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EXCEL - IDEA: XBRL DOCUMENT - ABAKAN, INCFinancial_Report.xls
EX-32.1 - CERTIFICATION - ABAKAN, INCexhibit321.htm
EX-21 - SUBSIDIARIES - ABAKAN, INCexhibit21.htm
EX-31.2 - CERTIFICATION - ABAKAN, INCexhibit312.htm
EX-32.2 - CERTIFICATION - ABAKAN, INCexhibit322.htm
EX-31.1 - CERTIFICATION - ABAKAN, INCexhibit311.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

þ     ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended May 31, 2014.

 

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from

_to

.

Commission file number: 000-52784

ABAKAN INC.

(Exact name of registrant as specified in its charter)

Nevada

98-0507522

(State or other jurisdiction of

(I.R.S. Employer

incorporation or organization)

Identification No.)

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

(Address of principal executive offices)    (Zip Code)

Registrant’s telephone number, including area code:  (786) 206-5368

Securities registered under Section 12(b) of the Act: None.

Securities registered under Section 12(g) of the Act: common stock (title of class), $0.0001 par value.

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes o No þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

Yes o No þ

Indicate by check mark whether the registrant (1) has filed all reports required  to be filed  by Section  13 or 15(d) of the Securities

Exchange  Act  of  1934  during  the  preceding  12  months  (or  for  such  shorter  period  that  the  registrant  was  required  to  file  such

reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate  by  check  mark  whether  the  registrant  has  submitted  electronically  and  posted  on  its  corporate  Web  site,  if  any,  every

Interactive  Data  File  required  to  be  submitted  and  posted  pursuant  to  Rule  405  of  Regulation  S-T    232.405  of  this  chapter)

during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes þ No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not

contained  herein,  and  will  not  be  contained,  to  the  best  of  registrant’s  knowledge,  in  definitive  proxy  or  information  statements

incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ

Indicate by check mark  whether the registrant is a large  accelerated filer, an accelerated  filer, a non-accelerated  filer, or a  smaller

reporting  company.  See  the  definitions  of  “large  accelerated  filer,”  “accelerated  filer”  and  “smaller  reporting  company”  in  Rule

12b-2 of the Exchange Act. Smaller reporting company þ

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

The  aggregate  market  value  of  the  registrant’s  common  stock,  $0.0001  par  value  (the  only  class  of  voting  stock),  held  by  non-

affiliates  (44,173,615  shares)  was  $30,479,794  based  on  the  average  of  the  bid  and  ask  price  ($0.69)  for  the  common  stock  on

September 30, 2014.

On  September  30, 2014, the number  of  shares outstanding of the registrant’s  common  stock, $0.0001  par  value (the only class  of

voting stock), was 68,418,615.

1



TABLE OF CONTENTS

PART I

Item1.

Business

3

Item 1A.

Risk Factors

31

Item 1B.

Unresolved Staff Comments

36

Item 2.

Properties

36

Item 3.

Legal Proceedings

36

Item 4.

Mine Safety Disclosure

37

PART II

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of

38

Equity Securities

Item 6.

Selected Financial Data

43

Item 7.

Management's Discussion and Analysis of Financial Condition and Results of  Operations

44

Item 7A.

Quantitative and Qualitative Disclosures about Market Risk

52

Item 8.

Financial Statements and Supplementary Data

52

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

53

Item 9A.

Controls and Procedures

53

Item 9B.

Other Information

54

PART III

Item 10.

Directors, Executive Officers, and Corporate Governance

55

Item 11.

Executive Compensation

63

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder

67

Matters

Item 13.

Certain Relationships and Related Transactions, and Director Independence

68

Item 14.

Principal Accountant Fees and Services

68

PART IV

Item 15.

Exhibits, Financial Statement Schedules

69

Signatures

70

2



As used herein the terms “Company,” “we,” “our,” and “us” refer to Abakan Inc. unless context

indicates otherwise.

ITEM 1.

BUSINESS

Corporate History

The Company was incorporated in the State of Nevada on June 27, 2006.

Our corporate office is located at 2665 S. Bayshore Drive, Suite 450, Miami, Florida, 33133 and our

telephone number is (786) 206-5368. Our registered agent is EastBiz.com, Inc., located at 5348 Vegas

Drive, Las Vegas, Nevada, 89108, and their telephone number is (702) 871-8678.

Our common stock is quoted on the OTCQB electronic quotation system under the symbol “ABKI”.

The Company

The Company designs, develops, manufactures, and markets advanced nano-composite materials,

innovative fabricated metal products, highly engineered metal composites, and engineered reactive

materials for applications in the oil and gas, petrochemical, mining, aerospace and defense, energy,

infrastructure, and processing industries. Our technology portfolio includes high-speed, large-area metal

cladding technology, long-life nano-composite anti-corrosion and-wear coating materials, high-strength,

lightweight metal composites, and energetic materials. Operations are conducted through our subsidiary,

MesoCoat, Inc. (“MesoCoat”) and an affiliated entity, Powdermet, Inc. (“Powdermet”).

The Company owns an 87.5% controlling interest in MesoCoat and a 24.1% non-controlling interest in

Powdermet. Powdermet owns a 12.5% interest in MesoCoat.  The Company’s interest in Powdermet

represents an additional 3.0% indirect interest in MesoCoat.  The Company’s combined direct and

indirect interest in MesoCoat is equal to 90.5% ownership.

MesoCoat, Inc. and Powdermet, Inc.

On December 11, 2009, the Company entered into an Investment Agreement, dated December 9, 2009,

with MesoCoat and Powdermet, in order to purchase 79,334 shares of MesoCoat, to acquire a fully

diluted 34% interest in MesoCoat for $1,400,030.  Prior to the execution of the Investment Agreement,

MesoCoat was owned 100% by Powdermet.  Powdermet was in turn owned 52% by Andrew Sherman,

41% by Kennametal, Inc. (an unrelated company) and 7% by other unrelated parties.  On March 21, 2011,

the Company purchased 596,813 shares of Powdermet from Kennametal, Inc. equal to a 41% interest in

Powdermet.

On July 13, 2011, the Company placed MesoCoat and Powdermet completed the purchase of 86,156

newly issued shares, equal to a fully diluted 18.5% equity interest for $2,800,000 on July 13, 2011

thereby increasing its direct ownership of MesoCoat to a fully diluted 52.5% interest.

3



On May 31, 2014, the Company, MesoCoat and Powdermet, entered into an Accord and Satisfaction of

Investment Agreement (“Investment Accord and Satisfaction”), in order to terminate the Investment

Agreement and accelerate the plan to increase the Company’s direct ownership of MesoCoat. The

Investment Accord and Satisfaction permitted the Company to convert its additional investment in

MesoCoat of $6,169,236 to equity, and exchange a portion of its Powdermet shares for a portion of

Powdermet’s MesoCoat shares and 2,000,000 of the Company’s shares. The effect of the transaction was

that the Company increased its ownership position in MesoCoat to 88.08% direct and 90.5% direct and

indirect ownership, in exchange it decreased its ownership position in Powdermet to 24.9% from 40.5%.

The Company intends to acquire Powdermet’s remaining shares of MesoCoat in exchange for its

remaining shares of Powdermet and additional shares of the Company, on receipt of independent business

valuations for MesoCoat and Powdermet.

MesoCoat’s Business

MesoCoat is an Ohio based materials science company intending to become a technology leader in metal

protection and repair based on its metal coating and metal cladding technologies designed to address

specific industry needs related to conventional oil and gas, oil sands, mining, aerospace, defense,

infrastructure, and shipbuilding. The company was originally formed as a wholly owned subsidiary of

Powdermet, known as Powdermet Coating Technologies, Inc., to focus on the further development and

commercialization of Powdermet’s nano-composite coatings technologies. The company was renamed as

MesoCoat in March of 2008. Thereafter, in July of 2008, the coatings and cladding assets of Powdermet

were conveyed to MesoCoat through an asset transfer, an IP license and technology transfer, and a

manufacturing support agreement.

MesoCoat has exclusively licensed and developed a proprietary metal cladding application process as

well as advanced nano-composite coating materials that combine corrosion and wear resistant alloys, and

nano-engineered cermet materials with proprietary high-speed coating or cladding application systems.

The result is protective cladding solutions that will be offered on a competitive basis with existing market

solutions while the PComP coating materials unite high strength, hardness, fracture toughness, and a

low coefficient of friction into one product structure. Ten of MesoCoat’s products; 3 Corrosion Resistant

Alloy (CRA) materials (625,825, 316L), 3 Wear Resistant Alloy (WRA) material. (Tungsten Carbide

(WC), Chrome Carbide (CRC), Structurally Amorphous Metal (SAM) Alloys) and 4 PComP product

families (PComPW, PComPT, PComP S and PComP M) that have either undergone extensive

testing, or are being tested by oil and gas majors, pipe manufacturers, oil field equipment manufacturing

and service companies, original equipment manufacturers (OEMs) and other end users.

MesoCoat’s revenues are comprised of sales of the PComP powder and thermal spray applications in

addition to grants that are awarded to further the development of various products. New grants from U.S.

government agencies are to develop new uses for PComP powders and to develop new solutions to

critical problems, including certain applications for NASA. CermaCladTM clad products, which will

include the cladding of the inside of a full length pipe for the oil and gas industries, are in the

development and qualification stage.  Meanwhile, MesoCoat has expanded its technical team and

transitioned staff from Powdermet to MesoCoat, in line with the requirements of various development

projects and the expansion of the PComP powder and coating services.

4



PComP.

PComP is a family of nano-composite cermet coating materials used to impart wear and corrosion

resistance and to restore dimensions of worn metal components.  Named for its particulate composite

powders, PComP, is the result of over a decade of nano-engineered materials development, and is now

one of the few commercially viable industry replacement solutions for hard chrome and carbides.

PComP competes against thermally sprayed carbide and other coatings such as chrome and nickel

plating in the $32 billion dollar (source, BCC Inc.) inorganic metal finishing market.  Competing

materials like hexavalent chrome, carbides and tungsten carbide-cobalt have become a major concern for

industrial producers in the metal finishing industry since these materials are on the EPA’s hazardous

materials watch list and are legally banned in many countries. While businesses grapple with the need to

transition away from these harmful products, they continue to spend billions on these materials despite the

harm done to the environment. The adoption of green products and processes such as PComP thermal

spray coatings would place the business at a competitive advantage over destructive solutions while at the

same time mitigating environmental liabilities. PComP thermal spray coatings comprise a performance

leading solution platform which has shown order of magnitude improvements in head to head wear and

corrosion performance tests while offering a significantly better value proposition over other hard chrome

alternatives.

On the PComP platform, MesoCoat has developed and patented a family of corrosion resistant and

wear resistant coating solutions that combine extreme corrosion and/ or wear resistance, fracture

toughness (resiliency), and a low friction coefficient all in one product.   In conventional materials science

toughness normally decreases as hardness and wear resistance increases. However, by combining nano-

level structure control and advanced ductile phase toughening materials science, MesoCoat has developed

a material structure that can be both very tough and very wear resistant (hard). Equally important, the

hardness of a wear coating normally limits the ease with which it can be machined. The unique

hierarchical structure of the PComP coating solutions results in a coating that can be machined through

a finish grinder much faster than a product with a traditional carbide coating which needs to be diamond

ground. The speed of coating application and final machining results in higher productivity and lower

costs in metal finishing operations.

The revolutionary nano-structure of the PComP coatings produces a coating that is self-smoothing in

service, resulting in friction properties approaching those of diamond-like carbon films and solid

lubricants, with the ability to be used structurally and applied to large components at a fraction of the cost

of coatings such as diamond-like carbon.  This low friction property reduces wear, and improves energy

efficiency and life in sliding components such as drilling rotors, plungers, mandrels, ball and gate valves,

rotating and sliding seals, and metal processing equipment.

The PComP product platform, combined with metal finishing applications of the large area weld

overlay technologies underlying the CermaClad clad steel product family provides a high degree of

product differentiation and a sustainable competitive advantage, which includes OEM components and

the maintenance, repair, and overhaul of industrial assets and machinery in the “components

manufacturing and repair” segment of MesoCoat’s business.

The PComP family of nanocomposite coatings currently consists of five products, not including

variation in composition, all of which have shown in testing by third parties to provide better wear,

corrosion and mechanical properties at a lower life cycle cost than these, and several other alternatives are

as follows:

5



Wear and Corrosion Resistance and Dimensional Restoration

PComP T is a titanium carbo-nitride based high corrosion/wear resistant, low friction high velocity

oxygen fuel (HVOF) coating that competes with hard chrome and diamond like carbon PVD (physical

vapor deposition) alternatives for hydraulic cylinders, piston rings, bearings, rotating shafts, and valve

components where low stick-slip, corrosion, and modest wear resistance are required. PComP provides

both wear and corrosion resistance (unlike chrome), and significantly reduces environmental safety and

health liabilities.  Furthermore, in many applications, thermal spray coatings such as PComP provide

life multiples over chrome (80 times in cylinder liner application in testing reported by Caterpillar).

Lower coefficient of friction protects seals from premature wear and reduces energy consumption in

rotating components through lower friction losses, and the lower coating stresses and higher toughness

enable thicker coatings to be applied than chrome or other alternatives, meaning component life can be

extended through enabling additional repair cycles. Grinding and finishing of PComP T coatings can be

done faster and cheaper with conventional grinding techniques compared to the expensive diamond

finishing process used for competing carbide coatings.

PComP S is a silicon-nitride based hard chrome replacement solution for aerospace applications that

exhibits high toughness, wear resistance and displays increased spallation resistance. PComP S also has

the lowest density of any chrome alternative, enabling significant fuel savings to be realized in

transportation markets.

PComP W is MesoCoat’s “nano-engineered” tungsten carbide coating solution that offers industry

leading toughness and wear resistance for thermal spray coatings, making it better for critical high wear

applications such as gate valves and downhole drilling tools. PComP W replaces conventional tungsten

carbide cobalt in the thermal spray industry and provides increased wear resistance, design allowable

(stress levels), and reduced friction in abrasive wear applications, with higher toughness and impact

resistance than ceramic alternatives such as alumina-titania.

Liquid Metal Corrosion

PComP -M is a hierarchically structured molybdenum boride coating designed for use in liquid metal

corrosion application, especially the rolls used in galvanizing baths.  PComP -M has demonstrated, in

laboratory and initial field testing, vastly improved molten metal corrosion resistance, combined with

increased durability and reliability, in the rapidly changing environment encountered in molten metal

contact when compared to conventional materials. MesoCoat believes that its PComP -M will be able

to provide significant cost savings to industrial customers and generate a new revenue stream within the

$150+ million primary metals production equipment coatings market. We expect to focus PComP -M

initially on zinc pot stabilizer roll and pot bearing roll refurbishment market.

Thermal Barrier Coatings

ZComP is MesoCoat’s nano-composite thermal barrier coatings that offers 50% lower thermal

conductivity, with improved toughness and cyclic thermal life compared to conventional thermal barrier

coatings in the $500 million thermal barrier coatings market.  MesoCoat has received interest from

multiple companies in multiple industries needing improved thermal barrier materials, but to date the

Company has not formed any partnership with such entities. The Company initially wants to introduce

ZComP materials into the turbine engine market.

6



Recent Developments - PComP

MesoCoat is expanding its production capacity for PComP powders to meet the demand from current

customers with plans to further expand the PComP production capacity to serve the anticipated demand

of prospective customers. The process of installing the equipment necessary to meet this objective is

underway in MesoCoat’s Euclid, Ohio plant. The expansion from a1-cell thermal spray coating facility

for coating mid-sized components to qualify coatings for early adopters, to a 3- cell thermal spray coating

facility that will be able to provide a full coating service for large components like mandrels, plungers,

valves, rods, stabilizer rolls and other equipment is expected to be a leap forward in efforts to increase the

demand for our powders. The initial ramp up of powder production and the spray coating facility is

expected to be completed this fiscal year.

Ohio Department of Development’s Third Frontier Commission Loan

On February 12, 2014, MesoCoat was awarded a match loan of up to $1,500,000 by the Ohio Department

of Development’s Ohio Third Frontier Commission to fund the scale up PComP production and expand

PComP coating services. The loan will assist MesoCoat to increase PComP production from 18 tons

to 160 tons per year and to set-up two additional thermal spray coating stations. MesoCoat’s Euclid

facility could then support projected powder sales revenues of $1,600,000 a month and thermal spray

revenues of $1,000,000 per month over the next few years. The terms and conditions of the loan require

MesoCoat to make an even contribution to fund the scale up of which MesoCoat has contributed a

significant portion to date.

OEM Powder Sales

MesoCoat is selling PComP advance coating materials through different channels that are appropriate

to the specific market. As an example OEM’s and government agencies including the Department of

Defense and their manufacturing industrial base, procure raw powders and apply them for their specific

products under license, as such agencies are vertically integrated to perform their own thermal spray and

coating applications using dedicated maintenance and repair depots. The FY 15 House Defense

Appropriation bill contains language that directs the Department of Defense to make better use of its

existing equipment (planes, helicopters, jets, tanks and other armored vehicles, etc.) as budgets for the

purchase of new equipment is to be limited over the next few years. MesoCoat’s low-cost, long-life

coating materials appeal to government buyers striving to meet budgetary restrictions.

Expansion of Coating Services

MesoCoat is expanding the market for its coating services by qualifying licensed application partners that

have an existing customer bases. Our efforts to increase the geographic reach of PComP advance

coating materials based on our partner model have been focused in areas which MesoCoat cannot service

directly, such as Houston, Alberta and Los Angeles. We believe that this strategy is a cost effective way

to initially garner market acceptance and market share, while supporting economies of scale for the

powder production needed to meet product cost targets.  Eventually, we expect that a majority of our

commercial sector accounts will be able to order coating application services from us on a regional basis.

MesoCoat has also incorporated a wholly owned subsidiary, MesoCoat Coating Services in June 2013 to

build, acquire, integrate, and manage thermal spray coating shops to directly serve regional markets.

7



MesoCoat’s PComP coatings are applied using thermal spray coating application systems. Currently

MesoCoat produces and sells PComP thermal spray coating materials to end users and end user

qualified coating application shops. However, since PComP thermal spray coating materials are easier

and faster to apply, have higher deposition efficiencies, and are much easier and faster to grind and finish

than competitive products, there is a significant amount of value to be captured by providing coating

services directly instead of merely selling PComP thermal spray coating powder. In addition, coating

services account for over 75% of the global thermal spray coating market, whereas selling coating

materials accounts for only 20% of the overall market. MesoCoat’s intends to transform the productivity

of the metal coatings industry through the introduction of our scalable, productivity and performance-

leading PComP nano-composite materials. Execution of this strategy requires that we build our own

and potentially acquire third party metal finishing shops.

MesoCoat is in the process of fulfilling two recent NASA grants. In one of the grants, MesoCoat is going

to design PComPTM S coatings for components designated by NASA and to test for efficacy in space

applications. This NASA grant also includes the testing of PComPTM T low friction and wear resistant

coatings on certain designated components. MesoCoat expects to complete the testing phase of this grant

in December of 2014.

CermaClad

CermaClad is a multiple award winning technology to produce coatings that protect metal, primarily

carbon steel, from wear and corrosion, that offers the benefits of corrosion resistant alloys such as

stainless steel, nickel, or titanium based alloys and wear resistant materials such as tungsten carbide and

chrome carbide at a significantly lower cost by permanently altering, or cladding, the surface of a high

strength, low cost carbon steel with a layer of a much higher cost wear or corrosion resistant alloy.  The

result is a hybrid product offering the wear and corrosion performance of costly alloys with the ease of

fabrication and the lower cost of traditional steel material.

Cladding refers to the process where a high performance wear or corrosion resistant metal alloy or

composite (the cladding material) is applied through the use of high pressure and/ or high temperature

processes onto another dissimilar metal (the base metal or substrate) to enhance its durability, strength or

appearance. The majority of clad products produced today use carbon steel as the substrate and nickel

alloys, stainless steel, or various hard materials such as chrome carbides as the clad layer to protect that

underlying steel base metal from the environment it resides in.  MesoCoat is utilizing a unique, patented,

“High Density Infrared” or HDIR technology, exclusively licensed from Oak Ridge National Laboratory

(“ORNL”) to produce clad steel.  Testing by ORNL has shown that this HDIR technology is capable of

applying a very high quality cladding at 2 to 10 times higher productivity (100’s of Kg’s versus 3-

20Kg/hr) than traditional laser bead or weld cladding techniques, in current wide commercial use.

MesoCoat believes that this HDIR process represents the first truly scalable, large area cladding

technology.  Scalable, low capital cost cladding technology then enables the production of large volumes

of customized, premium, high margin clad steel products.

CermaClad clad steel is a premier, metallurgically bonded, clad carbon steel materials solution that is

optimized to manage the risks and consequences of wear and corrosion damage and the failure of large

assets including oil and gas risers and flowlines, refinery/chemical processing towers and transfer lines,

power plant heat exchanger tubes, and other steel infrastructure. In corrosive environments, including

seawater, road salt, mining slurry transport lines, unprocessed oil containing water, sulphides and carbon

dioxide, chemical processing and transportation equipment, metals production, and other large industrial

applications, asset owners and operators either need to continually maintain and replace major assets, or

fabricate these assets using expensive, corrosion resistant alloy (CRA) materials, which substantially

increase capital costs.

8



Clad steel, and CermaClad in particular, offer a competing, lower cost solution to these alloys, allowing

the owner or operator to use clad carbon steel which typically costs about half of solid CRA.  Combining

the reduced material cost with reduced fabrication, installation, and maintenance costs, cladding solutions

such as CermaClad are estimated to save up to 75% over the cost of using solid alloys, while still

providing essentially maintenance free corrosion lifetimes equal to the life of the asset. In the last 20

years, clad steel products have gained wide acceptance and continually increased its market share in oil

and gas exploration and production, mining, petrochemical processing and refining, nuclear, and power

generation industries.  The oil and gas industry is the largest consumer of clad steel products. In order to

meet growing global energy demands, oil companies continue to extend their offshore drilling efforts into

deeper waters farther from shore. The higher temperatures and corrosivity (carbon dioxide, sea water,

hydrogen disulfide content, etc.) of these new reserves are resulting in a significantly increased demand

for corrosion resistant alloys.

Currently used cladding processes include weld overlay, roll-bonding, co-extrusion, explosion cladding,

and mechanical lining. While cladding carbon steel pipes is cheaper than using a solid stainless steel

alloy, current production technologies still have significant limitations which CermaClad is believed to

overcome.  Directly comparable Metallurgical clad pipes are primarily manufactured using roll-bonded

clad plate which is then bent and welded to form a pipe.   Though a higher productivity process, Roll-

bonded pipe involves a lot of welded area and the failure of that weld is the single most common reason

for pipeline leaks.  Furthermore, current bimetal rolling mills are limited to around 40 feet in length by 5

feet in width (less than 20 inch diameter), limiting the size of pipe that can be fabricated.  Expanding roll

mill size to enable the production of larger diameter pipe needed for large gas projects in Southeast Asia

would require very large investments, estimated to be in excess of a $400M compared to similar capacity

from an 8-line CermaClad large diameter pipe production facility budgeted to cost $43 million.

Mechanically lined (bi-metal) pipe now makes up a significant portion of the clad pipe market.  Bimetal

pipe is lower in cost than metallurgically clad pipe, but provides only a mechanical attachment between

the inner and outer pipe.  This reduced bonding strength results in a higher risk of buckling, wrinkling and

disbonding when under stress, such as during bending, reeling, or application of external coatings on

these pipes. Mechanically lined pipe also raise concerns with respect to uniformity and reliability in that

the gap between the inner and outer pipes, coupled with the mixture of materials, leads to challenges in

NDT (non-destructive testing) inspections. Co-extrusion is another process that involves extruding a

bimetal billet into a clad pipe.  Co-extrusion has not been successful in producing long lengths of larger

diameter pipes, and would require significant capital investment and further technology development to

meet growing demand for the thicker wall and larger diameter clad pipes that CermaClad is targeted.

The remaining production process, weld overlay, does not have the productivity needed to meet clad pipe

demand, and is primarily used for smaller diameter and complex shapes, such as manifolds and

“Christmas tree’s” used in oil and gas, although weld overlay is a dominant technology for wear resistant

overlays that cannot be produced by the other techniques.

Worldwide, there is a large and growing need for clad pipes as deeper and hotter, corrosive reserves come

into production.   Current production methods not only have the above limitations, but plants are

operating at capacity, creating an increasing tight supply and lead-times of 2 years or more to delivery. A

number of organizations have stated that the market for clad pipe is expected to grow from approximately

$2 billion per year currently, to $4 billion to $8 billion within 2 to 4 years.

9



CermaClad clad steel utilizes MesoCoat’s proprietary cladding process based on the use of a high-

intensity arc lamp to rapidly melt, fuse, and metallurgically bond (make inseparable) the protective,

proprietary cladding materials onto steel pipes and tubes (internal and external surfaces), plates, sheets,

and bars. The CermaClad clad steel product portfolio combines this high-speed fusion cladding process

with proprietary corrosion resistant alloy (“CRA”) and wear resistant alloy (“WR”) coating materials

which incorporate patented microstructural and compositional modifications.  The HDIR process melts

and fuses material onto the inside of a pipe within seconds to produce the CermaClad product that offers a

seamless metallurgical bond, a smooth surface, low porosity, and minimal dilution of the overlay, along

with good strength retention of the substrate . More importantly, CermaClad clad pipe is easier to

inspect and install (reel) irrespective of the size and thickness of the pipe compared to current alternatives.

Today, clad steel is a specialized, profitable segment of the steel industry where demand has outstripped

supply and margins are high as a result.  Management believes that the CermaClad process is scalable

to large volumes with a modest capital investment that is lower than that invested in existing production

methods.

Historically, the typical contract for clad pipe was for 3 to 5 kilometers of product with larger contracts

for 20 to 30 kilometers of product. Currently, typical requirements are for tens of kilometres with growing

numbers of projects needing hundreds of kilometers per project. As a result the clad pipe market is

growing rapidly and the limitations of current solutions in terms of installation, inspectability, quality, and

availability are restraining this growth. Full commercialization of CermaClad clad pipes can address

these constrains to clad pipe market growth.

Management believes the competitive advantages of CermaClad over current competing technologies

and products are:

§     CermaClad clad steel provides a metallurgically bonded overlay, making the clad pipes easier

to inspect, bend, reel, and install compared to the widely used and slightly lower cost

mechanically bonded clad pipes.

§     CermaClad clad steel offers a seamless metallurgical cladding requiring only girth welds,

unlike the pipes made from metallurgically clad plates which have longitudinal welds

§     CermaClad application technology utilizes a 30cm wide, high density, infrared “lamp”

compared to a 0.7 cm wide laser “torch” for laser or inert gas welding torches, resulting in

application rates much faster than current weld overlay technologies.

§     The proprietary process used to make CermaClad clad steel products is more flexible (it can do

both wear and corrosion resistant alloys, for example), and has relatively low capital costs for

initial and added capacity.  This provides the advantage of being able to respond to customer

needs, such as meeting local content requirements, faster and with less investment risk than

currently established alternatives.

§     CermaClad products exceed the requirements of the defining API 5LD and DNV OS F101

standard requirements for clad pipe.

§     CermaClad offers a smoother surface, minimal dilution, greater flexibility in materials, and the

ability to do thinner, lower cost claddings than current production technologies.

10



The CermaClad clad steel product lines under development include:

§     CermaClad CRA (Corrosion Resistant Alloys). 1-3mm thick CRA clad steel that offers a lower

cost alternative to solid nickel, stainless steel, and titanium alloys for oil and gas, mining,

desalination, pulp and paper, and chemical process.

§     CermaClad WR (Wear Resistant). 1-15mm thick carbide, metal matrix composite, structurally

amorphous metal, and nanocomposite wear resistant clad steel that extends the life of steel

structures such as hydrotransport slurry lines, pump components, valve components, spools, T’s,

and elbows for oil sands, heavy oil, mining and mineral processing.

§     CermaClad HT (High Temperature). Steel clad with nickel-chromium and metal-chromium-

aluminum alloys for high temperature applications such as heat exchanger tubing, boiler

waterwalls, and other energy production components offering greater compositional control

(higher performance) and lower cost than solid alloys or traditional weld overlays.

§     CermaClad LT (Low Thickness). Lower cost thin-clad steel that exploits the unique high purity

capabilities of the HDIR application process to provide thin one millimeter claddings that should

provide 50-200 year corrosion free life in atmospheric and seawater corrosion environments.

This “stainless steel paint” is applicable to the outside diameter transportation pipelines, marine

structures, fuel and cargo tanks, bridges, architectural steel, and transportation structures.

Recent Developments - CermaClad

MesoCoat has made significant progress in quality control and the reliability of the pipe cladding process,

including the development of correlations between control variables, dependant variables, and cladding

quality. Our work has generated detailed analytical models of the fusion process that enable us to predict,

measure, control, and understand the fusion cladding process, and how that process relates to cladding

and base metal quality and performance. Most recently, these efforts have enabled the controlled

production of fully clad short sections of pipe with strong metallurgical bond, uniform quality, and good

surface finish. In line with these efforts, it has become necessary to make modifications to our full sized

production equipment that will enable a reliable process and reduce total process costs. We expect to

implement these modifications and upgrades over the next few months, which when completed will allow

us to increase the size of pipe sections to be clad. Samples of coated pipe sections that have been

produced on our full size production equipment are now being released for evaluation by potential end

users. Longer pipe sections will be produced in the same manner. When MesoCoat can demonstrate the

abililty to clad the inside surface of a full length of pipe, we expect that a major corporation, negatively

affected by the unavailability of clad pipe, will express an interest in accelerating our readiness for

commercial production.

MesoCoat is currently working with NASA to combine high temperature materials with CermaClad

application technology.  Meeting the objectives of this project would enable MesoCoat to develop and

commercialize CermaClad coatings that can withstand extreme heat and permit high heat transfer that

might enable NASA’s long duration missions within extreme wide temperature and cosmic radiation

infused environments.  The first feasibility results are expected by the end of December 2014.

MesoCoat is also currently working with US Environmental Protection Agency (EPA) to evaluate the use

of CermaClad LT processes to reduce the CO2 and wastewater emissions from galvanizing operations.

The objective is to determine whether the use of CermaClad-LT, metallic powder coating technology

can end the use of the large, energy intensive molten metal baths and associated acid pickling lines used

to prepare corrosion resistant coated steels. Initial test results have been very positive, so MesoCoat will

be preparing new grant requests and business plans associated with this potential new line of business.

11



Mattson Exclusivity Agreement

Due to ongoing supply and support issues with our arc lamp component supplier, Mattson Technology

Inc. (“Mattson”), on October 16, 2013, MesoCoat elected to exit the mutual exclusivity agreement with

Mattson and initiated  projects to solve the supply and reliability issues associated with the use of full

scale production equipment that have been hindering and limiting commercialization efforts. Management

has been evaluating the assets acquired from Mattson in order to determine to what extent the assets have

been impaired.

Meanwhile, MesoCoat determined to design a new HDIR (High Density Infrared) plasma lamp system in-

house. In support of this effort, NASA Glenn was awarded a GLIDE contract in addition to the ongoing

MesoCoat-funded space act agreement to support lamp components and controls development.

MesoCoat’s efforts and those of NASA Glenn have to date produced a new reflector design that is better

than the previous designs at managing and delivering the amount of heat generated by the CermaClad

process. We are also testing anode prototype designs which are exhibiting the same or better anode

lifetime properties without the cost and delivery problems associated with our previous supplier. Our first

MesoCoat design working prototype lamp head is expected to be ready for testing in October, 2014.

LIMO/LILAS Agreement

On November 21, 2013, the Company entered into a memorandum of understanding with Lissotschenko

Mikrooptic GmbH (“LIMO”) to support CermaClad-LT (low thickness) product commercialization, and

to extend the application of our cladding technology to smaller diameter pipes.  The LIMO technology

creates a new type of thermal micro-climate that delivers superior performance in accuracy and process

control compared to the plasma arc lamp.  Highly efficient semiconductor laser technology would extend

Abakan´s capabilities to provide portable systems for covering smaller diameter pipes while still

providing significant productivity.

On April 4, 2014, the parties to the memorandum of understanding was replaced in its entirety with an

agreement, to assign those obligations of LIMO to its sister company LILAS GmbH (“LILAS). The

execution of the agreement remains subject to the execution of a shareholder agreement between the

principal of LIMO and LILAS with a third party that would fund the objectives of the agreement with the

Company to the tune of 3,000,000 in exchange for the exclusive rights to all coating applications

developed for the LILAS laser systems, except those rights associated with thin 50 -500 micron coating of

the internal diameter of pipe for which rights the Company would pay the third party 1,500,000 within

twelve months of the third party’s initial payment to LILAS. Abakan would also retain a right of first

refusal to joint venture all of the other applications with the third party.

Sales Agency Agreement for Mexico and Central America

On September 16, 2013, the Company entered into an exclusive sales agent agreement with Metallurgic

Solutions, S.A. de CV (“MetalSol”) intended to facilitate the introduction of MesoCoat’s products into

Mexico and Central America. MetalSol is working with MesoCoat’s to identify prospective production

and service operations in Mexico for PComP long-life metal coatings, CermaClad clad steel.

12



MetalSol has been working on establishing large scale operations in Mexico to provide locally produced

products of the highest quality while creating skilled employment opportunities. MetalSol is currently in

discussions with several regional economic development departments in order to finalize the best location

for building PComP and CermaClad operating facilities in Mexico. MetalSol has also secured initial

sales and test orders for PComP coatings from some of Mexico’s largest steel manufacturers. MetalSol

has also made significant progress in driving the oil and gas industry in Mexico towards early commercial

adoption of the Company’s CermaClad pipe cladding products. Mexico’s energy sector is in the

process of expanding its offshore developments to greater depths in the Gulf of Mexico exacerbating the

acute need for superior cladding products.

The Company expects that if an accelerated qualification process can be determined and met, that Mexico

may well prove to be the commercial entry point for CermaClad pipe cladding products worldwide.

Northern Alberta Institute of Technology

MesoCoat has been approved to receive a $2.75 million funding commitment from certain Canadian

federal and provincial agencies for an 18 month collaborative effort with the Northern Alberta Institute of

Technology (“NAIT”) to develop wear-resistant clad pipes to transport the abrasive oil sands from mining

sites to processing/refining facilities.  The total project cost for setting-up a R&D facility within NAIT's

Souch campus, and related activities is $4,260,000, of which $1,500,000 is being funded by Western

Economic Diversification' Canada; $1,250,000 is being funded by Enterprise and Advanced Education,

Alberta; $1,200,000 is being funded by the Company; and $310,000 being funded by NAIT.

The $1,200,000 to be funded by the Company will be offset by $500,000 to be received for the lease of

one of the Company’s lamp systems. The space we are located in at the NAIT facility has been renovated

with appropriate power, ventilation and other safety measures to allow for the operation of our lamp

system.

Anticipated Product Development Timeline

The anticipated product development timeline detailed below is based on management’s estimate of the

time requisite to bring the respective products to market, all of which products are subject to uncertainties

surrounding the actual completion date of any number of items as is normal in product development.

Note, certain of the anticipated commercial timelines presented have not advanced since the end of our

last reporting period. Unless otherwise explained below in respect to specific products, the unanticipated

delays are attributed, in large part, to ongoing supply and support issues with our arc lamp component

supplier, Mattson, personnel changes, the need to replace aging equipment associated with  PComP and

availability of financing.

13



TIME TO

PRODUCT

COMMERCIAL STATUS

COMMERCIALIZE

(MONTHS)

PComP W

Growth and Expansion

Current

PComP T

Market Entry

Current

PComP M

Field Testing

Current

PComP S

Prototype Qualification

12

PComP Coating Services

Market Entry

Current

ZComP

Development

18

CermaClad CRA Euclid, Ohio

Full scale product API qualification

9 for small scale orders

CermaClad CRA 4 line plant

Full scale product API qualification

28 full scale production

CermaClad WR

Development

8 plate sales from OH

CermaClad LT

Development Delayed

24

CermaClad HT

Incubation

36

Product Commercial Expansion Timeline

The Company’s near term plan is to expand the presence of its products in North America and the Asia-

Pacific market. Our attempts to negotiate reasonable terms for a “build to suit” agreement to construct a

manufacturing plant in the Recife, Brazil free trade zone have been abandoned. We continue to consider

the best strategy to secure direct access for our products to Brazilian markets. Meanwhile, our wholly

owned Asian subsidiary, PT MesoCoat Indonesia, is negotiating the terms of a “build-to-suit” agreement

to construct a manufacturing plant on the island of Batam, Indonesia. The expected time-frame for the

completion of this project is yet to be finalized.

In Mexico our sales agent Metallurgic Solutions, S.A. de CV has been working to get financial support

from government and corporate entities to build a production facility in Mexico.

License agreement with Powdermet, Inc.

On July 22, 2008, MesoCoat entered into a license agreement with Powdermet. The agreement granted to

MesoCoat a royalty-free, exclusive, perpetual license to PComP  and CermaClad intellectual

property, certain equipment, contracts and business lists, including supporting patents, trademarks, in

addition to supporting confidential and trade secret information, including formulations, processes,

customer lists and contracts, in the field of wear and corrosion resistant coatings. The license agreement

also included Powdermet’s commitment to provide manufacturing expertise and technical capabilities

supporting PComP powders. MesoCoat was at the time of licensing a wholly owned subsidiary of

Powdermet. The license agreement between MesoCoat and Powdermet was amended and restated in its

entirety on May 31, 2014, in connection with the Company increasing its majority interest in MesoCoat.

The amended and restated license agreement includes the grant of intellectual property provided in the

earlier license agreement taking into account developments subsequent to the earlier license agreement.

The amended and restated license agreement will end upon the last valid claim of licensed patents to

expire unless terminated earlier with the terms of the agreement.

14



MesoCoat’s exclusive patent license agreement with UT-Battelle LLC.

MesoCoat has a two stage, exclusive license from UT-Battelle, LLC to utilize two patents in its processes

to develop products for wear and corrosion applications. The initial non-commercial exclusive license

was entered into on September 22, 2009, which enabled MesoCoat to conduct development work to prove

out the technology within the field of use. The second stage of the agreement comprises a commercial

exclusive license, executed on March 7, 2011, that permits MesoCoat to conduct commercial sales

utilizing the licensed process and technology. The license is valid through the expiration of the last patent

in 2024 and required that MesoCoat invest in additional research and development of the technology and

the market for products that stem from the technology by committing to a certain level of personnel hours

and $350,000 in expenditures. MesoCoat has met the aforesaid conditions of the license agreement.

