UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

    þ     Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended August 31, 2010.

    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)

2665 S. Bayshore Drive, Suite 450, Miami, Florida 33133

 (Address of principal executive offices)    (Zip Code)

 (786) 206-5368

 (Registrant’s telephone number, including area code)

   N/A  

(Former name or former address, if changed since last report)

Indicate by check mark whether the registrant: (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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 o   No 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 as defined by Rule 12b-2 of the Exchange Act:

Large accelerated filer o   Accelerated filer o   Non-accelerated filer o  Smaller reporting company þ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act): Yes þ  No o         

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. The number of shares outstanding of the issuer’s common stock, $0.0001 par value (the only class of voting stock), at January 7, 2011, was 58,175,000.

PART I – FINANCIAL INFORMATION

ITEM 1.          FINANCIAL STATEMENTS

As used herein, the terms “Company,” “we,” “our,” and “us” refer to Abakan Inc. (formerly “Waste to Energy Group Inc.”), a Nevada corporation, unless otherwise indicated.  In the opinion of management, the accompanying financial statements included in this Form 10-Q reflect all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation of the results of operations for the periods presented.  The results of operations for the periods presented are not necessarily indicative of the results to be expected for the full year.

Abakan Inc.

(Formerly known as Waste to Energy Group Inc)

(A Development Stage Enterprise)

Condensed Balance Sheets

See accompanying notes to financial statements.

Abakan Inc.

(Formerly known as Waste to Energy Group Inc.)

(A Development Stage Enterprise)

Condensed Statements of Operations

(Unaudited)

See accompanying notes to financial statements.

Abakan Inc.

(Formerly known as Waste to Energy Group Inc)

(A Development Stage Enterprise)

Condensed Statements of Cash Flows

See accompanying notes to financial statements.

NOTE 1 – BUSINESS

Abakan Inc. (“the Company,” we, us, our, ABKI) was incorporated in the state of Nevada on June 27, 2006, and is in the development stage as defined under FASB ASC 915-10, "Development Stage Entities."

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.

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.

In the Company’s current business plan we are investing in early stage companies. Since those firms are typically pre- commercialization, it is anticipated that each firm we decide to invest in will need successive rounds of funding to fund their research & development and their sales and marketing efforts. 

Our acquisition strategy is to make sure we negotiate upfront future ownership based on a series of value creating steps whereby Abakan has the right to continue or discontinue investing based on an investee meeting those milestone steps. This allows management to forecast potential financing needs of a firm in stages to plan for our present and future fundraising efforts.  It also gives Abakan the right to hedge its investing if it feels a company is not performing up to the goals that were anticipated during the negotiating process. By doing this, each investee company is expected to reach certain operating milestones prior to receiving the next round of fundraising or us exercising our next round of acquisition.

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 

Basis of Presentation

In the opinion of management, the accompanying unaudited financial statements have been prepared in accordance with generally accepted accounting principles (GAAP) for interim financial information and with the instructions to Form 10-Q.  Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the Company’s financial position as of August 31, 2010, and the results of its operations and cash flows for the three months ended August 31, 2010, have been made.  Operating results for the three months ended August 31, 2010 are not necessarily indicative of the results that may be expected for the year ended May 31, 2011.

These consolidated financial statements should be read in conjunction with the financial statements and notes for the year ended May 31, 2010, thereto contained in the Company’s Form 10-K.

Development Stage Enterprise

At August 31, 2010, 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.

Reclassifications

Certain amounts in the period ended August 31, 2009 financial statements have been reclassified to conform to the current period ended August 31, 2010 presentation.

Use of Estimates in the Preparation of Financial Statements

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods.  Actual results could differ from those estimates and assumptions.

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 inception to the period ended August 31, 2010, of $2,663,245, and a working capital deficit of $559,012.  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 meet its obligations, to obtain additional financing as may be required an ultimately to attain profitability.  The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

NOTE 4 - PROPERTY AND EQUIPMENT

Property and equipment consisted of the following:

Depreciation and amortization expense was $1,378 and $2,455 for the years ended August 31, 2010 and 2009, respectively. On May 8, 2010, we purchased a computer for $916, and this will be depreciated according to our depreciation policy.

NOTE 5 – PREPAID EXPENSES

Prepaid expenses consisted of the following at August 31, 2010:

NOTE 6 – PREPAID EXPENSES – RELATED PARTY

Prepaid expenses – related party consisted of the following at August 31, 2010:

NOTE 7 - INVESTMENT IN NON-CONTROLLING INTEREST

MesoCoat, Inc.

MesoCoat, Inc. (“MesoCoat”) is an Ohio based nanotechnology materials science business in which the Company holds a thirty four percent (34%) equity interest with the option to acquire up to a seventy five percent (75%) interest.

