishment of existing intercompany debt of
$486,000, and the return of 400,000 outstanding Company common shares to treasury.
IOLF Loan Notice of Default
The Company received a notice of default from the Ohio Development Services Agency dated September
4, 2015, in respect to amounts due to the Innovation Ohio Loan Fund in connection with a Loan
Agreement dated July 20, 2012. The loan is secured by certain equipment owned by MesoCoat
F-48
ABAKAN INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDING MAY 31, 2015 AND 2014
NOTE 18– SUBSEQUENT EVENTS - continued
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 14, 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
sought $720,698.72 plus interest. On September 11, 2015, the parties entered into a settlement agreement
resolving the litigation. The Company agreed pursuant to the settlement agreement to pay Eberhard
$550,000 on December 31, 2015 and $100,000 on April 30, 2016, in addition to providing a consent
judgment in the amount of $750,000 and a consent judgment in the amount of $100,000, to be filed with
the court in the event that Abakan fails to satisfy the agreed payments..
On August 14, 2015, further to a hearing on a motion filed by George Town asserting that the Company
and MesoCoat had violated a temporary injunction entered previously in the case, the Court announced
that it would appoint a receiver for Mesocoat. On August 18, 2015, the Court appointed a receiver for
MesoCoat, granted George Town summary judgment on its claims, and denied the Company’s
counterclaims with leave to file a third party complaint. The Court entered a final judgment against the
Company and MesoCoat for $1,770,932.03. On August 28, 2015, George Town filed a motion seeking
an award of attorney’s fees in the amount of $27,918.04. The Company and MesoCoat intend to oppose
this motion. The Company and MesoCoat also intend to appeal the Court’s order and final judgment
along with all previously issued Court orders in this case. The Company has until September 17, 2015 to
file a notice of appeal.
Private Placement
On August 13, 2015, the board of directors authorized the issuance of five private placements for an
aggregate $144,750, or 361,875 units consisting of one share of our restricted common stock with a
purchase price of $.40 per with a one year downside protection such that if the Company completes any
form of equity or convertible debt financing at a sale price or conversion price that is lower than the per
share purchase price, which additional shares would be provided to decrease the investor’s cost basis in
the shares to equal that of the lower priced equity or convertible debt financing.
On August 13, 2015 our board of directors authorized the issuance of 260,000 shares of its restricted
common stock to retire of which 160,000 shares were used to retire accounts payable obligations and
100,000 restricted shares as bonus to employee.
F-49
ABAKAN INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDING MAY 31, 2015 AND 2014
NOTE 18– SUBSEQUENT EVENTS - continued
New Debt Obligations
The Company issued various convertible debt securities subsequent to May 31, 2015 totaling $518,750.
The terms for $333,750 of the obligations are generally that accrue interest between 6% to12% per
annum, convertible at 60% of the lowest trading price for 20 prior trading days from the date of
conversion per conversion unit, which consists of one share of our common stock. The terms for
$185,000 of the new debt obligations include original issue discounts convertible at effective interest rates
of up to 44%, convertible at between 60% to 100% of the lowest trading price for 20 prior trading days
from the date of conversion, per conversion unit. Each conversion unit consists of one share of our
common stock. The Company has the option of paying off the $518,750 convertible debt securities prior
to the conversion dates. The Company has reserved 14,064,000 shares in the name of the holders for
possible conversion. This debt will be due in the years ending May 31 as follows: includes original issue
discounts:
2016
$225,000
2017
$233,750
2018
$60,000
F-50
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, 2015. 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.
52
The Company’s management conducted an assessment of the effectiveness of our internal control over
financial reporting as of May 31, 2015, 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, 2015, 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, 2015, 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, 2015, 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 quarter ended May 31, 2015, there has been no change in internal control over financial
reporting that has materially affected, or is reasonably likely to materially affect our internal control over
financial reporting.
ITEM 9B.
OTHER INFORMATION
None.
53
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
62
2009
President, Chief Executive Officer,
Chief Financial Officer and Director
Andrew J. Sherman
52
2010
Director
Stephen Goss
72
2012
Chief Operating Officer and Director
Raymond Tellini
49
2012
Director
Dr. Ryan Owen
44
2014
Director
Keven Chen
51
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. Mr. Miller was appointed the Chief Financial Officer on May 29,
2015.