Stage I and II license fees of $50,000 have been paid against the agreement and a royalty of $15,000 or

2.5% of revenues generated in the United States that utilize the technology, minus allowable costs as

defined by contract, whichever is greater, are due March 31 on an annual basis beginning after the first

commercial sale. For the first calendar year after the achievement of a certain milestone and the following

two calendar years during the term of the agreement, MesoCoat is obligated to pay a minimum annual

royalty payment of $10,000, $15,000 and $20,000 respectively. MesoCoat is $10,000 in arrears on the

$15,000 annual payment.

Cooperation agreement with Petroleo Brasileiro S.A

MesoCoat entered into a cooperation agreement dated January 7, 2011, with Petroleo Brasileiro S.A

(“Petrobras”) for the purpose of carrying out development work and conducting validation tests in

connection with applying the CermaClad process to coating the internal surfaces of pipes for use in the

oil and gas industry. The term of the agreement was initially for 18 months during which time MesoCoat,

with the assistance of Petrobras, carried out development work and a series of tests divided into two

phases with the prospect of a third phase. Phase I was a feasibility demonstration designed to verify that

the CermaClad process and resultant materials were compliant with industry standards and acceptable

for clad pipe use. Phase II was the development of a prototype pipe cladding facility that could clad the

inner surface of a 10 inch diameter pipe, and then verify that the CermaClad process as applied to

prototype pipes was suitable for application to line pipe in accordance with current industry standards.

The prospective third phase would be to finalize the design and construction of a clad pipe manufacturing

facility in Brazil with the capacity of producing cladding on the interior diameter of pipes and tubes with

section lengths of 12 meters.

The immediate objective of the agreement, in each of Phase I and II, was that the CermaClad product

and samples met the American Petroleum Institute (API) 5LD and Det Norte Veritas (DNV) OS F101

standard requirements. API and DNV approvals would, assuming the completion of a suitable

manufacturing facility as anticipated by the prospective third phase, permit MesoCoat’s market entry into

the oil and gas industry and cause full scale production activities. MesoCoat successfully completed

Phase I by demonstrating that the CermaClad process is capable of producing clad steel products that

meet API 5LD and DNV OS F101 specifications for CRA clad steel pipe on flat plate coupons.

15



MesoCoat also accomplished the major objectives of Phase II with the design, fabrication, installation,

and initial operation of a prototype ID cladding system in our Eastlake, Ohio facility, which became

operational in April, 2012.  Clad sections of pipe were prepared and tested against API and DNV

standards, resulting in proof of capability that the pipe cladding system could produce sections of clad

pipe product compliant with industry standards.  To expand the time available for testing, the agreement

with Petrobras was extended by six months until January, 2013.  The Phase II final report was submitted

in November 2012, including equipment and facility designs and plant layouts for a 4-line Brazilian

production facility.

In January of 2013 Petrobras and MesoCoat agreed to a further nine month extension and an expanded

scope of development work to include the addition of thermal modeling and imaging to enhance

instrumentation and other controls of the pipe cladding process, prior to the delivery of clad pipe sections

for qualification testing. This expanded scope was designed to provide defect-free larger sections of clad

pipe, and is part of MesoCoat’s overall manufacturing development program which continues to be

supported by Petrobras internal support.  This work has been progressing and MesoCoat completed the

expanded program in the 1st quarter of 2014. Results to date from these activities resulted in

improvements to our ability to monitor the thermal effects through the use of high temperature sensors

and cameras along with developing and validating simulation software to analyze the results to support

improving the process quality.

Cladding consistency (total area coverage) was linked to consistent and controlled pipe OD surface

temperature.  In addition to supporting prototype development and defect elimination efforts, the added

data generation, imaging, calibration, simulation, and analysis techniques support the development of

quality and manufacturing process control systems necessary to ensure the highest quality clad products.

Over the duration of this agreement, MesoCoat has been able to develop, test and qualify short pipe

sections cladded with 3mm thick 625 coating.

Outside of the cooperation agreement, in support of the Phase III manufacturing objectives of the

cooperative agreement, MesoCoat has expanded the scope of the design, procurement, installation, and

ramp up of a full-scale, 12-meter clad pipe manufacturing facility in Euclid, Ohio. Recently the Company

has prepared design drawing and comprehensive budgets to clad the inside of diameter of 24, 30 & 36

inch diameter, 12 meter pipe. This has been instigated by requests from numerous entities from both

inside and outside of the oil and gas industry. Our expanded scope will support further automation of the

cladding process while ensuring a high level of process control.

16



Powdermet’s Business

Powdermet was formed in 1996 when it licensed technology developed by its founder from Ultramet Inc.

Since then Powdermet has developed a product platform of advanced materials solutions derived from

nano-engineered particle agglomerate technology and derived hierarchically structured materials. These

advanced materials include energy absorbing ultra-lightweight syntactic- and nano-composite metals, and

energetic materials in addition to the PComP nano-composite cermets (a cermet is a metal-ceramic

composite) exclusively licensed to MesoCoat. The business has historically financed itself non-dilutively

through revenues from corporate engineering consulting and development fees, government and private

sector contracts and grants and recently through partnerships with prime contractors and systems

integrators.  Powdermet operates as a commercial technology incubator with a subsidiary, spin-out, or

license model for major commercial markets (such as with Mesocoat), while retaining and supporting the

supply of critical nano-composite powders to licensees, spin-outs, and through toll production, equipment

sales, and engineering services.  The company provides nanoengineered materials, technology

development services, and specialized production equipment in the nano- and engineered particle space.

While MesoCoat’s product focus is on market development and commercialization of advanced cermets

to address corrosion and wear coating needs, Powdermet’s product differentiation is based on its ability to

build advanced nano-structured metal formulations to address energy efficiency, energy absorption and

release, reduction in hazardous materials, and life cycle cost reduction. Powdermet’s technologies are

particularly useful in crash and ballistic energy management markets since they offer weight reduction

and the ability to dissipate substantially more impact energy than the aluminum alloys and foamed metals

currently available.

Powdermet has four materials solution families under development:

(1)  SComP - A family of syntactic metal composites known for their light weight properties and

ability to absorb more impact energy than any other known material. SComP can provide

weight savings over aluminum and magnesium alloys without magnesium’s corrosion and wear

limitations, reducing structural weight by 10-30% in targeted aerospace, consumer electronics,

and transportation applications.   One new patent application was filed in the quarter ended May

31, 2014, on low density, mill product and method of manufacture.

(2)  MComP - A family of hierarchically structured, rare earth free, nano-composite metal and

metal matrix composites that provide higher strength and temperature capability compared to

traditional aluminum and magnesium allows. MComP is designed to be a market replacement

for beryllium, aluminum and magnesium in structural applications, without relying on scare and

expensive rare earths to produce high strength and thermal stability. Targeted applications include

aerospace and defense and transportation market segments, as well as electrical transmission and

distribution.  A nano-composite cermet bearing material, HybriMet, was recently demonstrated

for large hybrid bearing applications utilizing the combined high toughness and strength of

hierarchically structured nano-composite materials platform.

17



(3)  EnComP - A diverse family of nano-engineered particle based solutions for energy storage and

release. Current developments include record setting energy density nanoparticle filled films for

capacitors, structured nano-composite anode and cathode materials for thermal and lithium ion

batteries, and hydrogen storage media capable of energizing power fuel cells down to -34C.   A

new patent application was filed related to environmentally-triggered reactive composites, with

applications to well perforation devices, reactive warheads, and dissolvable frack balls for shale

gas field completions Nano-composite capacitor films with 16X higher energy storage density

than state of the art biaxially oriented polypropylene (BOPP) have been demonstrated at the pilot

plant scale, and these films are currently being integrated into devices for eventual commercial

product launch.  To this end, a new company, Cratus Energy, LLC has been formed as a potential

launch vehicle for the capacitor technology, but this has not yet been monetized or licensed.

(4)  SynFoam - A family of structural, thermally insulating syntactic ceramic composites

combining strength, high temperature functionality and low thermal conductivity into one

multifunctional material. Applications include rocket propulsion and re-entry vehicle systems,

and structural insulation for high temperature energy production and use including flowlines and

heat treatment furnaces.   Two patent applications were filed for high temperature structural

insulation, and for high temperature insulation for production flowlines to support new product

releases in the Synfoam Product line.

Powdermet’s developmental products closest to commercialization are Hybrimet nano-composite

bearing materials and EnComP energetic nano-composites. Powdermet also produces custom-

engineered powders and nano-powders, provides advanced materials contract research and development

services, and derives significant revenues from development contracts and toll manufacturing services.

Powdermet’s MComP metal nano-composite development group continues to work on reducing the

cost of record-breaking light metal nano-composites.  Nano-composite metals which have been

engineered with specific distributions of nano- and micro-scale features have been shown to possess

previously unachievable combinations of strength and ductility, with nano-composite aluminum

approaching the strength of steel at 1/3rd the density/weight.  These nano-engineered metals are highly

sought after for weight reduction and fuel economy benefits in transportation vehicles, including armored

military, high speed rail, and large truck applications.   Powdermet has been collaborating in a joint

venture with Oshkosh defense, Eck industries, and the University of Wisconsin to develop a low cost

(compared to powder metallurgy routes) castable aluminum nano-composite exhibiting record-breaking

combinations of strength and ductility along with improved fabricability.    Powdermet is working with its

partners to demonstrate scalable production, and our next major milestone is to produce a several hundred

pound casting suitable for use in a heavy transport vehicle.

Powdermet’s SComP solution addresses a large market need for crash energy management and reduced

weight for fuel economy and portability.  Today’s engineered materials market offers nothing like

SComP and its closest competition would be engineered honeycomb structures and foamed metals,

neither of which have SComP’s energy absorption capabilities, metal-like aesthetics and ease of use.

One of the largest benefits of these syntactic metal composites is their ability to absorb energy from

impacts and ballistic events through deformation. Powdermet’s current development focus for SComP

products are on scalable processing to reduce costs necessary to enter larger, shorter sell cycle markets, as

well as product design and insertion into defense markets which have a long acceptance cycle.  Market

competition may come from nanotube companies which are attempting to build energy absorption

features using this type of technology but without the same property characteristics as Powdermet’s

products, especially in the area of thermal resistance.  SComP is expected to fare well when introduced

to the commercial market.

18



Terves, Inc.

On July 23, 2013, Powdermet announced the launch of its wholly owned subsidiary Terves Inc., to

commercialize proprietary reactive materials and light metals technology for the shale gas and oil

industry. Terves’ TervAlloy technology was initially based on Powdermet’s MComP metallic nano-

composite and EnComP structural energetics development group to build reactive warheads for the US

Department of Homeland Security and beryllium alternatives for missile defense systems. TervAlloy

technology has since been reconfigured and customized into engineered reactive materials that can

significantly improve the efficiency, oil recovery, and safety of well isolation, perforation and completion

for oil and gas companies operating in shale and tight rock formations in the United States and across the

globe.  Terves was granted an exclusive license for Powdermet light and reactive metals technology, and

the company has matched external economic grants to provide initial start-up capital.

TervAlloy is a class of patent pending, environmentally responsive, lightweight metallic materials

manufactured from magnesium and other light metals such as lithium and calcium that are high strength,

machinable, and also respond in an engineered and controlled manner to environmental stimuli such as

changes in fluid, pH, temperature or electrical or magnetic fields to induce material changes such as

decoherence (disintegration), gas generation, or heat generation. TervAlloy is engineered for various

market applications including oil and gas tools for well isolation and completion (frac-balls, sleeves, and

seats), well perforation, and fracturing, lightweight electronic packaging, beryllium replacement, airframe

structures, missile airframes and rocket motor cases, and transportation The primary application of

TervAlloy for oil and gas include controlled disintegration well completion tools and reactive tooling

that provides for the generation of heat and gas pressure inside a formation.

Terves’s first generation disintegrating frac ball product was launched in August, 2014, and the second

generation disintegrating frac balls is scheduled for release in October, 2014.  The company is developing

a suite of products including frac balls, completion tooling, proppants, energetic materials, and diagnostic

materials to meet industry needs in the well stimulation marketplace, and has formed development

partners with leading oilfield service companies to further develop the product for market insertion

towards the end of 2014.

Tervalloy products are designed to compete with dissolving polymeric frac balls, such as bioballs from

Fairmont Santrol, or those distributed by Magnum Oil Tools.  The company is competing with new

product offerings from Baker Hughes (Intellifrac), and several new players including Rockwell Tools

and several others.   Terves is already working on gen-2 higher strength materials (30KSI versus 18KSI

shear), and surface engineering technologies to modify the response and triggering of the balls to leapfrog

ahead of emerging competitors in the metallic frac ball market.

AMP Distributors Inc. SEZC and AMP Distributors, Inc.

AMP Distributors Inc. SEZC (“AMP SEZC”)(formerly AMP Distributors, Inc.) and AMP Distributors,

Inc. (“AMP FL”) were formed by the Company in June 2011 and July 2012, as a Cayman Islands

company and a Florida corporation respectively.  In April 2013, AMP SEZC filed for a Trade Certificate

which was approved in full in May 2013 to begin operations as a Special Economic Zone Company. An

office has been established by AMP SEZC in the Cayman Enterprise City. The primary purpose of these

entities is to negotiate, execute and administer the set up of the corporate and tax structures of our

overseas subsidiaries, as well as potentially handling some international sales of MesoCoat's products.

19



AMP SEZC and AMP FL will also be tasked with acquiring equipment and coating materials for the

Company’s international transactions. AMP SEZC has acquired a Work Certificate for its General

Manager (with over 30 years of experience in the overseas financial services industry).  Kariola Limited,

a consultancy organization, was commissioned and has fulfilled its agreement to assist it with technical

advice and entry into Asian markets.

Industry Overview

External Environment: Corrosion

The U.S. Department of Commerce monitors a large number of industry sectors that face problems with

corrosion, which is a growing issue faced by companies worldwide. Metallic corrosion is the degradation

that results from interaction of metals with various environments such as air, water, naturally occurring

bacteria, chemical products and pollutants. Steel accounts for almost all of the world’s metal consumption

and therefore an astoundingly high percentage of corrosion issues involve steel products and by-products.

These issues affect many sectors of the worldwide economy. According to The World Corrosion

Organization, the cost of corrosion to the global economy is $2.2 trillion annually, or roughly 3% of the

world’s GDP.

Although worldwide corrosion studies began in earnest in the 1970s, there has never been a standardized

way for countries to measure corrosion costs. As a result, estimates of economic damage are difficult to

compare. What is clear, however, is that the impact of corrosion is serious and severe. As a result of

corrosion, manufacturers and users of metallic products incur a wide range of costs, including:

§     painting, coating and other methods of surface preparation;

§     utilizing more expensive corrosion resistant materials;

§     downtime costs;

§     larger spare parts inventories; and

§     increased maintenance costs.

§     Cost of failure.

There are also related costs that may be less obvious. For instance, some of the nation’s energy demand is

generated by firms fixing metallic degradation problems. It is estimated that every tonne of steel produced

leads to 2.4 tonnes of CO2 emission; and thus it is easy to compute the reduction in CO2 emissions that

could be achieved by making steel last longer. Studies have shown that this increased energy demand

would be avoidable if corrosion was addressed at the preventable stage. Some of this demand could be

reduced through the economical, best-practice application of available corrosion control technology.

External Environment: Wear

Corrosion is not the only concern of engineers and material scientists. In most industries, the deterioration

of surfaces is also a huge problem. Wear is often distinct from corrosion and describes the deterioration of

parts or machinery due to use. The effects of wear can generally be repaired. However, it is also usually

very expensive. Prevention and wear protection is the most economical way to offset the high costs

associated with component repair or replacement. To accomplish this, hard-face coatings are applied to

problematic wear surfaces for the purpose of reducing wear and/or the loss of material through abrasion,

cavitation, compaction, corrosion, erosion, impact, metal-to-metal, and oxidation. Some companies focus

on the prevention side of the business (applying coatings to prevent wear) while others focus on the repair

side of the business (reforming metal or applying coatings to fix metal substrate problems).

20



In order to properly select a coating alloy for a specific requirement, it is necessary to understand what

has caused the surface deterioration. The various types of wear can be categorized and defined as follows:

§     Abrasion is the wearing of surfaces by rubbing, grinding, or other types of friction that usually

occurs due to metal-to metal contact. It is a scraping, grinding wear that rubs away metal surfaces

and can be caused by the scouring action of sand, gravel, slag, earth, and other gritty material.

§     Cavitation wear results from turbulent flow of liquids that carry small suspended abrasive

particles.

§     Compression is a deformation type of wear caused by heavy static loads or by slowly increasing

pressure on metal surfaces. Compression wear causes metal to move and lose dimensional

accuracy.

§     Corrosion wear is the gradual deterioration of unprotected metal surfaces, caused by the effects

of the atmosphere, acids, gases, alkalis, etc. This type of wear creates pits and perforations and

may eventually dissolve metal parts.

§     Erosion is the wearing away or destruction of metals and other materials by the abrasive action of

water, steam, slurries which carry abrasive materials. Pump parts are subject to this type of wear.

§     Impact wear is the striking or slamming contact of one object against another and this type of

wear causes a battering, pounding type of wear that breaks, splits, and deforms metal surfaces.

§     Metal–to-Metal wear is a seizing and/or galling type of wear that rips and tears out portions of

metal surfaces. It is often caused by metal parts seizing together because of lack of lubrication. It

usually occurs when the metals moving together are of the same hardness. Frictional heat

promotes this type of wear.

§     Oxidation is a type of wear causing flaking or crumbling layers of metal surfaces when

unprotected metal is exposed to a combination of heat, air and moisture. Rust is an example of

oxidation.

Generally, the initial coating selected to protect a product against wear is also the same product applied to

correct the problem once the product is worn. However, at that time, engineers can determine whether

some of the characteristics they set for the initial preventative coating have withstood the environment or

other pressures initially assumed in the product’s design. If it is determined that the initial coating

selection was not adequate, material scientists can change the application parameters of the prior coating

material (like amount or width of coating material applied) or select a new coating material that has new

properties. For instance once the type of wear is identified, a material engineer might determine that a

new coating material with better lubricity and other characteristics is needed for repair.

Presently there is no governmental standardized method to classify or specify degrees of wear. Nor is

there a central agency that collects market data on the cost of wear-based issues, primarily because firms

account for repair costs differently. Each industry sector has its own means of evaluation and approach to

repair, based on the type of part that needs repair, the urgency of that repair, the availability of a coating

solution and the cost associated with downtime. In general, companies already have plans in place on how

to fix a part once it goes down. However, if an unexpected problem occurs, firms utilize the expertise of

experienced materials engineers that have worked with numerous coating suppliers to evaluate a solution.

Sometimes this evaluation is done by reviewing vendor data only (suppliers typically provide complete

data product information worksheets which detail product properties, testing specifications, best

applications methods and conditions). If self-review is insufficient, consultants and vendors are flown it to

help assist companies in their material selection or solution repair needs. Those solutions then go through

review to determine their merit and cost benefit. Sometimes, parts cannot be repaired and new ones are

required.

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Metal Coating – PComP

MesoCoat’s PComP ceramic-metallic (cermet) thermal spray coatings replace electrolytic hard chrome,

electroplating, spray and fuse, and thermal spray carbides by imparting supreme wear and corrosion

resistance. Thermal spraying is generic term used to define a group of processes that deposit finely

divided metallic or nonmetallic materials onto a prepared substrate to form a coating. The coating

material may be in powder, rod or wire form. Thermal spray coatings are applied by means of special

devices / systems through which melted or molten spray material is propelled at high speed onto a cleaned

and prepared component.

In all sectors of industry today, the catch phrase “better, faster, cheaper” is common and valid, as it seems

that production demands are ever-increasing. Highly demanding requirements and aggressive service

conditions often lead to the premature loss of component or system function. Metal coatings are used

primarily to protect metal components and equipment from corrosion and wear. Thermal spray coatings

and electroplating are used in over 34 industrial sectors including aerospace, energy, automotive,

transportation, steel, textile, agriculture, pulp and paper, printing, petrochemical, electronics,

semiconductor, computer, defense and medical/dental industries, etc.

According to International Thermal Spray Society, the thermal spray industry was estimated to be around

$7.6 billion (for 2006), and with a modest 4.5% CAGR the market size is expected to be approximately

$11 billion per annum globally at the end of 2014. The thermal spray coatings market can be divided into

three primary segments; coating equipment, coating materials, and coating services. Industry reports and

experts estimate that thermal spray coating services accounts for the largest share at 75% of the market,

whereas coating materials at 20% and coating equipment at 5% of the market constitute the rest.

According to a BCC research report, the worldwide market for chromium electroplating grew at a low

CAGR of approximately 0.6% during 2005 to 2010, from approximately $3.2 billion in 2005 to

approximately $3.3 billion in 2010. This slow growth is attributed to the immense health and

environmental hazards caused by the waste generated in this process. Moreover, it is expected that

chromium electroplating will be largely replaced by electroless nickel plating. This anticipated change is

reflected in the decreasing percentage of chromium electroplating in the total electroplating market, from

approximately 33% in 2005 to approximately 26% in 2010. The electroplating of chromium is done for a

variety of applications and can be broadly categorized as hard chromium electroplating, decorative

chromium electroplating, and trivalent chromium electroplating. It is expected that thermal spray coatings

would continue to capture an increasing share of the electroplating market, driven primarily by

regulations that mandate the ban of toxic materials and waste streams.

Metal Cladding – CermaClad

MesoCoat’s CermaClad metal cladding technology is used to produce corrosion- and wear-resistant

clad pipes and flat plates and sheets. MesoCoat’s development and qualification efforts are currently

focused on developing corrosion-resistant clad pipes for the oil and gas industry, and wear-resitant clad

pipes for the oil sands and the mining industry. Cladding refers to a process where a metal, corrosion

resistant alloy or composite (the cladding material ) is bonded electrically, mechanically or through some

other high pressure and temperature process onto another dissimilar metal (the substrate) to enhance its

durability, strength or appearance. The majority of clad products made today uses carbon steel as the

substrate and aluminum, nickel, nickel alloys, copper, copper alloys and stainless steel as the clad

materials to be bonded. Typically, the purpose of the clad is to protect the underlying steel substrate from

the environment it resides in.

22



Estimates and industry experts suggest that metal cladding is a $4 billion market globally, which can be

further segmented as $2 billion for clad pipes and $2 billion for clad plates and components. Clad pipes

are primarily used to protect against corrosion and wear in offshore oil and gas, petrochemical, and

mining industries; whereas the clad plates are used to form equipment and components such as pressure

vessesl, reactors, tanks, etc. for a variety of industries including oil and gas, petrochemical, nuclear,

desalination, chemical, concrete, etc. It is estimated that over 50% of the clad products are used in the oil

and gas industry.

The International Energy Agency estimates that more than 70% of the remaining oil and gas reserves are

highly corrosive and an increasing share of global oil and gas production is now offshore. To explore

these corrosive reserves and especially the high-pressure high-temperature reserves found offshore, there

is a need for pipes and components that can withstand the assault of extremely corrosive constituents

present in these reserves.

Until the early 1990s, offshore exploration and drilling in deepwater areas was considered an

economically unattractive option for the production of hydrocarbons from offshore reserves due to

substantially higher development costs of drilling, the lack of heavy-duty equipment, technological

limitations, and high project risks making it commercially unviable. However, with recent advancements

in offshore drilling technology, offshore rigs, and vessels have helped exploration and production

companies to venture into deepwater and ultra-deepwater basins. Even governments across different

countries have been encouraging deepwater and ultra-deepwater E&P activity through favorable policies,

taxation systems, and concessions in order to achieve maximum possible energy self-reliance. Deepwater

activity is expected to grow substantially in the future, and is likely to witness aggressive steps by E&P

companies worldwide seeking to drill for new hydrocarbon reserves in deeper waters.

The global oil and gas capital expenditure (CapEx) is expected to increase from $1,036 billion in 2012 to

$1,201 billion in 2013, registering a growth of 15.9%. The trend of increasing capital expenditure is

expected to continue for the foreseeable future, especially driven by reserves that are deeper and farther

away from the shore. Infield Systems Deepwater and Ultradeepwater Market Report states that the largest

proportion of deepwater investment to be directed towards pipeline installations; comprising 39% of total

global deepwater expenditure - and clad pipes would constitute a healthy share of this offshore pipeline

investment.

Oil and gas companies have been exploring in progressively deeper fields. For example, Transocean Ltd

recently stated that it drilled the deepest well in its company’s history, at 10,385 feet underwater. Drilling

in deeper waters, along with the discoveries of new offshore oil and gas fields around the world, has led

to strong increases in offshore production equipment. Noble Corporation stated in its FY12 earnings

conference call that oil and gas E&P companies announced 52 oil and gas field discoveries that were at

least 4,000 feet underwater, breaking the previous record by 40%. Eighteen of these fields were at least

7,000 feet underwater and nine of these fields were at least 8,000 feet underwater. These numbers are

indicative of the trend toward producing oil and gas in deeper offshore fields. It is expected that this trend

will continue, which will create the need for increases in both the quality and quantity of clad pipe.

In addition, the high CO2 content witnessed in the reserves in the Asia-Pacific and MENA regions, and

high H2S content in Gulf of Mexico, Brazil, and West Africa which when coupled with higher pressure

and higher temperature of these deepwater reserves, make corrosion not just a concern but a challenge, a

substantial challenge. To encounter such corrosive assault, it has become imperative to use corrosion-

resistant clad pipes which perform the role of solid CRA pipes but at 1/5th cost thus making several of

these challenging reserves economically viable.

23



Competition

MesoCoat and Powdermet can expect to face intense competition within their respective market segments

with product commercialization. The industrial coatings and engineered materials sectors are highly

fragmented by companies with competing technologies each seeking to develop standards for respective

industries. Industrial coatings research and development has been ongoing for some time and several

firms are perceived as the industry leaders. Despite, the prospect of intense competition, the Company is

confident that the growing demand for protective coatings and cladding, from the oil and gas sector alone,

has created an industry wide gap in availability into which its products can successfully compete.

MesoCoat

PComP

PComP nanoengineered cermet products have few directly comparable competitors. Although there are

established thermal spray coating material manufacturers such as Deloro Stellite, Oerlikon Metco,

Hoganas; and a few emerging companies like Nanosteel, Integran, Inframat, Xtallic, and Modumetal that

offer solutions for corrosion and wear competition, no competitor has yet been able to engineer the

combination of properties that MesoCoat has built into its PComP product line.

MesoCoat has been able to manufacture a corrosion resistant product that has high strength, hardness, and

fracture toughness.  Toughness and hardness are normally inversely proportional characteristics and no

other company has been able to reverse the nature of these properties which is what makes the PComP

products unique in the market place. MesoCoat has also increased the ductility factor in the PComP

products so basically not only has PComP shown to provide a harder coating surface, but the hard

objects are able to bend more without breaking.

One good example of how the PComP family of products have a competitive edge over existing

alternatives is PComP W, MesoCoat’s tungsten cobalt carbide replacement solution. PComP W

exhibits high deposition efficiency and at a Vickers hardness similar to that of tungsten carbide while

being stronger than the conventional carbide coatings it is designed to replace. Good toughness tolerates

more flexing of the part than other HVOF WC coatings without the usual cracking of the coating. The

structure of the PComP coatings generally also allow for conventional grinding techniques, eliminating

the expensive diamond finishing process needed for conventional materials used in tungsten carbide and

cobalt coating solutions.

The PComP family of products are expected to fare well among existing competitors on market entry.

CermaCladTM

A handful of large companies cater to this market segment – JSW Steel Co., Voest Alpine and Sulzer-

Metco are heavily involved in the clad plate market with a significant portion of the market share, Butting

GmbH and Cladtek International Pty Ltd. are large participants in the mechanically clad pipe market, and

ProClad Group is important in the metallurgically clad pipe market. Most of the large companies

participating in the cladding market have very similar technologies and impact the market mostly on their

scale of production (availability), relationships, and price.

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Several smaller companies spread across the globe are also involved in this market segment, like Arc

Energy Resources, IODS, High Energy Metals, and Kladarc LLC (acquired by PCC), all of which offer

weld overlay services for the oil and gas industry which we believe generate less than $25 million in

annual revenues. Other examples include Matrix Wear Technologies, Cladtech Canada, Brospec LP,

Almac, and Clearwater Welding and Fabrication LP all of which offer weld overlay processes to those

working in the Canadian oil sands which we believe generate between $15-50 million in revenues. The

higher revenues for the Canadian weld overlay companies is primarily due to their presence in Canada

where oil sands operations require large amounts of clad pipe and components, and the emphasis is on

local shops and faster turnaround times.

CermaClad is a seamless metallurgical clad product which is cost competitive with existing

metallurgically clad products and exhibit better properties in almost every parameter when compared to

competing technology.  A superior product and the fact that several multi-billion dollar oil and gas

projects across the globe have been delayed due to availability of high-quality clad pipes may facilitate

the ready adoption of CermaClad clad pipes. Spearheaded by more than trillion dollars of spending to

exploit oil and gas reserves, the clad pipe market is expected to increase exponentially over the years

leading to an increasing demand-supply gap for clad pipes. Unlike our competition that have to spend

$200 million to $1 billion to set-up new clad pipe/plate manufacturing facilities or expand production

capability; the very high productivity of the CermaClad technology  and lower equipment costs enables

MesoCoat to set-up clad pipe manufacturing facilities at a much lower capital cost  than competing

technologies with similar production capacity. This competitive advantage would permit MesoCoat to set-

up multiple facilities across the globe to serve the regional market and fulfill the growing local content

requirements in the Asia Pacific, Middle East, South America, Gulf of Mexico and Africa with

significantly lower capital requirements. Even with considering the global shortage of cladding capacity

and the endemic quality problems the industry is suffering, the Company believes that it can achieve

significant sales without taking any business away from the current participants in the market.

Other specific competitive advantages supported by the application of the CermaClad products include:

Time and productivity

§     Much  higher  material  application  rate  than  weld/laser  cladding,    application  rate  -  more

scalable for production volume

§     Capital  investment  significantly  lower  than  mechanical  cladding  or  metallurgical  cladding

(roll bonding) for similar capacity, reducing fixed costs

§     Ability to provide local content in scalable manner at reasonable capital investment levels

§     Reduces   lead   times   for   new   capacity   compared   to   current   market,   and   provides   high

scalability  for  market  flexibility.   Potentially  enables  distribution  and  customization  of  pipe

for fast-turnaround project needs

§     CermaClad  solves  many  industry limitations  for  large  diameter  (14”  diameter  and  up)  and

thick   walled   (more   than   1”   wall   thickness)   where   both   the   mechanically   clad   and

metallurgical clad plate to pipe do not provide an ideal solution.

Performance risk

§     True  metallurgical  bond  coupled  with  a  smoother  surface  enables  easier  inspection  thus

reducing risk of failure

§     Smoother   surface   enables   ease   in   fluid   flow   reducing   operating   costs   incurred   in

transportation of fluids

§     Crack-free hard coatings up to 15mm thickness enable performance multiples in hardfacing

25



§     Better properties than weld overlay due to lower dilution or dissolution.

§     CermaClad enables  the use of metallurgically bonded clad seamless  pipe, eliminating 90%

or more of the welds compared to other product offerings.

Cost

§     Faster  Application  and  high  throughput  lowers  cost  basis  for  metallurgically  bonded  clad

product

§     Technology  allows  the  application  of  thinner  clad  layers,  potentially  enabling  dramatic  cost

reduction at sustained margins

§     High  productivity  and  scalability  can  enable  reduced  lead  times,  reducing  capital  costs  for

large projects.

§     Lower  capital  costs  also  enable  the  set-up  of  regional  clad  pipe  manufacturing  facilities  to

meet  the  growing  local  content  requirement,  positioning  us  as  the  preferred  vendor  for  the

region and to avoid import duties.

Powdermet

Powdermet’s SComP solution addresses a large market need for crash energy management and reduced

weight for fuel economy and portability.  Today’s engineered materials market offers nothing like

SComP and its closest competition would be engineered honeycomb structures and foamed metals,

neither of which have SComP’s energy absorption capabilities, metal-like aesthetics and ease of use.

One of the largest benefits of these syntactic metal composites is their ability to absorb energy from

impacts and ballistic events through deformation.

Powdermet is aware of one firm, APS, Inc., started by a former employee that offers a similar product.

Powdermet’s current development focus for SComP products are on scalable processing to reduce costs

necessary to enter larger, shorter sell cycle markets, as well as product design and insertion into defense

markets which have a long acceptance cycle.  Market competition may come from nanotube companies

which are attempting to build energy absorption features using this type of technology but without the

same property characteristics as Powdermet’s products, especially in the area of thermal resistance.

SComP is expected to fare well when introduced to the commercial market.

General Company Competitive Advantages

The following general factors serve as keys to the Company’s success:

§     Management    A  well-balanced,  experienced  management  team  provides  the  Company  and  its

subsidiaries with the guidance and strategic direction to successfully gain market entry.

§     Products – The Company’s  products represent innovations in multi-billion dollar markets.

§     Intellectual  Property    The  intellectual  property  of  MesoCoat  and  Powdermet  includes  owned

patents,   exclusive   licensing   rights,   and   proprietary   processes   that   make   market   penetration

effective and feasible.

§     Qualification   and   Testing      As   leading   companies   in   multiple   industries,   as   well   as   U.S.

government  agencies,  test  and  qualify  MesoCoat  and  Powdermet’s  products,  significant  barriers

to entry are automatically created for potential competitors.

§     Fundraising  -  As  a  publicly  traded  entity,  the  Company  can  access  financing  from  public  equity

markets which can provide liquidity and access to required capital.

26



The Company has also constructed the following barriers for potential competitors:

§     Product development expertise in both MesoCoat and Powdermet;

§     Exclusive global license for the high density fusion cladding process from Oak Ridge National

Laboratory; and several additional design and utility patents filed by the companies coupled with

several product and process trade secrets

§     Strong product pipeline that are expected to be ready for market in the next 2-3 years;

§     Strong research and development programs.

The Company will encounter the following barriers to entry:

§     American Petroleum Institute (API) certification for its CermaClad products. In order to

successfully sell to the oil and gas industry, MesoCoat’s coatings must receive official approval

and certification, a process that generally requires major oil and gas entities to qualify our

products for use, followed by qualification for specific projects. MesoCoat’s cooperation

agreement with Petroleo Brasileiro S.A. has demonstrated product suitability at the laboratory

scale, and is in the final stages of a prototype clad pipe product qualification. The construction of

our Euclid, Ohio 12 meter pipe plant, at a cost of over $6,000,000 (including funding from joint

development agreements and federal grants) and subsequent quality certification of the facility

and its products represent significant steps towards introducing the Company’s pioneering

products in the oil and gas sector.

§     Market acceptance of MesoCoat’s CermaClad’ product line that would encourage entry into

markets such as the oil sands development in Alberta, Canada. MesoCoat is in the process of

establishing a research and development facility in Alberta, Canada to accelerate qualification of

its CermaClad WR clad pipe and components.

§     developing the best products with the best value and protecting proprietary technology.

Marketability

The ultimate success of any product will depend on market acceptance in its many forms, including cost,

efficiency, production capability, convenience and application. The market for MesoCoat’s prospective

products is potentially enormous and will require the Company to apply a significant portion of its focus

on how to best initiate market introductions and into which segments. The commercial possibilities for

those products currently under development at Powdermet are no less expansive and will likewise require

that significant resources are dedicated to an effective marketing strategy.

MesoCoat

A tremendous need exists today to find better corrosion protection and wear prevention technologies to

replace many of the limited life, high cost coating and alloy materials used today to solve operational

problems in industrial and infrastructure applications.  A general trend exists across several industries of

operating in increasingly challenging environments where components and equipment have to withstand

the assault of high degree of corrosion and wear.

27



The inorganic metal finishing industry currently is one of the largest industrial users of hazardous and

carcinogenic chemicals, and produces hundreds of millions of gallons of contaminated wastewater and

toxic by-products annually. Hazardous metals such as lead, cadmium, chromium, and to a lesser extent,

cobalt, tungsten carbide, and volatile organic compounds used to strip rust and repair large steel structures

are being phased out or subjected to increasingly strict environmental regulations, creating opportunities

for innovation. U.S. companies annually spend billions of dollars on coatings and surface treatments

made from hazardous materials. Private companies and government defense agencies often use harmful

products like chrome because these solutions have been the lowest cost, most available corrosion and

wear resistant products available for the last 50 years. However, private and public users are now

recognizing the environmental problems these materials cause and the potential safety issues for those

who come in contact with these materials.  Many companies would stop using these hazardous materials

if a cost effective substitute product could be brought to market.  Legally, users may soon have no choice

but to desist from using hazardous materials as the EPA and other international environmental

organizations are moving to ban their use.

Manufacturers are now modifying their product’s bill of materials list and seeking substitute coating

products with similar or better corrosion and wear resistant properties in advance of impending legal

changes. Many are turning to next generation coatings made from alternative technologies like

nanotechnology-based materials to accomplish their goals. Innovative companies, such as MesoCoat, that

can develop non-toxic and longer life coating alternatives that have equal or superior corrosion and wear

protection capability at equal or lower cost relative to today’s solutions stand to reap significant financial

rewards in the next several decades.

PComP

MesoCoat has been working with major fortune 100 clients, and several equipment manufacturers from

the oil and gas industry for product insertion.  In addition to these large clients which have long sell

cycles (2-5 years not atypical), MesoCoat has worked through certified application partners in Calgary,

and Houston to capture short cycle sales and gain initial market exposure.  The company has established

relationships with several coating application shops, end users, and has sales representatives in Houston,

Midwest, and Canada to drive product adoption. Application services will be sold on a “per square inch”

basis and pricing will be reflective of market pressures and the volume of work received from each

commercial customer. Pricing variables will be taken into consideration for each application service

order.

MesoCoat has a full-functional thermal spray coating facility with one large capacity spray booth,

completed with a Fanuc robot, DJ 2600, DJ 2700 and JP 5000 HVOF spray systems, and is setting-up two

additional thermal spray coating booths along with the associated surface preparation, component

handling, and finishing equipment. Our staff has over 50 years of thermal spray experience coating parts

for several industries including aerospace, chemical & plastics, oil & gas, mining, primary metals,

industrial, and paper. MesoCoat has also secured a $1.5 million match loan from the State of Ohio for

scaling-up powder production capability and setting-up two additional thermal spray coating cells in

Ohio. Meanwhile, MesoCoat will continue to work with several thermal spray coating facilities that are

pre-qualified with the largest OEM’s in the Gulf Coast, Midwest, and Canada.