NOTE 7 - INVESTMENT IN NON-CONTROLLING INTEREST - continued

We have analyzed our investment in accordance of “Investments – Equity Method and Joint Ventures” (ASC 323), and concluded that our 34% minority interest investment does give us significant influence over MesoCoat’s business actions, board of directors, or its management, and therefore we will account for our investment using the Equity Method. We have analyzed our investment in accordance to ASC323 and have determined that no impairment of our investment is necessary at this time; because we believe our intention to exercise our future options to increase our investment represent level 2 indicators of fair value of our existing investment. In addition, we have reduced the amount of our investment by $122,015, which represent our equity in MesoCoat’s loss, for the period ended August 31, 2010.

Please see Note 13 – Subsequent Events for a discussion on how the planned purchase of ownership in Powdermet affects our investment in Mesocoat.

NOTE 8 – NOTES PAYABLE

As of August 31, 2010 and 2009, the loans payable balance consisted of:

NOTE 8 – NOTES PAYABLE - continued

We also owed $15,386 and $10,584 in accrued interest for the above notes as of August 31, 2010 and 2009, respectively.

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 and Warrants Granted

For the three months ended August 31, 2010 there were no share issuances.

A summary of the common stock warrants outstanding as of the period ended August 31, 2010 is presented below:

NOTE 10 – RELATED PARTY TRANSACTIONS

As of August 31, 2010 and 2009, we had balances totaling $102,989 and $81,233 outstanding in accounts payable - related party respectively. In addition to related party transactions mentioned elsewhere, we have the below agreements and transactions:

Consulting Agreements

a)      On June 1, 2010, we entered into a consulting agreement with a company controlled by the spouse of our chief executive officer. The terms of the consulting agreement are $2,500 per month payable in consulting fees and reimbursement to the consultant for all reasonable business expenses incurred by it in the performance of its duties, and rental of office space $1,200, and will be in effect until June 1, 2011. For the period ended August 31, 2010 and 2009,

we expensed $7,500 and $15,000, respectively, in connection with this contract and their previous contract and are included in consulting fees – related parties. As of August 31, 2010 and 2009, we owed $-0- and $20,529, respectively, and is included in accounts payable - related party.

b)      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. The terms of the consulting agreement are $8,000 per month payable in consulting fees and reimbursement to the consultant for all reasonable business expenses incurred by it in the performance of its duties, and will be in effect until July 31, 2012. The consultant was also granted 200,000 stock options with an exercise price of $0.65 per share; they will vest equally over 3 years (see Note 11). For the period ended August 31, 2010 and 2009, we expensed $8,000 and $-0-, respectively, in connection with this contract and are included in consulting fees – related parties. As of August 31, 2010 and 2009, we owed $7,900 and $-0-, respectively, and is included in accounts payable - related party.

Notes receivable

a)      On March 1, 2010 a loan of $25,000 paying 10% interest per annum payable by February 26, 2011 was provided to a company owned by a related party. Interest shall be payable quarterly or as mutually agreed on. Accordingly we have recorded interest income of $431 on this note. Additionally on April 21, 2010 a loan of $25,000 paying 10% interest per annum payable by April 16, 2011 was provided to a second company owned by the same related party. Interest shall be payable quarterly or as mutually agreed on. Accordingly we have recorded interest income of $461 on this note. These amounts owed to us may be assigned to a related party of these two unrelated parties, and applied to their accounts payable once a final agreement is made.

b)      On April 29, 2010, we entered in to a noncollaterized note receivable with a related company to ours with some common ownership on an interest free basis, payable on demand. During the period ended August 31, 2010, we repaid $4,000 cash on this note and have a balance remaining of $4,500.

NOTE 11 – STOCK – BASED COMPENSATION

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 the year ended May 31, 2010 we had granted 3,150,000 options, as was previously disclosed. On August 20, 2010, we granted 200,000 stock options to our chief financial officer at an exercise price of $0.65 per share. The 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. After these grants there will be 6,650,000 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.

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.

NOTE 11 – STOCK – BASED COMPENSATION - continued

The value of employee and non-employee stock warrants granted during the period ended August 31, 2010 was estimated using the Black-Scholes model with the following assumptions: 

The expected volatility assumption was based upon historical stock price volatility measured on a daily basis. The risk-free interest rate assumption is based upon U.S. Treasury bond interest rates appropriate for the term of the Company’s employee stock options. The dividend yield assumption is based on our history and expectation of dividend payments.

A summary of the options granted to employees and non-employees under the plan and changes during the period ended August 31, 2010 is presented below:

ABAKAN INC.

(Formerly Waste to Energy Group Inc.)

(A DEVELOPMENT STAGE ENTERPRISE)

CONDENSED NOTES TO FINANCIAL STATEMENTS (UNAUDITED)

For the three months ended August 31, 2010 and 2009

NOTE 11 – STOCK BASED COMPENSATION - continued

The following table summarizes information about employee stock options under the 2009 Plan outstanding at August 31, 2010:

On August 20, 2010, the board of directors granted to our chief financial officer 200,000 stock options with an exercise price of $0.65 per share. The options will expire ten years from the grant date, and the options will vest in equal one third parts on the anniversary of the option grant date.

