UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K/A

(Mark One)

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

For the fiscal year ended May 31, 2015.

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

For the transition period from

_to

Commission file number: 000-52784

ABAKAN INC.

(Exact name of registrant as specified in its charter)

Nevada

98-0507522

(State or other jurisdiction of

(I.R.S. Employer

incorporation or organization)

Identification No.)

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

(Address of principal executive offices) (Zip Code)

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

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

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

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

Yes o No þ

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

Yes o No þ

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

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

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

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

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

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

Yes þ No o

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

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

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

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

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

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

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

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

affiliates (55,256,088 shares) was $11,051,218 based on the average of the bid and ask price ($0.20) for the common stock on

September 11, 2015.

On September 14, 2015, the number of shares outstanding of the registrant’s common stock, $0.0001 par value (the only class of

voting stock), was 79,501,088.

TABLE OF CONTENTS

PART I

Item1.

Business

Item 1A.

Risk Factors

Item 1B.

Unresolved Staff Comments

Item 2.

Properties

Item 3.

Legal Proceedings

Item 4.

Mine Safety Disclosure

PART II

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of 37

Equity Securities

Item 6.

Selected Financial Data

Item 7.

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

Item 7A.

Quantitative and Qualitative Disclosures about Market Risk

Item 8.

Financial Statements and Supplementary Data

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

Item 9A.

Controls and Procedures

Item 9B.

Other Information

PART III

Item 10.

Directors, Executive Officers, and Corporate Governance

Item 11.

Executive Compensation

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder

Matters

Item 13.

Certain Relationships and Related Transactions, and Director Independence

Item 14.

Principal Accountant Fees and Services

PART IV

Item 15.

Exhibits, Financial Statement Schedules

Signatures

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

indicates otherwise.

EXPLANATORY NOTE

The Company’s Form 10-K filed on September 15, 2015 (“Original Filing”) is amended hereby by this Form 10-K/A filed on September 16, 2015 ("Amendment") to amend the presentation only of certain disclosure in its Consolidated Statements of Stockholders’ Equity due to formatting issues discovered subsequent to the Original Filing. The disclosures in this Amendment continue to describe conditions as of the date of the Original Filing, and the disclosures contained herein have not been updated to reflect events, results or developments that have occurred after the Original Filing, or to modify or update those disclosures affected by subsequent events. Among other things, forward-looking statements made in the Original Filing have not been revised to reflect events, results or developments that have occurred or facts that have become known to us after the date of the Original Filing, and should be read in their historical context.

ITEM 1.

BUSINESS

Corporate History

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

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

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

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

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

The Company

The Company designs, develops, manufactures, and markets advanced nano-composite materials, innovative fabricated metal products, highly engineered metal composites and engineered reactive materials for applications in the oil and gas, petrochemical, mining, aerospace and defense, energy, infrastructure, and processing industries. Our technology portfolio includes high-speed, large-area metal cladding technology, long-life nano-composite anti-corrosion and wear coating materials, high-strength lightweight metal composites, and high-strength dissolvable materials. Operations are conducted through our subsidiary, MesoCoat, Inc. ("MesoCoat").

The Company owned an 88.08% controlling interest in MesoCoat and a 24.1% non-controlling interest in Powdermet as of May 31, 2015. Powdermet owned an 11.92% interest in MesoCoat, and 84.5% interest in Terves Inc. (82.2% on a fully diluted basis). The Company’s interest in Powdermet represented an additional 2.87% indirect interest in MesoCoat. The Company’s combined direct and indirect interest in MesoCoat was 90.95% as of May 31, 2015. On July 23, 2015, the Company increased its interest in MesoCoat to 100% of MesoCoat and decreased its interest in Powdermet to 4.53%.

On August 18, 2015, the United States District Court for the Southern District of New York granted summary judgment against the Company and MesoCoat in favor of George Town Associates S.A. in the amount of $1,770,932 in connection with a default on amounts owed pursuant to a secured promissory note. The Court further appointed a receiver over MesoCoat to administer the collection of the judgment. The effect of the Court’s decision is that currently substantially all of MesoCoat’s assets are now subject to determination by the Court appointed receiver. The Company does not have the funds to satisfy the default judgment and although efforts remain underway to secure financing sufficient to satisfy the obligation no financing for this purpose has yet been secured.