28



CermaClad

MesoCoat’s market entry plans for CermaClad are to clad the interior diameter of full length oil and

gas pipes with corrosion resistance alloys, and initially Alloy 625 using high productivity CermaClad

application technology.  In this market, MesoCoat is qualifying CermaClad 625 to current industry

standards, working with Petrobras, other oil and gas majors, offshore pipe manufacturers, and

engineering, procurement, and construction (EPC) companies to ensure industry acceptance of

qualification data as the path to market acceptance.  Due to the large order size for clad pipes, ranging

from $2-500+ million per project, successful introduction of CermaClad CRA clad pipes is expected to

result in an immediate market success. MesoCoat expects to send shorter section of clad pipe for

qualification to oil and gas majors within the next 6 months, and to begin commercial corrosion-resistant

clad pipe production at the Euclid plant in the second or third quarter of 2015.

In addition, MesoCoat along with its partner Northern Alberta Institute of Technology (NAIT) received a

$2.75 million dollar funding commitment from Alberta’s Ministry of Innovation and Advanced Education

(IAE) and Western Economic Diversification Canada (WD) for an 18-month collaborative effort to

establish a prototype demonstration facility for developing, testing and commercializing wear-resistant

clad pipe and components. Improvements in wear resistance are expected to make a significant impact in

reducing losses due to maintenance and downtime while increasing productivity in oil sands and other

mining applications. The development of Alberta’s oil sands has been slowed by the lack of resistant

materials for transport lines, and components that are subjected to corrosion from the highly abrasive

slurry. Currently, pipes that transport the highly abrasive oil sands slurry have to be rotated every three to

four months and are replaced every 12 to 15 months. The cost of maintenance and its associated

downtime in the Alberta Oil Sands industry is estimated at more than $10 billion annually. According to

the Materials and Reliability in Oil Sands (MARIOS) consortium in Alberta, this figure is expected to

increase significantly as production expands in the coming years. Improvements in wear resistance are

expected to make a significant impact in reducing losses due to maintenance and downtime while

increasing productivity in oil sands and other mining applications.  This new facility will serve as a

platform for MesoCoat’s to introduce its products to the Alberta oil sands market, which, with proven

reserves estimated at more than 169 billion barrels, is one of the world’s largest oil resources. The oil

sands are a major source of oil for Canada, the United States and Asia. Alberta’s Energy Resources

Conservation Board expects output from the province’s oil sands to double to 3.8 million barrels per day

(bpd) by 2022, from the 1.9 million bpd in 2012. Producers are looking to extend the life of carbon steel

transport pipes with harder, tougher coatings that protect them from the abrasiveness and high acidity of

the tar-like bituminous oil sands. CermaClad wear-resistant clad products could provide that

economically viable, long-term solution. MesoCoat is collaborating with several oil sands majors and

expects to complete development and qualification of wear-resistant clad pipes within the next 18 months,

and commercial production within the next 24 months.

Management has made sizeable investments in redesigning and miniaturizing the technology to commit to

this initial market solution. The initial CermaClad system has a very large footprint, 4 feet cube, and

MesoCoat and partners had to make substantial modifications to the system to make it fit inside a 10”

inner diameter pipe. The new inside diameter CermaClad lamp head has now been operating for over

three years integrated into a subscale 6-ft CermaClad pipe coating system, and for close to 2 years in a

production-scale 40 feet CermaClad pipe cladding system.  The 6-feet prototype cladding system was

used for initial product demonstration, sub-scale prototype development, and industry-standard product

qualification milestones.  In April, 2013, MesoCoat completed the installation of a 11,000 sq.ft

production-scale cladding set-up to demonstrate full scale manufacturing, develop clad pipe sections for

product and process qualification, and get certified for supplying clad pipes to oil and gas majors.

Completion of the full scale product facility followed by subsequent product certifications will enable

MesoCoat to begin market roll-out and sales of clad pipe to the oil and gas industry.

29



MesoCoat’s expansion within the market place will be tied to its ability to attract growth capital for

project financing to undertake global expansion, or attracting appropriate joint venture partners to build

fabrication plants to serve global demand. Given the projected profitability of such plants and the

anticipated short payback period anticipated, management foresees no problem attracting interested

partners.

Patents, Trademarks, Licenses, Franchises, Concessions, Royalty Agreements and Labor Contracts

The Company has no patents, trademarks, licenses, franchises, concessions, royalty agreements or labor

contracts other than those held by MesoCoat and Powdermet.

MesoCoat's patents include: six exclusively licensed patents from Powdermet, the earliest of which

expires May 30, 2020 (see dates below); two exclusively licensed patents from UT Battelle LLC which

expire on March 15, 2019 and July 30, 2024; and four pending U.S. Patents and three pending global

patents, all of which expire in 2030 or after.

Powdermet's patents include: six U.S. Patents, which have expiry dates of May 30, 2020, December 7,

2020, July 12, 2022, August 22, 2022, April 6, 2025 and June 23, 2026; and an exclusively licensed

patent from Ultramet Inc., which expires on February 21, 2016,  six pending US patents and two pending

international patents.  Powdermet also has trademarks and licenses which it will use to protect its assets as

necessary.

Patents in general remain in place 20 years from application and 17 years from issuance.

Governmental and Environmental Regulation

The Company is subject to local, state and national taxation. Additionally, the Company’s operations are

subject to a variety of national, federal, state and local laws, rules and regulations relating to, among other

things, worker safety and the use, storage, discharge and disposal of environmentally sensitive materials.

We believe that the Company is in full compliance will all laws, rules, regulations and requirements that

affect its business.

We believe that MesoCoat and Powdermet are in full compliance with the Resource Conservation

Recovery Act, the key legislation dealing with hazardous waste generation, management and disposal.

Nonetheless, under some of the laws regulating the use, storage, discharge and disposal of

environmentally sensitive materials, an owner or lessee of real estate may be liable for the costs of

removal or remediation of certain hazardous or toxic substances located on or in, or emanating from, such

property, as well as related costs of investigation and property damage.

Laws of this nature often impose liability without regard to whether the owner or lessee knew of, or was

responsible for, the presence of hazardous or toxic substances. We further believe that MesoCoat and

Powdermet are in compliance in all material respects with all laws, rules, regulations and requirements

that affect their respective businesses and that such compliance does not impose a material impediment on

either entities ability to conduct business.

30



Climate Change Legislation and Greenhouse Gas Regulation

A majority of the climate change related studies over the past couple decades have indicated that

emissions of certain gases contribute to warming of the Earth’s atmosphere. In response to these studies,

many nations have agreed to limit emissions of “greenhouse gases” or “GHGs” pursuant to the United

Nations Framework Convention on Climate Change, and the “Kyoto Protocol.” Although the United

States did not adopt the Kyoto Protocol, several states have adopted legislation and regulations to reduce

emissions of greenhouse gases.

The United States Supreme Court ruled, in Massachusetts, et al. v. EPA, that the EPA abused its

discretion under the Clean Air Act by refusing to regulate carbon dioxide emissions from mobile sources.

As a result of the Supreme Court decision the EPA issued a finding that serves as the foundation under

the Clean Air Act to issue other rules that would result in federal greenhouse gas regulations and

emissions limits under the Clean Air Act, even without Congressional action. Finally, acts of Congress,

the decisions of lower courts, large numbers of states, and foreign governments could widely affect

climate change regulation. Greenhouse gas legislation and regulation could have a material adverse effect

on our business, financial condition, and results of operations.

Research and Development

The Company is focused on the research and development of those entities in which it holds an interest.

MesoCoat and Powdermet have a history of working on critical research and development projects for the

private and public sector over a broad range of research fields, with further work extending into

peripheral areas. MesoCoat and Powdermet have adopted this approach because they believe that

excellent products can be created when a backdrop of diversified sciences and technologies exist. From

this broad range, their respective research and development staffs work closely with sales and operations

management teams to establish priorities and effectively manage individual projects.

Currently, MesoCoat and Powdermet are working on several critical and high risk-high reward research

and development projects funded by the federal government, state government and end users. MesoCoat’s

PComP and Powdermet’s SComP product lines that are the end product of federally funded research

and development.

Employees

As of September 30, 2014, the Company and its subsidiary, MesoCoat have 30 employees. We use

additional consultants, attorneys, and accountants as necessary to assist in the development of our

business.

ITEM 1A.

RISK FACTORS

The Company’s operations and securities are subject to a number of risks. Below we have identified and

discussed the material risks that we are likely to face. Should any of the following risks occur, they will

adversely affect our business, financial condition, and/or results of operations as well as the future trading

price and/or the value of our securities.

31



The Company has a history of significant operating losses and such losses may continue in the future.

The Company incurred net losses of $19,502,097 for the period from June 27, 2006 (inception) to May

31, 2014. Since we have been without significant revenue since inception and have only recently

transitioned to producing revenue that is insufficient to support operations, losses may likely continue for

the foreseeable future.

The Company has a history of uncertainty about continuing as a going concern.

The Company’s audits for the periods ended May 31, 2014 and 2013 expressed an opinion as to its ability

to continue as a going concern as a result of net losses since inception and a working capital deficit of

$7,927,372 as of May 31, 2014. Until the Company is able to produce net income over successive future

periods its ability to continue as a going concern will remain in jeopardy.

The Company requires capital funding.

The Company must raise additional funds, either through equity offerings, debt placements or joint

ventures, to maintain operations and meet our long term financial commitments. Additional capital, if in

the form of equity, will result in dilution to our current shareholders. Should the Company be unable to

realized future income it ability to continue as a going concern will remain in jeopardy.

The Company has defaulted on certain unsecured debt obligations

The Company has defaulted on certain significant unsecured debt obligations due prior to or subsequent

to the end of this annual reporting period, which defaults have caused the original obligations to increase

due to higher interest and penalties. Despite discussions with the holders of the debt, the Company has

been unable to resolve amounts due. The Company does intend to fulfill its obligations but without

additional capital funding it may be unable to satisfy the debt holders which in turn may subject the

Company to legal action.

MesoCoat has secured its assets against the payment of certain loan amounts due in April of 2015.

Should MesoCoat be unable to repay amounts due to a third party creditor of approximately $1,340,000

on April 29, 2015, all of its assets, with limited exceptions, absent any change in certain loan documents,

will become the property of a third party creditor on declaration of default. The Company is in the process

of securing a financing sufficient to repay said creditor and is confident that MesoCoat’s obligations will

be satisfied or otherwise amended to avert any default. However, neither the financing to satisfy

MesoCoat’s loan obligations nor any changes to the terms and conditions of the loan documents have yet

been agreed.

The Company’s success is dependent on its ability to commercialize proprietary technologies to the point

of generating sufficient revenues to sustain and expand operations.

The Company’s near term future operation is dependent on its ability to commercialize proprietary

technologies to produce sufficient revenue to sustain and expand operations. The success of these

endeavors will require that sufficient funding be available to assist in the development of its business

interests. Currently, the Company’s financial resources are limited, which limitation may slow the pace at

which proprietary technologies can be commercialized. Should the Company be unable to improve its

financial condition through debt or equity offerings, the ability to successfully advance its business plan

will be severely challenged.

32



We face significant commercialization risks related to technological businesses.

The industries in which MesoCoat and Powdermet operate and plan to operate are characterized by the

continual search for higher performance at lower cost. Our growth and future financial performance will

depend on the ability of MesoCoat and Powdermet to develop and market products that keep pace with

technological developments and evolving industry requirements. Further, the research and development

involved in commercializing products requires significant investment and innovation to keep pace with

technological developments. Should we be unable to keep pace with outside technological developments,

respond adequately to technological developments or experience significant delays in product

development, our products might become obsolete. Should these risks overcome our ability to keep pace

there is a significant likelihood that our ability to successfully advance our business will be severely

limited.

The coatings industry is likely to undergo technological change so our products and processes could

become obsolete at any time.

Evolving technology, updated industry standards, and frequent new product and process introductions are

likely to characterize the coatings industry going forward so our products or processes could become

obsolete at any time. Competitors could develop products or processes similar to or better than our own,

finish development of new technologies in advance of our research and development, or be more

successful at marketing new products or processes, any of which factors may hurt our prospects for

success.

MesoCoat and Powdermet compete with larger and better financed corporations.

Competition within the industrial coatings industry and other high technology industries is intense. While

each of MesoCoat and Powdermet’s products are distinguished by next-generation innovations that are

more sophisticated and cost effective than many competitive products currently in the market place, a

number of entities and new competitors may enter the market in the future. Some of MesoCoat’s and

Powdermet’s existing and potential competitors have longer operating histories, greater name recognition,

larger customer bases and significantly greater financial, technical and marketing resources than we do,

including well known multi-national corporations. Accordingly, MesoCoat’s and Powdermet’s products

could become obsolete at any time. Competitors could develop products similar to or better than our own,

finish development of new technologies in advance of either MesoCoat’s or Powdermet’s research and

development, or be more successful at marketing new products, any of which factors may hurt our

prospects for success.

Market acceptance of the products and processes produced by MesoCoat and Powdermet is critical to

our growth.

We expect to generate revenue and realize a gain on our interest in Powdermet from the development and

sale of products and processes produced by MesoCoat and Powdermet. Market acceptance of those

products is therefore critical to our growth. If our customers do not accept or purchase those products or

processes produced by MesoCoat and Powdermet, then our revenue, cash flow and operating results will

be negatively impacted.

33



General economic conditions will affect our operations.

Changes in the general domestic and international climate may adversely affect the financial performance

of the Company, MesoCoat and Powdermet. Factors that may contribute to a change in the general

economic climate include industrial disputes, interest rates, inflation, international currency fluctuations

and political and social reform. Further, the delayed revival of the global economy is not conducive to

rapid growth, particularly of technology companies with newly commercialized products.

MesoCoat and Powdermet rely upon patents and other intellectual property.

MesoCoat and Powdermet rely on a combination of patent applications, trade secrets, trademarks,

copyrights and licenses, together with non-disclosure and confidentiality agreements, to establish and

protect proprietary rights to technologies they develop. Should either of MesoCoat or Powdermet be

unable to adequately protect their intellectual property rights or become subject to a claim of

infringement, their businesses and that of the Company may be materially adversely affected.

MesoCoat and Powdermet expect to prepare patent applications in accordance with their respective

worldwide intellectual property strategies on acquiring new technologies. However, neither they nor the

Company can be certain that any patents will be issued with respect to future patents pending or future

patent applications. Further, neither they nor the Company know whether any future patents will be

upheld as valid, proven enforceable against alleged infringers or be effective in preventing the

development of competitive patents. The Company believes that MesoCoat and Powdermet have each

implemented a sophisticated internal intellectual property management system to promote effective

identification and protection of their products and know-how in connection with the technologies they

have developed and may develop in the future

We may not be able to effectively manage our growth.

We expect considerable future growth in our business. Such growth will come from the addition of new

plants, the increase in global personnel, and the commercialization of new products. Additionally, our

products should have an impact on the cladding industry; as companies learn that they can receive

materials with a short lead time at a higher quality and lower price, market demand should grow,

expanding the overall market itself. To achieve growth in an efficient and timely manner, we will have to

maintain strict controls over our internal management, technical, accounting, marketing, and research and

development departments. We believe that we have retained sufficient quality personnel to manage our

anticipated future growth though we are still striving to improve financial accounting oversight to ensure

that adequate reporting and control systems in place. Should we be unable to successfully manage our

anticipated future growth by adherence to these strictures, costs may increase, growth could be impaired

and our ability to keep pace with technological advances may be impaired which failures could result in a

loss of future customers.

Environmental laws and other governmental legislation may affect our business.

Should the technologies which each of MesoCoat and Powdermet have under development not comply

with applicable environmental laws then the Company’s business and financial results could be seriously

harmed. Furthermore, changes in legislation and governmental policy could also negatively impact us.

Although we are currently unaware of any introduced or proposed bills, or policy, that might cause us to

make specific changes to our operations, no assurance can be given that if new legislation is passed we

will be able to make the changes to comport our technologies with future regulatory requirements.

34



The Company and those entities in which it holds an interest may face liability claims.

Although MesoCoat and Powdermet intend to implement exhaustive testing programs to identify

potential material defects in technology each develops, any undetected defects could harm their reputation

and that of the Company, diminish their customer base, shrink revenues and expose themselves and us to

product liability claims. Any imposition of liability that is not covered by insurance or is in excess of

insurance coverage could have a material adverse effect on our business, results of operations and

financial condition.

The market for our stock is limited and our stock price may be volatile.

The market for our common stock has been limited due to low trading volume and the small number of

brokerage firms acting as market makers. Due to the limitations of our market and the volatility in the

market price of our stock, investors may face difficulties in selling shares at attractive prices when they

want to sell. The average daily trading volume for our stock has varied significantly from week to week

and from month to month, and the trading volume often varies widely from day to day.

The Company’s common stock is deemed to be “penny stock”, which determination may make it more

difficult for investors to sell their shares.

The Company’s common stock is and will be subject to the “penny stock” rules adopted under section

15(g) of the Exchange Act. The penny stock rules apply to companies whose common stock is not listed

on the NASDAQ Stock Market or other national securities exchange and trades at less than $5.00 per

share or that have tangible net worth of less than $5,000,000 ($2,000,000 if the company has been

operating for three or more years). These rules require, among other things, that brokers who trade penny

stock to persons other than “established customers” complete certain documentation, make suitability

inquiries of investors and provide investors with certain information concerning trading in the security,

including a risk disclosure document and quote information under certain circumstances. Many brokers

have decided not to trade penny stocks because of the requirements of the penny stock rules and, as a

result, the number of broker-dealers willing to act as market makers in such securities is limited. If the

Company remains subject to the penny stock rules for any significant period, it could have an adverse

effect on the market, if any, for our securities. If the Company’s securities are subject to the penny stock

rules, investors will find it more difficult to dispose of our securities.

The elimination of monetary liability against the Company’s directors, officers and employees under

Nevada law and the existence of indemnification rights to our directors, officers and employees may

result in substantial expenditures by the Company and may discourage lawsuits against our directors,

officers and employees.

The Company’s certificate of incorporation contains a specific provision that eliminates the liability of

directors for monetary damages to us and our stockholders; further, the Company is prepared to give such

indemnification to its directors and officers to the extent provided by Nevada law. The Company may

also have contractual indemnification obligations under its employment agreements with its executive

officers. The foregoing indemnification obligations could result in our incurring substantial expenditures

to cover the cost of settlement or damage awards against directors and officers, which the Company may

be unable to recoup. These provisions and resultant costs may also discourage us from bringing a lawsuit

against directors and officers for breaches of their fiduciary duties and may similarly discourage the filing

of derivative litigation by our stockholders against the Company’s directors and officers even though such

actions, if successful, might otherwise benefit the us and our stockholders.

35



ITEM 1B.

UNRESOLVED STAFF COMMENTS

None.

ITEM 2.

PROPERTIES

The Company maintains 800 sq. ft. of executive office space at 2665 S. Bayshore Drive, Suite 450,

Miami, Florida, 33133 on a month to month basis at a cost of $2,419 a month paid to Grand Bay Property

Management. The Company does not believe that it will need to maintain a larger office at any time in the

foreseeable future in order to carry out its operations.

MesoCoat maintains 22,000 sq. feet of the research and development space and a11,000 sq. feet clad pipe

manufacturing facility located at 24112 Rockwell Drive, Euclid, Ohio 44117 each of which is leased from

Powdermet on a sub-lease basis that runs through May 31, 2020. The cost of the sub-lease for MesoCoat

is $6,700 paid to Powdermet per month.

Powdermet maintains 48,000 sq. ft. of research and development space located at 24112 Rockwell Drive,

Euclid, Ohio 44117. The cost of the lease is $6,800 per month, adjustable on an annual basis, paid to

Sherman Properties LLC., a related party. The term of the lease runs through October 31, 2020 with the

right to sub-lease the premises to MesoCoat.

ITEM 3.

LEGAL PROCEEDINGS

Uptick Capital, LLC.

The Company initiated legal proceedings against Uptick Capital, LLC. (“Uptick”) on November 7, 2012,

in the United States District Court for the Southern District of New York Superior Court. The claim was

based on Uptick’s alleged failure to perform according to the terms of a consulting agreement dated

November 1, 2010, pursuant to which Uptick was to identify and introduce suitable investors to the

Company in exchange for certain consideration including 60,000 shares. The Company sought the return

of its 60,000 shares delivered which were subsequently sold or in the alternative a judgment in an amount

to be ascertained for damages in addition to reasonable attorney’s fees and court costs. The parties settled

the legal proceedings on April 1, 2014, pursuant to which settlement the parties agreed to hold each other

harmless and to each pay their own legal and other expenses.

Paloma Capital Group Ltd.

The Company initiated legal proceedings against Paloma Capital Group Ltd (“Paloma”) on July 2, 2013,

in the Circuit Court in and for Miami-Dade County. The claim is based on Paloma’s failure to perform

according to the terms of a consulting agreement dated May 2, 2011, pursuant to which Paloma was to

introduce suitable investors to the Company in exchange for certain consideration including 50,000 shares

of the Company and 150,000 stock options to purchase shares of the Company. The suit demands the

return of the Company shares and the stock options. Paloma is yet to be served with the complaint. The

Company no longer intends to proceed with its complaint and expects that the legal proceedings will be

dismissed without prejudice.

36



Joe T. Eberhard

Joe T. Eberhard initiated legal proceedings against the Company on August 29, 2014, in the United States

District Southern District of Florida. The claim is based on the Company’s failure to repay amounts due

on certain promissory notes. The complaint seeks $720,698.72 plus interest. The Company has obtained

an extension of time in which to respond to the complaint and will respond in due course.

ITEM 4.

MINE SAFETY DISCLOSURE

Not applicable.

37



PART II

ITEM 5.

MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED

STOCKHOLDER MATTERS, AND BUSINESS ISSUER PURCHASES OF

EQUITY SECURITIES

The Company’s common stock is quoted on the OTC Pink Limited Information electronic quotation

system under the symbol “ABKI” due to the late filing of this annual periodic report. On the filing of this

report, the Company expects to resume trading on the OTCQB. These prices reflect inter-dealer prices

without retail mark-up, mark-down, or commission, and may not necessarily reflect actual transactions.

The following table sets forth the high and low bid prices for the common stock as reported for each

quarterly period over the last two fiscal years.

High and Low Bid Prices

Year

Quarter Ended

High

Low

2014

May 31

$1.21

$0.60

2014

February 28

$1.36

$0.86

2013

November 30

$2.57

$0.86

2013

August 31

$3.20

$2.16

2013

May 31

$3.50

$2.52

2013

February 28

$2.85

$2.55

2012

November 30

$2.93

$1.46

2012

August 31

$2.45

$1.55

Reports to Security Holders

We are a reporting company pursuant to the Securities and Exchange Act of 1934. As such, we make

available our annual report which includes audited financial statements, and our quarterly reports which

include unaudited financial statements.

Capital Stock

The following is a summary of the material terms of the Company’s capital stock. This summary is

subject to and qualified by our articles of incorporation and bylaws.

Common Stock

As of September 30, 2014, there were approximately 1,200 shareholders of record holding a total of

68,418,615 shares of fully paid and non-assessable common stock of the 2,500,000,000 shares of

common stock, par value $0.0001, authorized. The board of directors believes that the number of

beneficial owners is greater than the number of record holders because a portion of our outstanding

common stock is held in broker “street names” for the benefit of individual investors. The holders of the

common stock are entitled to one vote for each share held of record on all matters submitted to a vote of

stockholders. Holders of the common stock have no pre-emptive rights and no right to convert their

common stock into any other securities. There are no redemption or sinking fund provisions applicable to

the common stock.

38



Preferred Stock

As of September 30, 2014, there were 50,000,000 shares of preferred stock, par value $0.0001 authorized

of which none were outstanding. The Company’s preferred stock may have such rights, preferences and

designations and may be issued in such series as determined by the board of directors.

Dividends

The Company has not declared any cash dividends since inception and does not anticipate paying any

dividends in the near future. The payment of dividends is within the discretion of the board of directors

and will depend on our earnings, capital requirements, financial condition, and other relevant factors.

There are no restrictions that currently limit the Company’s ability to pay dividends on its common stock

other than those generally imposed by applicable state law.

Warrants

As of September 30, 2014, there were 1,889,566 warrants outstanding to purchase shares of the

Company’s common stock.

Stock Options

As of September 30, 2014, there were 3,419,994 stock options outstanding to purchase shares of our

common stock.

Convertible Debt Securities

As of September 30, 2014, there were four convertible debt securities convertible into the shares of its

common stock for an aggregate principal amount of $3,541,963 plus accrued interest and penalties.

One convertible debt security, in the principal amount of $500,000, due on or before July 14, 2014,

accrued interest at 5% per annum, convertible at $1.00 per conversion unit, which unit consists of one

share of our common stock and one half share warrant to purchase an additional share of our common

stock at $1.50 per share, for a period of two years following the conversion date. The Company did not

satisfy this unsecured obligation as of the stated maturity date subjecting the amount due thereunder to

additional interest charges and penalties.

Two convertible debt securities, in the aggregate principal amount of $1,700,000, due on or before

September 15, 2014, accrued interest at 5% per annum, convertible at $1.00 per conversion unit, which

unit consists of one share of our common stock and one half share warrant to purchase an additional share

of our common stock at $1.50 per share, for a period of two years following the conversion date. The

Company has not satisfied this unsecured obligation as of the stated maturity date subjecting the amount

due hereunder to additional interest charges and penalties.

One secured convertible debt security, in the principal amount of $1,341,963, due on or before April 27,

2015, bears no interest and is convertible at $0.80 per conversion unit (subject to decrease in the event of

dilutive issuances), which unit consists of one share of our common stock and one half share warrant to

purchase an additional share of our common stock at $1.20 per share for a period of two years following

the conversion date.

39



Debt Securities

As of September 30, 2014, there were two debt securities for an aggregate principal amount of $455,000

plus accrued interest and penalties.

One debt security, in the principal amount of $50,000, due on or before September 15, 2013, that accrued

interest at 5% per annum. The Company has not satisfied this unsecured obligation as of the stated

maturity date subjecting the amount due hereunder to additional interest charges and penalties.

One debt security, in the principal amount of $405,000, due on or before September 15, 2014, that

accrued interest at 8% per annum. The Company has not satisfied this unsecured obligation as of the

stated maturity date subjecting the amount due hereunder to additional interest charges and penalties.

Securities Authorized for Issuance Under Equity Compensation Plans

As of September 30, 2014, the Company has issued 82,941 restricted common shares under equity

compensation plans to the MesoCoat, Inc. Supplemental Discretionary Tax Qualified Profit Sharing and

Trust (57,242) and the Powdermet, Inc. Supplemental Discretionary Tax Qualified Profit Sharing and

Trust (25,699).

Purchases of Equity Securities made by the Issuer and Affiliated Purchasers

The Company has not repurchased any shares of its common stock during the fiscal year ended May 31,

2014 or since that date through September 30, 2014.

Recent Sales of Unregistered Securities; Use of Proceeds from Registered Securities

On April 9, 2014 our board of directors authorized the issuance of 25,000 restricted shares at $1.00 per

share to Crystal Research Associates, LLC in accordance with the signed acceptance letter dated

February 11, 2012 representing payment for year two of this agreement pursuant to the exemption from

registration provided by Section (4) of the Securities Act of 1933, as amended (“Securities Act”).

The Company complied with the exemption requirements of Section 4(2) of the Securities Act based on

the following factors: (1) the issuance was an isolated private transactions by the Company which did not

involve a public offering; (2) the offeree had access to the kind of information which registration would

disclose; and (3) the offeree is financially sophisticated.

The Company complied with the requirements of Regulation D of the Securities Act by: (i) foregoing any

general solicitation or advertising to market the securities; (ii) offering only to an accredited offeree; (iii)

having not violated antifraud prohibitions with the information provided to the offeree; (iv) being

available to answer questions by the offeree; and (v) providing restricted stock options to the offeree.

On April 9, 2014 our board of directors authorized the issuance of 15,000 restricted shares at $1.00 per

share to Financial Insights in accordance with the terms of the agreement dated September 1, 2013,

pursuant to the exemption from registration provided by Section (4) of the Securities Act.

The Company complied with the exemption requirements of Section 4(2) of the Securities Act based on

the following factors: (1) the issuance was an isolated private transactions by the Company which did not

involve a public offering; (2) the offeree had access to the kind of information which registration would

disclose; and (3) the offeree is financially sophisticated.

40



The Company complied with the requirements of Regulation D of the Securities Act by: (i) foregoing any

general solicitation or advertising to market the securities; (ii) offering only to an accredited offeree; (iii)

having not violated antifraud prohibitions with the information provided to the offeree; (iv) being

available to answer questions by the offeree; and (v) providing restricted stock options to the offeree.

On April 9, 2014, our board of directors authorized the issuance of 256,000 restricted shares of its

common stock and 128,000 warrants to purchase 128,000 shares of our common stock at an exercise price

of $2.70 until February 27, 2016 to the following entities and individuals for $1.00 each, or an aggregate

of $256,000 pursuant to the exercise of warrants in reliance upon the exemptions from registration

provided by Section 4(2), Regulation D and Regulation S of the Securities Act:

Name

Consideration

Basis

Shares

Warrants

Exemption

Warren D. Lydon      $20,000

Subscription

20,000

20,000

Sec. 4(2)/Reg D

Steven R. Ferris

$216,000

Services

216,000

216,000

Sec. 4(2)/Reg D

Chris T. Bennett

$20,000

Subscription

20,000

20,000

Sec. 4(2)/Reg D

The Company complied with the exemption requirements of Section 4(2) of the Securities Act based on

the following factors: (1) the issuances and grants were isolated private transactions by the Company

which did not involve a public offering; (2) the offerees have access to the kind of information which

registration would disclose; and (3) the offerees are financially sophisticated.

The Company complied with the requirements of Regulation D of the Securities Act by: (i) foregoing any

general solicitation or advertising to market the securities; (ii) selling only to accredited offerees; (iii)

having not violated antifraud prohibitions with the information provided to the offerees; (iv) being

available to answer questions by the offerees; and (v) issuing restricted securities to the offerees.

On April 9, 2014, our board of directors authorized the issuance of 1,439,268 restricted shares of its

common stock and 719,635 warrants to purchase 719,635 shares of our common stock at an exercise price

of $1.20 until April 9, 2016 to the following entities and individuals for $0.80 each, or an aggregate of

$1,151,414 pursuant to the exercise of warrants in reliance upon the exemptions from registration

provided by Section 4(2), Regulation D and Regulation S of the Securities Act:

Name

Consideration    Basis

Units

Warrants     Exemption

Ammon & Associates, Inc.

$400,000

Subscription     500,000     250,000

Sec. 4(2)Reg D

Orsa & Company

$40,000

Services

50,000

25.,000

Sec. 4(2)Reg D

Hermann Buschor

$72,236

Services

90,295

45,148

Sec. 4(2)Reg D

Stratton SA

$ 164,792

Subscription     205,990     102,995

Sec. 4(2)Reg S

Green Chip SA

$394,386

Subscription     492,983     246,492

Sec. 4(2)Reg S

Steven R. Ferris

$80,000

Services

100,000     50,000

Sec. 4(2)Reg D

The Company complied with the exemption requirements of Section 4(2) of the Securities Act based on

the following factors: (1) the issuances and grants were isolated private transactions by the Company

which did not involve a public offering; (2) the offerees have access to the kind of information which

registration would disclose; and (3) the offerees are financially sophisticated.

The Company complied with the requirements of Regulation D of the Securities Act by: (i) foregoing any

general solicitation or advertising to market the securities; (ii) selling only to accredited offerees; (iii)

having not violated antifraud prohibitions with the information provided to the offerees; (iv) being

available to answer questions by the offerees; and (v) issuing restricted securities to the offerees.

41



The Company complied with the exemption requirements of Regulation S by having directed no offering

efforts in the United States, by offering common shares only to offerees who was outside the United

States at the time of the offering, and ensuring that the offerees to whom the restricted common shares

and warrants were offered and authorized were non-U.S. offerees with addresses in a foreign country.

On April 22, 2014 our board of directors authorized the issuance of 30,000 restricted shares at $0.80 per

share to Avid Advertising, Inc. Dba Stockblogs.com in accordance with the signed letter of agreement

dated April 16, 2014 representing payment commencing April 15, 2014 for a period of seven months,

pursuant to the exemption from registration provided by Section (4) of the Securities Act.

The Company complied with the exemption requirements of Section 4(2) of the Securities Act based on

the following factors: (1) the issuance was an isolated private transactions by the Company which did not

involve a public offering; (2) the offeree had access to the kind of information which registration would

disclose; and (3) the offeree is financially sophisticated.

The Company complied with the requirements of Regulation D of the Securities Act by: (i) foregoing any

general solicitation or advertising to market the securities; (ii) offering only to an accredited offeree; (iii)

having not violated antifraud prohibitions with the information provided to the offeree; (iv) being

available to answer questions by the offeree; and (v) providing restricted stock options to the offeree.

On May 6, 2014 our board of directors authorized the grant of 150,000 stock options with an exercise

price of $1.00 per share that expire ten years from the date of vesting in equal one-third increments

annually beginning on April 30, 2015, to Ryan Owen and authorized the issuance of 20,000 restricted

shares valued at $0.1 per share in accordance with his Board of Directors Compensation Agreement dated

May 6, 2014 in reliance upon the exemptions from registration provided by Section 4(2) of the Securities

Act.

The Company complied with the exemption requirements of Section 4(2) of the Securities Act based on

the following factors: (1) the issuance was an isolated private transactions by the Company which did not

involve a public offering; (2) the offeree had access to the kind of information which registration would

disclose; and (3) the offeree is financially sophisticated.

On May 30, 2014 our board of directors authorized the grant of 20,000 stock options with an exercise

price of $1.14 per share that expire ten years from the date of vesting in equal one-third increments

annually beginning on May 30, 2015, to Milena Ordenes in consideration for her position with Abakan

Inc. as Executive Assistant to the President as an incentive in reliance upon the exemptions from

registration provided by Section 4(2) of the Securities Act.

The Company complied with the exemption requirements of Section 4(2) of the Securities Act based on

the following factors: (1) the issuance was an isolated private transactions by the Company which did not

involve a public offering; (2) the offeree had access to the kind of information which registration would

disclose; and (3) the offeree is financially sophisticated.

On May 30, 2014 our board of directors authorized the grant of 100,000 stock options with an exercise

price of $1.14 per share that expire ten years from the date of vesting in equal one-third increments

annually beginning on May 30, 2015, to Evelina Vogli in consideration for her position with Abakan Inc.

as Executive Assistant to the President as an incentive in reliance upon the exemptions from registration

provided by Section 4(2) of the Securities Act.

42



The Company complied with the exemption requirements of Section 4(2) of the Securities Act based on

the following factors: (1) the issuance was an isolated private transactions by the Company which did not

involve a public offering; (2) the offeree had access to the kind of information which registration would

disclose; and (3) the offeree is financially sophisticated.

On May 30, 2014, our board of directors authorized the issuance of 60,000 restricted shares of its

common stock and 60,000 warrants to purchase 60,000 shares of our common stock at an exercise price

of $1.20 until May 29, 2016 to the following entities and individuals for $0.80 each, or an aggregate of

$48,000 pursuant to the exercise of warrants in reliance upon the exemptions from registration provided

by Section 4(2), Regulation D and Regulation S of the Securities Act:

Name

Consideration      Basis

Units

Warrants      Exemption

Warren D. Lydon

$20,000

Subscription      25,000

25,000

Sec. 4(2)/Reg D

Susan S. Almendinger

$20,000

Subscription      25,000

25,000

Sec. 4(2)/Reg D

Kevin McDonnell

$8,000

Subscription      10,000

10,000

Sec. 4(2)/Reg D

The Company complied with the exemption requirements of Section 4(2) of the Securities Act based on

the following factors: (1) the issuances and grants were isolated private transactions by the Company

which did not involve a public offering; (2) the offerees have access to the kind of information which

registration would disclose; and (3) the offerees are financially sophisticated.

The Company complied with the requirements of Regulation D of the Securities Act by: (i) foregoing any

general solicitation or advertising to market the securities; (ii) selling only to accredited offerees; (iii)

having not violated antifraud prohibitions with the information provided to the offerees; (iv) being

available to answer questions by the offerees; and (v) issuing restricted securities to the offerees.

On May 31, 2014, our board of directors authorized the issuance of 2,000,000 restricted shares of its

common stock to Powdermet, as part of an exchange for 98,000 restricted shares of MesoCoat made in

accordance with the terms and conditions of an accord and satisfaction of investment agreement, pursuant

to the exemption from registration provided by Section 4(2) of the Securities Act.

The Company complied with the exemption requirements of Section 4(2) of the Securities Act based on

the following factors: (1) the issuance was an isolated private transaction by the Company which did not

involve a public offering; (2) the offeree had access to the kind of information which registration would

disclose; and (3) the offeree is financially sophisticated.

Trading Information

The Company’s common stock is quoted under the symbol “ABKI”.

The information for our transfer agent is as follows:

Island Stock Transfer

100 Second Avenue South, Suite 300

St. Petersburg, Florida  33701

Tel: (727) 289-0010.

ITEM 6.

SELECTED FINANCIAL DATA

Not required.

43



ITEM 7.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATION

This Management’s Discussion and Analysis of Financial Condition and Results of Operations and other

parts of this current report contain forward-looking statements that involve risks and uncertainties.

Forward-looking statements can also be identified by words such as “anticipates,” “expects,” “believes,”

“plans,” “predicts,” and similar terms. Forward-looking statements are not guarantees of future

performance and our actual results may differ significantly from the results discussed in the forward-

looking statements. Factors that might cause such differences include but are not limited to those

discussed in the subsection entitled Forward-Looking Statements and Factors That May Affect Future

Results and Financial Condition below. The following discussion should be read in conjunction with our

financial statements and notes thereto included in this current report. Our fiscal year end is May 31.

The Company’s plan of operation for the coming year is to scale-up production and accelerate market

entry for our PComP products and to complete the development and qualification of our CermaClad

products. Meanwhile, the Company will continue research and development efforts to ensure the

continuity of our product pipeline. Mentioned below are a few key efforts and milestones accomplished

by the Company and its subsidiaries during the twelve month period ended May 31, 2014, in pursuing the

fulfillment of our plan:

  §

The Company completed debt and equity financings in the amount of $3,992,422.

  §

2,000,000 shares of common stock, valued at $2,580,000, were issued in exchange for shares in

Powdermet.

  §

The Company announced expansion plans for PComP coatings that will involve scaling-up

PComP powder production to 160 tons/year and set-up and potentially acquiring up to 5 US

based thermal spray production businesses, with 12 to  spray booths over the next 3 years.

  §

The Company signed an exclusive agreement with LIMO Lissotschenko Mikrooptik GmbH

("LIMO'), based in Dortmund, Germany for the development of a laser based system for the

production of wear and corrosion resistant cladding to supply the multi-billion dollar coating

market for 3 to 8 inch diameter pipe used extensively in the oil and gas industry.