The total value of employee and non-employee stock options granted during the period ended August 31, 2010, was $129,734. During period ended August 31, 2010 the Company recorded $169,024 in stock-based compensation expense relating to stock option grants.

At August 31, 2010 there was $1,660,853 of total unrecognized compensation cost related to stock options granted under the plan.  That cost is expected to be recognized pro rata through April 29, 2013.

NOTE 12 – RECENT ACCOUNTING PRONOUNCEMENTS

We have examined all recent accounting pronouncements and believe that none of them will have a material impact on the financial statements of the Company.

NOTE 13– SUBSEQUENT EVENTS

In accordance with Accounting Standards Codification (ASC) topic 855-10 “Subsequent Events”, the Company has evaluated subsequent events through the date which the financial statements were available to be issued. The Company has determined that there were no such events that warrant disclosure or recognition in the financial statements except as follows.

·         On October 18, 2010 the Company granted 1,225,000 options to six individuals, a director and a related consultant with an exercise price of $0.65 per share, which expire on October 18, 2020, and vest in equal increments over three years beginning on October 18, 2011.

·         On November 1, 2010, the Company issued 60,000 shares of its common stock to a consultant for services rendered.

·         On November 18, 2010 the Company granted 25,000 options to an individual consultant with an exercise price of $1.01 per share, which expire on November 18, 2020, and vest in equal increments over three years beginning November 18, 2011.

·         On December 10, 2010, the Company issued 3,000,000 shares to one individual and three entities for cash at $0.75 a share.

Powdermet, Inc.

Under the terms of our September 7, 2010 amendment to our stock purchase agreement dated June 28, 2010, Abakan Inc. (the “Company) entered into a stock purchase agreement with Kennametal Inc. (“Kennametal”) to purchase from Kennametal five hundred and ninety six thousand eight hundred and thirteen (596,813) shares being a forty one percent (41%) interest in Powdermet, Inc. (“Powdermet”) in exchange for one million five hundred thousand dollars ($1,500,000).

The terms and conditions of the stock purchase agreement required the Company to pay an initial payment of five hundred thousand dollars ($500,000) to Kennametal on September 7, 2010, and the remainder on or before September 30, 2010. The stock purchase agreement contains additional terms related to monthly liquidated damages in the amount of fifty thousand ($50,000) per month, starting October 1, 2010. The transaction should close no later than December 31, 2010.

We made the initial payment of $500,000 on Sept. 7, and did not make the payment on the balance as agreed; accordingly we will record Liquidating damages of $50,000 per month beginning October 1, 2010. We are currently in negotiations to amend the stock purchase agreement.

NOTE 13– SUBSEQUENT EVENTS - continued

Powdermet is the parent company of MesoCoat, Inc. (“MesoCoat”). Andy Sherman serves as the chief executive officer of each of Powdermet and MesoCoat in addition to his duties as a member of the Company’s board of directors.

We have analyzed our investment in accordance of “Investments – Equity Method and Joint Ventures” (ASC 323), and concluded that when the stock purchase agreement is completed our 41% minority interest investment does give us significant influence over Powdermet, Inc.’s business actions, board of directors, or its management, and therefore we will account for our investment using the Equity Method. Although, if we consummate this deal, we will own 41% of Powdermet, and indirectly an additional 27% of Mesocoat, we will still not have control of Mesocoat, and therefore will still account for our investment according to the equity method of accounting.

Item 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Item 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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.

Overview

The Company intends to become a leader in the multi-billion dollar advanced coatings and metal formulations markets by assembling controlling interests in a small portfolio of next generation technology firms. We expect to achieve this goal by investing in R&D firms that have the potential to substantially impact the surface engineering and energy management needs of Fortune 1000 companies and government entities. The Company is actively involved in supporting the R&D, market development, and commercialization efforts of those entities in which it has invested and continues to identify prospective future investments. To date we have successfully acquired a non-controlling interest in an advanced coatings company, MesoCoat, Inc. (“MesoCoat”) and have an agreement to acquire a non-controlling interest in MesoCoat’s parent company, Powdermet Inc. (“Powdermet”), a metal formulations company based in Euclid, Ohio. The Company is also currently evaluating future acquisition opportunities to add to its portfolio.

The Company’s plan of operation for the coming year is to develop its non-controlling investment in MesoCoat and position the firm to succeed in future commercialization efforts while evaluating whether to increase that investment to a controlling investment pursuant to the terms and conditions of our agreement with the shareholders of MesoCoat. Further, we plan to close the agreement with Powdermet and seek out other prospective business acquisitions.