MesoCoat, Inc.

On December 11, 2009, the Company entered into an Investment Agreement with MesoCoat and

Powdermet, in order to initially acquire a fully diluted 34% interest in MesoCoat for $1,400,030, with the

intention to increase its ownership of MesoCoat to 75%, before exchanging Company shares for

Powdermet’s Mesocoat shares to acquire 100% of MesoCoat. Prior to the execution of the Investment

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

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

21, 2011, the Company purchased 596,813 shares of Powdermet from Kennametal, Inc. equal to a 41%

interest in Powdermet.

On July 13, 2011, the Company completed purchased an additional 86,156 newly issued shares of

MesoCoat under the Investment Agreement, equal to a fully diluted 18.5% equity interest in MesoCoat

for $2,800,000, thereby increasing its direct ownership of MesoCoat to a fully diluted 52.5% interest.

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

Investment Agreement (“Investment Accord and Satisfaction”) that terminated any further obligation of

the parties to the Investment Agreement and accelerated the plan to increase the Company’s direct

ownership of MesoCoat. The Investment Accord and Satisfaction permitted the Company to convert its

additional investment in MesoCoat of $6,169,236 into MesoCoat equity, exchange a portion of its

Powdermet shares for a portion of Powdermet’s MesoCoat shares and 2,000,000 of the Company’s

shares, reduce lease obligations, and modify an acquisition and license agreement to secure additional IP,

equipment, and manufacturing rights. The effect of the transaction was that the Company increased its

ownership position in MesoCoat to 88.08% direct and 90.5% direct and indirect ownership in exchange

the Company decreased its ownership position in Powdermet to 24.9% from 40.5%.

On July 23, 2015, the Company acquired from Powdermet: the remaining 11.9% of MesoCoat, land and

equipment worth $550,000, the extinguishment of existing inter-company debt of $486,000, the return of

400,000 outstanding Company common shares to authorized capital, and $1,000,000 in cash to increase

its ownership MesoCoat Inc. to 100%. in exchange for 240,000 shares of the Company's minority

ownership in Powdermet Inc. (decreasing its issued and outstanding [not fully diluted] ownership

percentage of Powdermet from 24.1% to 4.53% after returning shares to Powdermet for cancellation),

The decision to divest a significant portion of the Company’s ownership of Powdermet, was unanimously

agreed upon by the respective boards of directors of the Company and Powdermet, and is the culmination

of the staged acquisition of MesoCoat which was planned on the Company’s initial investment in 2009.

The price per share of the July 2015 equity conversion of the Company’s investment in MesoCoat is

equal to the last price at which the Company converted invested capital to equity in May 2014. The

Company originally purchased Kennametal’s 41% interest in Powdermet specifically to acquire its

minority interest in MesoCoat. The 41% interest was purchased from Kennametal Inc., in March, 2011

for $1,700,000, (including a $300,000 late payment fee), of which 37.4% has now been returned to

Powdermet in two separate transactions for an approximate value to the Company of $10,000,000, based

on the same value per share calculated in the valuation of MesoCoat that was relied upon in the

Company's May 31, 2014 year-end audit, translating into an effective return on investment of around

500%.

MesoCoat’s Business

MesoCoat is an Ohio based materials science company intent on becoming a technology leader in metal

protection and repair based on its metal composite coating and metal cladding technologies. These

technologies are designed to address specific industry needs related to conventional oil and gas, oil sands,

mining, aerospace, defense, infrastructure, and shipbuilding. MesoCoat was originally formed by

Powdermet to focus on the further development and commercialization of Powdermet’s nano-composite

coatings technologies. The coating assets of Powdermet were licensed to MesoCoat in July of 2008, along

with transfer of outstanding contracts and key personnel.