  §

The Company appointed oil and gas industry veteran, Dr. Ryan Owen, PhD, to its board of

directors

  §

MesoCoat along with the lead project partner, Northern Alberta Institute of Technology (NAIT)

received a $2.75 million dollar funding commitment from Alberta’s Ministry of Innovation and

Advanced Education (IAE) and Western Economic Diversification Canada (WD) for an 18-

month collaborative effort to establish a prototype demonstration facility for developing, testing

and commercializing wear-resistant clad pipe and components.

  §

MesoCoat was awarded a $1.5 million dollar match loan from the Ohio Department of

Development’s Ohio Third Frontier Commission to scale up PComP production and expand

PComP coating services.

  §

MesoCoat signed an exclusive sales agreement with Metallurgic Solutions, S.A. de CV

(“MetalSol”) to introduce MesoCoat’s products into Mexico, Guatemala, El Salvador, Honduras,

Nicaragua, Costa Rica, and Panama.

  §

MesoCoat received a Phase One SBIR Grant from the Environmental Protection Agency (EPA)

for a six month project to develop CermaClad environmentally friendly high-speed large-area

metal cladding technology, as a replacement alternative for the highly toxic galvanizing process

currently in use.

44



  §

MesoCoat received two awards from NASA under its Small Business Innovation Research

(SBIR) program to develop advanced coatings that self-lubricate to minimize friction and wear in

extreme environments, and for developing advanced nanocomposite coatings that can withstand

extreme heat and facilitate high heat transfer for an extended period of time.

  §

MesoCoat incorporated a wholly owned subsidiary, MesoCoat Coating Services, to accelerate

entry into the high-value coating services market for its PComP nano-composite thermal spray

coatings.

  §

MesoCoat won the American Metal Market Steel Excellence Awards for the Best Innovation in

Process for its CermaClad technology.

  §

MesoCoat was ranked #15 fastest-growing manufacturing company in the Annual Inc. 500|5000

list of fastest-growing companies in the U.S.

  §

MesoCoat’s CermaClad clad pipe product received the highly prestigious National Association

of Corrosion Engineers (NACE) Materials Performance (MP) Corrosion Innovation of the Year

Award in the Coatings and Linings category.

  §

Powdermet spun out a wholly-owned subsidiary, Terves Inc., to commercialize engineered

reactive materials and other technology platforms for the oil and gas industry.

  §

Terves secured a Phase I Small Business Innovation Research award from U.S. Navy to develop

controlled deflagration of metals.

  §

Terves secured non-dilutive financing from local economic agencies and development financing

from a leading oilfield completions company to accelerate commercialization of its products.

  §

Terves began initial test sales of its disintegrating frac-ball products.

  §

The Company increased its direct ownership in MesoCoat to 87.5% through conversion of

additional investment, a partial disposition of itsPowdermet interest, and the issuance of

2,000,000 restricted common shares.

  §

The Company announced its intention to acquire the remaining 12.5% shares of MesoCoat held

by Powdermet in exchange for those remaining shares of Powdermet which it holds and the

issuance of additional shares of Abakan, to the extent necessary, on receipt of independent

business valuations of MesoCoat and Powdermet.

Subsequent to the twelve month period ended May 31, 2014:

§

The Company initiated a private placement of up to eighteen million seven hundred and fifty

thousand (18,750,000) shares of its restricted common stock, at a price of $0.40 a share, to

realize and extinguish debt of up to seven million five hundred thousand dollars ($7,500,000), to

support ongoing operations, retire outstanding debt and bolster product development. The

placement has realized $427,800 in cash proceeds as of the filing date of this report and

subsequent to the filing date of this report, is expected to include the extinguishment of debt in

the amount of $764,000, in proceeds realized since the annual period end, and an additional

$1,700,000 in proceeds realized prior to the annual period end. The Company has further

allocated $4 to $5 million dollars of the private placement to secure an industry partner, which

expectation, if realized, will occur subsequent to the filing date of this report. The Company

does not intend to close this private placement prior to realizing the aforementioned

expectations.

§

MesoCoat and Metasol secured initial sales and test orders for PComP coatings from some of

Mexico’s largest steel manufacturers.

§

MesoCoat began initial field-testing, on full-sized production equipment, of its proprietary nano-

composite liquid metal corrosion-resistant coating, PComP M, with a leading steel producer.

§

Terves secured two Phase I Small Business Innovation Research award from NASA to develop

rocket fuels, and high strength magnesium for radiators.

45



Results of Operations

(000)

For the years ended

May 31,

Change

Revenues

2014

2013

$

%

Commercial

$

553    $

190    $

363

191

Contract and grants

284

1,657

(1,373)

(83)

Other income

17

-

17

100

854

1,847

(993)

(54)

Cost of revenues

298

739

(441)

(60)

Gross profit

556

1,108

(552)

(50)

General and administrative

6,329

6,080

249

4

Stock options expense

1,120

1,827

(707)

(39)

Operation Loss

(6,893)

(6,800)

93

1

Interest exp & amortization of discount on

debt

(449)

(1,061)

(612)

(58)

Other income (expense)

(237)

(476)

239

50

Loss before non-controlling interest

(7,579)

(8,337)

(758)

(9)

Non-controlling interest in MesoCoat loss

1,623

1,114

509

46

Loss before income taxes

(5,956)

(7,223)

1,267

18

Income taxes

-

-

-

-

Net Income

$    (5,956)      $    (7,223)      $      1,267

18

Revenues

Revenues for the year ended May 31, 2014 were $853,566, as compared to $1,846,862 for the year ended

May 31, 2013, a decrease of 54%. Revenues for the two periods can be wholly attributed to the operations

of MesoCoat.

Revenue in the current year was derived from commercial revenues of $552,952 as compared to $190,362

in the prior year, contract and grant revenues of $283,748 in the current year as compared to $1,656,500

in the prior year, and other income of $16,866 as compared to zero in the prior year. Commercial revenue

increased by 190% as MesoCoat continues implementation of its commercial products. The 83% decrease

in contract and grant revenue in the current year over the prior year is due to the reduction in grant

applications as MesoCoat focused on developing and commercializing its products.

We expect grant revenue to decrease over the next twelve months as MesoCoat’s government sponsored

contracts that commenced late last year are completed. However, we do expect a significant increase in

commercial revenue over the next twelve months as MesoCoat implements the PComP expansion plan.

Meanwhile, we continue to focus on the development of both current and new products while continuing

to commercialize existing products lines.

46



Gross Profit

Gross profit for the twelve month period ended May 31, 2014 was $556,009 compared to $1,107,789 for

the twelve month period ended May 31, 2013, a decrease of 50%. Gross profits in both annual periods can

be wholly attributed to the operations of MesoCoat.  Gross profit decreased in the current year over the

comparative year as the result of the decrease in contract and grants revenue offset partly by the increase

in commercial revenue.

We expect gross profit to decrease over the next twelve months as result of the reduction in grant

applications.  This reduction is expected to be offset at an increase margin throughout the year as the

Company expands its PComP product line.

Net Losses

Net losses for the year ended May 31, 2014, were $5,956,310 compared to a net loss of $7,223,423 for the

year ended May 31, 2013, a decrease of 17.5%.

The change in net losses in the current year as compared to net losses in the prior year can be attributed to

the decrease in revenues which resulted in a $551,780 decrease in gross profit.  In addition, operating

expenses decreased by $459,111 while we to continue the development and implementation of

commercial applications.  Other income (expense) changed by $851,121 resulting in an additional

reduction to net losses when compared to the prior year.  Other income included among other categories a

loss associated with our equity interest in Powdermet of $126,519 versus a loss in the prior year of

$260,877 and a loss on intangible impairment of $110,600 compared to zero in the prior year.

We do not expect to realize net income in the near term as anticipated operational expenses associated

most significantly with research and development, consulting, payroll expenses and the depreciation and

amortization of existing assets. The increase in expenses are expected to be the direct result of continued

research and development costs associated with the CermClad product line in addition to costs

anticipated for the building of a manufacturing plant.

Despite management’s focus on ensuring operating efficiencies, we expect to continue to operate at a loss

through fiscal 2015.

Expenses

Operating expenses for the year ended May 31, 2014 were $7,448,754 compared to $7,907,865 for the

year ended May 31, 2013, a decrease of 5.8%. The decrease in operating expenses over the prior year can

be attributed to decreases in administrative costs, consulting fees, consulting fees to related parties, and

stock option expenses offset partly by increases in professional fees, professional fees to related parties

and a significant increase in depreciation and amortization. Stock option expense decreased by $707,119

during the current year as the Company refines its management team, directors and advisors.  General &

administrative expense, payroll and professional fees increased by $248,008 as the Company continues its

efforts to develop and commercialize its products that included the opening of its research and testing

manufacturing facility in Euclid, Ohio.

We expect that operating expenses will continue to increase as our aggressive growth strategy over the

next five years will require significant increases in personnel and facilities along with significant research

and development to ensure that products nearing commercialization are brought to market as quickly and

as effectively as possible.

47



Other Expense

Other expense for the year ended May 31, 2014 was $686,158 as compared to $1,537,279 for the year

ended May 31, 2013.   The decrease in other expense of $851,121 in the current year over the prior year

can be primarily attributed to the amortization of discount on debt which decreased by $700,925 in the

current year.  The Company also recorded a loss associated with our equity interest in Powdermet of

$126,519 in the current year versus a loss in the prior year of $260,877. Other significant transactions

include a loss on intangible impairment of $110,600 compared to zero in the prior year and a zero gain on

debt settlement compared to $235,794 in the prior year.

We expect to continue to incur other expense in future periods due to the interest accruing on convertible

debt and the anticipated increase in interest on new debentures that are required for future growth.

Income Tax Expense (Benefit)

The Company may have a prospective income tax benefit resulting from a net operating loss carry-

forward and start up costs that will offset any future operating profit.

Capital Expenditures

The Company has spent significant amounts of capital expenditures for the period from June 27, 2006

(inception) to May 31, 2014, which amounted to $9,222,925.   A large portion of these expenditures are

related to plant, property and equipment in the construction of the manufacturing facility in Euclid, Ohio,

minority interest in Powdermet.

Liquidity and Capital Resources

The Company has experienced significant changes in liquidity, capital resources, and stockholders’

equity.

As of May 31, 2014, the Company had current assets of $336,003 consisting of cash and cash equivalents

of $31,111, accounts receivable of $119,122, prepaid expenses of $185,770. The Company had total

assets of $14,683,564 consisting of current assets, net property, plant and equipment of $5,539,549,

patents and licenses of $6,106,686, an assignment agreement of $171,055, an investment in Powdermet of

$2,151,817, goodwill of $364,384 and net deferred financing fees of $14,070.

As of May 31, 2014, the Company had current liabilities of $8,263,375, consisting of accounts payable of

$1,552,402, accounts payable to related parties of $675,041, capital leases of $31,465, loans payable of

$4,820,816, accrued interest of $306,160, loan payable to related parties of $224,799, accrued interest to a

related party of $480 and accrued liabilities of $652,212.  The Company had total liabilities of $9,373,521

consisting of current liabilities of $8,263,375 and long-term liabilities of $1,110,146. Long-term liabilities

consist of loans payable of $1,056,106 and capital leases of $54,040.

The Company had stockholders’ equity of $5,310,043 and a working capital deficit of $7,927,372 at May

31, 2014.

48



Net cash used in operating activities for the year ended May 31, 2014 was $2,808,037 as compared to

$2,940,182 for the year ended May 31, 2013. Net cash used in operating activities is the result of the

current year income plus a number of items that are book expense items which do not affect the total

amount relative to actual cash used including depreciation, amortization of discount on debt, stock issued

for services and stock option expense offset by equity in investee profit.  Balance sheet accounts that

actually affect cash but are not income statement related items and thus are added or deducted to arrive at

cash used include accrued liabilities, accounts payable, accrued interest on loans payable, and prepaid

expenses offset by changes in accounts receivable.

We expect to continue to generate negative cash flow in operating activities until such time as net losses

transition to net income.

Net cash used in investing activities for the year ended May 31, 2014, was $698,040 as compared to net

cash used in investing activities of $2,719,490 for the year ended May 31, 2013. Net cash used in

investing activities in the current period can be primarily attributed to the purchase of property, plant and

equipment, and capitalized patents and licenses.

We expect to continue to generate negative cash flow in investing activities as the Company increases its

investment in property, plant and equipment through MesoCoat.

Net cash provided by financing activities for the year ended May 31, 2014 was $3,304,147 as compared

to $5,033,146 the year ended May 31, 2013. Net cash provided by financing activities in the current

period is attributable to proceeds from the sale of common stock and loans payable, offset by payments on

loans payable, and repayments on capital leases.

We expect to continue to generate positive cash flow from financing activities as the Company seeks new

rounds of financing to build its business.

Our current assets are insufficient to meet our current obligations or to satisfy our cash needs over the

next twelve months and as such the Company will require additional debt or equity financing.

Management to this end initiated private equity placements, debt financing and debt settlements prior to

period end pursuant to which the Company had raised $3,992,422 during the twelve month period ended

May 31, 2014. Nevertheless, additional capital will be required to meet obligations and needs over the

next twelve months. Except for the private equity placements noted, we had no other commitments or

arrangements for financing at May 31, 2014, though we continue to pursue a number of prospective

sources that include industry or strategic partners, sale of additional equity, the sale of additional equity,

the procurement of long term debt, shareholder loans or the settlement of additional debt for equity. We

face certain financial obstacles to attracting new financing due to our historical record of net losses and

working capital deficits. Therefore, we can provide no assurance that the Company will be able to obtain

the financing required to meet its stated objectives or even to continue as a going concern.

The Company initiated a private placement of common stock subsequent to period end that has realized of

$427,800 in cash proceeds and is expected to include the extinguishment of debt of $764,000, realized

since the annual period end, and an additional $1,700,000 realized prior to the annual period end. The

Company has further allocated $4 to $5 million dollars of the placement to secure an industry partner. The

Company does not intend to close this placement prior to meeting the aforementioned expectations.

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

The Company has a defined stock option plan titled “The Abakan Inc., 2009 Stock Option Plan” and

contractual commitments with all of its officers and directors.

49



The Company has plans for the purchase of plant or equipment in connection with expansion of the

PComP powder production commercial line.

The Company intends to increase the number of employees engaged by MesoCoat on completion on the

PComP product line expansion and commercialization of the CermaClad product at the new Euclid,

Ohio manufacturing facility.

Off Balance Sheet Arrangements

As of May 31, 2014, the Company had no off-balance sheet arrangements that have or are reasonably

likely to have a current or future effect on our financial condition, changes in financial condition,

revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources that is

material to stockholders.

Going Concern

The Company’s auditors have expressed an opinion that refers to our ability to continue as a going

concern as a result of net losses since inception and a working capital deficit of $7,927,372 as of May 31,

2014. Our ability to continue as a going concern is dependent on realizing net income from operations,

gains on investment, obtaining funding from outside sources or realizing some combination of these

objectives. Management’s plan to address the Company’s ability to continue as a going concern includes:

(i) obtaining funding from the private placement of debt or equity; (ii) revenue from operations; (iii)

converting debt to equity; and (iv) obtaining loans and grants from financial or government institutions.

Management believes that it will be able to obtain funding to allow the Company to remain a going

concern through the methods discussed above, though there can be no assurances that such methods will

prove successful.

The statements contained in the section titled Results of Operations and Description of Business, with the

exception of historical facts, are forward looking statements. We are ineligible to rely on the safe-harbor

provision of the Private Litigation Reform Act of 1995 for forward looking statements made in this

current report. Forward looking statements reflect our current expectations and beliefs regarding our

future results of operations, performance, and achievements. These statements are subject to risks and

uncertainties and are based upon assumptions and beliefs that may or may not materialize. These

statements include, but are not limited to, statements concerning:

 §     our anticipated financial performance;

 §     uncertainties related to the commercialization of proprietary technologies held by entities in which

we have an investment interest;

 §     our ability to generate revenue from operations or gains on investments;

 §     our ability to raise additional capital to fund cash requirements for operations;

 §     the volatility of the stock market; and

 §     general economic conditions.

We wish to caution readers that our operating results are subject to various risks and uncertainties that

could cause our actual results to differ materially from those discussed or anticipated including the factors

set forth in the section entitled Risk Factors included elsewhere in this report. We also wish to advise

readers not to place any undue reliance on the forward looking statements contained in this report, which

reflect our beliefs and expectations only as of the date of this report. We assume no obligation to update

or revise these forward looking statements to reflect new events or circumstances or any changes in our

beliefs or expectations, other that is required by law.

50



Critical Accounting Policies

The notes to the audited financial statements for the Company for the years ended May 31, 2014 and

2013, included in this Form 10-K, discusses those accounting policies that are considered to be significant

in determining the results of operations and financial position. Our management believes that their

accounting principles conform to accounting principles generally (GAAP) accepted in the United States

of America.

The preparation of financial statements in conformity with GAAP requires management to make

estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of

contingent assets and liabilities at the date of the financial statements and the reported amounts of

revenues and expenses during the year. The more significant areas requiring the use of estimates include

asset impairment, stock-based compensation, beneficial conversion features on debt instruments, and

future income tax amounts. Management bases its estimates on historical experience and on other

assumptions considered to be reasonable under the circumstances. Actual results may differ from the

estimates.

Stock-Based Compensation

We have adopted Accounting Standards Codification Topic (“ASC”) 718, Share-Based Payment, which

addresses the accounting for stock-based payment transactions in which an enterprise receives employee

services in exchange for (a) equity instruments of the enterprise or (b) liabilities that are based on the fair

value of the enterprise’s equity instruments or that may be settled by the issuance of such equity

instruments.

We account for equity instruments issued in exchange for the receipt of goods or services from other than

employees in accordance with ASC 505. Costs are measured at the estimated fair market value of the

consideration received or the estimated fair value of the equity instruments issued, whichever is more

reliably measurable. The value of equity instruments issued for consideration other than employee

services is determined on the earliest of a performance commitment or completion of performance by the

provider of goods or services.

Recent Accounting Pronouncements

In June 2014, the FASB released ASU 2014-10 — Accounting Standards Update 2014-10, Income Taxes

Topic 915: Elimination of Certain Financial Reporting Requirements, Including an Amendment to

Variable Interest Entities Guidance in Topic 810, Consolidation. The amendments in this Update

eliminate the concept of a development stage entity (DSE) from US GAAP. This change rescinds

financial reporting requirements that have historically applied by DSEs such as labeling financial

statements as those of a DSE, providing inception to date information in the statements of income, cash-

flows and shareholder equity and certain specific disclosures. This ASU has been early adopted by the

Company as of April 1, 2014 and therefore for the current period ended May 31, 2014 as such early

adoption is permitted for all financial statements that have not been issued or made available for issuance.

This ASU had impact to the Company’s consolidated financial statements, as the corresponding inception

to date information, labeling financial statements as those of a DSE, etc. will no longer be provided.

51



In May 2014, the FASB released ASU 2014-9 -   Accounting Standards Update 2014-9, Topic 606:

Revenue from Contracts with Customers that outlines a single comprehensive model for entities to use in

accounting for revenue arising from contracts with customers and supersedes most current revenue

recognition guidance, including industry-specific guidance. The guidance is based on the principle that an

entity should recognize revenue to depict the transfer of goods or services to customers in an amount that

reflects the consideration to which the entity expects to be entitled in exchange for those goods or

services.  The guidance also requires additional disclosure about the nature, amount, timing and

uncertainty of revenue and cash flows arising from customer contracts, including significant judgments

and changes in judgments and assets recognized from costs incurred to fulfill a contract.  Entities have the

option of using either a full retrospective or a modified retrospective approach for the adoption of the new

standard.  This guidance becomes effective for annual reporting periods beginning after December 15,

2016 and early adoption is not permitted.  The Company is currently assessing the impact that this

standard will have on its financial statements.

ASU 2014-15, Presentation of Financial Statements Going Concern (Subtopic 205-40) (ASU 2014-15), is

effective for fiscal years, and interim periods within those years, beginning after December 15, 2016.

ASU 2014-15 requires management to assess an entity's ability to continue as a going concern by

incorporating and expanding upon certain principles that are currently in U.S. auditing standards.

Specifically, ASU 2014-15 provides a definition of the term substantial doubt and requires an assessment

for a period of one year after the date that the financial statements are issued (or available to be issued). It

also requires certain disclosures when substantial doubt is alleviated as a result of consideration of

management's plans and requires an express statement and other disclosures when substantial doubt is not

alleviated. We do not expect the adoption of ASU 2014-15 to have material impact on our consolidated

financial statements, although there may be additional disclosures upon adoption.

Other pronouncements issued by the FASB or other authoritative accounting standards groups with future

effective dates are either not applicable or are not expected to be significant to the financial statements of

the Company.

ITEM 7A.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET

RISK

Not required.

ITEM  8.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Our audited financial statements for the years ended May 31, 2014 and 2013 are attached hereto as F-1

through F-55.

52



Abakan Inc.

Index to Financial Statements

Report of Independent Registered Public Accounting Firm

F-2

Consolidated Balance Sheets for the years ended May 31, 2014 and 2013

F-3

Consolidated Statements of Operations for the years ended May 31, 2014 and 2013

F-4

Consolidated Statements of Stockholders' Equity (Deficit) for the years ended May 31, 2014 and 2013

F-5

Consolidated Statements of Cash Flows for the years ended May 31, 2014 and 2013

F-10

Notes to the Consolidated Financial Statements

F-12

F-1



Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of

Abakan, Inc.

We   have   audited   the   accompanying   consolidated   balance   sheets   of   Abakan,   Inc.   and   Subsidiaries

(together  the  “Company”)  as  of  May  31,  2014  and  2013,  and  the  related  consolidated  statements  of

operations,  stockholders’  equity  (deficit)  and  cash  flows  for  the  years  then  ended.    These  financial

statements  are  the  responsibility  of  the  Company’s  management.  Our  responsibility  is  to  express  an

opinion on these consolidated financial statements based on our audits.

We  conducted  our  audits  in  accordance  with  the  standards  of  the  Public  Company Accounting  Oversight

Board  (United  States).  Those  standards  require  that  we  plan  and  perform  the  audits  to  obtain  reasonable

assurance  about  whether  the  financial  statements  are  free  of  material  misstatement.  The  Company  is  not

required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.

Our audits included consideration of internal control over financial reporting as a basis for designing audit

procedures  that  are  appropriate  in  the  circumstances,  but  not  for  the  purpose  of  expressing  an  opinion  of

the  effectiveness  of the  Company’s  internal control  over  financial reporting.   Accordingly,  we  express  no

such  opinion.   An  audit  also  includes  examining,  on  a  test  basis,  evidence  supporting  the  amounts  and

disclosures  in  the  financial  statements,  assessing  the  accounting  principles  used  and  significant  estimates

made  by management,  as well  as  evaluating the overall  financial  statement  presentation.   We  believe  that

our audits provide a reasonable basis for our opinions.

In  our  opinion,  the  consolidated  financial  statements  referred  to  above  present  fairly,  in  all  material

respects,  the  consolidated  financial  position  of  Abakan,  Inc.  and  Subsidiaries  at  May  31,  2014  and  2013

and the consolidated results of their operations and their cash flows for the years then ended in conformity

with accounting principles generally accepted in the United States of America.

The accompanying financial statements have been prepared assuming that the Company will continue as a

going  concern.   As  discussed  in  Note  3  to  the  financial  statements,  the  Company  has  incurred  net  losses

since   inception   in   the   amount   of   $19,502,097   and   a   working   capital   deficiency   of   $7,927,372.

Management’s  plans  concerning these  matters  are  also described  in  Note  3.   The  accompanying  financial

statements do not include any adjustments that might result from the outcome of this uncertainty.

/s/ Skoda Minotti

Skoda Minotti

Cleveland, Ohio

September 30, 2014

F-2



ABAKAN INC.

CONSOLIDATED BALANCE SHEETS

May 31,

May 31,

2014

2013

ASSETS

Current assets

Cash and cash equivalents

$

31,111     $

233,040

Accounts receivable

119,122

105,523

Note receivable - related parties

-

4,500

Prepaid expenses

185,770

117,028

Total current assets

336,003

460,091

Noncurrent assets

Deferred finance fees, net

14,070

15,799

Property, plant and equipment, net

5,539,549

5,595,007

Patents and licenses, net

6,106,686

7,545,163

Assignment agreement - MesoCoat

171,055

210,528

Investment - Powdermet

2,151,817

2,449,312

Goodwill

364,384

364,384

Total assets

$

14,683,564     $

16,640,284

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities

Accounts payable

$

1,552,402     $

890,791

Accounts payable - related parties

675,041

251,004

Capital leases - current portion

31,465

28,006

Loans payable, net of discounts of $0 and $137,364

4,820,816

965,555

Accrued interest - loans payable

306,160

153,825

Loan payable- related parties

224,799

30,000

Accrued interest - related parties

480

1,987

Accrued liabilities

652,212

377,392

Total current liabilities

8,263,375

2,698,560

Non-current liabilities

Loans payable

1,056,106

4,241,278

Capital leases - non-current portion

54,040

63,875

Total liabilities

$

9,373,521     $

7,003,713

Commitments and contingencies (Note 13)

Stockholders' equity

Preferred stock, $0.0001 par value, 50,000,000 shares

authorized, none issued and outstanding

-

-

Common stock, par value $0.0001, 2,500,000,000 shares

authorized, 68,374,815 issued and outstanding - May 31, 2014,

64,284,855 issued and outstanding - May 31, 2013

6,840

6,430

Paid-in capital

24,530,074

20,833,426

Subscription receivable

(28,000)

(76,244)

Contributed capital

5,050

5,050

Accumulated deficit

(19,502,097)

(13,545,788)

5,011,867

7,222,874

Non-controlling interest

298,176

2,413,697

Total stockholders' equity

5,310,043

9,636,571

Total liabilities and stockholders' equity

$

14,683,564     $

16,640,284

SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.

F-3



ABAKAN INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

For the years ended

May 31,

2014

2013

Revenues

Commercial

$

552,952     $

190,362

Contract and grants

283,748

1,656,500

Other income

16,866

-

853,566

1,846,862

Cost of Revenues

297,557

739,073

Gross profit

556,009

1,107,789

Expenses

General and administrative

General and administrative

749,001

831,387

Professional fees

667,540

513,068

Professional fees - related parties

63,028

60,000

Consulting

989,952

1,382,484

Consulting - related parties

237,397

441,250

Payroll and benefits expense

1,263,364

848,798

Depreciation and amortization

784,057

417,072

Research and development

1,327,648

1,347,190

Stock expense on note conversion

246,390

239,120

Stock options expense

1,120,377

1,827,496

Total expenses

7,448,754

7,907,865

Loss from operations

(6,892,745)

(6,800,076)

Other (expense) income

Interest expense:

Interest - loans

(310,067)

(222,134)

Interest - related parties

(1,113)

(773)

Amortization of discount on debt

(137,364)

(838,289)

Total interest expense

(448,544)

(1,061,196)

Interest income

15

3,794

Loss on intangible impairment

(110,600)

-

Creditor Fee

-

(235,794)

Gain on debt settlement

-

17,715

Loss on sale of assets

(510)

(921)

Equity in Powdermet (loss)

(126,519)

(260,877)

Total Other (expense) income

(686,158)

(1,537,279)

Net (loss) before noncontrolling interest

(7,578,903)

(8,337,355)

Non-controlling interest in MesoCoat Loss

1,622,593

1,113,932

Net (loss) attributable to Abakan Inc.

(5,956,310)

(7,223,423)

Provision for income taxes

-

-

Net (loss)

$

(5,956,310)     $

(7,223,423)

Net (loss) per share - basic

$

(0.09)     $

(0.12)

Net (loss) per share - diluted

$

(0.09)     $

(0.12)

Weighted average number of common

shares outstanding – basic

64,663,650

62,443,108

Weighted average number of common

shares outstanding – diluted

65,663,650

62,443,108

SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.

F-4



ABAKAN INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)

Total

Paid - in

Contributed

Subscription

Subscription

Non-controlling

Accumulated

Stockholders’

Shares

Amount

Capital

Capital

Receivable

Payable

Interest

Deficit

Equity

Balance May 31, 2012

61,465,445

$

6,147

$      13,321,527    $

5,050

$

-

$

-

$

3,454,310

$

(6,322,365)

$

10,464,669

Common shares issued for services on July 9,

2012 at $2.00 per share

10,000

1

19,999

-

-

-

-

-

20,000

Private placement for cash, closed July 30,

2012 for $1.75 per share

300,000

30

524,970

-

-

-

-

-

525,000

Common shares issued for services on June

1, 2012 for services on May 1, 2012 at

$2.61 per share

12,500

1

32,624

-

-

-

-

-

32,625

Common shares issued for services on June

1, 2012 at $2.22 per share

12,500

1

23,124

-

-

-

-

-

23,125

Common shares issued for services on July 1,

2012 at $2.00 per share

12,500

1

24,999

-

-

-

-

25,000

Common shares issued for services on

August 7, 2012 at $1.90 per share

10,000

1

18,999

-

-

-

-

19,000

Common shares issued for services on

September 18, 2012 for $1.75 per share

25,000

3

42,747

-

-

-

-

-

42,750

Private placement for cash, closed September

28 , 2012 for $1.75 per share

150,000

15

262,485

-

-

-

-

-

262,500

Private placement for cash, closed October

18, 2012 for $2.30 per share

100,000

10

229,990

-

-

-

-

-

230,000

Private placement for cash, closed November

26, 2012 for $2.30

7,000

1

16,099

-

-

-

-

-

16,100

Common shares issued for services on

November 29, 2012 at $1.70 per share,

including costs of $21,000

20,000

2

54,998

-

-

-

-

-

55,000

Debt converted into stock November 30,

2012 for $2.30 per share, including costs

of $28,000

70.000

7

188,993

-

-

-

-

-

189,000

Accounts payable debt converted into stock

November 30, 2012 for $2.30 per share,

including costs of $8,000

20,000

2

53,998

-

-

-

-

-

54,000

Private placement for cash, closed November

30, 2012 for $2.30 per share including

costs of $5,217

25,000

3

62,715

-

-

-

-

-

62,718

Subscription receivable from above private

placement

-

-

-

-

(27,500)

-

-

-

(27,500)

Subscription payable deposit against stock

subscription

-

-

-

-

-

12,000

-

-

12,000

Note payable debt converted into stock

November 30, 2012 for $2.30 per share

including costs of $1,223

3,058

1

8,255

-

-

-

-

-

8,256

May 31, 2013 continued on following page

SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

F-5



ABAKAN INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) – CONTINUED

Total

Paid-in

Contributed

Subscription

Subscription

Non-controlling

Accumulated

Stockholders’

Shares

Amount

Capital

Capital

Receivable

Payable

Interest

Deficit

Equity

May 31, 2013 continued from previous page

Private placement for cash, closed December 3,

2012 for $2.30 per share

121,500      $

12

$

278,988

$

-

$

-

$

-

$

-

$

-

$

279,000

Private placement for cash, closed December 3, 8,

2012 for $2.30

22,000

2

50,598

-

-

(12,000)

-

-

38,600

Private placement for cash, closed December

19, 2012 for $2.30 per share

70,000

7

160,993

-

-

-

-

161,000

Private placement for cash, closed December

19, 2012 for $2.30 per share

45,000

5

103,495

-

-

-

-

103,500

Private placement for cash, closed December

20, 2012 for $2.30

76,522

8

175,992

-

-

-

-

-

176,000

Subscription receivable from above private

placement

-

-

-

-

(84,000)

-

-

-

(84,000)

Private placement for cash, closed December

30, 2012 for $2.30 per share

100,000

10

229,990

-

-

-

-

-

230,000

Common shares issued for services on January

8, 2013 at $2.80 per share

21,429

2

59,998

-

-

-

-

-

60,000

Common shares issued for services on February

21, 2013 at $2.70 per share

20,000

2

53,998

-

-

-

-

-

54,000

Common shares issued for services on February

21, 2013 at $2.70 per share

10,000

1

26,999

-

-

-

-

-

27,000

Subscription receivables received from

November 30, 2012

-

-

-

-

27,500

-

-

-

27,500

Subscription payable deposit against stock

subscription

-

-

-

-

-

101,200

-

-

101,200

Common shares issued for services on March

18, 2013 at $2.80 per share

15,000

2

41,999

-

-

-

-

-

42,000

Common shares issued for raffle prize on

March 18, 2013 at $2.54 per share

100

0

270

-

-

-

-

-

270

Common shares issued for services to be

rendered on March 18, 2013 at $2.54 per

share

26,622

2

59,998

-

-

-

-

-

60,000

Common shares issued for services to be

rendered on March 18, 2013 at $2.52 per

share

10,000

1

25,199

-

-

-

-

-

25,200

Private placement for cash, closed March 18,

2013 for $2.30 per share

44,000

4

101,196

-

-

(101,200)

-

-

(0)

Note payable debt converted into stock March

18, 2013 for $2.30 per share, including costs

of $81,200

232,000

23

614,777

-

-

-

-

-

614,800

May 31, 2013 continued on following page

SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

F-6



ABAKAN INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) – CONTINUED

Total

Paid-in

Contributed

Subscription

Subscription

Non-controlling

Accumulated

Stockholders’

Shares

Amount

Capital

Capital

Receivable

Payable

Interest

Deficit

Equity

May 31, 2013 continued from previous page

Accounts payable debt of $25,000 converted

into stock and $96,000 prepaid expenses

March 18, 2013 for $2.30 per share,

including costs of $12,100

55,000

$

6

$

138,595

$

-

$

-

$

-

$

-

$

-

$

138,600

Accounts payable debt converted into stock

March 25, 2013 including costs of $5,783

16,522

2

43,782

-

-

-

-

-

43,783

Cash exercise of warrants on April 1, 2013 at

$1.50 per share

15,000

2

22,499

-

-

-

-

-

22,500

Common shares issued for services on April 2,

2013 at $2.70 per share

23,600

2

63,718

-

-

-

-

-

63,720

Private placement for cash, closed April 10,

2013 at $1.00 per share

10,000

1

22,999

-

-

-

-

-

23,000

Common shares issued for conversion of

convertible debt on April 13, 2013 at $1.00

per share

500,000

50

499,950

-

-

-

-

-

500,000

Note payable debt converted into stock April

15, 2013 for $2.30 per share, including costs

of $47,250

135,000

14

357,737

-

-

-

-

-

357,750

Cash exercise of warrants on April 18, 2013 at

$1.50 per share

50,000

5

74,995

-

-

-

-

-

75,000

Private placement for cash, closed April 22,

2013 for $2.60 per share

39,000

4

101,396

-

-

-

-

-

101,400

Private placement for cash, closed April 23,

2013 for $2.60 per share

78,000

8

202,792

-

-

-

-

-

202,800

Private placement for cash, closed April 29,

2013 for $2.60 per share

78,000

8

202,792

-

-

-

-

-

202,800

Private placement for cash, closed April 30,

2013 for $2.60 per share

13,500

1

35,099

-

-

-

-

-

35,100

Cash exercise of warrants on May 7, 2013 at

$1.50 per share

7,500

1

11,249

-

-

-

-

-

11,250

Note payable debt converted into stock May 7,

2013 for $2.60 per share including costs of

$6,800

10,000

1

32,799

-

-

-

-

-

32,800

Private placement for cash, closed May 9, 2013

for $2.60 per share

12,000

1

31,199

-

-

-

-

-

31,200

Note payable debt converted into stock May 15,

2013 for $2.60 per share including costs of

$6,000

10,000

1

31,999

--

-

-

-

-

32,000

Cash exercise of warrants on May 17, 2013 at

$1.50 per share

32,733

3

49,096

-

-

-

-

-

49,100

May 31, 2013 continued on following page

SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

F-7



ABAKAN INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) – CONTINUED

Total

Paid-in

Contributed

Subscription

Subscription

Non-controlling

Accumulated

Stockholders’

Shares

Amount

Capital

Capital

Receivable

Payable

Interest

Deficit

Equity

May 31, 2013 continued from previous page

Cash exercise of warrants on May 21, 2013 at

$1.50 per share

82,500

$

8

$

123,742

$

-

$

-

$

-

$

-

$

-

$

123,750

Private placement for cash, closed May 21,

2013 for $2.60 per share

3,900

0

10,140

-

-

-

-

-

10,140

Cash exercise of warrants on May 29, 2013 at

$1.50 per share

82,500

8

123,742

-

-

-

-

-

123,750

Subscription receivable from above exercise of

warrants

-

-

-

-

(67,244)

-

-

-

(67,244)

Accounts payable debt converted into stock

May 31, 2013 for $2.60 per share including

costs of $16,547

26,924

3

86,546

-

-

-

-

-

86,549

Shares returned and cancelled per settlement

agreement dated May 8, 2013, at $1.13 per

share

(31,000)

(3)

(35,027)

-

-

-

-

-

(35,030)

Shares returned and cancelled per settlement

agreement dated May 8, 2013, at $1.18 per

share

(20,000)

(2)

(23,598)

-

-

-

-

-

(23,600)

Subscription receivables received from

December 20, 2012

-

-

-

-

75,000

-

-

-

75,000

Stock options expense

-

-

1,827,496

-

-

-

-

-

1,827,496

MesoCoat stock option expense allocated to

non-controlling interest

-

-

(73,318)

-

-

-

73,318

-

-

Net loss for the year

-

-

-

-

-

-

(1,113,932)

(7,223,423)

(8,337,355)

Balance, May 31, 2013

64,284,855     $

6,430

$      20,833,426

$

5,050

$

(76,244)

$

-

$

2,413,697

$     (13,545,788)     $

9,636,572

Subscription receivables received from May 29,

2013 and December 20, 2012

-

-

-

-

76,244

-

-

-

76,244

Common shares issued for services on October

25, 2013 at $3.03 per share

19,802

2

59,998

-

-

-

-

-

60,000

Common shares issued for services on October

25, 2013 at $2.94 per share

25,000

3

73,498

-

-

-

-

-

73,501

Shares issued for retirement plan on October 25,

2013 at $2.83 per share

82,941

8

234,715

-

-

-

-

-

234,723

Non-cash exercise of warrants on December 4,

2013 at $0.65 per share including costs of

$30,500

50,000

5

62,995

-

-

-

-

-

63,000

Common shares issued for services on

December 4, 2013 at $1.20 per share

10,000

1

11,999

-

-

-

-

-

12,000

May 31, 2014 continued on following page

SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.