We will require a minimum additional amount of $5,000,000 in debt or equity funding over the next twelve months to fulfill our plan of operation but prefer to raise a higher amount of funds to be aggressive in our commercialization strategy. This funding is not currently available, though we are in the process of securing verbal commitments from private investors to realize this funding with private placements of our restricted common stock. If we cannot secure additional financing from outside sources or our existing shareholder base, we may not be able to meet our milestones, and may need to scale back operations. Any shortfall will affect our ability to expand or even continue operations. We cannot guarantee that additional funding will be available to us on favorable terms, if at all.

Results of Operations

During the three month period ended August 31, 2010, we (i) focused our efforts on our non-controlling interest in MesoCoat, (ii) strengthened our management team with industry experts, (iii) enlarged our board of directors, (iv) sought financing pursuant to the interest acquisition agreements, and (v) continued to identify prospective business opportunities for merger or acquisition.

Since investing in MesoCoat we have been (i) assisting it with interviewing and hiring new senior management, (ii) redefining its market strategy, (iii) improving its branding, (iv) introducing it to several new potential joint commercialization partners, and (v) aggressively getting it to accelerate R&D schedules by negotiating favorable engineering contracts with third parties.

Management has also spent significant time developing an extensive deal sourcing network, including top international university materials sciences laboratories; government sponsored labs, industry brokers, lawyers and materials sciences’ association executives, as well as a formal advisory board with specific technology skills.

The Company intends to raise an additional $5 to 10 million in capital over the next twelve months to continue investing in and expanding the operations of its existing portfolio interests. The proceeds of such financings will also be used for our intended investment in Powdermet, working capital, and other potential acquisition targets.

The Company has been funded since inception through private debt or equity placements or by major shareholders in the form of loans. All of the capital raised to date has been allocated to investment activities, general and administrative costs, due diligence, loans and interest expenses.

Net Losses

For the period from inception until August 31, 2010, the Company incurred net losses of $2,663,245. Net losses for the three month period ending August 31, 2010 were $645,113 as compared to $51,310 for the three month period ending August 31, 2009. The increase in net losses over the comparative periods can be attributed to an increase in operating losses and a loss attributed to the value of our investment in MesoCoat.

We have never generated enough revenue to fund operations and may continue to operate at a loss through fiscal 2011.

Revenues

We had no revenue for the three month period ending August 31, 2010 and 2009.

Operating Expenses

Operating expenses for the three month period ending August 31, 2010 were $519,953 as compared to $47,331 for the three month period ending August 31, 2009. The increase in operating expenses is primarily due to an increase in general and administrative expenses and the realization of stock option expenses during the current period. General and administrative expenses include accounting costs, consulting fees, employment costs, professional fees and consulting fees.

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.

Impact of Inflation

The Company believes that inflation has not had a material effect on operations for the period from June 27, 2006 (inception) to August 31, 2010.

Capital Expenditures

The Company has not spent any significant amounts on capital for the period from June 27, 2006 (inception) to August 31, 2010.

Liquidity and Capital Resources

The Company has been in the development stage since inception. As of August 31, 2010 the Company had a working capital deficit of $559,012, current assets of $246,139 consisting of cash, note receivable, and prepaid expenses, and total assets of $1,091,915 consisting of current assets, an investment in minority interest, computer equipment, and a website. As of August 31, 2010 the Company had current and liabilities of $805,151, consisting of accounts payable and accruals, accounts payable to related parties, loans payable and accruals, and accrued liabilities. Stockholders equity in the Company was $532,903 as of August 31, 2010.

For the period from inception until August 31, 2010, the Company’s cash flow used in operating activities was $1,013,635. Cash flows used in operating activities for the three month period ending August 31, 2010, were $285,983 compared to $43,631 for the three month period ending August 31, 2009. Cash flow used in operating activities during the current period was due to net losses. We expect to continue to use cash flow in operating activities until such time as the Company realizes a gain on its portfolio investment

For the period from inception until August 31, 2010, the Company’s cash flow used investing activities was $1,610,409. Cash flow used in investing activities for the three month period ending August 31, 2010, was $917 as compared to $0 for the three month period ending August 31, 2009. The cash flows used in the current period are attributable to the investment in computer equipment. We expect to continue to use cash flow in investing activities as we develop and expand our investment portfolio.

For the period from inception until August 31, 2010, the Company’s cash flow provided by financing activities was $2,838,477. Cash flow provided by financing activities for the three month period ending August 31, 2010 was $460,769 as compared to $49,600 for the three month period ending August 31, 2009. Cash flows provided by financing activities in the current period are attributable to proceeds from loans payable. We expect to continue to have cash flow provided by financing activities as the Company completes new rounds of financing.

The Company does not expect to pay cash dividends in the foreseeable future.

The Company has a defined stock option plan and contractual commitments with all of its officers or directors.

The Company has no current plans for any significant purchase or sale of any plant or equipment.

The Company has no current plans to make any changes in the number of employees.

Off Balance Sheet Arrangements

As of August 31, 2010, the Company had no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources that is material to stockholders.