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.
54
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 and financial decisions. 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 and is also
a director of MesoCoat .
Business Experience:
From 1996 until the present Mr. Sherman has served as CEO for Powdermet and from 2008 until May 31,
2014 served as CEO of MesoCoat. Mr. Sherman also serves at the CEO of Terves Inc. since its inception
on June 13, 2013 (a subsidiary of Powdermet). 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 30 years of experience in the nano-engineered coatings field (including an
intimate knowledge as founder and initial technical lead of MesoCoat, Powdermet and Terves) 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 from 2006 through 2014. 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 has served as a director of the
nanonetwork and Edison Materials technology center (EMTEC) non-profit foundations. 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 130 papers and presentations on ceramics, metallurgy and
composite powder coatings, his inventions and developments have been recognized with 5 R&D100
awards for industrial innovation, four Nortec innovation awards for best new technologies, was a 2005
businessman of the year for the business advisory council, and was an Ernst and Young entrepreneur of
the year finalist in 2009 and again in 2012.
Other Public Company Directorships in the Last Five Years:
None.
55
Stephen Goss was appointed as a member of the board of directors on January 4, 2012 and the
Company’s chief operating officer on January 1, 2015.
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.
Officer and Director Responsibilities and Qualifications:
Mr. Goss is responsible for the overall operations of the Company and is involved in many of the
Company’s day-to-day operations. Mr. Goss also serves as the MesoCoat’s chief executive officer since
January 2014.
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.
56
Director Responsibilities and Qualifications:
Mr. Tellini serves as the head of the Company’s Audit Committee, and as a member of the Compensation
Committee, Nominating & Governance Committee and the Compliance & Ethics Committee as an
independent member of the board of directors. He is a Certified Public Accountant, inactive, in New
York. Mr. Tellini started his career at PricewaterhouseCoopers, LLC where he worked from 1987-1994
most recently as a manager in the corporate finance group. Afterward, Mr. Tellini has held executive
level financial positions for Wassall Plc (1995-1999), a private equity firm, and for the hedge fund firms
Palladin Partners Group LP and its successor, Imperium Partners Group LP, where he also ran their
investment banking affiliate. Mr. Tellini brings independent management oversight, investment
management, consultancy experience and expert leadership background to the Corporation’s board of
directors.
Mr. Tellini earned a Bachelor of Science in Accounting from Lehigh University and an MBA in Finance
from the New York University, Stern School of Business.
Other Public Company Directorships in the Last Five Years:
None.
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.
57
Other Public Company Directorships in the Last Five Years:
None.
Kevin Chen was appointed as a member of the board of directors on November 13, 2014.
Business Experience:
Mr. Chen has worked for UP Scientech in1998 and currently serves as UP Scientech’s VP of Operations.
Mr. Chen served as the CEO of UP Scientech’s wholly owned subsidiary, Suzhou UP Compound
Materials Co. Ltd. (“Suzhou UP”) until November 2014. Suzhou UP is a leading competitor worldwide
in wear resistant compound steel manufacturing. Mr. Chen’s initial responsibilities at Suzhou UP were
tied to enhancing operating systems, growing manufacturing facilities, and building sales. Over the last
five years Mr. Chen has built sales at Suzhou UP from three million dollars to fifty five million dollars.
Since 2012 to date, Mr. Chen’s focus at UP Scientech has transitioned to company management, financial
planning and strategic investments, in anticipation of a public offering of UP Scientech common shares
on the Taiwan Stock Exchange.
Director Responsibilities and Qualifications:
Mr. Chen earned his MBA from Western Michigan University and his BA in Economics at Chinese
Culture University (Tiawan).
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, except on May 26, 2015, reports that Costas Takkas,
the Company’s chief executive officer at that time was detained in Switzerland, based on an indictment
issued by the U.S. District Court, Eastern District of New York charging him with certain activities
unrelated to his position with the Company. Mr. Takkas has since been dismissed as an officer of the
Company and we are in the process of reviewing his trading history to determine compliance with federal
securities laws.
58
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, 2015, failed to file, on a timely basis, reports
required by Section 16(a) of the Securities Exchange Act of 1934.