F-8



ABAKAN INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) – CONTINUED

Total

Paid-in

Contributed

Subscription

Subscription

Non-controlling

Accumulated

Stockholders’

Shares

Amount

Capital

Capital

Receivable

Payable

Interest

Deficit

Equity

May 31, 2014 continued from previous page

Common shares issued for services on January

3, 2014 at $1.18 per share

16,949

$

2

$

19,998

$

-

$

-

$

-

$

-

$

-

$

20,000

Subscription payable deposit payable  stock

subscription on February 21, 2014

-

-

-

-

-

20,000

-

-

20,000

Subscription payable deposit payable  stock

subscription on February 24, 2014

-

-

-

-

-

216,000

-

-

216,000

Private placement for cash, closed April 9, 2014

at $1.00 per share

40,000

4

39,996

-

-

(20,000)

-

-

20,000

Common shares issued for services on April 9,

2014 at $1.00 per share

70,000

7

69,993

-

-

-

-

-

70,000

Accounts payable debt converted into stock

April 9, 2014 for $1.00 per share including

costs of $0.00

216,000

22

215,978

-

-

(216,000)

-

-

-

Accounts payable debt converted into stock

April 9, 2014 for $0.80 per share, including

costs of $7,500

50,000

5

47,495

-

-

-

-

-

47,500

Accounts payable debt converted into stock

April 9, 2014 for $0.80 per share including

costs of $208,390

1,389,268

139

1,319,666

-

-

-

-

-

1,319,805

Common shares issued for services on April 22,

2014 at $0.80 per share

30,000

3

23,997

-

-

-

-

-

24,000

Common shares issued for services on May 6,

2014 at $0.71 per share

20,000

2

14,198

-

-

-

-

-

14,200

Private placement for cash, closed May 30,

2014 for $0.80 per share

60,000

6

47,994

-

(28,000)

-

-

-

20,000

Common shares issued for services on May 30,

2014 at $1.20 per share

10,000

1

11,999

-

-

-

-

-

12,000

Common shares issued for share exchange

agreement with Powdermet on May 31, 2014

2,000,000

200

2,579,800

-

-

-

-

-

2,580,000

Effect of share exchange with Powdermet on

May 31, 2014

-

-

(2,189,032)

-

-

-

(561,944)

-

(2,750,976)

Stock option expense

-

-

1,120,377

-

-

-

-

-

1,120,377

MesoCoat stock option expense allocated to

minimum interest

-

-

(69,016)

-

-

-

69,016

-

-

Net loss for the year

-

-

-

-

-

-

(1,622,593)

(5,956,310)

(7,578,903)

Balance, May 31, 2014

68,374,815     $

6,840

$      24,530,074      $

5,050

$

(28,000)

$

-

$

298,176

$     (19,502,097)      $

5,310,043

SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.

F-9



ABAKAN INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the years ended

May 31,

2014

2013

CASH FLOWS FROM  OPERATING ACTIVITIES

Net (loss) before non-controlling interest

$

(7,578,903)     $

(8,337,355)

Adjustments to reconcile net (loss) to net

cash (used in) operating activities:

Depreciation and amortization

784,057

417,072

Amortization of discount on debt

137,364

838,289

Imputed Interest on debt

-

59,343

Amortization of deferred financing fees

1,729

-

Stock options expense

1,120,377

1,827,496

Stock expense on note conversion

246,390

239,120

Stock issued for services

285,700

415,791

Stock issued for retirement plan expense

234,723

-

Equity in investee (profit)/ loss

126,519

260,877

Loss on intangible impairment

110,600

-

Loss on sale of capital asset

510

-

Changes in operating assets and liabilities:

Accounts receivable

(13,599)

(82,669)

Prepaid expenses

(68,742)

66,106

Prepaid expenses - related parties

-

(16,676)

Accounts payable

1,133,234

1,150,049

Accounts payable - related parties

424,037

170,231

Accrued interest - loans payable

213,759

(14,251)

Accrued liabilities

34,209

66,395

Total adjustments

4,770,866

5,397,173

NET CASH (USED IN) OPERATING ACTIVITIES

(2,808,037)

(2,940,182)

CASH FLOWS FROM  INVESTING ACTIVITIES

Purchase of property, plant, equipment and website

(662,703)

(2,675,328)

Proceeds from sale of capital assets

-

921

Capitalized patents and licenses

(35,337)

(45,083)

NET CASH (USED) IN INVESTING ACTIVITIES

(698,040)

(2,719,490)

CASH FLOWS FROM  FINANCING ACTIVITIES

Proceeds from sale of common stock

110,000

3,126,964

Proceeds from loans payable

3,144,692

2,107,292

Payments on loans payable

(161,591)

(207,816)

Proceeds from loans payable - related parties

185,648

66,200

Payments on loans payable - related parties

(44,470)

(36,200)

Repayments of capital leases

(6,376)

(23,294)

Stock issuable

76,244

-

NET CASH PROVIDED BY FINANCING ACTIVITIES

3,304,147

5,033,146

NET INCREASE (DECREASE)  IN CASH AND CASH EQUIVALENTS

(201,929)

(626,526)

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD

233,040

859,566

CASH AND CASH EQUIVALENTS, END OF PERIOD

$

31,111     $

233,040

SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.

F-10



ABAKAN INC

CONSOLIDATED STATEMENT OF CASH FLOWS – CONTINUED

For the years ended

May 31,

2014

2013

Supplemental Disclosures:

Cash paid for income taxes

$

-     $

-

Cash paid for interest

$

57,119     $

-

Supplemental Non-cash Disclosures:

Notes and accounts payable converted to stock

Accounts payable - related parties

$

(288,500)     $

(279,255)

Loans payable

(1,048,483)

(1,607,595)

Accrued interest

(10,694)

(13,044)

Accrued interest - related parties

(2,236)

-

Common stock

1,349,914

1,976,138

Subscription receivable

-

(76,244)

-

-

Write off of assets acquired in MesoCoat acquisition

Patents and licenses

$

1,336,281     $

-

Long term debt

(1,576,892)

-

Accrued liabilities

240,611

-

$

-     $

-

Share exchange agreement with Powdermet and MesoCoat

Investment - Powdermet

$

170,976     $

-

Common stock

390,968

-

Noncontrolling interest - MesoCoat

(561,944)

-

$

-     $

-

Accounts payable converted to notes payable

Accounts payable

$

233,121     $

155,161

Notes payable

(233,121)

(155,161)

$

-     $

-

SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

F-11



ABAKAN INC.

NOTES TO FINANCIAL STATEMENTS

FOR THE YEARS ENDING MAY 31, 2014 AND 2013

NOTE 1 – BUSINESS

Your Digital Memories, Inc. was incorporated in the state of Nevada on June 27, 2006.

Waste to Energy Group Inc., a wholly-owned subsidiary of Your Digital Memories Inc., was

incorporated in the state of Nevada on August 13, 2008. Waste to Energy Group Inc. and Your Digital

Memories Inc. entered into an Agreement and Plan of Merger on August 14, 2008. The board of

directors of Waste to Energy Group Inc. and Your Digital Memories Inc. deemed it advisable and in the

best interest of their respective companies and shareholders that Waste to Energy be merged with and

into Your Digital Memories Inc. with Your Digital Memories Inc. remaining as the surviving

corporation under the name Waste to Energy Group Inc.

Abakan Inc., a wholly-owned subsidiary of Waste to Energy Group Inc., was incorporated in the state of

Nevada on November 6, 2009. Abakan Inc. and Waste to Energy Group Inc. entered into an Agreement

and Plan of Merger on November 6, 2009. The board of directors of Abakan Inc. and Waste to Energy

Group Inc. deemed it advisable and in the best interest of their respective companies and shareholders

that Abakan Inc. be merged with and into Waste to Energy Group Inc. with Waste to Energy Group Inc.

remaining as the surviving corporation under the name “Abakan Inc.”

Unless the context indicates otherwise, all references herein to the “Company”, “we,” “us,” and “our”

refer to Abakan Inc. and its consolidated subsidiaries.

On December 10, 2009 the Company purchased a thirty-four percent (34.59%) interest in MesoCoat,

Inc. ("MesoCoat"), and on July 13, 2011 purchased an additional eighteen percent (17.86%), and on

May 31, 2014 (please see Note 7) purchased an additional thirty-five percent (35.63%), for an aggregate

total of eighty-eight percent (88.08%) of the outstanding stock of MesoCoat.

MesoCoat (formerly “Powdermet Coating Technologies, Inc.”) was incorporated in Nevada as a wholly

owned subsidiary of Powdermet, Inc. (“Powdermet”) on May 18, 2007. Operations began in 2008 and

effective March 31, 2008, it was renamed as MesoCoat Inc. Future success of operations is subject to

several technical hurdles and risk factors, including satisfactory product development, regulatory

approval and market acceptance of MesoCoat’s products and its continued ability to obtain future

funding. MesoCoat is currently in the development stage, as operations consist primarily of research and

development expenditures, and revenues from planned principal operations that have not yet been

realized. MesoCoat has invested heavily in intellectual property, machinery and equipment to initiate

the research and development of its core technology. Currently, MesoCoat’s revenue consists of

government grants, cooperative reimbursement agreements and commercial contracts

On March 21, 2011, the Company purchased 596,813 shares of Powdermet from Kennametal, Inc., an

unrelated party, equal to a fully diluted 41% interest in Powdermet. On May 31, 2014, we participated

in a share exchange agreement in which we exchanged 310,000 shares of Powdermet’s common stock

in exchange for 98,000 shares of common stock of MesoCoat and 2,000,000 shares of the Company’s

common stock. Because of this transaction our interest is now a fully diluted 24.9% interest in

Powdermet.

F-12



ABAKAN INC.

NOTES TO FINANCIAL STATEMENTS

FOR THE YEARS ENDING MAY 31, 2014 AND 2013

NOTE 1 – BUSINESS - continued

Powdermet was formed in 1996 as a Delaware corporation and has since developed a product platform

of advanced materials solutions derived from nano-engineered particle agglomerate technology and

derived hierarchically structured materials. Powdermet also owned 47.50% of MesoCoat, on May 31,

2014, we completed a share exchange agreement that we exchanged shares of Powdermet for shares of

Mesocoat reducing Powdermet’s interest in MesoCoat to twelve percent (11.92%).

On June 8, 2011, the Company formed a wholly owned subsidiary company named, AMP Distributors,

Ltd. (“AMP Distributors”), a Grand Cayman corporation. AMP Distributors was formed to distribute

MesoCoat products to consumer markets.

On July 27, 2012, the Company formed a wholly owned subsidiary company named, AMP Distributors,

Inc. (“AMP FL”), a Florida corporation. AMP Distributors was formed to distribute MesoCoat products

to consumer markets.

On May 15, 2012, MesoCoat formed a wholly owned subsidiary company named, MesoCoat

Technologies (“MST TECH”), a Alberta Canada corporation. MesoCoat Technologies was formed to

develop, market, and sell wear-resistant clad pipes and components in Canada.

On June 13, 2013, MesoCoat formed a wholly owned subsidiary company named, MesoCoat Coating

Services (“MSTC”), a Nevada corporation. MesoCoat Coatings was formed to extract maximum value

from the PComP family by offering high margin coating services.

On October 23, 2013, MesoCoat formed a wholly owned subsidiary company named, PT. MesoCoat

Indonesia (“MSTIND”), an Indonesian corporation. PT. MesoCoat Indonesia was formed to

manufacture and sell wear-resistant clad pipes and components in Indonesia.

Abakan’s plan of operations is to develop and commercialize their products in advanced coatings and

metal formulations markets as a result of its investment in MesoCoat, Inc. (“MesoCoat”) and

Powdermet, Inc. (“Powdermet”).  Abakan is actively involved in supporting their R&D, market

development, and commercialization efforts.  Since the Company is in the pre-commercialization phase

for the majority of its products, it is anticipated that the Company will need successive rounds of

financing to fund research & development, lengthy qualification periods, sales and marketing efforts.

F-13



ABAKAN INC.

NOTES TO FINANCIAL STATEMENTS

FOR THE YEARS ENDING MAY 31, 2014 AND 2013

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Accounting Basis

These financial statements are prepared on the accrual basis of accounting in conformity with

accounting principles generally accepted in the United States of America (GAAP).

We follow accounting standards set by the Financial Accounting Standards Board, commonly referred

to as the FASB.  The FASB sets GAAP that we follow to ensure we consistently report our financial

condition, results of operations, and cash flows.  References to GAAP issued by the FASB in these

footnotes are to the FASB Accounting Standards Codification, sometimes referred to as the Codification

or ASC.

Cash and Cash Equivalents

For the purposes of the statements of cash flows, cash equivalents include all highly liquid investments

with a maturity of three months or less.

Concentration in Sales to Few Customers

In the year ended May 31, 2014 and 2013, our government contracts accounted for 33% and 90% of our

revenues, respectively.

Cash in Excess of FDIC Insured Limits

We maintain our cash in bank deposit accounts which, at times, may exceed federally insured limits.

Accounts are guaranteed by the Federal Deposit Insurance Corporation (FDIC) up to $250,000. At May

31, 2014 and 2013, we had approximately none and none, respectively, in excess of FDIC insured

limits. We have not experienced any losses in such accounts.

Consolidation Policy

The accompanying May 31, 2014 financial statements include the Company’s accounts and the accounts of

its subsidiaries. All significant intercompany transactions and balances have been eliminated in

consolidation. The Company’s ownership of its subsidiaries as of May 31, 2014, is as follows:

Name of Subsidiary

Percentage of Ownership

AMP Distributors (Cayman)

100.00%

AMP Distributors (Florida)

100.00%

MesoCoat, Inc.

88.08%

MesoCoat’s ownership of its subsidiaries as of May 31, 2014, is as follows:

Name of Subsidiary

Percentage of Ownership

MesoCoat Technologies (Canada)

100.00%

MesoCoat Coating Services, Inc. (Nevada)   100.00%

PT MesoCoat Indonesia

100.00%

F-14



ABAKAN INC.

NOTES TO FINANCIAL STATEMENTS

FOR THE YEARS ENDING MAY 31, 2014 AND 2013

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued

Fair Value of Financial Instruments

In January 2008, the Company adopted FASB ASC 820, Fair Value Measurements and Disclosures

(“ASC 820”) (Formerly referenced as SFAS No. 157, Fair Value Measurements), to value its financial

assets and liabilities. The adoption of ASC 820 did not have a significant impact on the Company’s

results of operations, financial position or cash flows.  ASC 820 defines fair value, establishes a

framework for measuring fair value under GAAP and expands disclosures about fair value

measurements.  ASC 820 defines fair value as the exchange price that would be paid by an external party

for an asset or liability (exit price).

ASC 820 also establishes a fair value hierarchy which requires an entity to maximize the use of

observable inputs and minimize the use of unobservable inputs when measuring fair value.  Three levels

of inputs may be used to measure fair value:

·

Level 1 – Active market provides unadjusted quoted prices for identical assets or liabilities that the

company has the ability to access;

·

Level 2 – Quoted prices for similar assets or liabilities in active markets or quoted prices for identical

or similar assets or liabilities in inactive markets. Level 2 inputs include those other than quoted

prices that are observable for the asset or liability and that are derived principally from, or

corroborated by, observable market data by correlation of other means. If the asset or liability has a

specified term the Level 2 input must be observable for substantially the full term of the asset or

liability; and

·

Level 3 – Inputs to the valuation methodology are unobservable and significant to the fair value

measurement.

Fair value estimates discussed herein are based upon certain market assumptions and pertinent

information available to management as of May 31, 2014.  The Company uses the market approach to

measure fair value for its Level 1 financial assets and liabilities.  The market approach uses prices and

other relevant information generated by market transactions involving identical or comparable assets or

liabilities.

The respective carrying value of certain on-balance-sheet financial instruments approximated their fair

values.  These financial instruments which include cash, accounts receivable, accounts payable, and notes

payable are valued using Level 1 inputs and are immediately available without market risk to

principal.  Fair values were assumed to approximate carrying values for these financial instruments since

they are short term in nature and their carrying amounts approximate fair values or they are receivable or

payable on demand.  The carrying value of note payable to stockholder approximates its fair value

because the interest rates associated with the instrument approximates current interest rates charged on

similar current borrowings.  The Company does not have other financial assets that would be

characterized as Level 2, but we do feel that our investment in Powdermet would be characterized as

Level 3 assets.

F-15



ABAKAN INC.

NOTES TO FINANCIAL STATEMENTS

FOR THE YEARS ENDING MAY 31, 2014 AND 2013

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued

Non-Controlling Interest

Non-controlling interest represents the minority members’ proportionate share of the equity of MesoCoat,

Inc.  The Company’s controlling interest in MesoCoat requires that its operations be included in the

consolidated financial statements.  The equity interest of MesoCoat that is not owned by the Company is

shown as non-controlling interest in the consolidated financial statements.

Equity Method

Investee companies that are not consolidated, but over which the Company exercises significant

influence, are accounted for under the equity method of accounting, in accordance with ASC 323.

Whether or not the Company exercises significant influence with respect to an Investee depends on an

evaluation of several factors including, among others, representation on the investee company’s board of

directors and ownership level, which is generally a 20% to 50% interest in the voting securities of the

investee company. Under the equity method of accounting, an investee company’s accounts are not

reflected within the Company’s Balance Sheets and Statements of Operations; however, the Company’s

share of the earnings or losses of the investee company is reflected in the caption “Equity in (Investee)

income (loss)” in the Statements of Operations. The Company’s carrying value in an equity method

investee company is reflected in the caption “Investment – (Investee)” in the Company’s Balance Sheets.

Occasionally, we may make payments towards our investment in investee companies. As we make those

deposits on our total investment, we account for those payments on our balance sheet as “Investment

deposits in (investee).” When we complete the total investment amount, these amounts are moved into the

individual investment accounts discussed above.

Earnings (Loss) Per Common Share

The Company computes net loss per share in accordance with FASB ASC 260-10, "Earnings per Share".

FASB ASC 260 requires presentation of both basic and diluted earnings per share (EPS) on the face of

the statement of operations. Basic  EPS  is  computed   by  dividing  net  loss  available to common

stockholders  (numerator)  by  the   weighted  average  number  of  shares outstanding (denominator)

during the period.  Diluted EPS gives effect to all potentially dilutive common shares outstanding during

the period. Diluted EPS excludes all potentially dilutive shares if their effect is anti-dilutive. The only

potentially dilutive common shares outstanding are stock options and warrants from inception (Note 10).

Development Stage Enterprise

At May 31, 2014, the Company’s business operations had not fully developed and the Company is highly

dependent upon funding and therefore is considered a development stage enterprise. The Company has

also Adopted Early the FASB released ASU 2014-10 concerning our development stage enterprise

financial statement presentation.

F-16



ABAKAN INC.

NOTES TO FINANCIAL STATEMENTS

FOR THE YEARS ENDING MAY 31, 2014 AND 2013

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued

Accounts Receivable

Accounts receivable are stated at face value, less an allowance for doubtful accounts. The Company

provides an allowance for doubtful accounts based on management's periodic review of accounts,

including the delinquency of account balances. Accounts are considered delinquent when payments have

not been received within the agreed upon terms, and are written off when management determines that

collection is not probable. As of May 31, 2014 and 2013 management has determined that no allowance

for doubtful accounts is required.

Notes Receivable

Notes receivable are stated at face value, plus any accrued interest earned. The Company analyzes each

note receivable each period for probability of collectability. Notes are considered in default when

payments have not been received within the agreed upon terms, and are written off when management

determines that collection is not probable. On April 22, 2014, the associated notes receivable had been

assigned to our chief executive officer for settlement of the accounts. As of May 31, 2013, management

determined that no occurrence of default exists.

Property, Plant and Equipment

Property, plant and equipment are stated at cost less accumulated depreciation and amortization.

Maintenance and repairs are charged to operations as incurred. Depreciation and amortization are based

on the straight-line method over the estimated useful lives of the related assets. When assets are retired or

otherwise disposed of, the cost and accumulated depreciation and amortization are removed from the

accounts, and any resulting gain or loss is reflected in operations in the period realized.

Asset Construction in Progress

Construction in progress assets, represent assets that are in process of construction and rehabilitation in

order to bring them to operational status. All costs are captured in a separate Construction in Progress

account, and are included in the “Property, plant and equipment – net” amounts, and when the asset is

ready to enter service, the total costs are capitalized and depreciation commences per the schedule below.

Depreciation

Depreciation is computed on the straight-line method net of salvage value with useful lives as follows:

Computer equipment and software

3 - 5 years

Office furniture and equipment

5 - 7 years

Machinery and equipment

7 - 10 years

Leasehold improvements

balance of lease term

Patent and Technology Licenses

Patent costs are recorded at the cost to obtain the patent and are amortized on a straight-line basis over their estimated

useful lives up to 20 years, beginning when the patent is secured by the Company. License costs are recorded at

the cost to obtain the license and are amortized on a straight-line basis over effective term of the license, up to 15

years.

F-17



ABAKAN INC.

NOTES TO FINANCIAL STATEMENTS

FOR THE YEARS ENDING MAY 31, 2014 AND 2013

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued

Indefinite-lived Intangible Assets

In accordance with GAAP, Intellectual Property Research and Development in the amount of $6,120,200

related to the acquisition of MesoCoat, will not be amortized and was  reviewed for impairment  starting fiscal

year ending May 31, 2013, due to its indefinite life. As of May 31, 2014, the Company has reviewed this

intellectual property and has determined that a write off of $110,600 is appropriate due to market conditions, and

is reflected in the accompanying Statements of Operations. Please see Note 5 for further transactions. As of the

year ended May 31, 2013, no impairment charges were necessary.

Goodwill

In accordance with GAAP, goodwill in the amount of $364,384 related to the acquisition of MesoCoat will be

evaluated for impairment on an annual basis starting fiscal year ending May 31, 2013. We evaluated our

goodwill for impairment and found that no adjustment is necessary for the years ended May 31, 2014 and 2013.

Dividends

The Company has not adopted any policy regarding payment of dividends.  No dividends have been

paid during the periods shown.

Income Taxes

Income taxes are provided for using the liability method of accounting. A deferred tax asset or liability

is recorded for all temporary differences between financial and tax reporting. Deferred tax expense

(benefit) results from the net change during the year in deferred tax assets and liabilities.  Valuation

allowances are established when necessary to reduce deferred tax assets to the amount expected to more

likely than not be realized in future tax returns. Tax law and rate changes are reflected in income in the

period such changes are enacted.

Revenue Recognition

The Company recognizes revenue when there is persuasive evidence of an arrangement, delivery has

occurred or services have been rendered, the sales price if fixed or determinable, and collectability is

reasonably assured.

Grant Revenue

Revenue from grants is generally recorded when earned as defined under the terms of the agreements. Each

grant document sets the timing of amounts that are allowed to be billed and how to bill those amounts. We generally

look at a two week time period to bill from and work on the incurred costs for the same time period and bill according

to preset amounts that are allowed to be billed for per the grant documents. This is then billed through a government

billing system, reviewed by the government department, and then payment is sent to us.

F-18



ABAKAN INC.

NOTES TO FINANCIAL STATEMENTS

FOR THE YEARS ENDING MAY 31, 2014 AND 2013

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued

Research and development costs

Research and development costs are charged to expense as incurred and are included in operating expenses. Total

research and development costs were $1,327,648 and $1,347,190 for the years ended May 31, 2014 and 2013,

respectively.

Advertising Expenses

Advertising costs are expensed as incurred. Advertising expenses are included in general and

administrative expense in the accompanying statement of operations. Total advertising expenses were none

and $6,875 for the years ended May 31, 2014 and 2013, respectively.

Shipping and Handling Costs

The Company’s shipping and handling costs are included in cost of sales for all periods presented.

Stock-Based Compensation

The Company adopted FASB ASC 718-10 and valued our employee stock based awards based on the

grant-date fair value estimated in accordance with the provisions of FASB ASC 718-10.  The Company

accounts for equity instruments issued in exchange for the receipt of goods or services from other than

employees in accordance with FASB ASC 718-10 and the conclusions reached in FASB ASC 505-10.

Costs are measured at the estimated fair market value of the consideration received or the estimated fair

value of the equity instruments issued, whichever is more reliably measurable.  The value of equity

instruments issued for consideration other than employee services is determined on the earliest of a

performance commitment or completion of performance by the provider of goods or services as defined

by FASB ASC 505-10.

Derivatives

The Company occasionally issues financial instruments that contain an embedded instrument. At

inception, the Company assesses whether the economic characteristics of the embedded derivative

instrument are clearly and closely related to the economic characteristics of the financial instrument (host

contract), whether the financial instrument that embodies both the embedded derivative instrument and

the host contract is currently measured at fair value with changes in fair value reported in earnings, and

whether a separate instrument with the same terms as the embedded instrument would meet the definition

of a derivative instrument.

If the embedded derivative instrument is determined not to be clearly and closely related to the host

contract, is not currently measured at fair value with changes in fair value reported in earnings, and the

embedded derivative instrument would qualify as a derivative instrument, the embedded derivative

instrument is recorded apart from the host contract and carried at fair value with changes recorded in

current-period earnings.

The Company determined that all embedded items associated with financial instruments at this time do

not qualify for derivative treatment, nor should those be separated from the host.

F-19



ABAKAN INC.

NOTES TO FINANCIAL STATEMENTS

FOR THE YEARS ENDING MAY 31, 2014 AND 2013

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued

Impairment of Long Lived Assets

We evaluate whether events and circumstances have occurred which indicate the remaining estimated

useful life of long lived assets, including other intangible assets, may warrant revision or the remaining

balance of an asset may not be recoverable. The measurement of possible impairment is based on a

comparison of the fair value of the related assets to the carrying value using discount rates that reflect the

inherent risk of the underlying business. Impairment losses, if any, would be recorded to the extent the

carrying value of the assets exceeds the implied fair value resulting from this calculation.  In the year

ended May 31, 2014 the Company recorded an impairment (please see Note 5).

General Accounting Policy for Contingencies

Certain conditions may exist which may result in a loss to the Company, but which will only be resolved

when one or more future events occur or fail to occur. The Company’s management and its legal counsel

assess such contingent liabilities, and such assessment inherently involves an exercise of judgment. In

assessing loss contingencies related to legal proceedings that are pending against the Company, or

unasserted claims that may result in such proceedings, the Company’s legal counsel evaluates the

perceived merits of any legal proceedings or unasserted claims as well as the perceived merits of the

amount of relief sought or expected to be sought therein.

If the assessment of a contingency indicates that it is probable that a material loss has been incurred and

the amount of the liability can be estimated, the estimated liability would be accrued in the Company’s

financial statements. If the assessment indicates that a potentially material loss contingency is not

probable but is reasonably possible, or is probable but cannot be estimated, the nature of the contingent

liability, together with an estimate of the range of possible loss if determinable and material, would be

disclosed.

Loss contingencies considered remote are generally not disclosed unless they arise from guarantees, in

which case the guarantees would be disclosed.

As of May 31, 2014 and 2013, the Company’s management believes that there are no outstanding legal

proceedings which would have a material adverse effect on the financial position of the Company.

Use of Estimates in the Preparation of Financial Statements

The preparation of financial statements in conformity with GAAP requires management to make

estimates and assumptions that affect the reported amounts of assets, the disclosure of contingent assets

and liabilities at the date of the financial statements and the reported amounts of revenues and expenses

during the reporting periods. The more significant areas requiring the use of estimates include asset

impairment, stock-based compensation, beneficial conversion features on debt instruments, and future

income tax amounts. Management bases its estimates on historical experience and on other assumptions

considered to be reasonable under the circumstances. Actual results may differ from the estimates.

F-20



ABAKAN INC.

NOTES TO FINANCIAL STATEMENTS

FOR THE YEARS ENDING MAY 31, 2014 AND 2013

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued

Subsequent Events

In accordance with ASC 855-10 “Subsequent Events”, the Company has evaluated subsequent events and

transactions for potential recognition or disclosure in the financial statements through the date the

financial statements were issued (Note 17).

NOTE 3 – GOING CONCERN

The accompanying financial statements have been prepared assuming that the Company will continue as

a going concern.  The Company has net losses for the period of June 27, 2006 (inception) to the year

ended May 31, 2014, of $19,502,097, and a working capital deficit of $7,927,372. These conditions

raise substantial doubt about the Company’s ability to continue as a going concern. The Company’s

continuation as a going concern is dependent on its ability to develop additional sources of capital,

and/or achieve profitable operations and positive cash flows. Management’s plan is to aggressively

pursue its present business plan. Since inception we have funded our operations through the issuance of

common stock, debt financing, and related party loans and advances, and we will seek additional debt or

equity financing as required. The accompanying financial statements do not include any adjustments

that might result from the outcome of this uncertainty.

NOTE 4 – PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consisted of the following:

May 31, 2014

May 31, 2013

Machinery and equipment

$

4,298,705

$

4,227,464

Construction in progress

1,282,370

692,655

Computer equipment and office furniture

54,139

47,032

Leasehold improvements

835,593

840,953

6,470,807

5,808,104

Less accumulated depreciation and amortization

(931,258)

(213,097)

$

5,539,549

$

5,595,007

Depreciation and amortization expense was $718,161 and $100,488 for the years ended May 31, 2014 and

2013, respectively.  The Company recognized a gain of $510 and $921 for equipment sold the years

ending May 31, 2014 and 2013, respectively.

F-21



ABAKAN INC.

NOTES TO FINANCIAL STATEMENTS

FOR THE YEARS ENDING MAY 31, 2014 AND 2013

NOTE  5    PATENTS  AND  LICENSES

Patents and licenses consist of the following:

May 31, 2014

May 31, 2013

Patents

$

171,720    $

157,546

Website

21,000

21,000

Intellectual Property Research and Development

6,009,600

6,120,200

Licenses

--0--

1,843,200

6,202,320

8,141,946

Less accumulated amortization

(95,634)

(596,783)

$

6,106,686    $

7,545,163

Amortization expense was $26,423 and $276,235 for the years ended May 31, 2014 and 2013,

respectively. In the years ended May 31, 2014 and 2013, we have capitalized an additional $35,337 and

$45,083, respectively, on patents and licenses, and have begun amortizing those according to our policy.

In August 2013, we wrote off the value of a license agreement that is no longer in use. Accordingly, we

adjusted out in intangibles – licenses by the carrying value of $1,917,748, and the accompanying

accumulated amortization of $581,467, and we have discontinued amortization also.

On May 31, 2014, we analyzed our long lived intangibles for impairment and found that an adjustment of

$110,600 in our Intellectual Property – Research and Development was needed in order to reflect the true

value of our intangibles.

Future amortization patents and licenses are presented in the table below:

For the years ended May 31,

2015

29,321

2016

22,785

2017

19,561

2018

19,561

2019 and beyond

5,858

$   97,086

Patent license agreement

The Company has an exclusive commercial patent license agreement with a third party which requires the

Company to invest in the research and development of technology and the market for products by

committing to a certain level of personnel hours and $350,000 of expenditures.

The patent license agreement required a total of $50,000 in execution fees which are included in

intangible assets. The patent license agreements requires royalty payments equal to 2.5% of net sales of

the product sold by the Company beginning after the first commercial sale. For the first calendar year

after the achievement of a certain milestone and the following two calendar years during the term of the

agreement, the Company will pay a minimum annual royalty payment of $10,000, $15,000 and $20,000

respectively. During the years ended May 31, 2014 and 2013, none and $19,742 of royalty payments were

made, respectively.

F-22



ABAKAN INC.

NOTES TO FINANCIAL STATEMENTS

FOR THE YEARS ENDING MAY 31, 2014 AND 2013

NOTE 6 – ASSIGNMENT AGREEMENT – MESOCOAT

On March 25, 2011, the Company entered into an assignment agreement (the Agreement) whereby it

would assume the exclusive rights to distribute MesoCoat’s products intended for applications specific to

the oil and gas pipeline industry in consideration of $250,000.  The Agreement was entered into with a

company who entered into an exclusive distribution agreement with MesoCoat dated October 10, 2008

which was in effect for 10 years following the original date of the exclusive distribution agreement.  On

May 31, 2011, the Company completed the transfer of consideration and assumed all rights to the

agreement.  We commenced amortization on June 1, 2012, over the remaining term of 76 months, and

have recorded $39,474 and $39,472 in amortization expense as of the years ended May 31, 2014 and

2013, respectively.

NOTE 7 – INVESTMENT IN NON-CONTROLLING INTEREST

Powdermet, Inc.

The Company purchased a forty one percent (41%) interest  in Powdermet,  Inc. (“Powdermet”),  on June

28, 2010  from Kennametal in  exchange  for  one  million  six hundred  fifty thousand  dollars  ($1,650,000).

On  May  31,  2014,  we  participated  in  a  share  exchange  agreement  in  which  we  exchanged  310,000

shares of Powdermet’s common stock in exchange for 98,000 shares of common stock of MesoCoat and

2,000,000  shares  of  Abakan’s  restricted  common  shares.  Because  of  this  transaction  our  interest  is  now

a fully diluted 24.9% interest in Powdermet.

Powdermet was formerly the parent company of MesoCoat, owning 66% of MesoCoat at May 31, 2011.

Andy Sherman serves as the chief executive officer of Powdermet, in addition to his duties as a member

of the Company’s board of directors. Through the Company’s purchase of 41% of Powdermet, it also

gained indirect ownership of the additional shares of MesoCoat that Powdermet owns. On June 13, 2013,

Powdermet formed a wholly owned subsidiary, Terves Inc.  The results for Terves Inc. have been

consolidated in the results of Powdermet.

We have analyzed our investment in accordance of “Investments – Equity Method and Joint Ventures”

(ASC 323), and concluded that when the stock purchase agreement was completed our 24% minority

interest investment gave us significant influence over Powdermet’s business actions, board of directors,

and its management, and therefore we account for our investment using the Equity Method. The table

below reconciles our investment amount and equity method amounts to the amount on the accompanying

balance sheet.

Investment balance, May 31, 2012

$

2,710,189

Equity in loss for the year ended May 31, 2013

(260,877)

Investment balance, May 31, 2013

$

2,449,312

Equity in loss for year ended May 31, 2014

(126,519)

Reduction in Investment for Share Exchange

(170,976)

Investment balance, May 31, 2014

$

2,151,817

Powdermet’s ownership in MesoCoat was diluted when the Company exercised its initial option to

purchase 86,156 shares of common stock from MesoCoat, and was further diluted when the Company

completed the additional purchase of 120,710 shares of MesoCoat on May 31, 2014. Powdermet’s

ownership in MesoCoat as of May 31, 2013 is 47.50% and as of May 31, 2014 is 11.92%.

F-23



ABAKAN INC.

NOTES TO FINANCIAL STATEMENTS

FOR THE YEARS ENDING MAY 31, 2014 AND 2013

NOTE 7 – INVESTMENT IN NON-CONTROLLING INTEREST - continued

Below is a table with summary financial results of operations and financial position of Powdermet:

Powdermet Inc. and Subsidiary

For the year ended

For the year ended

May 31, 2014

May 31, 2013

Equity Percentage

24.9%

41%

Condensed income statement information:

Total revenues

$

1,952,591     $

2,178,117

Total cost of revenues

975,149

1,188,988

Gross margin

977,442

989,129

Total expenses

(995,945)

(946,873)

Other (expense)

(1,584,970)

(1,057,278)

Benefit from income taxes

1,294,889

378,737

Net (loss)

$

(308,584)     $     $

(636,285)

Company’s equity in net profit

$

(126,519)     $     $

(260,877)

Condensed balance sheet information:

May 31, 2014

May 31, 2013

Total current assets

$

822,467     $     $

533,168

Total non-current assets

3,088,733

3,080,248

Total assets

$

3,911,200     $     $

3,613,416

Total current liabilities

$

424,085     $     $

260,897

Total non-current liabilities

924,286

1,676,463

Total equity

2,562,829

1,676,056

Total liabilities and equity

$

3,911,200     $     $

3,613,416

Share Exchange and Purchase Transaction

On May 31, 2014, the Company, MesoCoat and Powdermet, entered into an Accord and Satisfaction of

Investment Agreement (“Investment Accord and Satisfaction”), in order to terminate the Investment

Agreement and accelerate the plan to increase the Company’s direct ownership of MesoCoat. The

Investment Accord and Satisfaction permitted the Company to convert its additional investment in

MesoCoat of $6,169,236 to equity, and exchange a portion of its Powdermet shares and 2,000,000 of the

Company’s shares for a portion of Powdermet’s MesoCoat shares. The effect of the transaction was that

the Company increased its ownership position in MesoCoat to 88.08% direct and 90.5% direct and

indirect ownership, respectively, in exchange it decreased its ownership position in Powdermet to 24.9%

from 40.5%.

In accordance with ASC 810-10, whenever a parent who has control of a subsidiary increases their

ownership in the subsidiary, any difference between the consideration paid over the adjustment to the

carrying amount of the Non-Controlling Interest is recognized as a change directly into Paid In Capital.

As a result, we reduced the non-controlling interest in our balance sheet by $561,944 and also recorded a

direct charge against paid in capital of $2,189,032.

F-24



ABAKAN INC.

NOTES TO FINANCIAL STATEMENTS

FOR THE YEARS ENDING MAY 31, 2014 AND 2013

NOTE 8 – LOANS PAYABLE

As of May 31, 2014 and 2013, the loans payable balance comprised of:

Description

May 31, 2014

May 31, 2013

Convertible demand note to an unrelated  entity bearing 5% interest per annum which matures

$

1,500,000     $

1,500,000

on September 15, 2014.

Convertible demand note to an unrelated  entity bearing 5% interest per annum which matures

200,000

175,163

on September 15, 2014. The note is shown net of a discount of $-0- and $24,837, respectively,

attributable to the beneficial conversion feature, and an effective interest rate of 176% due to

attached warrants.

Convertible demand note to an unrelated  entity bearing 5% interest per annum which matured

500,000

387,473

on July 14, 2014. The note is shown net of a discount of $-0- and $112,527, respectively,

attributable to the beneficial conversion feature, and an effective interest rate of 143% due to

attached warrants.

Uncollateralized demand note to an unrelated entity bearing 8% interest per annum

70,000

70,000

Uncollateralized demand note to an unrelated entity bearing 8% interest per annum

3,850

3,850

Uncollateralized demand note to an unrelated entity bearing 8% interest per annum

50,000

--

Uncollateralized demand note to an unrelated entity bearing 8% interest per annum

19,350

19,350

Uncollateralized demand note to an unrelated entity bearing 8% interest per annum

20,000

20,000

Uncollateralized demand note to a related entity bearing 8% interest per annum

65,000

--

Uncollateralized demand note to an unrelated entity bearing 8% interest per annum

15,000

--

Uncollateralized demand note to an unrelated entity bearing 8% interest per annum

43,600

--

Uncollateralized demand note to a related entity bearing 8% interest per annum

26,685

--

Uncollateralized demand note to a related entity bearing 8% interest per annum

79,494

--

Uncollateralized demand note to an unrelated entity bearing 5% interest per annum

50,000

--

Uncollateralized demand note to an unrelated entity bearing 6% interest per annum

20,000

--

Uncollateralized demand note to an unrelated entity bearing 8% interest per annum

30,867

--

Uncollateralized demand note to an unrelated entity bearing 5% interest per annum

250,000

--

Uncollateralized demand note to an unrelated entity bearing 5% interest per annum

130,000

--

Collateralized demand note to an unrelated entity bearing 5% interest per annum

1,341,963

--

Collateralized term note to an unrelated  entity bearing 5.15% interest per annum which

132,158

--

matures on September 7, 2018.