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

known as CermaClad, and a family of advanced nano-composite thermal spray coating materials known

as PComP. CermaClad and PComP combine corrosion and wear resistant alloys, and nano-engineered

cermet materials with proprietary high-speed coating or cladding application systems. Ten of MesoCoat’s

products; 3 Corrosion Resistant Alloy (CRA) materials (625, 825 and 316L), 3 Wear Resistant Alloy

(WRA) materials (Tungsten Carbide (WC), Chrome Carbide (CRC)and Structurally Amorphous Metal

(SAM) Alloys) and 4 PComP product families (PComP-W, PComP-T, PComP-S and PComP-M) have

either undergone extensive laboratory and independent testing, are in the development and qualification

stage, or are being used in the field or being tested by oil and gas majors, pipe manufacturers, oil field

equipment manufacturing and service companies, original equipment manufacturers (OEMs) and other

end users.

MesoCoat’s revenues are comprised of sales of PComP powder along with thermal spray application

services, research and development grants and equipment sale and lease income. Current grants from U.S.

government agencies are to develop new uses for CermaClad to solve critical problems, including certain

projects for the Department of Energy and the National Institute of Health. Lease income is generated

from a 24 month CermaClad equipment lease as part of a Contribution Agreement with the Northern

Alberta Institute of Technology to establish a prototype demonstration facility for developing, testing and

commercializing wear-resistant clad pipe and components in Alberta, Canada. One CermaClad unit was

also sold to a local university to help establish a nationwide corrosion and coating center of excellence,

and support Mesocoat’s R&D and company workforce development needs via access to graduate and

undergraduate students and staff at the University of Akron.

Although the oil and gas industry is important to the Company, it is not the only industry that could

benefit from our low life-cycle cost products. The U.S. Department of Commerce counts 800 industry

classifications that face problems with corrosion and wear, which is a growing issue faced by companies

worldwide. The Company’s advanced metal coating solutions addresses the concerns of several other

large industries including steel, mining, aerospace and defense, chemical, petrochemical, infrastructure,

nuclear, desalination, and others. For example, the U.S. military alone spends over $40 billion annually to

address wear and corrosion of its assets (Source: The U.S. Army’s SBIR Commercialization Brochure,

2010). According to ‘The World Corrosion Organization’, the cost of corrosion to the global economy is

$2.2 trillion annually, or roughly 3% of the world’s GDP. The global market for products and services to

combat wear and corrosion is estimated at over $200 billion, which includes more than $103 billion

annually in paints and coatings, and a forecasted $100 billion in specialty steel, alloys, and metal

composites (Sources: Data Monitor and BCC Research).

The Company is also developing solutions for the nuclear, healthcare, medical, and other industries,

primary funded by government agencies.

PComP

PComP is an award-winning family of nano-composite cermet coating materials used to impart wear and

corrosion resistance and to restore dimensions of worn metal components. Named after Particulate

Composite Powders, PComP is the result of over a decade of nano-engineered materials development, and

is now one of the few commercially viable industry replacement solutions for hard chrome plating and

thermal spray carbide coatings. Note that PComP is a manufacturing and materials science platform, and

not a product, which means that with the PComP manufacturing methodology we can combine a variety

of materials with precision control at the nano-level, creating best-in-class corrosion- and wear-protection.

PComP technology has been awarded the globally recognized R&D100 award, along with multiple

additional awards.

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

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

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

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

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

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

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

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

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

solution platform which has shown order of significant improvements in head to head wear and corrosion

performance tests, while offering a significantly better value proposition over hard chrome alternatives.

Using the proprietary PComP technology platform, MesoCoat has developed and patented a family of

corrosion resistant and wear resistant coating solutions that combine extreme corrosion and/or wear

resistance, fracture toughness (resiliency), and a low friction coefficient. In conventional materials

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

nano-level structure control with advanced ductile phase toughening materials science, MesoCoat has

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

important, the hardness of a wear coating normally limits the ease with which it can be machined, and

limit the efficiency and rate at which it can be applied as a coating. The unique hierarchical structure of

the PComP coating solutions results in a coating that can be machined through a finish grinder much

faster than a product with a traditional carbide coating, and which can be applied at much higher rates and

efficiencies. The speed and efficiency of the coating application, and faster final machining results in

higher productivity and lower costs in metal finishing operations, enabling these higher performance

coatings to be applied with lower capital cost, space, and applications costs than competing overlay

products, and without the regulatory and worker exposure liabilities of competing operations.