Going Concern

The report attached to the financial statements included in the Company’s most recent Form 10-K filed with the Securities and Exchange Commission (the “Commission”) included the Company’s auditors opinion as to the Company’s ability to continue as a going concern as a result of net losses of $2,018,132, and a working capital deficit of $205,399 as of May 31, 2010, which have increased to $2,663,245 and $559,012, respectively, as of August 31, 2010. The Company’s ability to continue as a going concern is subject to the ability of the Company to realize a profit and /or obtain funding from outside sources. 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) realizing a gain from its investment in MesoCoat; and (iii) 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.

Forward Looking Statements and Factors That May Affect Future Results and Financial Condition

The statements contained in the section titled Results of Operations and Description of Business, with the exception of historical facts, are forward looking statements. A safe-harbor provision may not be applicable to the forward looking statements made in this current report. Forward looking statements reflect our current expectations and beliefs regarding our future results of operations, performance, and achievements. These statements are subject to risks and uncertainties and are based upon assumptions and beliefs that may or may not materialize. These statements include, but are not limited to, statements concerning:

·         our anticipated financial performance

·         uncertainties related to the research and development of our subsidiary’s technology;

·         our ability to generate revenues through sales to fund operations

·         our ability to raise additional capital to fund cash requirements for operations

·         the volatility of the stock market

·         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 consolidated financial statements for the Company for the years ended May 31, 2010 and 2009, included in the Company’s most recent Form 10-K filed with the Commission, discussed 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 accepted in the United States of America.

The preparation of financial statements requires management to make significant estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. By their nature, these judgments are subject to an inherent degree of uncertainty. On an on-going basis, we evaluate our estimates, including those related to bad debts, inventories, intangible assets, warranty obligations, product liability, revenue, and income taxes. We base our estimates on historical experience and other facts and circumstances that are believed to be reasonable, and the results form the basis for making judgments about the carrying value of assets and liabilities. The actual results may differ from these estimates under different assumptions or conditions.

Stock-Based Compensation

We have adopted Accounting Standards Codification Topic (“ASC”) 718, formerly SFAS No. 123 (revised 2004) (SFAS No. 123R), Share-Based-Payment, which addresses the accounting for stock-based payment transactions in which an enterprise receives employee services in exchange for (a) equity instruments of the enterprise or (b) liabilities that are based on the fair value of the enterprise’s equity instruments or that may be settled by the issuance of such equity instruments.

We have adopted Accounting Standards Codification Topic (“ASC”) 718, formerly SFAS No. 123 (revised 2004) (SFAS No. 123R), Share-Based Payment, which addresses the accounting for stock-based payment transactions in which an enterprise receives employee services in exchange for (a) equity instruments of the enterprise or (b) liabilities that are based on the fair value of the enterprise’s equity instruments or that may be settled by the issuance of such equity instruments. 

We account for equity instruments issued in exchange for the receipt of goods or services from other than employees in accordance with ASC 505. Costs are measured at the estimated fair market value of the consideration received or the estimated fair value of the equity instruments issued, whichever is more reliably measurable. The value of equity instruments issued for consideration other than employee services is determined on the earliest of a performance commitment or completion of performance by the provider of goods or services.

Recent Accounting Pronouncements

We have examined all recent accounting pronouncements and believe that none of them will have a material impact on the financial statements of the Company.

ITEM 3.          QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not required.

ITEM 4.          CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

In connection with the preparation of this report, an evaluation was carried out by the Company’s management, with the participation of the chief executive officer and the 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 August 31, 2010. 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 accumulated and communicated to management, including the chief executive officer and the chief financial officer, to allow timely decisions regarding required disclosures.

Changes in Internal Control over Financial Reporting

During the three month period ended August 31, 2010, 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.

PART II – OTHER INFORMATION

ITEM 1.          LEGAL PROCEEDINGS

None.

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.

We have a history of significant operating losses and such losses may continue in the future.
 

The Company incurred net losses of $2,663,245 for the period from June 27, 2006 (inception) to August 31, 2010. Since we have been without significant revenue since inception and currently have no revenue producing operations outside of that produced by our portfolio investment company, historical losses may continue into the future.

The Company’s success is dependent on its ability to assist its portfolio companies to commercialize their proprietary technologies to the point of generating sufficient revenues to sustain and expand operations.
 

Our future operation is dependent on our ability to assist MesoCoat and Powdermet in the commercial application of their proprietary technologies to produce sufficient revenue to sustain and expand operations. The same successful efforts will be required for any additional investments that are added to the Company’s portfolio. The success of these endeavors will require that sufficient funding be available to the Company to assist the development of portfolio investments. Currently, the Company’s financial resources are limited, which limitation may slow the pace at which proprietary technologies can be commercialized and deter the prospect of additional portfolio investments. Should we be unable to improve our financial condition through debt or equity offerings, our ability to successfully advance our business plan will be severely limited.

There are significant commercialization risks related to technological businesses.