Uncollateralized demand note to a related entity bearing 8% interest per annum

21,308

--

Uncollateralized demand note to a related entity bearing 7% interest per annum

32,313

--

Uncollateralized demand note to an unrelated entity bearing 8% interest per annum

35,000

--

Uncollateralized demand note to an unrelated entity bearing 7% interest per annum

20,000

--

Collateralized note to an unrelated entity bearing 1% interest for the first year and then 7%

1,000,000

1,000,000

per annum for years two – seven.

Uncollateralized demand note to a related entity bearing 8% interest per annum

-0-

30,000

Convertible demand note to an unrelated  entity bearing 7.5% imputed interest per annum

40,134

48,228

which matures on July 10, 2018.

Uncollateralized demand notes to an unrelated entity bearing 5% interest per annum

405,000

405,877

Capital leases payable to various vendors expiring in various years through September 2016;

85,505

91,881

collateralized by certain equipment with a cost of $205,157.

Uncollateralized demand note to an unrelated entity for royalties shown net of discount of $-

-0-

1,576,892

0- and $23,108, respectively

6,187,226     $

5,328,714

Less current liabilities

5,077,080

1,020,956

Total long term liabilities

$

1,110,146     $

4,307,758

We also owed $306,040 and $155,812 in accrued interest for the above notes as of May 31, 2014 and

2013, respectively. We also amortized $137,364 and $838,289 in discount on debt for the years ended

May 31, 2014 and 2013, respectively.

F-25



ABAKAN INC.

NOTES TO FINANCIAL STATEMENTS

FOR THE YEARS ENDING MAY 31, 2014 AND 2013

NOTE 8 – LOANS PAYABLE - continued

As of May 31, 2014 and 2013, we had no restrictive covenants attached to any of the above referenced

notes except for the $1,000,000 Development Loan which requires MesoCoat to create or maintain 46

jobs by the 3rd anniversary date of the completion of the project in Euclid, Ohio. If the 46 jobs are not

created or maintain by such date, the interest rate will increase from 7% to 10% per annum.

Future maturity of our notes payable is presented in the table below:

For the years ended May 31,

2015

$      5,077,080

2016

213,277

2017

218,790

2018

208,391

2019 and beyond

469,688

$   6,187,226

Development Loan - MesoCoat

On October 2, 2012 we began drawing against a development loan from the State of Ohio with a

maximum amount of $1,000,000, and bearing an interest rate of one percent the first year after the

disbursement date, and then for years two through seven, the interest rate is seven percent. On October 2,

2012, we received our first payout from this loan of $584,066.  We received three additional draws on

October 5, 2012, February 7, 2013, and April 30, 2013 of $316,477, $69,441, and $30,016, respectively,

for a total of $1,000,000. The loan is to be repaid over seven years, and is collateralized by the project

equipment, one CermaClad system and automated pipe blasting equipment, and all inventory,

equipment, all fixtures, all intangibles and accounts receivables owned by MesoCoat.

Promissory notes

The Company extended a $1,500,000 and $200,000 note to September 14, 2014 that was due to mature on

March 16, 2013 and June 7, 2013, respectively.  The accrued interest on both notes and a creditor fee was

placed into a new $405,000 note bearing interest at 8% and will mature on September 14, 2014. In

addition to the extension date, certain force conversion options were modified on each of the original

notes.

On October 30, 2013, Abakan and MesoCoat entered into an agreement with an unrelated entity in which

$680,000 of uncollateralized demand notes and $9,000 in accrued interest were exchanged for a

$689,000, 5% secured promissory note maturing on April 29, 2014.   The agreement also includes the

commitment by the unrelated entity to loan MesoCoat $80,000 on closing and three loans of $180,000

loans on November 11, 2013, December 10, 2013 and January 10, 2014 under the same terms of the

$689,000 note. As of February 28, 2014, the Company had received the additional $180,000 tranches

dated December 10, 2013, and January 10, 2014. On April 27, 2014, the aggregate total of these notes,

$1,309,000, and accrued outstanding interest of $32,963 were combined into a new note having the same

terms of the original notes above, and will mature on April 27, 2015.

F-26



ABAKAN INC.

NOTES TO FINANCIAL STATEMENTS

FOR THE YEARS ENDING MAY 31, 2014 AND 2013

NOTE 9 – STOCKHOLDERS' EQUITY

Common Shares – Authorized

The Company has 2,500,000,000 common shares authorized at a par value of $0.0001 per share and

50,000,000 shares of preferred stock, par value $0.0001 per share.  All common stock shares have equal

voting rights, are non-assessable and have one vote per share.  Voting rights are not cumulative and,

therefore, the holders of more than 50% of the common stock could, if they choose to do so, elect all the

directors of the Company.

Common Stock Issuances

Private placements

For the years ended May 31, 2014 and 2013, we issued the following shares:

On July 30, 2012, we closed a private placement for $525,000, or 300,000 units consisting of one share of

our restricted common stock and one-half common stock warrant to purchase shares of our common

stock, with a purchase price of $2.00 per share and an expiration date of two years from the closing. In

connection with this placement we had no offering costs for a net of $525,000.

On September 28, 2012, we closed a private placement for $262,500, or 150,000 units consisting of one

share of our restricted common stock and one-half common stock warrant to purchase shares of our

common stock, with a purchase price of $2.00 per share and an expiration date of two  years from the

closing. In connection with this placement we had no offering costs for a net of $262,500.

On October 18, 2012, we closed a private placement for $230,000, or 100,000 units consisting of one

share of our restricted common stock and one-half common stock warrant to purchase shares of our

common stock, with a purchase price of $2.70 per share and an expiration date of two  years from the

closing. In connection with this placement we had no offering costs for a net of $230,000.

On November 26, 2012, we closed a private placement for $16,100, or 7,000 units consisting of one share

of our restricted common stock and one-half common stock warrant to purchase shares of our common

stock, with a purchase price of $2.70 per share and an expiration date of two years from the closing. In

connection with this placement we had no offering costs for a net of $16,100.

On November 30, 2012, we closed a private placement for $62,715, or 25,000 units consisting of one

share of our restricted common stock and one-half common stock warrant to purchase shares of our

common stock, with a purchase price of $2.70 per share and an expiration date of two  years from the

closing. In connection with this placement we had no offering costs for a net of $62,715.

On December 3, 2012, we closed two private placements for a total of $279,000, or 121,500 units

consisting of one share of our restricted common stock and one-half common stock warrant to purchase

shares of our common stock, with a purchase price of $2.70 per share and an expiration date of two years

from the closing. In connection with this placement we had no offering costs for a net of $279,000.

F-27



ABAKAN INC.

NOTES TO FINANCIAL STATEMENTS

FOR THE YEARS ENDING MAY 31, 2014 AND 2013

NOTE 9 – STOCKHOLDERS' EQUITY - continued

Common Stock Issuances - continued

Private placements - continued

On December 8, 2012, we closed a private placement for a total of $50,600, or 22,000 units consisting of

one share of our restricted common stock and one-half common stock warrant to purchase shares of our

common stock, with a purchase price of $2.70 per share and an expiration date of two  years from the

closing. In connection with this placement we had no offering costs for a net of $50,600.

On December 19, 2012, we closed two private placements for a total of $161,000, or 70,000 units

consisting of one share of our restricted common stock and one-half common stock warrant to purchase

shares of our common stock, with a purchase price of $2.70 per share and an expiration date of two years

from the closing. In connection with this placement we had no offering costs for a net of $161,000.

On December 19, 2012, we closed a private placement for $103,500, or 45,000 units consisting of one

share of our restricted common stock and one-half common stock warrant to purchase shares of our

common stock, with a purchase price of $2.70 per share and an expiration date of two  years from the

closing. In connection with this placement we had no offering costs for a net of $103,500.

On December 20, 2012, we closed a private placement for $176,000, or 76,522 units consisting of one

share of our restricted common stock and one-half common stock warrant to purchase shares of our

common stock, with a purchase price of $2.70 per share and an expiration date of two  years from the

closing. In connection with this placement we had no offering costs for a net of $176,000.

On December 30, 2012, we closed a private placement for $230,000, or 100,000 units consisting of one

share of our restricted common stock and one-half common stock warrant to purchase shares of our

common stock, with a purchase price of $2.70 per share and an expiration date of two  years from the

closing. In connection with this placement we had no offering costs for a net of $230,000.

On March 18, 2013, we closed a private placement for $101,200, or 44,000 units consisting of one share

of our restricted common stock and one-half common stock warrant to purchase shares of our common

stock, with a purchase price of $2.70 per share and an expiration date of two years from the closing. In

connection with this placement we had no offering costs for a net of $101,200.

On April 1, 2013, we issued 15,000 shares of our common stock for $1.50 per share, to a warrant holder

exercising previously issued warrants for a total of $22,500.

On April 10, 2013, we closed a private placement for $23,000 or 10,000 units consisting of one share of

our restricted common stock and one-half common stock warrant to purchase shares of our common

stock, with a purchase price of $2.70 per share and an expiration date of two years from the closing. In

connection with this placement we had no offering costs for a net of $23,000.

On April 18, 2013, we issued 50,000 shares of our common stock for $1.50 per share, to a warrant holder

exercising previously issued warrants for a total of $75,000.

F-28



ABAKAN INC.

NOTES TO FINANCIAL STATEMENTS

FOR THE YEARS ENDING MAY 31, 2014 AND 2013

NOTE 9 – STOCKHOLDERS' EQUITY - continued

Common Stock Issuances - continued

Private placements – continued

On April 22, 2013, we closed a private placement for $101,400 or 39,000 units consisting of one share of

our restricted common stock and one-half common stock warrant to purchase shares of our common

stock, with a purchase price of $3.00 per share and an expiration date of two years from the closing. In

connection with this placement we had no offering costs for a net of $101,400.

On April 23, 2013, we closed a private placement for $202,800 or 78,000 units consisting of one share of

our restricted common stock and one-half common stock warrant to purchase shares of our common

stock, with a purchase price of $3.00 per share and an expiration date of two years from the closing. In

connection with this placement we had no offering costs for a net of $202,800.

On April 29, 2013, we closed a private placement for $202,800 or 78,000 units consisting of one share of

our restricted common stock and one-half common stock warrant to purchase shares of our common

stock, with a purchase price of $3.00 per share and an expiration date of two years from the closing. In

connection with this placement we had no offering costs for a net of $202,800.

On April 30, 2013, we closed a private placement for $35,100 or 13,500 units consisting of one share of

our restricted common stock and one-half common stock warrant to purchase shares of our common

stock, with a purchase price of $3.00 per share and an expiration date of two years from the closing. In

connection with this placement we had no offering costs for a net of $35,100.

On May 7, 2013, we issued 7,500 shares of our common stock for $1.50 per share, to a warrant holder

exercising previously issued warrants for a total of $11,250.

On May 9, 2013, we closed a private placement for $31,200 or 12,000 units consisting of one share of our

restricted common stock and one-half common stock warrant to purchase shares of our common stock,

with a purchase price of $3.00 per share and an expiration date of two years from the closing. In

connection with this placement we had no offering costs for a net of $31,200.

On May 17, 2013, we issued 32,733 shares of our common stock for $1.50 per share, to a warrant holder

exercising previously issued warrants for a total of $49,099.

On May 21, 2013, we issued 82,500 shares of our common stock for $1.50 per share, to a warrant holder

exercising previously issued warrants for a total of $123,750.

On May 21, 2013, we closed a private placement for $10,140 or 3,900 units consisting of one share of our

restricted common stock and one-half common stock warrant to purchase shares of our common stock,

with a purchase price of $3.00 per share and an expiration date of two years from the closing. In

connection with this placement we had no offering costs for a net of $10,140.

On May 29, 2013, we issued 82,500 shares of our common stock for $1.50 per share, to a warrant holder

exercising previously issued warrants for a total of $123,750.

F-29



ABAKAN INC.

NOTES TO FINANCIAL STATEMENTS

FOR THE YEARS ENDING MAY 31, 2014 AND 2013

NOTE 9 – STOCKHOLDERS' EQUITY - continued

Common Stock Issuances - continued

Private placements – continued

On April 9, 2014, we closed a private placement for $40,000, or 40,000 units consisting of one share of

our restricted common stock and one-half common stock warrant to purchase shares of our common

stock, with a purchase price of $1.50 per share and an expiration date of two years from the closing. In

connection with this placement we had no offering costs for a net of $40,000.

On May 30, 2014, we closed several private placements for an aggregate $48,000, or 60,000 units

consisting of one share of our restricted common stock and one-half common stock warrant to purchase

shares of our common stock, with a purchase price of $1.50 per share and an expiration date of two years

from the closing. In connection with this placement we had no offering costs for a net of $48,000.

Conversion of debt to shares

For the years ended May 31, 2014 and 2013, we issued the following shares for conversion of debt to

shares:

On November 30, 2012, we converted several debt obligations for $168,033, or 73,058 units consisting of

one share of our restricted common stock and one-half common stock warrant to purchase shares of our

common stock, with a purchase price of $2.70 per share and an expiration date of two  years from the

closing. In connection with this placement we incurred stock expense on conversion of $29,223.

On November 30, 2012, we converted several accounts payables for $46,000, or 20,000 units consisting

of one share of our restricted common stock and one-half common stock warrant to purchase shares of

our common stock, with a purchase price of $2.70 per share and an expiration date of two years from the

closing. In connection with this placement we incurred stock expense on conversion of $8,000.

On November 30, 2012, we converted several accounts payable for $30,000, or 13,043 units consisting of

one share of our restricted common stock and one-half common stock warrant to purchase shares of our

common stock, with a purchase price of $2.70 per share and an expiration date of two  years from the

closing. In connection with this placement we incurred stock expense on conversion of $5,217.

On February 21, 2013, we converted accounts payables due to related party for $54,000, or 20,000 units

consisting of one share of our restricted common stock. In connection with this placement we did not

incurred any stock expense.

On March 18, 2013, we converted several debt obligations for $660,100, or 287,000 units consisting of

one share of our restricted common stock and one-half common stock warrant to purchase shares of our

common stock, with a purchase price of $2.70 per share and an expiration date of two  years from the

closing. In connection with this placement we incurred stock expense on conversion of $93,300.

On March 25, 2013, we converted several accounts payables for $38,000, or 16,522 units consisting of

one share of our restricted common stock and one-half common stock warrant to purchase shares of our

common stock, with a purchase price of $2.70 per share and an expiration date of two  years from the

closing. In connection with this placement we incurred stock expense on conversion of $5,783.

F-30



ABAKAN INC.

NOTES TO FINANCIAL STATEMENTS

FOR THE YEARS ENDING MAY 31, 2014 AND 2013

NOTE 9 – STOCKHOLDERS' EQUITY - continued

Common Stock Issuances - continued

Conversion of debt to shares - continued

On April 13, 2013, we converted one of our convertible debentures for $500,000 to 500,000 shares of our

restricted common stock with a conversion price of $1.00 per share. As part of the original convertible

debenture agreement, the holder received one-half common stock warrant to purchase shares of our

common stock upon conversion, with a purchase price of $1.25 per share and an expiration date of two

years from the closing.

On April 15, 2013, we converted several debt obligations for $310,500, or 135,000 units consisting of one

share of our restricted common stock and one-half common stock warrant to purchase shares of our

common stock, with a purchase price of $2.70 per share and an expiration date of two  years from the

closing. In connection with this placement we incurred stock expense on conversion of $47,250.

On May 7, 2013, we converted a note payable for $26,000, or 10,000 units consisting of one share of our

restricted common stock and one-half common stock warrant to purchase shares of our common stock,

with a purchase price of $3.00 per share and an expiration date of two years from the closing. In

connection with this placement we incurred stock expense on conversion of $6,800.

On May 15, 2013, we converted a note payable for $26,000, or 10,000 units consisting of one share of our

restricted common stock and one-half common stock warrant to purchase shares of our common stock,

with a purchase price of $3.00 per share and an expiration date of two years from the closing. In

connection with this placement we incurred stock expense on conversion of $6,000.

On May 31, 2013, we converted several debt obligations for $70,002, or 26,924 units consisting of one

share of our restricted common stock and one-half common stock warrant to purchase shares of our

common stock, with a purchase price of $3.00 per share and an expiration date of two  years from the

closing. In connection with this placement we incurred stock expense on conversion of $16,547.

On December 4, 2013, we issued 50,000 shares of our common stock for exercise of stock warrants

converted valued at $32,500, and paid for by an outstanding balance of accounts payable. In connection

with this placement we incurred stock expense on conversion of $30,500.

On April 9, 2014, we agreed to issue $216,000 or 216,000 units consisting of one share of our restricted

common stock and one-half common stock warrant to purchase shares of our common stock, with a

purchase price of $1.50 per share and an expiration date of two years from the closing for services to be

rendered. In connection with this placement we had no offering costs for a net of $216,000.

On April 9, 2014, we converted several debt obligations for an aggregate total of $751,414, or 939,268

units consisting of one share of our restricted common stock and one-half common stock warrant to

purchase shares of our common stock, with a purchase price of $1.20 per share and an expiration date of

two years from the closing. In connection with these placements we incurred stock expense on conversion

of $140,890.

F-31



ABAKAN INC.

NOTES TO FINANCIAL STATEMENTS

FOR THE YEARS ENDING MAY 31, 2014 AND 2013

NOTE 9 – STOCKHOLDERS' EQUITY - continued

Common Stock Issuances - continued

Conversion of debt to shares - continued

On April 9, 2014, we converted a note for $400,000, or 500,000 units consisting of one share of our

restricted common stock and one-half common stock warrant to purchase shares of our common stock,

with a purchase price of $1.20 per share and an expiration date of two years from the closing. In

connection with this placement we incurred stock expense on conversion of $75,000.

Share based compensation

For the years ended May 31, 2014 and 2013, Abakan issued the following shares for services and

compensation:

On June 1, 2012, we issued 12,500 shares of our common stock for services performed valued at $32,625.

On August 20, 2012, we issued 12,500 shares of our common stock for services performed valued at

$23,125.

On July 1, 2012, we issued 12,500 shares of our common stock for services performed valued at $25,000.

On July 9, 2012, we issued 10,000 shares of our common stock for services performed valued at $20,000.

On August 7, 2012, we issued 10,000 shares of our common stock for services performed valued at

$19,000.

On September 18, 2012, we issued 25,000 shares of our common stock for services performed valued at

$42,750.

On November 29, 2012, we issued 20,000 shares of our common stock for services performed valued at

$55,000, including costs of $21,000.

On January 8, 2013, we issued 21,429 shares of our common stock for services performed valued at

$60,000.

On February 21, 2013, we issued 10,000 shares of our common stock for future services to be performed

valued at $27,000.

On March 18, 2013, we issued 15,000 shares of our common stock for future services performed valued

at $42,000.

On March 18, 2013, we issued 100 shares of our common stock for a raffle prize valued at $270.

On March 18, 2013, we issued 33,622 shares of our common stock for future services to be performed

valued at $85,200.

F-32



ABAKAN INC.

NOTES TO FINANCIAL STATEMENTS

FOR THE YEARS ENDING MAY 31, 2014 AND 2013

NOTE 9 – STOCKHOLDERS' EQUITY - continued

Common Stock Issuances - continued

Share based compensation - continued

On April 2, 2013, we issued 23,600 shares of our common stock for future services performed valued at

$63,720.

On October 25, 2013, we issued 19,802 shares of our common stock for services performed valued at

$60,000.

On October 25, 2013, we issued 25,000 shares of our common stock for services performed valued at

$73,500.

On October 25, 2013, we issued 57,242 shares of our common stock to the MesoCoat Inc. Supplemental

Discretionary Tax-Qualified Profit Sharing Plan and Trust valued at $161,995.

On October 25, 2013, we issued 25,699 shares of our common stock to the Powdermet, Inc. Supplemental

Discretionary Tax-Qualified Profit Sharing Plan and Trust valued at $72,728.

On December 4, 2013, we issued 10,000 shares of our common stock for services performed valued at

$12,000.

On January 3, 2014, we issued 16,649 shares of our common stock per the terms of his

employment agreement valued at $20,000.

On April 9, 2014, we agreed to issue, and aggregate amount of $70,000 or 70,000 share of our

restricted common stock, debt owed to two unrelated vendors. In connection with this placement we had

no offering costs for a net of $70,000.

On April 22, 2014, we issued 30,000 shares of our common stock for services performed valued at

$24,000.

On May 6, 2014, we issued 20,000 shares of our common stock for services performed valued at $14,200.

On May 30, 2014, we issued 10,000 shares of our common stock for services performed valued at

$12,000.

Shares returned and cancelled

On May 8, 2013, we received back to the Treasury 31,000 shares of our common stock that were issued

for consulting services and the services were never performed valued at $35,030. Subsequently these

shares were cancelled.

On May 8, 2013, we received back to the Treasury 20,000 shares of our common stock that were issued

for consulting services and the services were never performed valued at $23,600. Subsequently these

shares were cancelled.

F-33



ABAKAN INC.

NOTES TO FINANCIAL STATEMENTS

FOR THE YEARS ENDING MAY 31, 2014 AND 2013

NOTE 9 – STOCKHOLDERS' EQUITY - continued

Common Stock Warrants

In connection with the above private placement we valued the common stock warrants granted during

the years ended May 31, 2014 and 2013, using the Black-Scholes model with the following

assumptions:

July 30,

September

October

November

November

December

2012

28, 2012

18, 2012

26, 2012

30, 2012

3, 2012

Expected volatility (based

102.68%

89.29%

89.62%

81.57%

81.63%

81.48%

on historical volatility)

Expected dividends

0.00

0.00

0.00

0.00

0.00

0.00

Expected term in years

2.00

2.00

2.00

2.00

2.00

2.00

Risk-free rate

0.23%

0.23%

0.29%

0.27%

0.25%

0.25%

December

December

March

April 4, 7,

May 5,8,

7, 8, 18,

30, 2012

18,22,25

10, 23, 29,

9, 10,

19, and 20,

, 2013

2013

15, 31,

2012

2013

Expected volatility (based

81.34%

81.46%

79.48% -

79.45% -

73.16 -

on historical volatility)

79.53%

79.63%

79.45%

Expected dividends

0.00

0.00

0.00

0.00

0.00

Expected term in years

2.00

2.00

2.00

2.00

2.00

Risk-free rate

0.25 –

0.25%

0.24-

0.20 –

0.20% -

.28%

.26%

0.24%

0.30%

April 9,

May 30,

2014

2014

Expected volatility (based

135.66%

135.39%

on historical volatility)

Expected dividends

0.00

0.00

Expected term in years

2.00

2.00

Risk-free rate

0.37%

0.37%

The expected volatility assumption was based upon historical stock price volatility measured on a daily

basis. The risk-free interest rate assumption is based upon U.S. Treasury bond interest rates appropriate

for the term of the Company’s warrants. The dividend yield assumption is based on our history and

expectation of dividend payments. All warrants are immediately exercisable upon granting.

F-34



ABAKAN INC.

NOTES TO FINANCIAL STATEMENTS

FOR THE YEARS ENDING MAY 31, 2014 AND 2013

NOTE 9 – STOCKHOLDERS' EQUITY - continued

Common Stock Warrants

A summary of the common stock warrants granted during the years ended May 31, 2014 and 2013 is

presented below:

Weighted

Weighted

Average

Average

Remaining

Aggregate

Number of

Exercise

Contractual

Intrinsic

Options

Price

Terms (In Years)

Value

Balance at June 1, 2012

2,066,296

$

1.64

Granted

1,186,934

2.35

Exercised

(270,233)

1.50

Forfeited or expired

(140,005)

1.50

Balance at May 31, 2013

2,842,992

$

1.80

1.00 years

$

--

Exercisable at May 31, 2013

2,842,992

$

1.80

1.00 years

$

--

Weighted average fair value of

Warrants granted during the year

ended May 31, 2013

$

2.35

Balance at June 1, 2013

2,842,992

$

1.80

Granted

877,634

1.41

Exercised

-

-

Forfeited or expired

(1,681,058)

1.89

Balance at May 31, 2014

2,039,568

$

1.89

1.15 years

$

--

Exercisable at May 31, 2014

2,039,568

$

1.89

1.15 years

$

--

Weighted average fair value of

warrants granted during the year

ended May 31, 2014

$

1.89

The following table summarizes information about the common stock warrants outstanding at May 31,

2014:

Warrants Exercisable

Weighted

Weighted

Weighted

Range of

Average

Average

Average

Exercise

Number

Remaining

Exercise

Number

Exercise

Price

Outstanding

Contractual Life

Price

Exercisable

Price

$

1.20

724,634

1.89 Years

$

1.20

724,634     $

1.20

$

1.50

378,000

1.19 Years

$

1.50

378,000     $

1.50

$

2.00

225,000

.22 Years

$

2.00

225,000     $

2.00

$

2.70

576,272

.63 Years

$

2.70

576,272     $

2.70

$

3.00

135,662

.88 Years

$

3.00

135,662     $

3.00

2,039,568

1.15 Years

$

1.89

2,039,568     $

1.89

F-35



ABAKAN INC.

NOTES TO FINANCIAL STATEMENTS

FOR THE YEARS ENDING MAY 31, 2014 AND 2013

NOTE 10 – EARNINGS-PER-SHARE CALCULATION

Basic earnings per common share for the years ended May 31, 2014 and 2013 are calculated by dividing

net income by weighted-average common shares outstanding during the period. Diluted earnings per

common share for the years ended May 31, 2014 and 2013 are calculated by dividing net income by

weighted-average common shares outstanding during the period plus dilutive potential common shares,

which are determined as follows:

For the year ended

For the year ended

May 31, 2014

May 31, 2013

Net earnings from operations

$

(5,956,310)     $

(7,223,423)

Weighted-average common shares

64,663,650

62,443,108

Warrants

-

-

Options to purchase common stock

-

-

Dilutive potential common shares

64,663,650

62,443,108

Net earnings per share from operations:

Basic

$

(0.09)     $

(0.12)

Diluted

$

(0.09)     $

(0.12)

Dilutive potential common shares are calculated in accordance with the treasury stock method, which

assumes that proceeds from the exercise of all warrants and options are used to repurchase common stock

at market value. The amount of shares remaining after the proceeds are exhausted represents the

potentially dilutive effect of the securities. The increasing number of warrants used in the calculation is a

result of the increasing market value of the Company’s common stock.

In periods where losses are reported the weighted-average number of common shares outstanding

excludes common stock equivalents because their inclusion would be anti-dilutive.

These securities below were excluded from the calculations above because to include them would be anti-

dilutive:

For the year ended

For the year ended

May 31, 2014

May 31, 2013

Common Stock Equivalents:

Warrants

2,039,568

2,842,992

Options to purchase common stock

3,419,994

3,800,000

Total of Common Stock Equivalents:

5,459,562

6,642,992

F-36



ABAKAN INC.

NOTES TO FINANCIAL STATEMENTS

FOR THE YEARS ENDING MAY 31, 2014 AND 2013

NOTE 11 – RELATED PARTY TRANSACTIONS

Due to the common control between the Company and its related parties, the Company is exposed to the

potential that ownership risks and rewards could be transferred among the parties.

In addition to related party transactions mentioned elsewhere, we have the below agreements and

transactions:

Board of Advisors

On June 1, 2012, we appointed a new member to our Board of Advisors and granted him 100,000 stock

options for their service. The stock options have an exercise price of $2.30 per share of common stock,

and expire ten years from the date of grant. These options vest in equal one-third parts beginning on June

1, 2013, and every grant date anniversary for the next two years. The term of the Board of Advisors

Agreement will be in force until June 1, 2013, and shall renew automatically on an annual basis unless

terminated in writing. We also agreed to reimburse the advisor for all reasonable business expenses.

On June 20, 2012, we appointed a new member to our Board of Advisors and agreed to pay him $5,000

per month for his services beginning July 1, 2012. We also granted him 50,000 stock options for their

service. The stock options have an exercise price of $2.05 per share of common stock, and expire ten

years from the date of grant. These options vest in equal one-third parts beginning on June 20, 2013, and

every grant date anniversary for the next two years. The term of the Board of Advisors Agreement will be

in force until May 31, 2013, and shall renew automatically on an annual basis unless terminated in

writing.  This agreement has subsequently been terminated.

On August 1, 2012, we appointed a new member to our Board of Advisors and agreed to pay him $3,000

per month for his services beginning August 1, 2012. We also granted him 75,000 stock options for his

service. The stock options have an exercise price of $1.95 per share of common stock, and expire ten

years from the date of grant. These options vest in equal one-third parts beginning on August 1, 2013, and

every grant date anniversary for the next two years. The term of the Board of Advisors Agreement will be

in force until August 1, 2013, and shall renew automatically on an annual basis unless terminated in

writing. We also agreed to reimburse the advisor for all reasonable business expenses.

On February 21, 2013, we appointed a new member to our Board of Advisors and agreed to pay up to

$5,000 and 10,000 restricted shares for services rendered through April 30, 2013.    Thereafter we agreed

to pay him $3,000 per month for his services through February 28, 2015.  We also granted him 15,000

stock options for his services.  The stock options have an exercise price of $2.70 per share of common

stock, and expire ten years from the date of grant. These options vest in equal one-third parts beginning

on March 1, 2013, and every year for the next two years. The term of the Board of Advisors Agreement

will be in force until February 28, 2015.  We also agreed to reimburse the advisor for all reasonable

business expenses.

On March 22, 2013, we appointed a new member to our Board of Advisors and agreed to grant him

100,000 stock options for his services.  The stock options have an exercise price of $2.80 per share of

common stock, and expire ten years from the date of grant. These options vest in equal one-third parts

beginning on December 10, 2013, and every year for the next two years. The term of the Board of

Advisors Agreement will be in force until March 22, 2015.  We also agreed to reimburse the advisor for

all reasonable business expenses.

F-37



ABAKAN INC.

NOTES TO FINANCIAL STATEMENTS

FOR THE YEARS ENDING MAY 31, 2014 AND 2013

NOTE 11 – RELATED PARTY TRANSACTIONS - continued

Board of Directors

On June 15, 2012, we appointed a new member to our Board of Directors. We agreed to pay him $15,000

per annum, payable in four equal payments. We also agreed to issue him 10,000 restricted shares of our

common stock and granted him 150,000 stock options for their service. The stock options have an

exercise price of $2.30 per share of common stock, and expire ten years from the date of grant. These

options vest in equal one-third parts beginning on September 15, 2012, and every September 15 after that.

We also agreed to pay for continuing education classes and related travel expenses, for a maximum of

$4,500. This agreement will be in force until May 31, 2015, unless terminated with a sixty day notice. We

also agreed to reimburse the new director for all reasonable business expenses. The director resigned on

December 5, 2012 and accepted the chief financial officer position of the Company.

On August 7, 2012, we appointed a new member to our Board of Directors. We agreed to issue him

10,000 restricted shares of our common stock and granted him 150,000 stock options for their service.

The stock options have an exercise price of $1.90 per share of common stock, and expire ten years from

the date of grant. These options vest in equal one-third parts beginning on August 7, 2013 and every

August 7 after that. This agreement will be in force until August 7, 2015, unless terminated with a sixty

day notice. We also agreed to reimburse the new director for all reasonable business expenses.

On December 5, 2012, we appointed a new member to our Board of Directors. We agreed to grant him

175,000 stock options for his service. The stock options have an exercise price of $2.61 per share of

common stock, and expire ten years from the date of grant. These options vest as follows; 25,000 upon

the date of this agreement and then in equal parts of 50,000 options beginning on December 5, 2013 and

every December 5 after that. This agreement will be in force until December 5, 2015, unless terminated

with a sixty day notice. We also agreed to reimburse the new member of the Board for all reasonable

business expenses.

On February 1, 2013, the Board of Directors approved the proposal of the Compensation Committee that

all independent members of the Board of Directors and all members of the respective Compensation,

Governance and Nominating Committee be compensated for attending Board or Committee meetings in

the amount of $750.  It was also agreed that the Company shall compensate director which is the Head of

the Compensation, Compliance and Nominating Committees $5,000 per annum and issue 20,000

restricted shares which were issued on February 21, 2013.

On May 6, 2014, we appointed a new member to our Board of Directors. We agreed compensation

agreement provides for the issuance of 20,000 restricted shares authorized as of his appointment to the

Board of Directors and the grant of 150,000 stock options that vest equally over three years, to purchase

shares of the Corporation’s common stock in accordance with the Abakan Inc. 2009 Stock Option Plan, at

an exercise price of $1.00 per share.

.

F-38



ABAKAN INC.

NOTES TO FINANCIAL STATEMENTS

FOR THE YEARS ENDING MAY 31, 2014 AND 2013

NOTE 11 – RELATED PARTY TRANSACTIONS - Continued

Employment agreement

On December 5, 2012, we entered into an employment agreement commencing December 10, 2012

with a related individual to perform duties as our Chief Financial Officer.  The individual was a prior

director and resigned the effective date of this agreement.  The employee retained previously issued

stock options. The terms of the employment agreement are $16,000 per month salary of which a portion

is deferred. The employment agreement will end on December 31, 2015 and which time it can be

renewed for 2 one year periods.  In the event that this agreement is terminated, the employee may be

eligible for severance pay based upon the length of employment. The employee was granted 125,000

stock options with an exercise price of $2.61 per share; they will vest equally over 3 years beginning

December 9, 2013. The employee was also given a retention award to be paid $20,000 in common

shares the month following the anniversary date of his employment. On February 10, 2014, the

employee resigned from his position and terminated his contract with us. For the year ended May 31,

2014 and 2013, we expensed $40,000 and $19,000, respectively, in connection with these contracts and

are included in professional fees – related party, and $109,948 and $86,308 in Payroll and benefits

expense, respectively. As of May 31, 2014 and 2013 we owed $12,896 and $11,064 included in

accounts payable - related party.

Note Receivable – Related Party

On April 29, 2010, we entered in to a non-collateralized note receivable with a related company to ours

with some common ownership on an interest free basis, payable on demand. On July 15, 2010, we were

repaid $4,000 cash on this note and on April 21, 2014 we assigned the balance of this note to our

President of $4,500 and as of May 31, 2014 and 2013 we are owed a balance remaining of none and

$4,500, respectively.

F-39



ABAKAN INC.

NOTES TO FINANCIAL STATEMENTS

FOR THE YEARS ENDING MAY 31, 2014 AND 2013

NOTE 11 – RELATED PARTY TRANSACTIONS - Continued

Consulting Agreements

On December 1, 2009 we entered into an agreement with a related individual to provide bookkeeping

services. The terms of the consulting agreement are $2,500 per month payable in consulting fees and

reimbursement to the consultant for all reasonable business expenses incurred by her in the performance

of her duties, and was in effect until December 1, 2010. The consultant was also granted 100,000 stock

options with an exercise price of $0.60 per share; they will vest equally over 2 years and the first third

was vested upon signing (see Note 124). On April 1, 2010, we entered into an amended agreement with

the same related individual to provide bookkeeping services. The terms of the amended consulting

agreement are $5,000 per month payable in consulting fees and reimbursement for all reasonable

business expenses incurred in the performance of her duties effective until April 1, 2011. The agreement

also had a provision to automatically renew for subsequent annual terms unless terminated in writing by

either party. For the years ended May 31, 2014 and 2013, we expensed $71,057 and $60,000,

respectively, in connection with these contracts and are included in professional fees – related party. As

of May 31, 2014 and 2013, we owed $30,000 and $5,000, respectively, and is included in accounts

payable - related party.

On August 20, 2010, we entered into a consulting agreement commencing August 1, 2010 with a related

individual to perform duties as our Chief Financial Officer. On May 11, 2011, this individual resigned

his position as Chief Financial Officer. Effective May 10, 2011, this agreement was amended to change

the consultant’s role from Chief Financial Officer to general consultant, and all other provisions remain

the same. On February 10, 2014, we re-appointed this individual again as our Chief Financial Officer,

we did not make any changes to the existing agreement, and it remains in force. The terms of the

consulting agreement are $8,000 per month payable in consulting fees and reimbursement to the

consultant for all reasonable business expenses incurred by him in the performance of his duties, and

was in effect until July 31, 2012. The agreement also had a provision to automatically renew for

subsequent annual terms unless terminated in writing by either party. The consultant was also granted

200,000 stock options with an exercise price of $0.65 per share; they will vest equally over 3 years (see

Note 12). For the years ended May 31, 2014 and 2013, we expensed $96,000 and $96,000, respectively,

in connection with this contract and are included in consulting – related party. As of May 31, 2014 and

2013, we owed $188,978 and $63,310, respectively, and is included in accounts payable - related party.

On June 1, 2010, we entered into a consulting agreement with a company controlled by the spouse of

our Chief Executive Officer. The terms of the consulting agreement are $2,500 per month payable in

consulting fees and reimbursement to the consultant for all reasonable business expenses incurred by it

in the performance of its duties, and rental of office space for $1,200 per month, and was in effect until

June 1, 2011. On December 1, 2010, we entered into a revised consulting agreement to supersede the

above agreement, with the same company as above. The terms of the consulting agreement are $2,500

per month payable in consulting fees and reimbursement to the consultant for all reasonable business

expenses incurred by it in the performance of its duties, and rental of office space for $2,213 per month,

and was in effect until December 1, 2011 and continues in force. On March 31, 2014, this contract was

cancelled. For the years ended May 31, 2014 and 2013, we expensed $25,000 and $30,000, respectively,

in connection with this contract and are included in consulting – related party. As of May 31, 2014 and

2013, we owed $5,515 and $5,263, respectively, and is included in accounts payable - related party.

F-40



ABAKAN INC.

NOTES TO FINANCIAL STATEMENTS

FOR THE YEARS ENDING MAY 31, 2014 AND 2013

NOTE 11 – RELATED PARTY TRANSACTIONS - Continued

Consulting Agreements - continued

On June 1, 2011, we entered into a consulting agreement commencing June 1, 2011, with a related

individual to provide services as our Chief Executive Officer. The terms of the consulting agreement are

the consultant will be paid $10,000 per month. We also agreed to reimburse the consultant for all

reasonable business expenses incurred by him in the performance of his duties, and was in effect until

June 1, 2012. The agreement also had a provision to automatically renew for subsequent annual terms

unless terminated in writing by either party. For the year ended May 31, 2014 and 2013, we expensed

$120,000 and $120,000, respectively, in connection with this contract, which amount is included in

consulting – related party. As of May 31, 2014 and 2013, we owed $85,660 and $53,673, respectively,

which amount is included in accounts payable - related party.