The revolutionary nano-structure of the PComP coatings produces a coating that offers significant

benefits being exploited by our value chain partners. PComP is self-polishing when in use, resulting in

extremely low fluid leakage, and friction properties approaching those of diamond-like carbon (DLC)

films and solid lubricants. Unlike DLC and other vapor deposited films, PComP has the ability to be

applied to large components without expensive vacuum equipment, at substantially lower capital and

application cost than coatings such as diamond-like carbon. The low friction properties reduces wear, and

improves energy efficiency and life in sliding components such as drilling rotors, plungers, mandrels, ball

and gate valves, rotating and sliding seals, and metal processing equipment.

When MesoCoat began operations in 2008, the primarily focus was to commercialize a customized,

silicon nitride (PComP-S) thermal spray coating material in the aerospace industry as it provided

improved performance compared ,to the conventionally used tungsten carbide coating (most viable

alternative for toxic chrome plating which is regulated by the Department of Defense) at 1/3rd the density

which could reduce the weight of coatings by up to 200 lbs. on a single aircraft thereby saving over $1

million a year in fuel costs. The transition plan was through the Department of Defense on legacy

aircraft, based on life extension and reduced operating costs. In 2009, due to sequestration, rescission of

the executive order directing the elimination of all DOD chrome use, and changes in the Air Force facility

engineering support value chain, this legacy aircraft insertion effort was defunded and delayed

indefinitely after the initial component scale validation efforts.

However, when MesoCoat forayed into the oil and gas industry, it learned more about that industry’s

thermal spray coating needs which relies heavily on conventional tungsten carbide thermal spray

powders. Even though these powders provide coatings that are very hard (can withstand significant

impact), the higher hardness leads to lower toughness (cannot withstand stress, flexing, or vibrations) that

leads to spallation (flaking). Since most components used in the oil and gas industry such as rolls,

mandrels, and drilling tools, vibrate and flex in high-pressure environments, conventional tungsten

carbide based coatings tend to flake causing failure. In early 2010, MesoCoat began development work on

a replacement by integrating its PComP manufacturing process to produce a tungsten carbide coating

material that is both hard and tough. The result was the PComP-W family of coating materials, which

produce coatings that are both hard and tough, enabling them to withstand both impact and stress.

PComP-W coatings can enable most oilfield and industrial components to operate 3-10X longer than

conventional coatings potentially saving millions of dollars in early replacement, downtime, and

maintenance costs ordinarily associated with flaking of the coatings. PComP-W coatings are now field-

proven in multiple applications, and are gaining traction in life-limiting components in a number of

applications.

A further result of this work was the development and commercialization of titanium nitride based

PComP-T coatings. MesoCoat is the only company that has been able to develop titanium-nitride

(PComP-T) and silicon-nitride (PComP-S) based thermal spray coatings. Researchers and scientists have

been trying to develop titanium-nitride and silicon-nitride based thermal spray coatings for several

decades with no success. Nonetheless, MesoCoat has not just been able to develop these thermal spray

coatings, but has also demonstrated the value proposition for these coatings. Both the PComP-S and

PComP-T families of thermal spray powders have lower density and in testing have offered at least 10X

higher resistance to sliding wear compared to the widely used tungsten carbide coatings.