The industries in which the Company’s portfolio companies operate and plan to operate are characterized by the continual search for higher performance and lower cost. Our growth and future financial performance will depend on the ability of our portfolio companies to develop and market products that keep pace with technological developments and evolving industry requirements. Further, the research and development involved in commercializing products requires significant investment and innovation to keep pace with technological developments. Should we be unable to keep pace with outside technological developments, respond adequately to technological developments, or experience significant delays in product development, our products might become obsolete. Should these risks overcome our ability to keep pace there is a significant likelihood that our business will fail.

The Company competes with larger and better financed corporations.

Competition within the industrial coatings industry and other high technology industries is intense. While the Company’s products are distinguished by next-generation innovations that are more sophisticated and cost effective than many competitive products currently in the market place, a number of entities and new competitors may enter the market in the future. Some of our existing and potential competitors have longer operating histories, greater name recognition, larger customer bases and significantly greater financial, technical and marketing resources than we do, including well known multi-national corporations. Accordingly, our 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 the Company’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 Company’s and MesoCoat’s financial performance. 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.

The market acceptance of the Company’s products is critical to the Company’s growth.

The Company will generate revenue from the advanced coating industry and other industries. Market acceptance of our products and services will be critical. If our customers do not accept or purchase our products and services, then our revenue, cash flow and/or operating results will be negatively impacted.

We may not be able to effectively manage our growth.

We expect considerable future growth in our business. However, to achieve this 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 and have 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.

We may rely upon patents and other intellectual property.

We may rely on a combination of patent applications, trade secrets, trademarks, copyrights and licenses, together with non-disclosure and confidentiality agreements, to establish and protect proprietary rights to technologies we develop. Should we be unable to adequately protect intellectual property rights or become subject to a claim of infringement, our business may be materially adversely affected.

We expect to prepare patent applications in accordance with our worldwide intellectual property strategy on acquiring new technologies. However, we cannot be certain that any patents will be issued with respect to future patents pending or future patent applications. Further, we do not 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 it has implemented a sophisticated internal intellectual property management system to promote effective identification and protection of its products and know-how in connection with the technologies it develops and may develop in the future.

Environmental laws and other governmental legislation may affect our business.

Should the technologies the Company develops not comply with applicable environmental laws or if it is exposed to liability claims, its business and financial results could be seriously harmed. 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. Furthermore, changes in legislation and government policy could also negatively impact us. We are currently unaware of any introduced or proposed bills, or policy, that may cause any specific changes to our operations. However, no assurance can be given that we will be able to obtain any necessary license required in the future, or that future changes in laws or government policies affecting any technology we develop, or products we market, will not impose additional regulatory requirements on us, intensify competition in the technology industries that we are involved in, or otherwise have a material adverse effect on our business, financial condition and results of operations.

We may face liability claims on our future products.

Although we intend to implement exhaustive testing programs to identify potential material defects in technology we develop, any undetected defects could harm our reputation, diminish our customer base, shrink revenues and expose us to product liability claims.

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. Because of the limitations of our market and volatility of the market price of our stock, investors may face difficulties in selling shares at attractive prices when they want to. 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.
 

We incur significant expenses as a result of the Sarbanes-Oxley Act of 2002, which expenses may continue to negatively impact our financial performance.

We incur significant legal, accounting and other expenses as a result of the Sarbanes-Oxley Act of 2002, as well as related rules implemented by the Commission, which control the corporate governance practices of public companies. Compliance with these laws, rules and regulations, including compliance with Section 404 of the Sarbanes-Oxley Act of 2002, has substantially increased our expenses, including legal and accounting costs, and made some activities more time-consuming and costly.

Our internal controls over financial reporting are not considered effective, which may result in a loss of investor confidence in our financial reports and in turn have an adverse effect on our stock price.

Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 we are required to furnish a report by our management on our internal controls over financial reporting. Such report must contain, among other matters, an assessment of the effectiveness of our internal controls over financial reporting as of the end of the year, including a statement as to whether or not our internal controls over financial reporting are effective. This assessment must include disclosure of any material weaknesses in our internal controls over financial reporting identified by management. As we have been unable assert that our internal controls were fully effective at May 31, 2010, investors may lose confidence in the accuracy and completeness of our financial reports, which in turn could cause our stock price to decline.

The Company’s shareholders may face significant restrictions on their stock.

The Company’s stock differs from many stocks in that it is a “penny stock.” The Commission has adopted a number of rules to regulate “penny stocks” including, but not limited to, those rules from the Securities Act of 1933, as amended (“Securities Act”) as follows:

3a51-1 which defines penny stock as, generally speaking, those securities which are not listed on either NASDAQ or a national securities exchange and are priced under $5, excluding securities of issuers that have net tangible assets greater than $2 million if they have been in operation at least three years, greater than $5 million if in operation less than three years, or average revenue of at least $6 million for the last three years;

15g-1   which outlines transactions by broker/dealers which are exempt from 15g-2 through 15g-6 as those whose commissions from traders are lower than 5% total commissions;

15g-2   which details that brokers must disclose risks of penny stock on Schedule 15G;

15g-3   which details that broker/dealers must disclose quotes and other information relating to the penny stock market;

15g-4               which explains that compensation of broker/dealers must be disclosed;

15g-5   which explains that compensation of persons associated in connection with penny stock sales must be disclosed;

15g-6               which outlines that broker/dealers must send out monthly account statements; and

15g-9               which defines sales practice requirements.