On May 31, 2014, we entered into a consulting agreement with a company owned by a related

individual to provide services as a consultant on business and grant matters. The terms of the consulting

agreement are the consultant will be paid $6,175 per month. We also agreed to compensate this

individual 5% of net proceeds secured from his efforts on behalf of the company. We also agreed to

reimburse the consultant for all reasonable business expenses incurred by him in the performance of his

duties, and is in effect until December 31, 2014. The agreement also has a provision for payments not

made within 30 days of due shall accrue interest at 1.5% per month until paid. The agreement also had a

provision to automatically renew for subsequent annual terms unless terminated in writing by either

party.

F-41



ABAKAN INC.

NOTES TO FINANCIAL STATEMENTS

FOR THE YEARS ENDING MAY 31, 2014 AND 2013

NOTE 11 – RELATED PARTY TRANSACTIONS – continued

Notes Payable – Related Party

On February 2, 2012, we entered into an uncollateralized demand note to a related individual, bearing

8% interest per annum for an aggregate total of $10,500. We also owed $63 in accrued interest for the

above note as of February 29, 2012. On March 16, 2013, this debt and accrued interest was converted

into shares of our common stock as discussed in Note 9, and has a zero balance.

For the year ended May 31, 2013, we entered into two uncollateralized demand notes to a Company

controlled by our Chief Executive Officer’s spouse, Prosper Financial, bearing 8% interest per annum

for an aggregate total of $66,200. On August 31, 2012, we applied $6,200 of principal in addition to

$59.24 of accrued interest to advances owed to us by the same company. On September 25, 2012, we

also made a cash principal payment of $30,000. As of May 31, 2013 we owed $30,000, and $1,987 of

accrued interest. As of May 31, 2014 we owed none, and $1,987 of accrued interest.

On February 24, 2014, we entered into an uncollateralized demand note to a related individual, bearing

8% interest per annum for a total of $21,308. As of May 31, 2014 we owed $21,308 of principal, and

$445 of accrued interest.

On March 7, 2014 and April 17, 2014 we entered into two uncollateralized demand notes to a related

individual, bearing 8% interest per annum for an aggregate total of $90,000. On March 7, 2014 and

April 10, 2014, we repaid an aggregate total of $25,000. We also owed $834 in accrued interest for the

above note as of May 31, 2014. As of May 31, 2014 we owed $65,000 of principal, and $834 of accrued

interest.

During the year ended May 31, 2014, we entered into two uncollateralized demand notes to a related

individual, bearing 8% interest per annum for an aggregate total of $106,178. We also owed $779 in

accrued interest for the above note as of May 31, 2014. As of May 31, 2014 we owed $106,178 of

principal, and $779 of accrued interest.

During the year ended May 31, 2014, we entered into an uncollateralized demand note to a related

individual, bearing 7% interest per annum for an aggregate total of $32,313. As of May 31, 2014 we

owed $32,313 of principal.

License agreement – Related Party

The Company has a license agreement with Powdermet, Inc., a related party, which grants the

Company an exclusive license to the use of technical information, proprietary know-how, data and patent

rights assigned to and/or owned by Powdermet, Inc. The agreement will end upon the last to expire valid

claim of licensed patents, unless terminated within the terms of the agreement.

As part of the agreement, the Company has a commitment to purchase consumable powders from

Powdermet, Inc. through July 1, 2013. Also, as part of the agreement the Company will receive

technology transition and development service to support its research and development activities on a cost

reimbursement basis. Total expense related to the cost reimbursement was $181,457 and $369,184 for the

years ended May 31, 2014 and 2013, respectively.

F-42



ABAKAN INC.

NOTES TO FINANCIAL STATEMENTS

FOR THE YEARS ENDING MAY 31, 2014 AND 2013

NOTE 12 – STOCK – BASED COMPENSATION

2009 Stock Option Plan – The Company

Our board of directors adopted and approved our 2009 Stock option Plan (“Plan”) on December 14, 2009,

which provides for the granting and issuance of up to 10 million shares of our common stock.

For the year ended May 31, 2013, the Company granted the following stock options:

For the year ended May 31, 2013

Options

Exercise

Expiration

To Whom

Grant Date

Granted

Price

term in  years

Granted

Vesting Terms

June 12,

Granted to a

Will vest in equal one third parts on the

2012

100,000

$

2.30

10.00

consultant

anniversary date of the option grant date

Will vest in one third on grant date and

June 12,

Granted to a

remaining equally over two years on

2012

75,000

$

2.30

10.00

employee

anniversary of the option grant date

Will vest in equal one third parts

beginning on September 15, 2012 and

June 15,

Granted to a new

then every September 15th for the next

2012

150,000

$

2.30

10.00

Director

two years

June 20,

Granted to a

Will vest in equal one third parts on the

2012

50,000

$

2.05

10.00

consultant

anniversary date of the option grant date

July 27,

Granted to a

Will vest in equal one third parts on the

2012

75,000

$

1.95

10.00

consultant

anniversary date of the option grant date

August 7,

Granted to a new

Will vest in equal one third parts on the

2012

150,000

$

1.90

10.00

Director

anniversary date of the option grant date

Will vest 25,000 options on Grant date,

remaining 150,000 options in equal one

December

Granted to a new

third parts on the anniversary date of the

5, 2012

175,000

$

2.61

10.00

Director

option grant date

Granted to our

December

new Chief

Will vest in equal one third parts on the

5, 2012

125,000

$

2.61

10.00

Financial Officer

anniversary date of the option grant date

December

Granted to a

Will vest in equal one third parts

17, 2012

50,000

$

2.80

10.00

employee

beginning on December 17, 2013

February 1,

Granted to a

Will vest in equal one half parts on

2013

70,000

$

2.70

10.00

consultant

January 31, 2014 and 2015

February

Granted to a

Will vest in equal one third parts

21, 2013

15,000

$

2.70

10.00

consultant

beginning on March 1, 2013

March 22,

Granted to  a

Will vest in equal one third parts

2013

100,000

2.80

10.00

consultant

beginning on December 10, 2013

Total

Granted

1,135,000

F-43



ABAKAN INC.

NOTES TO FINANCIAL STATEMENTS

FOR THE YEARS ENDING MAY 31, 2014 AND 2013

NOTE 12 – STOCK – BASED COMPENSATION - continued

2009 Stock Option Plan – The Company – continued

On December 4, 2012, we rescinded 1,500,000 stock options by mutual agreement between the Company

and the respective holder. From June 1, 2012 to May 31, 2013 945,000 stock options expired without

exercise according to the option agreement.  After these grants and expirations there are 6,200,000 stock

options available for future grant.

For the year ended May 31, 2014, the Company granted the following stock options:

For the year ended May 31, 2014

Options

Exercise

Expiration

Grant Date

Granted

Price

term in  years

To Whom Granted

Vesting Terms

Will vest in equal one third parts

June 14,

Granted to a

on the anniversary date of the

2013

80,000

$

2.94

10.00

consultant

option grant date

Will vest in equal one third parts

December

Granted to a

on the anniversary date of the

5, 2013

100,000

$

1.25

10.00

consultant

option grant date

Will vest in equal one third parts

December

Granted to a

on the anniversary date of the

5, 2013

50,000

$

1.25

10.00

consultant

option grant date

Granted to our new

Will vest in equal one third parts

December

Chief Financial

on the anniversary date of the

5, 2013

200,000

$

1.25

10.00

Officer

option grant date

Will vest in equal one third parts

December

Granted to a

on the anniversary date of the

5, 2013

100,000

$

1.25

10.00

consultant

option grant date

December

Granted to a

Will vest in equal one half parts on

5, 2013

50,000

$

1.25

10.00

consultant

December 5, 2013 and 2014

Will vest in equal one third parts

May 6,

Granted to a new

on the anniversary date of the

2014

150,000

$

1.00

10.00

Director

option grant date

Will vest in equal one third parts

May 30,

Granted to a

on the anniversary date of the

2014

20,000

$

1.14

10.00

consultant

option grant date

Will vest in equal one third parts

May 30,

Granted to a

on the anniversary date of the

2014

100,000

$

1.14

10.00

consultant

option grant date

Total

Granted

850,000

On May 31, 2014, we forfeited or rescinded 1,163,328 stock options by mutual agreement between the

Company and five respective holders. From June 1, 2013 to May 31, 2014, 66,678 stock options expired

without exercise according to the option agreement. After these grants and expirations there are

6,580,006 stock options available for future grant.

F-44



ABAKAN INC.

NOTES TO FINANCIAL STATEMENTS

FOR THE YEARS ENDING MAY 31, 2014 AND 2013

NOTE 12 – STOCK – BASED COMPENSATION - continued

2009 Stock Option Plan – The Company - continued

Our board of directors administers our Plan, however, they may delegate this authority to a committee

formed to perform the administration function of the Plan. The board of directors or a committee of the

board has the authority to construe and interpret provisions of the Plan as well as to determine the terms

of an award.  Our board of directors may amend or modify the Plan at any time.  However, no

amendment or modification shall adversely affect the rights and obligations with respect to outstanding

awards unless the holder consents to that amendment or modification.

The Plan permits us to grant Non-Statutory stock options to our employees, directors and consultants.

The options issued under this Plan are intended to be Non-Statutory Stock Options exempt from Code

Section 409A.

The duration of a stock option granted under our Plan cannot exceed ten years.  The exercise price of an

incentive stock option cannot be less than 100% of the fair market value of the common stock on the

date of grant.

The Plan administrator determines the term of stock options granted under our Plan, up to a maximum

of ten years, except in the case of certain events, as described below.  Unless the terms of an optionee's

stock option agreement provide otherwise, if an optionee's relationship with us ceases for any reason

other than disability or death, the optionee may exercise any vested options for a period of ninety days

following the cessation of service.  If an optionee's service relationship with us ceases due to disability

or death the optionee or a beneficiary may exercise any vested options for a period of 12 months in the

event of disability or death.

Unless the Plan administrator provides otherwise, options generally are not transferable except by will,

the laws of descent and distribution, or pursuant to a domestic relations order.  An optionee may

designate a beneficiary, however, who may exercise the option following the optionee's death.

The value of employee and non-employee stock warrants granted during the year ended May 31, 2014

was estimated using the Black-Scholes  model with the following assumptions:

June 14,

December 5,

May 6,

May 30,

2013

2013

2014

2014

Expected volatility (based on historical

143.64%

138.97%

134.49%

134.49%

volatility)

Expected dividends

0.00

0.00

0.00

0.00

Expected term in years

10

10

10

10

Risk-free rate

2.14%

2.87%

2.61%

2.48%

The expected volatility assumption was based upon historical stock price volatility measured on a daily

basis. The risk-free interest rate assumption is based upon U.S. Treasury bond interest rates appropriate

for the term of the Company’s employee stock options. The dividend yield assumption is based on our

history and expectation of dividend payments.

F-45



ABAKAN INC.

NOTES TO FINANCIAL STATEMENTS

FOR THE YEARS ENDING MAY 31, 2014 AND 2013

NOTE 12 – STOCK – BASED COMPENSATION - continued

2009 Stock Option Plan – The Company - continued

A summary of the options granted to employees and non-employees under the plan and changes during

the years ended May 31, 2014 and 2013 is presented below:

Weighted

Average

Weighted

Remaining

Average

Contractual

Aggregate

Number of

Exercise

Terms

Intrinsic

Options

Price

(In Years)

Value

Balance at June 1, 2012

5,160,000

$

0.77

Granted

1,135,000

2.39

Exercised

-

-

Forfeited or expired

(2,495,000)

$

0.69

Balance at May 31, 2013

3,800,000

$

1.26

7.78 years

$

108,750

Exercisable at May 31, 2013

2,396,662

$

0.86

7.78 years

$

--

Weighted average fair value of

options granted during the year ended

May 31, 2013

$

2.39

Balance at June 1, 2013

3,800,000

$

1.26

Granted

850,000

$

1.35

Exercised

-

$

-

Forfeited or expired

(1,230,006)

$

1.35

Balance at May 31, 2014

3,419,994

$

1.36

7.90 years

$

126,750

Exercisable at May 31, 2014

1,901,666

$

1.24

7.90 years

$

120,620

Weighted average fair value of

options granted during the year ended

May 31, 2014

$

1.35

F-46



ABAKAN INC.

NOTES TO FINANCIAL STATEMENTS

FOR THE YEARS ENDING MAY 31, 2014 AND 2013

NOTE 12 – STOCK – BASED COMPENSATION - continued

2009 Stock Option Plan – The Company - continued

The following table summarizes information about employee stock options under the 2009 Plan

outstanding at May 31, 2014:

Options Outstanding

Options Exercisable

Weighted

Number

Average

Weighted

Number

Weighted

Range of

Outstanding

Remaining

Average

Exercisable

Average

Aggregate

Exercise

at May 31,

Contractual

Exercise

Intrinsic

at May 31,

Exercise

Intrinsic

Price

2014

Life

Price

Value

2014

Price

Value

$      0.60

100,000

5.5 Years

$    0.60

$

--

100,000     $    0.60

$

--

$      0.65

475,000

6.2 Years

$    0.65

$

27,500

425,000     $    0.65

$

24,605

$      0.75

200,000

5.7 Years

$    0.75

$

30,000

200,000     $    0.75

$

30,000

$      1.00

366,666

8.6 Years

$    1.00

$

1,000

166,666     $    1.00

$

455

$      1.02

50,000

7.0 Years

$    1.02

$

10,000

50,000     $    1.02

$

50,000

$      1.03

50,000

7.7 Years

$    1.03

$

3,000

33,333     $    1.03

$

2,000

$      1.05

120,000

6.9 Years

$    1.05

$

--

120,000     $    1.05

$

--

$      1.07

95,000

8.7 Years

$    1.07

$

--

95,000     $    1.07

$

--

$

-

$      1.14

120,000

10.0 Years

$    1.14

$

18,000

--     $    1.14

-

$      1.20

100,000

7.3 Years

$    1.20

$

--

100,000     $    1.20

$

--

$      1.25

525,000

9.4 Years

$    1.25

$

1,250

25,000     $    1.25

$

60

$      1.30

166,661

6.0 Years

$    1.30

$

--

166,666     $    1.30

$

--

$      1.90

150,000

8.1 Years

$    1.90

$

--

50,000     $    1.90

$

--

$      1.95

75,000

8.9 Years

$    1.95

$

9,000

25,000     $    1.95

$

3,000

$      2.30

325,000

8.9 Years

$    2.30

$

--

133,334     $    2.30

$

--

$      2.61

300,000

8.0 Years

$    2.61

$

27,000

116,667

$    2.61

$

10,500

$      2.70

85,000

8.7 Years

$    2,70

$

--

45,000     $    2.70

$

--

$      2.80

116,667

8.8 Years

$    2.80

$

--

50,000     $    2.80

$

--

3,419,994

7.9 Years

$    1.36

$

126,750

1,901,666     $    1.24

$

120,620

The total value of employee and non-employee stock options granted during the years ended May 31,

2014 and 2013, was $1,089,451 and $2,730,968, respectively. During years ended May 31, 2014 and

2013 the Company recorded $1,051,362 and $1,752,087, respectively, in stock-based compensation

expense relating to stock option grants.

F-47



ABAKAN INC.

NOTES TO FINANCIAL STATEMENTS

FOR THE YEARS ENDING MAY 31, 2014 AND 2013

NOTE 12 – STOCK – BASED COMPENSATION - continued

2009 Stock Option Plan – The Company - continued

At May 31, 2014 and 2013 there was $1,696,214 and $2,015,966, respectively, of total unrecognized

compensation cost related to stock options granted under the plan.  That cost is expected to be

recognized pro-rata through May 30, 2017. The following table represents the stock options expense for

the each of the next three fiscal years ended May 31:

For years ended May 31,

Expense

2015

$

1,022,803

2016

499,495

2017

173,916

$

1,696,214

Stock Option Plan - MesoCoat

MesoCoat accounts for equity awards using the grant-date fair value.

MesoCoat’s stock option plan (the Stock Option Plan) is intended to advance the interest of MesoCoat

and its shareholders. Options granted under the Stock Option Plan can be either incentive stock options or

non-qualified stock options. The Stock Option Plan authorized the issuance of a maximum of 9,000

shares of MesoCoat’s common stock. These options have a term of six years and will expire beginning

August 2014 through November 2014.

The value of employee and non-employee stock warrants granted during the year ended May

31, 2013 was estimated using the Black-Scholes model with the following assumptions:

November 1,

2012

Expected volatility (based on historical

225.00%

volatility)

Expected dividends

0.00

Expected term in years

6

Risk-free rate

1.20%

The expected volatility assumption was based upon historical stock price volatility measured on

a daily basis. The risk-free interest rate assumption is based upon U.S. Treasury bond interest

rates appropriate for the term of the Company’s employee stock options. The dividend yield

assumption is based on our history and expectation of dividend payments.

F-48



ABAKAN INC.

NOTES TO FINANCIAL STATEMENTS

FOR THE YEARS ENDING MAY 31, 2014 AND 2013

NOTE 12 – STOCK – BASED COMPENSATION - continued

Stock Option Plan – MesoCoat - continued

A summary of MesoCoat’s stock option plan as of May 31, 2014 and 2013, and the changes during the

years then ended is presented in the table below:

Options Outstanding

Number of

Weighted

Shares

Average Exercise

Price

Outstanding at May 31, 2012

4,450    $

2.68

Granted

5,270

25.09

Exercised

-

Forfeited

(4,200)

(1.95)

Outstanding at May 31, 2013

5,520    $

24.78

Options exercisable at May 31, 2013

2,043    $

18.11

Number of

Weighted

Shares

Average Exercise

Price

Outstanding at May 31, 2013

5,520    $

24.78

Granted

-

Exercised

-

Forfeited

(2,620)

18.11

Outstanding at May 31, 2014

2,900    $

30.80

Options exercisable at May 31, 2014

1,450    $

30.80

The following table summarizes information about employee stock options under the MesoCoat Stock

Option Plan outstanding at May 31, 2014:

Options Outstanding

Options Exercisable

Weighted

Number

Average

Weighted

Number

Weighted

Range of

Outstanding

Remaining

Average

Exercisable

Average

Aggregate

Exercise

at May 31,

Contractual

Exercise

Intrinsic

at May 31,

Exercise

Intrinsic

Price

2014

Life

Price

Value

2014

Price

Value

$      18.11

250

3.0 Years

$    18.11

$

--

125     $    18.11

$

--

$      32.00

2,650

6.0 Years

$    32.00

$

--

1,325     $    32.00

$

--

2,900

5.74 Years

$    30.80

$

--

1,450     $    30.80

$

--

F-49



ABAKAN INC.

NOTES TO FINANCIAL STATEMENTS

FOR THE YEARS ENDING MAY 31, 2014 AND 2013

NOTE 12 – STOCK – BASED COMPENSATION - continued

Stock Option Plan – MesoCoat - continued

During years ended May 31, 2014 and 2013 MesoCoat recorded $69,015 and $75,408, respectively, in

stock-based compensation expense relating to stock option grants.

At May 31, 2014 and 2013 there was $134,168 and $211,239, respectively, of total unrecognized

compensation cost related to stock options granted under the plan.  That cost is expected to be

recognized pro-rata through November 1, 2016.

The following table represents the stock options expense for the each of the next three fiscal years ended

May 31:

For years ended May 31,

Expense

2015

$

56,568

2016

56,568

2017

21,032

$

134,168

NOTE 13 COMMITMENTS

Leases

In August 2011, the Company entered into a non-cash leasing arrangement where services are provided in

exchange for an asset. The Company has an obligation to provide 600 hours of services at a fair value of

$120,000 as consideration during the period from August 2011 to August 2017. The Company has

recorded this capital lease at its fair value. During the years ended May 31, 2014 and 2013, the Company

completed none and 51 hours of service, respectively, with a fair value of none and $10,200, respectively.

This amount is included in revenue.

The Company leases its office space in Miami on a month to month basis at a cost of $2,419 a month paid

to an unrelated party.

MesoCoat subleases its research and development and laboratory space, in Ohio, from Powdermet, a related

party. The cost of the sub-lease to MesoCoat is $4,500 per month that expires on May 31, 2020.  Mesocoat

leases a research and testing facility in Euclid, Ohio from a non-related party.  The cost of the lease to MesoCoat

is $3,500 per month and expires on May 31, 2020.

MesoCoat also leases machinery and equipment under various capital lease arrangements, which expires

through September 2016. These leases are included in long-term and short-term debt and the related assets have

been capitalized.

Total expense related to the operating leases was $147,289 and $156,116 for the year ending May 31,

2014 and May 31, 2013, respectively. Interest expense for the capitalized leases for the year ending May 31,

2014 and May 31, 2013 was $619 and $5,357 respectively.

F-50



ABAKAN INC.

NOTES TO FINANCIAL STATEMENTS

FOR THE YEARS ENDING MAY 31, 2014 AND 2013

NOTE 13 COMMITMENTS - continued

Leases - continued

Minimum annual rental commitments are as follows at May 31, 2014:

For the years ended May 31,

Capital Leases

Operating Leases

2015

$

32,214      $

122,400

2016

31,156

122,400

2017

24,311

122,400

2018

--

122,400

2019 and thereafter

--

244,800

Total minimum lease payments

$

87,682      $

734,400

Less amount representing interest

(2,177)

Present value of net minimum capital lease payments

85,505

Less current maturities

(31,465)

Long-term obligations under capital leases

$

54,040

NOTE 14 – INCOME TAXES

The following is an analysis of deferred tax assets as of May 31, 2014 and 2013:

Deferred Tax

Valuation

Assets

Allowance

Balance

Net deferred tax assets at May 31, 2012

$

2,282,292

$

(2,282,292)

$

-

Provision to tax return true ups

(1,017,660)

1,017,660

-

Additions for the year

2,244,170

(2,244,170)

-

Deferred tax assets at May 31, 2013

$

3,508,802

$

(3,508,802)

$

-

Provision to tax return true ups

333,123

(333,123)

-

Subtractions for the year

(179,899)

179,899

-

Deferred tax assets at May 31, 2014

$

3,662,026

$

(3,662,026)

$

-

F-51



ABAKAN INC.

NOTES TO FINANCIAL STATEMENTS

FOR THE YEARS ENDING MAY 31, 2014 AND 2013

NOTE 14 – INCOME TAXES – continued

Deferred income taxes are provided to recognize the effects of temporary differences between financial

reporting and income tax reporting. These differences arise principally from federal net operating losses,

stock compensation expense, basis differences in investments in affiliates and the use of accelerated

depreciation methods for tax purposes as opposed to the straight-line depreciation method for financial

reporting purposes and Federal net operating losses.

Temporary differences between financial statement carrying amounts and tax basis of assets and

liabilities that give rise to significant deferred tax assets and liabilities are presented below at May 31:

2014

2013

Deferred tax assets:

Current:

Compensation accruals

$

32,365

$

30,703

Non-current:

Deferred tax assets:

Net operating loss carry forward

4,037,738

3,733,957

Stock options

1,867,488

1,489,357

Research and Development Credit

443,659

114,246

Equity loss in affiliates, net

199,247

199,247

Impairment of intangibles

33,121

--

Other

7

7

Total non-current deferred tax assets

6,581,260

5,536,814

Deferred tax liabilities:

Fixed asset & intangible basis

(2,122,999)

(1,187,203)

Equity profit in affiliates, net

(228,854)

(271,766)

Book fair value adjustment in affiliate

(599,746)

(599,746)

Total non-current deferred tax liabilities

(2,951,599)

(2,058,715)

Net non-current deferred tax liabilities

3,629,661

3,478,099

Net deferred tax liability before valuation

3,662,026

3,508,802

allowance

Valuation allowance

(3,662,026)

(3,508,802)

Net deferred tax asset

$

-

$

-

The following is reconciliation from the expected statutory Federal income tax rate to the Company’s

actual income tax rate for the years ended May 31:

2014

2013

Expected income tax (benefit) at

Federal statutory tax rate – 34% and 34%

$

(2,015,099)

$

(2,455,949)

Gain on Exchange transaction

1,966,771

211,779

Other permanent differences

112,352

--

Research and Development Credit

(70,331)

--

Other adjustments

(146,917)

1,017,660

Change in valuation allowance

153,224

1,226,510

Income tax expense

$

-

$

-

F-52



ABAKAN INC.

NOTES TO FINANCIAL STATEMENTS

FOR THE YEARS ENDING MAY 31, 2014 AND 2013

NOTE 14 – INCOME TAXES – continued

We currently have three years of tax returns that are subject to examination, including the fiscal years

ended May 31, 2013, 2012 and 2011, based on their filing dates by taxing authorities.

We currently have no uncertainty of the tax positions that we have taken and believe that we can defend

them to any tax jurisdiction.  The Company would recognize interest accrued related to unrecognized

tax benefits in interest expense and penalties in operating expenses.  During the years ended May 31,

2014 and 2013, the Company did not recognize any interest and penalties related to uncertain tax

positions.

The net operating loss and research and development carry forward as of May 31, 2014 expires as

follows:

Abakan

MesoCoat Amount

Research and

Expiring

Amount

Development

Year

Combined Amount

Credit

2027

$

--

$

--

$

--

$

--

2028

--

--

--

1,189

2029

--

85,205

85,205

9,125

2030

--

1,228,813

1,228,813

96,472

2031

--

49,918

49,918

6,323

2032

1,145,098

--

1,145,098

78,562

2033

4,097,256

2,039,822

6,137,078

133,993

2034

--

3,229,588

3,229,588

117,995

Total

$  5,242,354

$   6,633,346

$      11,875,700

$

443,659

These loss carryovers could be limited under the Internal Revenue Code should a significant change in

ownership occur. These net operating losses include 88.08% of losses related to MesoCoat.  The entire

research and development credit is directly related to MesoCoat.

NOTE 15 - EMPLOYEE BENEFIT PLANS

The Company has a 401(k) Plan (the Plan) covering substantially all of its employees who are at least age

21 and have completed three months of service. Participating employees may elect to contribute, on a tax

deferred basis, a portion of their compensation in accordance with Section 401(k) of the Internal Revenue

Code. Additional matching contributions may be made to the Plan at the discretion of the Company. For

the years ended May 31, 2014 and 2013, the Company contributed $24,607 and $25,196, respectively.

MesoCoat established a “MESOCOAT, INC. SUPPLEMENTAL DISCRETIONARY TAX-QUALIFED

PROFIT SHARING PLAN AND TRUST” (Plan) on January 1, 2013. All employees are eligible to

participate after one thousand (1,000) service hours, including self-employed individuals performing

consulting services to MesoCoat. Excluded employees include those covered within a bargaining unit,

since they will be covered by separate benefits. All employees vest after their one thousand hours of

service, 100% of the employer contributions for their benefit. The Trustee of the Plan is A. Sherman, and

the maximum amount that can be contributed to the plan is $40,000 per year of service, or as updated to

the maximum allowable by Internal Revenue Code. For the year ended May 31, 2014, the Company

contributed 57,242 shares of its common stock to the Plan with a value of $161,995.

F-53



ABAKAN INC.

NOTES TO FINANCIAL STATEMENTS

FOR THE YEARS ENDING MAY 31, 2014 AND 2013

NOTE 16 – RECENT ACCOUNTING PRONOUNCEMENTS

In June 2014, the FASB released ASU 2014-10 — Accounting Standards Update 2014-10, Income Taxes

Topic 915: Elimination of Certain Financial Reporting Requirements, Including an Amendment to

Variable Interest Entities Guidance in Topic 810, Consolidation. The amendments in this Update

eliminate the concept of a development stage entity (DSE) from US GAAP. This change rescinds

financial reporting requirements that have historically applied by DSEs such as labeling financial

statements as those of a DSE, providing inception to date information in the statements of income, cash-

flows and shareholder equity and certain specific disclosures. This ASU has been early adopted by the

Company as of April 1, 2014 and therefore for the current period ended May 31, 2014 as such early

adoption is permitted for all financial statements that have not been issued or made available for issuance.

This ASU had impact to the Company’s consolidated financial statements, as the corresponding inception

to date information, labeling financial statements as those of a DSE, etc. will no longer be provided.

In May 2014, the FASB released ASU 2014-9  -   Accounting Standards Update 2014-9, Topic 606:

Revenue from Contracts with Customers that outlines a single comprehensive model for entities to use in

accounting for revenue arising from contracts with customers and supersedes most current revenue

recognition guidance, including industry-specific guidance. The guidance is based on the principle that an

entity should recognize revenue to depict the transfer of goods or services to customers in an amount that

reflects the consideration to which the entity expects to be entitled in exchange for those goods or

services.  The guidance also requires additional disclosure about the nature, amount, timing and

uncertainty of revenue and cash flows arising from customer contracts, including significant judgments

and changes in judgments and assets recognized from costs incurred to fulfill a contract.  Entities have the

option of using either a full retrospective or a modified retrospective approach for the adoption of the new

standard.  This guidance becomes effective for annual reporting periods beginning after December 15,

2016 and early adoption is not permitted.  The Company is currently assessing the impact that this

standard will have on its financial statements.

ASU 2014-15, Presentation of Financial Statements Going Concern (Subtopic 205-40) (ASU 2014-15), is

effective for fiscal years, and interim periods within those years, beginning after December 15, 2016.

ASU 2014-15 requires management to assess an entity's ability to continue as a going concern by

incorporating and expanding upon certain principles that are currently in U.S. auditing standards.

Specifically, ASU 2014-15 provides a definition of the term substantial doubt and requires an assessment

for a period of one year after the date that the financial statements are issued (or available to be issued). It

also requires certain disclosures when substantial doubt is alleviated as a result of consideration of

management's plans and requires an express statement and other disclosures when substantial doubt is not

alleviated. We do not expect the adoption of ASU 2014-15 to have material impact on our consolidated

financial statements, although there may be additional disclosures upon adoption.

Other pronouncements issued by the FASB or other authoritative accounting standards groups with future

effective dates are either not applicable or are not expected to be significant to the financial statements of

the Company.

F-54



ABAKAN INC.

NOTES TO FINANCIAL STATEMENTS

FOR THE YEARS ENDING MAY 31, 2014 AND 2013

NOTE 17– SUBSEQUENT EVENTS

Management has evaluated subsequent events after the balance sheet date, through the issuance of the

financial statements, for appropriate accounting and disclosure. The Company has determined that there

were no such events that warrant disclosure or recognition in the financial statements, except for the

below.

Default Joe T. Eberhard Notes

On July 14, 2014, the Company defaulted on a convertible debt obligation due to Joe T. Eberhard in the

principal amount of $500,000. The present default is in addition to a default on a promissory note due to

Mr. Eberhard on September 15, 2014, in the principal amount of $50,000. On August 28, 2014, Mr.

Eberhard filed a complaint in the United States District Southern District of Florida. The complaint seeks

$720,698.72 plus interest. The Company intends to respond in due course.

Default Sonoro Invest S.A. Notes

On September 15, 2014, the Company defaulted on convertible debt obligations and a debt obligation to

Sonoro Invest, S.A. (“Sonoro”) in the principal aggregate amount of $2,105,000. The Company received

a notice of default from Sonoro on September 16, 2014. The Company intends to respond in due course.

Private Placement

On August 19, 2014, the Company’s board of directors initiated a private placement of up to eighteen

million seven hundred and fifty thousand (18,750,000) shares of its restricted common stock, at a price of

$0.40 a share, for anticipated gross proceeds of seven million five hundred thousand dollars ($7,500,000),

to support ongoing operations, retire outstanding debt and bolster product development. The private

placement has realized $427,800 in cash proceeds as of the filing date of this report.

Debt Obligations

Subsequent to period end, as of the filing date of this report, the Company has realized debt financing in

the amount of $542,800.

F-55



ITEM 9.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON

ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A.

CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

In connection with the preparation of this annual report, an evaluation was carried out by the Company’s

management, with the participation of the chief executive officer and the acting chief financial officer, of

the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and

15d-15(e) under the Securities Exchange Act of 1934 (“Exchange Act”)) as of May 31, 2014. Disclosure

controls and procedures are designed to ensure that information required to be disclosed in reports filed or

submitted under the Exchange Act is recorded, processed, summarized, and reported within the time

periods specified in the Commission’s rules and forms, and that such information is accumulated and

communicated to management, including the chief executive officer and the chief financial officer, to

allow timely decisions regarding required disclosures.

Based on that evaluation, the Company’s management concluded, as of the end of the period covered by

this report, that the Company’s disclosure controls and procedures were ineffective in recording,

processing, summarizing, and reporting information required to be disclosed, within the time periods

specified in the Commission’s rules and forms, and such information was not accumulated and

communicated to management, including the chief executive officer and the chief financial officer, to

allow timely decisions regarding required disclosures.

Management’s Report on Internal Control over Financial Reporting

The Company’s management is responsible for establishing and maintaining adequate internal control

over financial reporting. The Company’s internal control over financial reporting is a process, under the

supervision of the chief executive officer and the chief financial officer, designed to provide reasonable

assurance regarding the reliability of financial reporting and the preparation of the Company’s financial

statements for external purposes in accordance with United States generally accepted accounting

principles (GAAP). Internal control over financial reporting includes those policies and procedures that:

§     Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the

transactions and dispositions of the Company’s assets.

§     Provide reasonable assurance that transactions are recorded as necessary to permit preparation of

the financial statements in accordance with generally accepted accounting principles, and that

receipts and expenditures are being made only in accordance with authorizations of management

and the board of directors.

§     Provide reasonable assurance regarding prevention or timely detection of unauthorized

acquisition, use, or disposition of the Company’s assets that could have a material effect on the

financial statements.

Due to its inherent limitations, internal control over financial reporting may not prevent or detect

misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk

that controls may become inadequate because of changes in conditions or that the degree of compliance

with the policies or procedures may deteriorate.

53



The Company’s management conducted an assessment of the effectiveness of our internal control over

financial reporting as of May 31, 2014, based on criteria established in Internal Control – Integrated

Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, this

assessment is to determine if there exist material weaknesses in internal control over financial reporting.

A material weakness is a control deficiency, or a combination of deficiencies in internal control over

financial reporting that creates a reasonable possibility that a material misstatement in annual or interim

financial statements will not be prevented or detected on a timely basis. Our assessment of the

effectiveness of our internal control over financial reporting identified certain material weaknesses,

therefore management considers its internal control over financial reporting to be in effective.

The matters involving internal control over financial reporting that our management considered to be

material weaknesses were:

Insufficient accounting resources. Management had insufficient accounting resources, which

insufficiency resulted in delays associated with our reporting of our operating results.  Accordingly, we

determined as of May 31, 2014, that the insufficient accounting resources are part of the material

weaknesses as stated above.

US GAAP knowledge. Management has engaged an external consultant to counter the internal lack of US

GAAP knowledge. Nonetheless, internally there is a lack of internal US GAAP knowledge, therefore, the

work of the external consultant does not entirely compensate for this internal deficiency. Accordingly, we

determined as of May 31, 2014, that the internal lack of US GAAP knowledge is part of the material

weaknesses as stated above.

As a result of the material weaknesses in internal control over financial reporting described above, the

Company’s management has concluded that, as of May 31, 2014, that the Company’s internal control

over financial reporting was not effective based  on the criteria in Internal Control – Integrated

Framework   issued by the COSO. The Company intends to remedy its material weaknesses by:

  engaging a new accounting officer that has a working knowledge of GAAP accounting

This annual report does not include an attestation report of our independent registered public accounting

firm regarding internal control over financial reporting. We were not required to have, nor have we,

engaged our independent registered public accounting firm to perform an audit of internal control over

financial reporting pursuant to the rules of the Commission that permit us to provide only management’s

report in this annual report.

Changes in Internal Controls over Financial Reporting

During the period ended May 31, 2014, management has implemented a variety of internal controls

procedure and financial reporting oversight.  This has enabled the company to perform an assessment of

the effectiveness of our internal control over financial reporting.  This assessment did identify material

weaknesses, which management intends to remedy.

ITEM 9B.

OTHER INFORMATION

None.

54



PART III

ITEM 10.

DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE

Set forth below is the name, age and present principal occupation or employment, and material

occupations, positions, offices or employments for the past five years of our current directors and

executive officers:

Name

Age

Year Appointed      Position(s) and Office(s)

Robert H. Miller

61

2009

President, Chief Executive Officer,

and Director

Andrew J. Sherman

51

2010

Director

Stephen Goss

71

2012

Director

Costas Takkas

57

2014

Chief Financial Officer

Raymond Tellini

48

2012

Director

Dr. Ryan Owen

43

2014

Director

Business Experience

The following is a brief account of the business experience of our directors, executive officers, and other

significant employees, including their background occupations and employment over the past five years.

We also provide the responsibilities and qualifications of our executive officers and other significant

employees and the qualifications of our directors. The following includes other directorships in public

companies over the past five years of our directors. Except as otherwise noted, none of the following

referenced organizations are affiliates of the Company.

Robert H. Miller was appointed as a member of the board of directors and as the Company’s chief

executive officer on December 8, 2009.

Background:

From 2007 until the present Mr. Miller has been a director of Lifespan Biosciences Inc., a company

commercializing proprietary antibodies, providing immune histochemistry services and developing

localization databases. Since 2009 he has served as an officer and director of Sonnen Corporation, a

company involved in the research and development of a novel process for energy generation consisting of

specific materials and proprietary material combinations. (Mr. Miller is the beneficial owner of more than

ten percent of Sonnen’s common stock.) Between 1998 and 2000 he was a director and financier of Zmax

Corporation, a "y2k" company. From 1997 to 2002 Mr. Miller was the president of Stamford International

whose principal subsidiary, Nanovation Technologies Inc., was a developer of nano-sized fiber-optic

products and he served as director of Nanovation between 1998 and 2001. In 1992 Mr. Miller was the

founder and president of Crystallex International Corporation and he served as the company’s Chairman

between 1992 and 1996. Between 1988 and 1992 he was the principal financier and consultant to

Asiamerica Equities Inc., a NASDAQ listed merchant bank.

55



Officer and Director Responsibilities and Qualifications:

Mr. Miller is responsible for the overall management of the Company and is involved in many of the

Company’s day-to-day operations. He is the Company’s primary leader, communicator and fundraiser.

Mr. Miller has worked as officer and director of many early-stage companies for almost three decades and

has participated as the principal investor in dozens of business ventures. He has founded corporations,

listed numerous companies on the NASDAQ and the Toronto Stock Exchange, worked full-time with and

as a consultant to numerous startups.