In 2010, MesoCoat with support from funds provided by Department of Energy, set its sight on

developing a non-stick corrosion-resistant coating for molten metal applications using the PComP

manufacturing methodology, which led to the development and commercialization of patent pending,

proprietary moly-boride based PComP-M coating materials. PComP-M is like an industrial Teflon non-

stick coating which protects metal components from liquid metal corrosion; which means in any

application where metal components are submersed or exposed to liquid metals PComP-M coatings can

protect the metal component. PComP-M has shown more than a 3X life extension compared to the current

state of art moly-boride based powder in lab testing, and is currently being sold at a cost comparable to

the current state-of-art moly- boride based thermal spray powder. Rolls used in galvanizing, nozzles used

in steel processing, dies and trays used in aluminum production, and several other applications where

liquid metal is used would see a significant reduction in early-replacement, downtime, and the

maintenance usually associated with the early failure of conventional used moly-boride based coatings.

Unique to PComP-M, is the ability of these hard coated components to be repeatedly immersed into

molten metals, a process which causes catastrophic spallation (coating removal) of competing coatings.

The PComP family of nano-composite coatings currently consists of five product families, all of which

have shown in testing by third parties to provide better wear, corrosion and mechanical properties at a

lower life cycle cost than previous state of the art. These product families are described above, and

summarized as follows:

Wear and Corrosion Resistance and Dimensional Restoration

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

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

applications such as gate valves and downhole drilling tools. PComP W is a replacement for conventional

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

allowable stress levels, and reduced friction in abrasive wear applications, with higher toughness and

impact resistance than ceramic alternatives.

PComP-T is a titanium nitride based high corrosion/wear resistant, low friction thermal spray coating that

competes with hard chrome and diamond like carbon PVD (physical vapor deposition) alternatives for

hydraulic cylinders, piston rings, bearings, rotating shafts, and valve components where low stick-slip,

corrosion, and modest wear resistance are required. PComP-T provides both wear and corrosion

resistance (unlike chrome), and significantly reduces environmental safety and health liabilities.

Furthermore, in many applications, thermal spray coatings such as PComP-T provide life multiples over

chrome (80X in sliding wear application in testing reported by Caterpillar). Lower coefficient of friction

protects seals from premature wear and reduces energy consumption in rotating components through

lower friction losses, and the lower coating stresses and higher toughness enable thicker coatings to be

applied than chrome or other alternatives, meaning component life can be extended through enabling

additional repair cycles. Grinding and finishing of PComP-T coatings can be done faster and cheaper with

conventional grinding techniques compared to the expensive diamond finishing process used for

competing carbide coatings.

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

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

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

transportation markets.

Liquid Metal Corrosion

PComP-M is a hierarchically structured molybdenum boride based thermal spray coating material

designed for use in liquid metal corrosion application, especially the rolls used in galvanizing baths.

PComP-M has demonstrated, in laboratory and initial field testing, vastly improved molten metal

corrosion resistance, improved thermal shock resistance, combined with increased durability and

reliability encountered in molten metal environments when compared to competitive coatings. MesoCoat

believes that its PComP-M will be able to provide significant cost savings to industrial customers and

generate a new revenue stream within the $150+ million primary metals production equipment coatings

market. We expect that the bulk of initial sales will be for sink rolls and other components used in the

galvanizing bath, and for molds, dies and other components used in aluminum and steel production.

Thermal Barrier Coatings

ZComP nano-composite thermal barrier coating, that in testing has shown 50% lower thermal

conductivity, has an improved toughness, improved thermal resistance, and improved cyclic thermal life

compared to conventional thermal barrier coatings in the $500 million thermal barrier coatings market.

These coatings were lab-qualified at NASA under an Air Force subcontract to general dynamics

information technologies (GDIT) for insertion into Air Force turbine repair and F100 engine life

extension programs, but due to sequestration and changes in the depo support contracts, depo-level

insertion efforts were not completed. MesoCoat has received ongoing interest from multiple companies

in multiple industries needing improved thermal barrier materials, but to date the Company has not

formed any partnership with such entities. The Company initially wanted to introduce ZComP materials

into the turbine engine market, but given the long qualification cycles associated and limited supplier

power in aerospace applications, has reduced priority for this market sector. The Company is currently

evaluating the next steps to accelerate qualification and commercialization of ZComP, including external

financing via partnerships and licensing routes.