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 incorporated hereto as Exhibit 14 to this Form 10-K. Further, our Code of
Business Conduct & Ethics is available in print, at no charge, to any security holder who requests such
information by contacting us. Our Code of Business Conduct and Ethics applies to directors and senior
officers, such as our principal executive officer, principal financial officer, controller, persons performing
similar functions and employees.
Board of Directors Committees
Audit Committee
The board of directors established an Audit Committee on June 25, 2012, comprised solely of
independent members to act on and report to the board of directors with respect to various auditing and
accounting matters, including the recommendations and performance of independent auditors, the scope
of the annual audits, fees to be paid to the independent auditors, and internal accounting and financial
control policies and procedures. Certain stock exchanges currently require companies to adopt a formal
written charter that establishes an audit committee that specifies the scope of an audit committee’s
responsibilities and the means by which it carries out those responsibilities.
Compensation Committee
The board of directors established a Compensation Committee on June 25, 2012, comprised solely of
independent members to help the board of directors discharge its responsibilities with respect to the
compensation of our Chief Executive Officer and other executive officers, the administration of the
Company's executive compensation and benefits programs and the production of an annual report on
executive compensation for inclusion in the Company's proxy statement.
Nominating Committee
The board of directors 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:
59
§ 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.
Since the respective board of directors committees are no longer comprised of independent directors,
decisions taken by the committees are presented to the full board of directors for final determination.
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, 2015 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 or
Awards
Awards Incentive Plan
Deferred
Compensation
Paid in
($)
($)
Compensation Compensation
($)
($)
Cash ($)
($)
Earnings ($)
Robert H.
Miller
-
-
-
-
-
155,000
155,000
Andrew J.
Sherman
-
-
-
-
-
49,400
49,400
Stephen Goss
12,950
- 386,094
-
-
170,000
569,044
Raymond
Tellini
-
-
-
-
-
-
-
Ryan Owen
-
-
-
-
-
35,000
164,200
Kevin Chen
--
-
-
-
-
-
-
60
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.
Vinod Gupta is currently the chairman of the Ohio Board of Regents, where he also chairs the
Commercialization Tasks Force and serves on the Shared Services Task Force. He also serves as an
Entrepreneur-In Residence (EIR) for the Cleveland-based venture development non-profit organization,
Jumpstart Entrepreneurial Network (JEN) Advisors, where he helps to grow the northeast Ohio
technology ecosystem by using his 15 years of materials sector experience to coach entrepreneurs.
ITEM 11.
EXECUTIVE COMPENSATION
The objective of the Company’s compensation program is to provide compensation for services rendered
by our executive officers. The Company’s salaries and stock option awards are designed to retain the
services of our executive officers. Salary and stock option awards are currently the only type of
compensation used in our compensation program. We use these forms of compensation because we feel
that they are adequate to retain and motivate our executive officers. The amount we deem appropriate to
compensate our executive officers is determined in accordance with market forces as we have no specific
formula to determine compensatory amounts at this time. While we have deemed that our current
compensatory program and the decisions regarding compensation are easy to administer and are
appropriately suited for our objectives, we may expand our compensation program to additional future
employees to include other compensatory elements.
During the annual periods ended May 31, 2015 and May 31, 2014 our chief executive officer received
compensation of $12,500 and $10,000 per month respectively 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, 2015 and May 31, 2014, our former chief financial officer
whose employment was terminated on May 29, 2015 by the Company 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.
61
During the annual period ended May 31, 2014, our former chief financial officer who resigned on
February 7, 2014, received compensation of $16,000 per month pursuant to an employment agreement
dated December 5, 2012.
On December 20, 2014, we entered into an employment agreement effective January 1, 2015, with a
related individual to perform duties as the chief operating officer of the Company and to continue to serve
as the chief executive officer of the Company’s subsidiary, MesoCoat. During the annual periods ended
May 31, 2015, our chief operating officer received compensation of $20,000 per month starting effective
January 1, 2015 of which 37.5% of it is deferred until the company raises cumulative financing of $3
million pursuant to his employment agreement. During the period from June 2014 to December 2014 he
received compensation of $10,000 per month as the chief executive officer of MesoCoat pursuant to his
consulting agreement. He is currently receiving all compensation from the Company and no longer
receives compensation from MesoCoat.