Other Public Company Directorships in the Last Five Years:

Mr. Miller has been a director of Sonnen Corporation from 2009 to 2013.

Andrew J. Sherman was appointed as a member of the board of directors on August 20, 2010.

Business Experience:

From 1996 until the present Mr. Sherman has served as CEO for Powdermet and from 2007 until the

present he has served as CEO of MesoCoat (both of which are the Company’s affiliates). Between 1986

and 1996 Mr. Sherman was Chief Metallurgist and New Business Development Manager for Ultramet,

Inc., a leading Chemical Vapor Deposition (CVD) company, in Pacoima, California, where his technical

and business developments resulted in a 10-fold growth in company revenues and the creation of three

spinouts (including a $100M plus exit). Mr. Sherman’s developments have been the basis for the

formation of eight successful companies to date.

Director Responsibilities and Qualifications:

Mr. Sherman brings his 25 years of experience in the nano-engineered coatings field (including an

intimate knowledge of both MesoCoat and Powdermet) and his entrepreneurial spirit to the board of

directors.

Additionally, Mr. Sherman was appointed to the United States Department of Energy’s Hydrogen Safety

Panel and has served on the review panel since 2006.  Panel duties include interfacing with codes and

standards, accident investigations, site reviews, H2 (hydrogen) project reviews, and H2 information and

training, education, and best practices development. He received a M.Sc. and B.Sc. in Ceramic

Engineering and a B.Sc. in Chemical Engineering from Ohio State University. He has also authored more

than 95 papers and presentations on ceramics, metallurgy and composite powder coatings and was

recognized with the 2000 R&D 100 award for his patented nano powder production and is a 2009 Ernst

and Young entrepreneur of the year finalist.

Other Public Company Directorships in the Last Five Years:

None.

56



Stephen Goss was appointed as a member of the board of directors on January 4, 2012.

Business Experience:

Mr. Goss has served as a director of Gemocasha, SA, a specialized consultancy group with emphasis on

giving technical, marketing and cash management advice to major firms such as Kraft, Heinz, Crystallex,

and BP from 1987 to present. He served as the chief executive officer of Crystallex de Venezuela, a

mining firm from 1992 to 1998 and Schindler Elevator from 1982 to 1987 in Venezuela, a role in which

he successfully integrated multiple acquisitions.  He also served as the Technical Maintenance and

Installation Manager for Schindler Brazil between 1979 and 1982 in which position he managed over

2,000 people and turned it from the least efficient worldwide operation to one of the three most efficient

operations worldwide.

Director Responsibilities and Qualifications:

Mr. Goss brings oversight and a deep scientific and entrepreneurial background to the Corporation with

over three decades of senior management and consultancy experience. He speaks five languages fluently,

has received decorations from the Order of the British Empire for services related to enhancing

international trade and is a graduate of the University of Grenoble.

Mr. Goss continues to serve on the Company’s Audit Committee, Compensation Committee, Nominating

& Governance Committee and the Compliance & Ethics Committee, pending the appointment of an

independent member of the board of directors as required by each respective committee’s mandate.

Other Public Company Directorships in the Last Five Years:

None.

Raymond Tellini was appointed as a member of the board of directors on December 5, 2012.

Business Experience:

Mr. Tellini is currently the managing member of Brennecke Partners LLC, a private investment firm

located in Connecticut that makes specialty finance and growth capital investments. He brings to the

Company’s board of directors independent management oversight with an expert accounting and

investment background garnered over two decades of accounting, management and investment

experience.

Director Responsibilities and Qualifications:

Mr. Tellini serves as the head of the Company’s Audit Committee, and as a member of the Compensation

Committee, Nominating & Governance Committee and the Compliance & Ethics Committee as an

independent member of the board of directors.   He is a Certified Public Accountant, inactive, in New

York. Mr. Tellini started his career at PricewaterhouseCoopers, LLC where he worked from 1987-1994

most recently as a manager in the corporate finance group.  Afterward, Mr. Tellini has held executive

level financial positions for Wassall Plc (1995-1999), a private equity firm, and for the hedge fund firms

Palladin Partners Group LP and its successor, Imperium Partners Group LP, where he also ran their

investment banking affiliate.   Mr. Tellini brings independent management oversight, investment

management, consultancy experience and expert leadership background to the Corporation’s board of

directors.

57



Mr. Tellini earned a Bachelor of Science in Accounting from Lehigh University and an MBA in Finance

from the New York University, Stern School of Business.

Other Public Company Directorships in the Last Five Years:

None.

Dr. Ryan Owen was appointed as a member of the board of directors on May 6, 2014.

Business Experience:

Dr. Owen is recognized in the oil and gas industry as having expertise in delivery of major projects,

operations management, technology development as well as strategy consulting. From 2012 to 2014, Dr.

Owen was engaged in setting up operations and project development at Ping Petroleum, an oil and gas

start-up company based in Malaysia. Prior to joining Ping Petroleum, Dr. Owen worked with Wood

Mackenzie, Inc. as a Managing Consultant for a number of companies and government organizations

related to the energy sector. Dr. Owen came to Wood Mackenzie after working for BP plc from 1997 to

2010, in a broad range of international engineering and engineering management roles. His

responsibilities at BP included working as Lead Engineer on oil and gas assets in BP’s Gulf of Mexico

Business Unit, Executive Personal Advisor to the Vice President of Technology (Exploration and

Production), Lead Process/Project Engineer for BP’s Angola Gas Business Unit and Senior Process

Engineer for BP Upstream Technology Group based in Houston, Texas. During his tenure with BP, Dr.

Owen was awarded a number of technology awards in internal company wide competitions and speaks

English, Italian and German fluently with basic Spanish, French and Norwegian.

Director Responsibilities and Qualifications:

Dr. Owen earned his PhD at the University of Cambridge in Bio-Chemical Engineering and his MEng

(Masters) in Chemical Engineering at the Imperial College of Science, Technology and Medicine in

London, England. He is also a Chartered Engineer (U.K. equivalent of Professional Engineer).

Dr. Owen serves on the Company’s Audit Committee, Compensation Committee, Nominating &

Governance Committee and the Compliance & Ethics Committee as an independent member of the board

of directors.

Other Public Company Directorships in the Last Five Years:

None.

Costas Takkas was appointed the Chief Financial Officer and Principal Accounting Officer on February

7, 2014.

Business Experience:

Mr. Takkas brings to his new positions management skills and an expert accounting background with

over 30 years of accounting, management and consultancy experience. Mr. Takkas, a practicing Chartered

Accountant has acted as a director and officer of numerous development-stage public companies involved

with projects in the technology, mining, construction, gaming, drug development and medical equipment

industries.

58



Officer Responsibilities and Qualifications:

Mr. Takkas is a member of the Institute of Chartered Accountants in England & Wales (ACA) and

graduated with a B.Sc. (Honors) in Physics and an Associate Royal College of Science (ARCS) from the

Imperial College of Science and Technology, University of London in 1978.

Other Public Company Directorships in the Last Five Years:

None.

Term of Office

Our directors are appointed for one year terms to hold office until the next annual meeting of our

shareholders or until removed from office in accordance with our bylaws. Our executive officers are

appointed by our board of directors and hold office pursuant to employment agreements or until removed

by the board.

Family Relationships

There are no family relationships between or among the directors or executive officers.

Involvement in Certain Legal Proceedings

During the past ten years there are no events that occurred related to an involvement in legal proceedings

that are material to an evaluation of the ability or integrity of any of the Company’s directors, persons

nominated to become directors or executive officers.

Compliance with Section 16(A) of the Exchange Act

Section 16(a) of the Securities Exchange Act of 1934 requires officers and directors of the Company and

persons who own more than ten percent of a registered class of the Company's equity securities to file

reports of ownership and changes in their ownership with the Commission, and forward copies of such

filings to us. Based solely upon a review of Forms 3, 4 and 5 furnished to the Company, we are not aware

of any persons who, during the annual period ended May 31, 2014, failed to file, on a timely basis, reports

required by Section 16(a) of the Securities Exchange Act of 1934, except as follows:

§     Dr. Ryan Owen failed to file a Form 3 or Form 5 in connection with his appointment to the

Company’s board of directors on May 6, 2014.

Code of Ethics

The Company adopted a Code of Business Conduct & Ethics on June 13, 2012 and amended on

December 10, 2012, within the meaning of Item 406(b) of Regulation S-K of the Securities Exchange Act

of 1934, a copy of which is attached hereto as Exhibit 14 to this Form 10-K. Further, our Code of

Business Conduct & Ethics is available in print, at no charge, to any security holder who requests such

information by contacting us.  Our Code of Business Conduct and Ethics applies to directors and senior

officers, such as our principal executive officer, principal financial officer, controller, persons performing

similar functions and employees.

59



Board of Directors Committees

Audit Committee

The board of directors established an Audit Committee on June 25, 2012, comprised solely of

independent members to act on and report to the board of directors with respect to various auditing and

accounting matters, including the recommendations and performance of independent auditors, the scope

of the annual audits, fees to be paid to the independent auditors, and internal accounting and financial

control policies and procedures. Certain stock exchanges currently require companies to adopt a formal

written charter that establishes an audit committee that specifies the scope of an audit committee’s

responsibilities and the means by which it carries out those responsibilities.

Compensation Committee

The board of directors established a Compensation Committee on June 25, 2012, comprised solely of

independent members to help the board of directors discharge its responsibilities with respect to the

compensation of our Chief Executive Officer and other executive officers, the administration of the

Company's executive compensation and benefits programs and the production of an annual report on

executive compensation for inclusion in the Company's proxy statement.

Nominating Committee

The board of directors has established a Nominating & Corporate Governance Committee on June 25,

2012, comprised solely of independent members to assist the board of directors in connection with

nominations and corporate governance practices related to serving on the Company’s board of directors,

including candidates that may be referred by the Company’s stockholders. Stockholders who desire to

recommend candidates for evaluation may do so by contacting the Company in writing, identifying the

potential candidate and providing background information. Candidates may also come to the attention of

the board of directors through current members of the board of directors, professional search firms and

other persons. In evaluating potential candidates, the Nominating & Corporate Governance Committee

takes into account a number of factors, including among others, the following:

§     independence from management;

§     whether the candidate has relevant business experience;

§     judgment, skill, integrity and reputation;

§     existing commitments to other businesses;

§     corporate governance background;

§     financial  and  accounting  background,  to  enable  the  board  of  directors  to  determine  whether  the

candidate would be suitable for audit committee membership; and

§     the size and composition of the board.

Compliance

The board of directors established a Compliance and Ethics Committee on June 25, 2012, comprised

solely of independent members to assist the board of directors in connection with overseeing the

Company’s compliance program with respect to the laws and regulations applicable to the Company’s

business and compliance with Company’s Code of Business Conduct & Ethics and related policies by

employees, officers, directors and other agents or associates of the Company.

60



Director Compensation

Directors currently are reimbursed for out-of-pocket costs incurred in attending meetings, awarded stock

compensation, granted stock options pursuant to our 2009 Stock Option Plan and reimbursed for expenses

related to their service. The Company has entered into board of director’s compensation agreements with

each of its independent directors and employment agreements with its dependent directors which

compensation is not tied to their service to the board of directors.

The following table provides summary information for the fiscal year ended May 31, 2014 concerning

cash and non-cash compensation paid or accrued by the Company to or on behalf of our directors.

Director Compensation Table

Name

Fees

Stock

Option

Non-Equity

Nonqualified

All Other

Total

Earned

Awards

Awards

Incentive Plan

Deferred

Compensation

($)

Paid in

($)

($)

Compensation     Compensation

($)

Cash ($)

($)

Earnings

($)

Robert H.

Miller

-

-

-

-

-

120,000

120,000

Andrew J.

Sherman

144,000

-

-

-

-

-

144,000

Stephen Goss

-

-

-

-

-

75,500

75,500

Raymond

Tellini

-

-

-

-

-

-

-

Ryan Owen

-

14,200

150,000

-

-

-

164,200

Jeffrey Webb(1)

--

-

-

-

-

-

-

(1) Jeffrey Webb resigned from the Company’s Board of Directors on May 6, 2014.

Key Advisors

Reg Allen was most recently Chief Executive Officer of Vortek, a Canadian technology company that had

developed the world’s most powerful arc lamp. In 2004, Mr. Allen successfully sold Vortek to a public

U.S. semiconductor equipment manufacturer. Mr. Allen is considered a leading authority on applications

of the focused arc lamp system that is employed by the Company. At Vortek, Mr. Allen assembled an

international team of top-caliber staff and executed an ambitious business plan to commercialize the

application of arc lamp technology in advanced semiconductor equipment manufacturing. Mr. Allen has

over 30 years of experience working with engineering related solutions.

James Rodriguez de Castro's most recent professional background includes 14 years spent with Merrill

Lynch based in Japan and Hong Kong. His numerous senior executive roles there included Head of

Global Markets, New Initiatives and Advisory, Pacific Rim; Head of Trading, Equity Derivatives, CBs

and Index Arbitrage, Asia; and Head Trader, Japanese Equity Derivatives. His experience in the oil and

gas sector began with Bankers Trust during the 1992 Gulf War. He remains a very active investor in this

sector in Asia, and maintains active interests in mining and offshore equipment rental.

61



Sam Thomas is a professor of Banking and Finance at the Weatherhead School of Management of Case

Western Reserve University. He teaches in the Weatherhead MBA, MS, and Undergraduate programs.

His research and consulting activities focus on the practice of investment science, valuation, and

corporate strategy. His notable expertise is in integrating the global macro business cycle with practices in

corporate finance strategy and investments strategy. Dr. Thomas is active in the research and development

activities of corporate strategists, institutional investors, financial advisors and money managers and is

known for his ability to materially integrate academic research with product development. His recent

projects incorporate innovations in the design of corporate strategy and life-long portfolio construction in

a manner that is compatible with phases of the business cycle. Dr. Thomas recently played a very

important role at BluFin to develop India’s first comprehensive monthly Consumer Confidence Index

(CCI) to assess the pulse rate of the consumer that is expected to become the de facto standard for

measuring consumer sentiment in India.  Other projects include business cycle indicators and the design

of a comprehensive suite of stock market indices for India.

Damian Kotecki brings 43 years of welding expertise as well as his extensive technical and business

network to the Company. Dr. Kotecki’s extensive experience in welding research, pipeline failure

analyses, welding training and specifications, welding procedure development, quality assurance and

stainless/high alloy welding filler metal and product development will help assure the company’s

CermaCladtm  products incorporate the highest levels of technical excellence. In addition to co-authoring

the leading textbook on stainless steel welding, Dr. Kotecki conducted welding research projects and

pipeline failure analyses for the Battelle Memorial Institute, was the Director of Research for Teledyne

McKay (today part of Illinois Tool Works) and retired as the Technical Director for Stainless and High

Alloy Product Development for the world’s largest welding company, The Lincoln Electric Company. Dr.

Kotecki is past president of the American Welding Society (AWS), where he currently chairs the A5D

subcommittee on stainless steel welding and the International Standards Activities Committee. He is also

past chair of the International Institute of Welding Commission II Arc Welding and Filler Metals. Dr.

Kotecki holds a BS and MS in Mechanical Engineering, and a Ph.D. in Mechanical Engineering with a

minor in Metallurgical Engineering.

Andrew Hall is the founder and managing partner of Hall, Lamb and Hall, P.A. based in Miami, Florida

where he specializes in complex commercial litigation, professional negligence, securities litigation and

arbitration and international cases. From the Watergate trials and the Ohio savings and loan crisis, to the

2000 terrorist attack on the USS Cole, Hall’s trial skills have earned him national recognition, including

being named one of “The Best Lawyers in America” by Best Lawyers for the past decade.

Vinod Gupta is currently the chairman of the Ohio Board of Regents, where he also chairs the

Commercialization Tasks Force and serves on the Shared Services Task Force. He also serves as

an Entrepreneur-In Residence (EIR) for the Cleveland-based venture development non-profit

organization, Jumpstart Entrepreneurial Network (JEN) Advisors, where he helps to grow the northeast

Ohio technology ecosystem by using his 15 years of materials sector experience to coach entrepreneurs.

62



ITEM 11.

EXECUTIVE COMPENSATION

The objective of the Company’s compensation program is to provide compensation for services rendered

by our executive officers. The Company’s salaries and stock option awards are designed to retain the

services of our executive officers. Salary and stock option awards are currently the only type of

compensation used in our compensation program. We use these forms of compensation because we feel

that they are adequate to retain and motivate our executive officers. The amount we deem appropriate to

compensate our executive officers is determined in accordance with market forces as we have no specific

formula to determine compensatory amounts at this time. While we have deemed that our current

compensatory program and the decisions regarding compensation are easy to administer and are

appropriately suited for our objectives, we may expand our compensation program to additional future

employees to include other compensatory elements.

During the annual periods ended May 31, 2014 and May 31, 2013 our chief executive officer received

compensation of $10,000 per month pursuant to his existing consulting agreement with the Company.

Management believes that the executive compensation paid to our chief executive officer will increase

over the next twelve months as its business develops as in a higher salary and the grant of stock options.

During the annual periods ended May 31, 2014 and May 31, 2013, our chief financial officer received

compensation of $8,000 per month pursuant to an employment agreement dated August 20, 2010, and a

grant of 200,000 stock options at an exercise price of $0.65 per share for a period of ten years from the

date of grant valued at $130,000. The Company made an additional grant of 200,000 stock options at an

exercise price of $1.25 per share for a period of ten years from the date of grant as an incentive for his

continued advice and consultation.

During the annual periods ended May 31, 2014 and May 31, 2013, our former chief financial officer

received compensation of $16,000 per month pursuant to an employment agreement dated December 5,

2012, a grant of 125,000 stock options at an exercise price of $2.61 per share for a period of ten years

from the date of grant valued at $331,384 in addition to those 150,000 stock options at an exercise price

of $2.30 per share for a period of ten years from the date of grant valued at $317,991 granted in

connection with his appointment to the Company’s board of directors on December 5, 2012 (from which

position he resigned on accepting his appointment as the Company’s chief financial officer), stock awards

and a stock retention award.

During the annual periods ended May 31, 2014 and May 31, 2013, the chief executive officer of

MesoCoat, a Company subsidiary, was paid $12,000 per month pursuant to an employment agreement

dated December 1, 2009.

Summary Compensation

The following table provides summary information for the fiscal years ended May 31, 2014 and 2013

concerning cash and non-cash compensation paid or accrued by the Company to or on behalf of (i) the

chief executive officer, (ii) the two most highly compensated executive officers other than the chief

executive officer if compensated at over $100,000 and (iii) additional individuals if compensated at over

$100,000.

63



Executive Compensation Table

Name and

Year

Annual

Bonus      Stock

Option

Non-Equity

Nonqualified

All Other

Total

Principal

(ended     Salary

($)

Awards

Awards

Incentive Plan

Deferred

Compensation

($)

Position

May

($)

($)

($)

Compensation

Compensation

($)

31)

($)

Earnings

($)

Robert Miller:

2014

120,000

-

-

-

-

-

-

120,000

CEO, Director(1)

2013

120,000

-

-

-

-

-

-

120,000

Costas Takkas

2014

96,000

-

250,000

-

-

-

346,000

CFO, PAO(2)

2013

96,000

-

-

-

-

-

96,000

David

Charbonneau:

2014

153,600

-

20,000

-

-

-

-

173,600

CFO, PAO(3)

2013

86,308

-

20,000

649,375

-

-

19,000

774,683

Andrew J.

2014

144,000

-

-

-

-

-

-

$144,000

Sherman

2013

144,000

-

-

-

-

-

-

$144,000

CEO MesoCoat(4)

(1)     Robert Miller was appointed as chief executive officer and director on December 8, 2009.

(2)     Costas Takkas was appointed as Chief Financial Officer and Principal Accounting Officer on August 20, 2010 and

resigned on May 11, 2011. Costas Takkas was appointed Chief Financial Officer and Principal Account Officer on

February 7, 2014 on the resignation of David Charbonneau..

(3)     David Charbonneau was appointed as Chief Financial Officer and Principal Accounting Officer on December 5, 2012

and resigned as Chief Financial Officer and Principal Accounting Officer on February 7, 2014.

(4)     Andrew J. Sherman served as the Chief Executive Officer of MesoCoat, a Company subsidiary, until his resignation on

May 31, 2014..

Outstanding Equity Awards

The following table provides summary information for the period ended May 31, 2014 concerning

unexercised options, stock that has not vested, and equity incentive plan awards by the Company to or on

behalf of (i) the chief executive officer and chief financial officer and (ii) an executive of MesoCoat

whose total compensation exceeds $100,000:

64



Outstanding Equity Awards at Fiscal Year-End

Option awards

Stock awards

Equity

Equity

incentive

Equity

incentive plan

plan

Market     incentive plan  awards: market

awards:

Number

value of    awards:

or payout

Number of

Number of

number of

of shares     shares

number of

value of

securities

securities

securities

or units

or units     unearned

unearned

underlying

underlying

underlying

of stock

of stock    shares, units     shares, units or

unexercised     unexercised

unexercised     Option

that have     that

or other rights  other rights

options

options

unearned

exercise

Option

not

have not   that have not    that have not

(#)

(#)

options

price

expiration     vested

vested

vested

vested

Name

exercisable      unexercisable     (#)

($)

date

(#)

(#)

(#)

($)

Robert H.

Miller(1)

-

-

-

-

-

-

-

-

-

Andrew J.

Sherman

1,000,000

-

-

0.60

December

11, 2019

-

-

-

-

David

Charbonneau

100,000

50,000

-

2.30

June 15,

2022

-

-

-

-

David

Charbonneau

41,667

83,333

-

2.61

December 5,

2022

-

-

-

-

Costas

Takkas

200,000

-

-

.65

August 20,

2020

Costas

Takkas

-

200,000

-

1.25

December 5,

2023

(1)    Mr. Miller was the indirect, beneficial owner of 1  million and 500,000 options.  The previously granted options

dated December 11, 2009 and October 19, 2010 were cancelled per mutual agreement on December 4, 2012.

(2)    Mr. Sherman’s previously granted options dated December 11, 2009 were cancelled except for 350,000 on May

31, 2014.

.

2009 Stock Option Plan

Our board of directors adopted and approved our 2009 Stock option Plan (“Plan”) on December 14,

2009, which provides for the granting and issuance of up to 10 million shares of our common stock. As

of August 17, 2014, 4,486,667 shares of common stock were outstanding at exercise prices of $0.60,

$0.65, $0.75, $1.00, $1.02, $1.03, $1.05, $1.07, $1.20,  $1.25, $1.30, $1,90, $1.95, $2.05, $2.30, $2.61,

$2.70, $2.80 and $2.94 per share, which options vest up to three years.  The Stock Option Plan has

6,120,000 options available for future grant.

Our board of directors administers our Plan, however, they may delegate this authority to a committee

formed to perform the administration function of the Plan. The board of directors or a committee of the

board has the authority to construe and interpret provisions of the Plan as well as to determine the terms

of an award. Our board of directors may amend or modify Plan at any time. However, no amendment or

modification shall adversely affect the rights and obligations with respect to outstanding awards unless

the holder consents to that amendment or modification.

The Plan permits us to grant non-statutory stock options to our employees, directors and consultants.

The options issued under this Plan are intended to be non-statutory stock options exempt from Code

Section 409A. The duration of a stock option granted under our Plan cannot exceed ten years. The

exercise price of an incentive stock option cannot be less than 100% of the fair market value of the

common stock on the date of grant.

65



The Plan administrator determines the term of stock options granted under our Plan, up to a maximum of ten years, except in the case of certain events, as described below.  Unless the terms of an optionee's stock option agreement provide otherwise, if an optionee's relationship with us ceases for any reason

other than disability or death, the optionee may exercise any vested options for a period of ninety days

following the cessation of service. If an optionee's service relationship with us ceases due to disability or

death the optionee or a beneficiary may exercise any vested options for a period of 12 months in the

event of disability or death.

Unless the Plan administrator provides otherwise, options generally are not transferable except by will,

the laws of descent and distribution, or pursuant to a domestic relations order. An optionee may

designate a beneficiary, however, who may exercise the option following the optionee's death.

Long Term Incentive Plan Awards.

We have no long-term incentive plans.

Termination of Employment and Change in Control Arrangements

The Company has no plans that provides for the payment of retirement benefits, or benefits that will be

paid primarily following retirement.

The Company has no agreement that provides for payment to any executive officer at, following, or in

connection with the resignation, retirement or other termination, or a change in control of Company or a

change in our executive officers’ responsibilities following a change in control.  .

66



ITEM 12.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND

MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The following table sets forth certain information concerning the ownership of the Company’s 68,418,615

shares of common stock issued and outstanding as of September 30, 2014 with respect to: (i) all directors;

(ii) each person known by us to be the beneficial owner of more than five percent of our common stock;

and (iii) our directors and executive officers as a group.

Name and Address of Beneficial

Title of Class

Ownership

Amount and nature of

Percent of

Beneficial Ownership1

Class

Robert H. Miller

Common Stock

4801 Alhambra Circle

24,120,0002

35.3%

Coral Gables, Florida 33146

Andrew J. Sherman

Common Stock

9181 Boyer Lane

03

0%

Kirtland Hills, Ohio  44060

Stephen Goss

Common Stock

16373 Bridle Wood Circle

20,0004

<0.01%

Delray Beach, Florida 33445

Ray Tellini

Common Stock

15 Shoreby Drive

05

0%

Bratenahl, Ohio 44108

Ryan Owen

Common Stock

1025 S. Shepherd Drive #101

20,0006

<0.01%

Houston, TX 77019

Costas Takkas

Common Stock

2642 Collins Avenue, Suite  305

105,0007

<0.01%

Miami Beach, FL 33140

Common Stock

All Executive Officers and Directors

as a Group

24,245,000

35.4%

Maria Maz

Common Stock

4801 Alhambra Circle

17,420,0008

25.5%

Coral Gables, Florida 33146

Common Stock

Thomas and Mario Miller Family

Irrevocable Trust u/a/d 12/01/2009

5,250,000

7.7%

(1)     Beneficial ownership is determined in accordance with Commission rules and generally includes voting or investment power with

respect to securities. Shares of common stock subject to options, warrants and convertible preferred stock currently exercisable or

convertible, or exercisable or convertible within sixty (60) days, would be counted as outstanding for computing the percentage of the

person holding such options or warrants but not counted as outstanding for computing the percentage of any other person.

(2)     Mr. Miller is a beneficial owner of 17,420,000 shares held by Ms. Maria Maz, to whom Mr. Miller is married, Ms Maz was the

previous chief executive officer of the Company from September 2008 until Mr. Miller assumed the position in Dec 2009 and the

beneficial owner of 5,250,000 shares held by the Thomas and Mario Miller Family Irrevocable Trust u/a/d 12/01/2009, which trust’s

beneficiaries are Mr. Miller’s children, and 1,450,000 shares held by the Tarija Foundation for which Mr. Miller serves as a director.

(3)     Mr. Sherman was granted 1,000,000 options that vest in equal increments over three years to purchase shares of common stock at

$0.60 per share on or before December 14, 2019. 650,000 of Mr. Sherman’s options were cancelled on May 31, 2014.

(4)     Mr. Goss was granted 150,000 options that vest in equal increments beginning on January 5, 2013 over three years to purchase shares

of common stock at $1.00 per share on or before January 4, 2023. On February 1, 2013 Mr. Goss entered into a BOD Compensation

Agreement wherein he was compensated in part with the issuance of 20,000 restricted shares.

(5)     Mr. Tellini was granted 175,000 options that vest in equal increments beginning on December 5, 2012 and thereafter in equal parts

over three years to purchase shares of common stock at $2.61 per share on or before December 4, 2022.

(6)     Mr. Owen was granted 150,000 options that vest in equal increments beginning on April 30, 2015 over three years to purchase

common stock at $1.00 per share on or before May 6, 2024. Mr. Owen entered into a BOD Compensation Agreement wherein he was

compensated in part with the issuance of 20,000 restricted shares.

(7)     Mr. Takkas was granted 130,000 options that vest in equal increments beginning on August 1, 2011 over three years to purchase

common stock at $0.65 per share on or before August 20, 2020. Mr. Takkas was also granted 200,000 options that vest in equal

increments beginning on December 5, 2014 over three years at $1.25 per share on or before December 5, 2023.

(8)     Ms. Maz directly owns 17,420,000 shares, and beneficially owns 5,250,000 shares held by the Thomas and Mario Miller Family

Irrevocable Trust u/a/d 12/01/2009, which trust’s beneficiaries are Ms. Maz’s children and 1,450,000 shares held by the Taraji

Foundation for which Mr. Miller serves as a director.

67



ITEM 13.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND

DIRECTOR INDEPENDENCE

Neither our director or executive officer, nor any proposed nominee for election as a director, nor any

person who beneficially owns, directly or indirectly, shares carrying more than 5% of the voting rights

attached to all of our outstanding shares, nor any members of the immediate family (including spouse,

parents, children, siblings, and in-laws) of any of the foregoing persons has any material interest, direct or

indirect, in any transaction in the period covered by this report or in any presently proposed transaction

which, in either case, has or will materially affect us, except as follows:

On May 6, 2014, the Company entered into a board of director’s compensation agreement with Ryan

Owen, pursuant to which agreement Mr. Owen was granted 150,000 stock options at an exercise price of

$1.00 per share for a period of ten years that vest in equal amounts over three years beginning April 30,

2015. Mr. Owen was also issued 20,000 restricted common shares.

On May 31, 2014, the Company’s subsidiaries, entered into a consulting agreement with Energy

Management Consultants, LLC. , an entity owned and controlled by Andrew Sherman, one of our

directors, on the termination of his employment agreement with MesoCoat, pursuant to which

Management Consultant’s is paid a consulting fee of $6,175 per month through the end of the term on

December 31, 2014. The agreement further provides for additional compensation in the event

Management Consultants is involved in procuring Federal contracts and grants.

Director Independence

Our common stock is quoted on the OTCQB electronic quotation system, which does not have director

independence requirements. Nonetheless, for the purposes of determining director independence, we have

applied the definitions set out in NASDAQ Rule 4200(a) (15), pursuant to which rule a director is not

considered independent if he or she is also an executive officer or employee of the corporation.

Accordingly, the Company deems Mr. Tellini and Mr. Owen to be independent directors.

ITEM 14.

PRINCIPAL ACCOUNTANT FEES AND SERVICES CL

The  following  is  a  summary  of  the  fees  that  are  billed  to  us  by  our  auditors  for  professional  services

rendered for the past two fiscal years:

Fee Category

Fiscal 2014 Fees ($)      Fiscal 2013 Fees ($)

Audit Fees

82,500

80,500

Audit-Related Fees

5,220

7,690

Tax Fees

12,210

7,210

All Other Fees

-

-

Audit fees consist of fees billed for professional services rendered for the audit of our financial statements

and review of the interim financial statements included in quarterly reports and services that are normally

provided by Skoda Minotti & Co., Certified Public Accountants (“Skoda”), since July 19, 2011 in

connection with statutory and regulatory filings or engagements.

Audit Committee Pre-Approval

The audit committee pre-approved all services provided to us by Skoda Minotti for the year ending May

31, 2014.   Skoda performed all work only with their permanent full time employees.

68



PART IV

ITEM 15.

EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) Financial Statements

The following documents are filed under Item 8. Financial Statements and Supplementary Data, pages

F-1 through F-55, and are included as part of this Form 10-K:

Financial Statements of the Company for the years ended May 31, 2014 and 2013:

Report of Independent Registered Public Accounting Firm

Balance Sheets

Statements of Operations

Statements of Stockholders’ Equity

Statements of Cash Flows

Notes to Financial Statements

(b) Exhibits

The exhibits required to be attached by Item 601 of Regulation S-K are listed in the Index to Exhibits on

page 71 of this Form 10-K, and are incorporated herein by this reference.

(c) Financial Statement Schedules

We are not filing any financial statement schedules as part of this Form 10-K because such schedules are

either not applicable or the required information is included in the financial statements or notes thereto.

69



SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant

has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Abakan Inc.

Date

/s/ Robert H. Miller

By: Robert H. Miller

September 30, 2014

Its: Chief Executive Officer and Director

/s/ Costas Takkas

By: Costas Takkas

Its: Chief Financial Officer and Principal Accounting Officer

September 30, 2014

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by

the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Date

/s/ Robert H. Miller

Robert H. Miller

Chief Executive Officer and Director

September 30, 2014

/s/ Andrew Sherman

Andrew Sherman

September 30, 2014

Director

/s/ Stephen Goss

Stephen Goss

September 30, 2014

Director

/s/ Ray Tellini

Ray Tellini

September 30, 2014

Director

/s/ Ryan Owen

Ryan Owen

September 30, 2014

Director

70



INDEX TO EXHIBITS

Exhibit No.

Exhibit Description

3.1*

Articles of Incorporation and Certificate of Amendment, incorporated hereto by reference to

the Form SB-2, filed with the Commission on June 19, 2007.

3.2*

Bylaws, incorporated hereto by reference to the Form SB-2, filed with the Commission on

June 19, 2007.

10.1*

Lease Agreement between Powdermet and Sherman Properties, LLC dated March 7, 2007,

incorporated hereto by reference to the Form 10-K filed with the Commission on September

13, 2011.

10.2*

License agreement between MesoCoat and Powdermet dated July 22, 2008, incorporated

hereto by reference to the Form 10-K/A-2 filed with the Commission on December 27, 2011.

10.3*

Exclusive license between MesoCoat and UT-Battelle, LLC, dated September 22, 2009,

incorporated hereto by reference to the Form 10-K/A-2 filed with the Commission on

December 27, 2011.

10.4*

Articles of Merger dated November 9, 2009, incorporated hereto by reference to the Form 8-

K filed with the Commission on December 9, 2009.

10.5*

Agreement and Plan of Merger dated November 9, 2009, incorporated hereto by reference to

the Form 8-K filed with the Commission on December 9, 2009.

10.5*

Consulting agreement dated December 1, 2009, between the Company and Mr. Greenbaum,

incorporated hereto by reference to the Form 8-K filed with the Commission on May 28,

2010.

10.7*

Employment agreement dated December 1, 2009, between MesoCoat and Andrew Sherman,

incorporated hereto by reference to the Form 10-K filed with the Commission on September

13, 2011.

10.8*

Consulting agreement date December 1, 2009 between the Company and Prosper Financial

Inc., incorporated hereto by reference to the Form 10-K filed with the Commission on

September 13, 2011.

10.9*

Consulting agreement dated December 8, 2009 between the Company and Robert Miller,

incorporated hereto by reference to the Form 10-K filed with the Commission on September

13, 2011.

10.10*

Investment Agreement dated December 9, 2009, between the Company, MesoCoat and

Powdermet, incorporated hereto by reference to the Form 8-K filed with the Commission on

December 17, 2009.

10.11*

Agreement date March 17, 2010 between the Company and Sonnen Corporation,

incorporated hereto by reference to the Form 10-K filed with the Commission on September

13, 2011.

10.12*

Agreement dated April 30, 2010 between the Company and Mr. Buschor, incorporated hereto

by reference to the Form 8-K filed with the Commission on May 11, 2010.

10.13*

Commercial lease agreement date June 1, 2010, between Powdermet and MesoCoat,

incorporated hereto by reference to the Form 10-K filed with the Commission on September

13, 2011.

10.14*

Stock Purchase Agreement dated June 29, 2010 between the Company and Kennametal,

incorporated hereto by reference to the Form 8-K filed with the Commission on September

15, 2010.

10.15*

Employment agreement dated August 20, 2010, between the Company and Mr. Takkas,

incorporated hereto by reference to the Form 8-K filed with the Commission on August 26,

2010.

71



10.16*

Amendment No. 1 to Stock Purchase Agreement between the Company and Kennametal

dated September 7, 2010, incorporated hereto by reference to the Form 8-K filed with the

Commission on September 15, 2010.

10.17*

Amendment to the Investment Agreement dated December 8, 2010, between the Company,

MesoCoat and Powdermet, incorporated hereto by reference to the Form 10-Q filed with the

Commission on January 19, 2011.

10.18*

Cooperation Agreement between MesoCoat and Petroleo Brasileiro S.A. dated January 11,

2011, incorporated by reference to the Form 8-K/A-3 filed with the Commission on March 6,

2012. (Portions of this exhibit have been omitted pursuant to a request for confidential

treatment.)

10.19*

Amendment No. 2 to Stock Purchase Agreement between the Company and Kennametal

dated January 19, 2011, incorporated hereto by reference to the Form 8-K filed with the

Commission on July 13, 2011.

10.20*

Accord and Satisfaction Agreement dated March 21, 2011 between the Company and

Kennametal, Inc., incorporated hereto by reference to the Form 8-K filed with the

Commission on March 25, 2011.

10.21*

Assignment Agreement dated March 25, 2011 with Polythermics LLC and MesoCoat,

incorporated hereto by reference to the Form 10-Q/A filed with the Commission on

September 27, 2011.

10.22*

Exclusivity Agreement between MesoCoat and Mattson Technology, Inc. dated April 7,

2011, incorporated hereto by reference to the Form 8-K/A-3 filed with the Commission on

March 6, 2012. (Portions of this exhibit have been omitted pursuant to a request for

confidential treatment.)

10.23*

Accord and Satisfaction of Investment Agreement dated May 31, 2014, incorporated hereto

by reference to the Form 8-K filed with the Commission on June 3, 2014.

14*

Code of Business Conduct & Ethics adopted on June 13, 2012, and incorporated hereto by

reference to the Form 10-K filed with the Commission on September 13, 2013.

21

Subsidiaries of the Company, attached.

31.1

Certification of the Chief Executive Officer pursuant to Rule 13a-14 of the Exchange Act as

adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, attached.

31.2

Certification of the Chief Financial Officer pursuant to Rule 13a-14 of the Exchange Act as

adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, attached.

32.1

Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted

pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, attached.

32.2

Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted

pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, attached.

101. INS      XBRL Instance Document

101. PRE     XBRL Taxonomy Extension Presentation Linkbase

101. LAB    XBRL Taxonomy Extension Label Linkbase

101. DEF     XBRL Taxonomy Extension Label Linkbase

101. CAL    XBRL Taxonomy Extension Label Linkbase

101. SCH     XBRL Taxonomy Extension Schema

*

Incorporated by reference to previous filings of the Company.

Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed “furnished”

and not “filed” or part of a registration statement or prospectus for purposes of Section 11 or

12 of the Securities Act of 1933, or deemed “furnished” and not “filed” for purposes of

Section 18 of the Securities and Exchange Act of 1934, and otherwise is not subject to

liability under these sections.

72