Recent Developments - PComP

Hundreds of PComP-W coated pumps have now been used in the field for over three years by one of the

largest oil field and industrial equipment manufacturer operating in western Canada. Use of the PComP

W product has demonstrated a minimum 3X life extension over existing products. The same customer is

now using PComP-W coated mandrels, plungers and other oil field components in field tests which also

have demonstrated a 3X life extension and are yet to fail. Field testing and efforts to secure a long term

sales contract continues. Meanwhile, the Company has begun the testing and marketing of its powder and

coating services in Canada, Mexico, India, and China and is communicating with several entities in South

Korea, Japan, Thailand, Russia, and Nigeria.

The Company’s Mexican subsidiary MesoCoat De Mexico secured its first commercial PComP order in

June of 2015 for the coating of certain large roller screens from one of the largest steel manufacturing and

iron ore processing companies in Mexico. The initial order has been followed up with repeat orders and

the company expects an annual contract to coat all of the rolls used at this facility as we earn their

confidence with outstanding material results in critical areas. MesoCoat De Mexico has also received

orders for coating lances which are used heavily in iron ore production and anticipates trial orders for

coating tuyeres, pumps, clad plates, turbines and other components. In August, MesoCoat De Mexico

secured a new order from one of the largest steel producers in Mexico for coating sink rolls. Sink rolls are

used in the process of galvanizing steel sheets for major appliances or white goods, infrastructure, and

automotive applications. MesoCoat De Mexico will be spraying the face of the sink rolls with PComP-M

liquid-metal corrosion-resistant coating, and the caps that protect each end of the roller shafts with

PComP-W tungsten carbide coatings, to increase the useful life of the rolls by an expected 2-4 times.

UP Scientech Materials Corp. (“UP Scientech”), the Company’s partner in Asia, has completed

evaluation of PComP coatings and is in the process of introducing these products through its existing

distribution channels to drive adoption in China, Taiwan, Australia and elsewhere.

The Company is currently working with two large coating shops in India to drive the adoption of PComP

coatings for the oilfield and industrial applications. Both of these coating shops have completed

independent evaluation of PComP coatings, and are about to commence field testing of PComP coatings

with their customers.

The Company exhibited its PComP thermal spray coating powders at the ITSC and OTC events held in

May, 2015, to educate thermal spray coating services providers, and oilfield, mining, and industrial

companies, as to the attractive value proposition offered by PComP thermal spray powders. The response

was very encouraging with test orders secured from industry majors in North America, Asia and Europe

for moly-boride based PComP-M and tungsten-carbide based PComP-W thermal spray powders. Several

of the companies that placed commercial and test orders consume tens of thousands of pounds of thermal

spray powders annually.

The ramp up of PComP powder production in the Company’s Ohio manufacturing facility is in line with

the anticipated demand. MesoCoat scaled the production of PComP powders from 3 tons/year to 6

tons/year by the end of 2014 and as of April of 2015 has scaled up that production to 30 tons/year. On

reaching this milestone, MesoCoat has scaled up production by 100% over a 12 month period, while

continuing to sell most of the powders that it has produced to date.

CermaClad

One of the limitations of the PComP product line was the limitation on application rate- 5-10 lbs/hr per

application system. To overcome this limitation, Mesocoat identified and acquired “High Density

Infrared, or HDIR” technology from technology partner Batelle/Oak Ridge National Lab. This

application technology enables the application of up to 100’s lbs/hr, adding high scalability to the

engineered coatings market. Further development of this application technology has led to the

CermaClad coating materials product portfolio.

Cermaclad is a multiple award winning product platform that changes the cost structure on high alloy

wear and corrosion resistant materials. The CermaClad platform enables the benefits of corrosion

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

tungsten carbide and chrome carbide to be achieved at a fraction of the cost of solid alloy. CermaClad

does this by adding a permanent thin layer of the costly corrosion- or wear-resistant layer on the surface

of low-cost carbon steel. The result is a hybrid product offering the wear and corrosion performance of

costly alloys with the ease of fabrication and the lower cost of traditional steel material. For example,

nickel alloy pipe costs 20-40X base low alloy steel. Using the CermaClad process, this can be reduced up

to 10X, to 4-10X base alloy steel, (or less if thinner coatings can be qualified). This can enable projects

to be undertaken that are currently cost-prohibitive, or save large capital projects 20-40% of their alloy

costs. CermaClad coatings compete with solid alloy, and weld-overlay and explosion- and roll-clad plate

in the specialty stainless steel and high alloy market. Applications include oil and gas pipelines,

chemical process plant equipment, shipbuilding, energy production, and water treatment including

desalination. Emerging applications in infrastructure and medical equipment have also been verified as

potential large markets.