Since our securities constitute a “penny stock” within the meaning of the rules, the rules would apply to us and our securities. Because these rules provide regulatory burdens upon broker-dealers, they may affect the ability of shareholders to sell their securities in any market that may develop; the rules themselves may limit the market for penny stocks. Additionally, the market among dealers may not be active. Investors in penny stock often are unable to sell stock back to the dealer that sold them the stock. The mark-ups or commissions charged by the broker-dealers may be greater than any profit a seller may make. Because of large dealer spreads, investors may be unable to sell the stock immediately back to the dealer at the same price the dealer sold the stock to the investor. In some cases, the stock may fall quickly in value. Investors may be unable to reap any profit from any sale of the stock, if they can sell it at all.

Shareholders should be aware that, according to Commission Release No. 34-29093 dated April 17, 1991, the market for penny stocks has suffered from patterns of fraud and abuse. These patterns include:

·        control of the market for the security by one or a few broker-dealers that are often related to the promoter or issuer;

·        manipulation of prices through prearranged matching of purchases and sales and false and misleading press releases;

·        “boiler room” practices involving high pressure sales tactics and unrealistic price projections by inexperienced sales persons;

·        excessive and undisclosed bid-ask differentials and mark-ups by selling broker-dealers; and

·        the wholesale dumping of the same securities by promoters and broker-dealers after prices have been manipulated to a desired level, along with the inevitable collapse of those prices with consequent investor losses.

ITEM 2.          UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

On December 10, 2010 the board of directors of the Company closed an equity financing to raise an aggregate of $2,250,000 through the sale of common shares at $0.75 per share as follows:

Regulation S provides generally that any offer or sale that occurs outside of the United States is exempt from the registration requirements of the Securities Act, provided that certain conditions are met. Regulation S has two safe harbors. One safe harbor applies to offers and sales by issuers, securities professionals involved in the distribution process pursuant to contract, their respective affiliates, and persons acting on behalf of any of the foregoing (the “issuer safe harbor”), and the other applies to resales by persons other than the issuer, securities professionals involved in the distribution process pursuant to contract, their respective affiliates (except certain officers and directors), and persons acting on behalf of any of the forgoing (the “resale safe harbor”). An offer, sale or resale of securities that satisfies all conditions of the applicable safe harbor is deemed to be outside the United States as required by Regulation S.

The Company complied with the exemption requirements of Regulation S by having directed no offering efforts in the United States, by offering common shares only to offerees who were outside the United States at the time of the offering, and ensuring that the persons to whom the common shares were issued and authorized were non-U.S. persons with addresses in foreign countries.

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 that did not involve a public offering; (2) there were limited offerees; (3) the offerees committed to hold their stock; (4) there have been no subsequent or contemporaneous public offerings of the stock; (5) the stock was not broken down into smaller denominations; and (6) the discussions that lead to the issuance of the stock took place directly between the offerees and the Company.

The Company complied with the requirements of Rule 506 of Regulation D of the Securities Act by: (i) foregoing any general solicitation or advertising to market the securities; (ii) selling only to an accredited investor; (iii) having not violated antifraud prohibitions with the information provided to the investor; (iv) being available to answer questions by the investor; and (v) issuing restricted securities to the investor.

On November 18, 2010, the Company granted options to purchase 25,000 shares of the Company’s common stock to Sofia Bitela, that vest in equal parts over three years commencing on October 18, 2011, at an exercise price of $1.01 per share for a period of ten years from the date of grant, relying on an exemption provided by Section 4(2) of the Securities Act.

The Company complied with the exemption requirements of Section 4(2) of the Securities Act based on the following factors: (1) the grant was an isolated private transaction that did not involve a public offering; (2) there was only one grantee; (3) the grantee committed to hold her options; (4) there have been no subsequent or contemporaneous public offerings of the options; (5) the options were not broken down into smaller denominations; and (6) the discussions that lead to the grant of the options took place directly between the grantee and the Company.

On November 1, 2010, the Company authorized the issuance of 60,000 shares of common stock to Uptick Capital, LLC, pursuant to a consulting agreement relying on an exemption provided by Section 4(2) of the Securities Act.