During the annual period ended May 31, 2014, the former chief executive officer of MesoCoat, a
Company subsidiary, was paid $12,000 per month pursuant to an employment agreement dated December
1, 2009. During the annual period ending May 31, 2015, he was paid $6,175 per month from June 2014 to
February 2015 pursuant to his consulting agreement.
Summary Compensation
The following table provides summary information for the fiscal years ended May 31, 2015 and 2014
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
$100,000.
62
Executive Compensation Table
Name and
Year
Annual
Bonus Stock
Option
Non-Equity
Nonqualified
All Other
Total
Principal
Awards
Awards
Incentive Plan
Deferred
Compensation
Position
(ended Salary
($)
($)
Compensation
Compensation
($)
($)
May
($)
Earnings
31)
($)
($)
($)
Robert Miller:
CEO, CFO,
Director(1)
2015
155,000
-
-
-
-
-
-
155,000
2014
120,000
-
-
-
-
-
-
120,000
Costas Takkas
2015
96,000
-
-
-
-
-
96,000
CFO, PAO(2)
2014
96,000
-
250,000
-
-
-
346,000
David
Charbonneau:
CFO, PAO(3)
2014
153,600
-
20,000
-
-
-
-
173,600
Andrew J.
Sherman
2015
49,400
-
-
-
-
-
-
49,400
CEO MesoCoat(4) 2014
144,000
-
-
-
-
-
-
144,000
2015
170,000
-
-
386,094
-
-
12,950
569,044
Stephen Goss,
COO, Director(5)
2014
-
-
-
-
-
-
-
-
(1) Robert Miller was appointed as Chief Executive Officer and director on December 8, 2009 and Chief Financial Officer
on May 29, 2015 on the termination of Costas Takkas.
(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. Costas Takkas employment as Chief Financial Officer was
terminated on May 29, 2015.
(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.
(5) Stephen Goss was appointed as a director on January 4, 2012 and Chief Operating Officer on January 1, 2015. Stephen
Goss has served as Chief Executive Officer of MesoCoat, a Company subsidiary since May 2014 until present.
Outstanding Equity Awards
The following table provides summary information for the period ended May 31, 2015 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 $100,000:
63
Outstanding Equity Awards at Fiscal Year-End
Option awards
Stock awards
Equity
Equity
incentive
Equity
incentive plan
plan
Market incentive plan awards: market
awards:
Number
value of awards:
or payout
Number of
Number of
number of
of shares shares
number of
value of
securities
securities
securities
or units
or units unearned
unearned
underlying
underlying
underlying
of stock
of stock shares, units shares, units or
unexercised unexercised
unexercised Option
that have that
or other rights other rights
options
options
unearned
exercise
Option
not
have not that have not that have not
(#)
(#)
options
price
expiration vested
vested
vested
vested
Name
exercisable unexercisable (#)
($)
date
(#)
(#)
(#)
($)
Robert H.
Miller(1)
-
-
-
-
-
-
-
-
-
Andrew J.
Sherman(2)
350,000
-
-
0.60 December
11, 2019
-
-
-
-
Stephen
Goss
150,000
-
-
1.00 January 5,
2022
Stephen
Goss
500,000
500,000
-
.60 January 1,
2025
Costas
Takkas
200,000
-
-
.65 August 20,
2020
Costas
Takkas
133,334
66,667
-
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 1,000,000 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 14, 2014, 3,725,000 shares of common stock were outstanding at exercise prices of $0.60,
$0.65, $0.75, $1.00, $1.02, $1.05, $1.07, $1.14, $1.20, $1.25, $1.95, $2.30, $2.61, $2.70 and $2.80 per
share, which options vest up to three years. The Stock Option Plan has 6,275,000 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.
64
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. .