The Company complied with the exemption requirements of Section 4(2) of the Securities Act based on the following factors: (1) the issuance was an isolated private transactions that did not involve a public offering; (2) there was only one offeree; (3) the offeree committed to hold its stock; (4) there have been no subsequent or contemporaneous public offerings of the stock; (5) the stock was not broken down into smaller denominations; and (6) the discussions that lead to the issuance of the stock took place directly between the offeree and the Company.

On October 18, 2010, the Company granted options to purchase an aggregate of 1,200,000 shares of the Company’s common stock, that vest in equal parts over three years commencing on October 18, 2011, at an exercise price of $0.65 per share for a period of ten years from the date of grant, relying on an exemption provided by Section 4(2) of the Securities Act, to the following:

The Company complied with the exemption requirements of Section 4(2) of the Securities Act based on the following factors: (1) the grants were isolated private transactions that did not involve a public offering; (2) there was only seven grantees; (3) the grantees committed to hold their options; (4) there have been no subsequent or contemporaneous public offerings of the options; (5) the options were not broken down into smaller denominations; and (6) the discussions that lead to the option grants took place directly between the grantees and the Company.

On July 31, 2010, the Company granted options to purchase 200,000 shares of the Company’s common stock to Costas Takkas, the Company’s chief financial officer, pursuant to a consulting agreement, which options vest in equal parts over three years commencing on July 31, 2011, at an exercise price of $0.65 per share for a period of ten years from the date of grant, relying on an exemption provided by Section 4(2) of the Securities Act.

The Company complied with the exemption requirements of Section 4(2) of the Securities Act based on the following factors: (1) the grant was an isolated private transaction that did not involve a public offering; (2) there was only one grantee; (3) the grantee committed to hold his options; (4) there have been no subsequent or contemporaneous public offerings of the options; (5) the options were not broken down into smaller denominations; and (6) the discussions that lead to the grant of the options took place directly between the grantee and the Company.

ITEM 3.          DEFAULTS ON SENIOR SECURITIES

None.

ITEM 4.          (REMOVED AND RESERVED)

Removed and reserved.

ITEM 5.          OTHER INFORMATION

None.

ITEM 6.          EXHIBITS

Exhibits required to be attached by Item 601 of Regulation S-K are listed in the Index to Exhibits on page 31 of this Form 10‑Q, and are incorporated herein by this reference.

SIGNATURES

Pursuant to the requirements 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.

INDEX TO EXHIBITS

Exhibit No.      Exhibit Description

3(i)                          Certificate of Incorporation of the Company, incorporated hereto by reference to the Form SB-2, filed with the Commission on June 19, 2007.

3(ii)                         Bylaws of the Company, incorporated hereto by reference to the Form SB-2, filed with the Commission on June 19, 2007.

10(i)                                        Certificate of Change (Pursuant to NRS 78.209), incorporated hereto by reference to the Form 8-K, filed with the Commission on September 9, 2008.

10(ii)                      Articles of Merger (Pursuant to NRS 92A.200), incorporated hereto by reference to the Form 8-K, filed with the Commission on September 9, 2008.

10(iii)                     Memorandum of Understanding, incorporated hereto by reference to the Form 8-K, filed with the Commission on September 9, 2008.

10(iv)                     Share Purchase Agreement, incorporated hereto by reference to the Schedule 13-D, filed with the Commission on September 29, 2008.

10(v)                      Share Purchase Agreement, incorporated hereto by reference to the Schedule 13-D, filed with the Commission on September 29, 2008.

10(vi)                     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(vii)                    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(viii)                   Consulting agreement dated December 1, 2009, between the Company and Mr. Greenbaum, incorporated hereto by reference to the Form 8-K filed with the Commission on May 28, 2010.

10(ix)                     Investment Agreement dated December 9, 2010, between the Company, MesoCoat and Powdermet, incorporated hereto by reference to the Form 8-K filed with the Commission on December 17, 2009.

10(x)                                      Agreement dated April 30, 2010 between the Company and Mr. Buschor, incorporated hereto by reference to the Form 8-K filed with the Commission on May 11, 2010.

10(xi)                     Stock Purchase Agreement dated June 29, 2010 between the Company and Kennametal, incorporated hereto by reference to the Form 8-K filed with the Commission on September 15, 2010.

10(xii)                    Employment agreement dated August 20, 2010, between the Company and Mr. Takkas, incorporated hereto by reference to the Form 8-K filed with the Commission on August 26, 2010.

10(xiii)                   Amendment No. 1 to Stock Purchase Agreement dated September 7, 2010, incorporated hereto by reference to the Form 8-K filed with the Commission on September 15, 2010.

21                           Subsidiaries of the Company, incorporated hereto by reference to the Form10-K filed with the Commission on December 21, 2010.

31(i)                       Certification of the Chief Executive Officer pursuant to Rule 13a-14 of the Exchange Act as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, attached hereto.

31(ii)                      Certification of the Chief Financial Officer pursuant to Rule 13a-14 of the Exchange Act as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, attached hereto.

32(i)                       Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, attached hereto.

32(ii)                       Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, attached hereto.