65
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 79,501,088
shares of common stock issued and outstanding as of May 31, 2015 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
121 Sorrento Drive
145,0004
0.18%
Moore, South Carolina 29369
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
Common Stock
All Executive Officers and Directors
as a Group
24,245,000
35.4%
Maria Maz
Common Stock
4801 Alhambra Circle
17,420,0007
21.6%
Coral Gables, Florida 33146
Common Stock
Thomas and Mario Miller Family
Irrevocable Trust u/a/d 12/01/2009
5,250,000
6.5%
(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. Mr. Goss entered into an employment
agreement to become the COO of Abakan on January 1, 2015. On January 1, 2015 Mr. Goss was granted 1,000,000 option in equal
installments on May 31, 2015 and May 31, 2016 to purchase shares of common stock at $0.60 per share on or before January 1, 2025.
(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) 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.
66
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 February 1, 2015, the Company entered into a 12 month consulting agreement with Ryan Owen, a
director of the Company, pursuant to which agreement Mr. Owen is paid $5,000 monthly for advisory
services.
Director Independence
Our common stock is quoted on the OTCQB electronic quotation system, which does not have director
independence requirements. Nonetheless, for the purposes of determining director independence, we have
applied the definitions set out in NASDAQ Rule 4200(a) (15), pursuant to which rule a director is not
considered independent if he or she is also an executive officer or employee of the corporation.
ITEM 14.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
The following is a summary of the fees that are billed to us by our auditors for professional services rendered
for the past two fiscal years:
Fee Category
Fiscal 2015 Fees ($) Fiscal 2014 Fees ($)
Audit Fees - 2014 FYE
68,000
82,500
Audit-Related Fees – 2014 FYE
66,857
5,220
Audit Fees – 2015 FYE
18,500
-
Tax Fees
9,910
12,210
All Other Fees
14,850
-
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. Other Fees are for the review of
transaction valuation and other transaction related events. Tax fees are related to the federal and state
income tax returns for the Company. On July 23, 2015, the Company engaged Maloney Novotny LLC to
provided services for the audit of our financial statements for the year ending May 31, 2015.
Audit Committee Pre-Approval
The audit committee pre-approved all services provided to us by Skoda for the year ending May 31, 2015
and May 31, 2014. Skoda performed all work only with their permanent full time employees. The audit
committee pre-approved all services provide to us by Maloney Novotny LLC for the year ending May 31,
2015. Maloney Novotny LLC performed all work only with their permanent full time employees.
67
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-50, and are included as part of this Form 10-K:
Financial Statements of the Company for the years ended May 31, 2015 and 2014:
Reports of Independent Registered Public Accounting Firms
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 70 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.
68
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
September 15, 2015
By: Robert H. Miller
Its: Chief Executive Officer, Chief Financial Officer, Principal
Accounting Officer and Director
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
September 15, 2015
Director
/s/ Andrew Sherman
Andrew Sherman
September 15, 2015
Director
/s/ Stephen Goss
September 15, 2015
Stephen Goss
Director
/s/ Ryan Owen
September 15, 2015
Ryan Owen
Director
/s/ Kevin Chen
September 15, 2015
Kevin Chen
Director
69
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 Abakan 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 Abakan 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 Abakan 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 Abakan, 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 Abakan 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 Abakan 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 Abakan and Kennametal, incorporated hereto
by reference to the Form 8-K filed with the Commission on September 14, 2010.
10.15*
Employment agreement dated August 20, 2010, between Abakan and Mr. Takkas, incorporated hereto
by reference to the Form 8-K filed with the Commission on August 26, 2010.
10.16*
Amendment No. 1 to Stock Purchase Agreement between Abakan and Kennametal dated September 7,
2010, incorporated hereto by reference to the Form 8-K filed with the Commission on September 14,
2010.
10.17*
Amendment to the Investment Agreement dated December 8, 2010, between Abakan, 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 Abakan 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 Abakan 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.)
70
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.
10.24*
UP Letter Agreement dated November 13, 2014, incorporated hereto by reference to the Form 8-K
filed with the Commission on November 25, 2014.
10.25*
Employment Agreement dated December 20, 2014, between Abakan and Stephen Goss incorporated
hereto by reference to the Form 10-Q filed with the Commission on January 14, 2015.
10.26*
Settlement and Exchange Agreement between Abakan and Powdermet dated July 23, 2015,
incorporated hereto by reference to the Form 8-K filed with the Commission on July 30, 2015.
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 Abakan attached..
31.1
Certification of the Chief Executive Officer and 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 and 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.
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..
71