MesoCoat is utilizing a unique, patented, “High Density Infrared (HDIR)” or ‘Plasma Arc Lamp’

technology, exclusively licensed from Oak Ridge National Laboratory (“ORNL”) to produce clad steel.

Testing by ORNL and the Company has shown that the plasma arc lamp is capable of applying a very

high quality cladding at 5 to 40 times higher productivity (100’s of Kg’s versus 3-20Kg/hr.) than

traditional laser bead or weld cladding techniques which are widely used commercially. MesoCoat

believes that this plasma arc lamp represents the first truly scalable, large area cladding technology.

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

premium, high margin clad steel products.

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

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

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

sheets. CermaClad has been used for melting, fusing, and metallurgical bonding nickel based alloys,

stainless steel, copper based alloys, niobium, tungsten and chrome carbides, structurally amorphous

materials, and several other materials including titanium on metal substrates – so there is no limitation on

the materials that we can clad using CermaClad. The CermaClad clad steel product portfolio combines

this high-speed fusion cladding process with proprietary corrosion resistant alloy (“CRA”) and wear

resistant alloy (“WR”) coating materials, which incorporate patented micro-structural and compositional

modifications. The CermaClad process melts and fuses material within seconds to produce the

CermaClad product that offers a seamless metallurgical bond, a smooth surface, low porosity, and

minimal dilution of the overlay, along with good strength retention of the substrate. More importantly,

CermaClad clad pipe is expected to be easier to inspect and install (reel) irrespective of the size and

thickness of the pipe compared to current alternatives.

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

manage the risks and consequences of wear and corrosion damage and the failure of large assets including

oil and gas risers and flowlines, refinery/chemical processing towers and transfer lines, power plant heat

exchanger tubes, and other steel infrastructure. In corrosive environments, including unprocessed crude

oil that contains water, sulfides, and carbon dioxide, seawater, road salt, mining slurry transport lines,

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

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

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

increase capital costs. Clad steel offers a competing, lower cost solution to these alloys, allowing the

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

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

such as CermaClad are estimated to save up to 85% over the cost of using solid stainless or other CRA

alloys, while still providing essentially maintenance free corrosion lifetimes equal to the life of the asset.

In the last 20 years, clad steel products have gained wide acceptance and continually increased its market

share in oil and gas exploration and production, mining, petrochemical processing and refining, nuclear,

and power generation industries. The oil and gas industry is one of the largest consumers of clad steel

products. In order to meet growing global energy demands, oil companies continue to extend their

offshore drilling efforts into deeper waters farther from shore. The higher temperatures and corrosivity

(carbon dioxide, sea water, hydrogen disulfide content, etc.) of these new reserves are resulting in a

significantly increased demand for corrosion resistant alloys.

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

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

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

overcome. Directly comparable metallurgically clad pipes are primarily manufactured with roll-bonded

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

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

for pipeline leaks. Furthermore, current bimetal rolling mills are limited to produce sheets that are around

40 feet in length by 5 feet in width (less than 20 inch diameter), limiting the size of pipe that can be

fabricated. Expanding a roll-bonded plate manufacturing facility to enable the production of larger

diameter pipe needed for large gas projects would require very large investments, estimated to be in

excess of $400 million compared to an 8-line CermaClad large diameter pipe production facility that we

budget would cost $38 million.

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

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

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

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

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

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

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

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

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

be commercially acceptable. The other production process, weld overlay, does not have the productivity

needed to meet clad pipe demand, and is primarily used for smaller diameter and complex shapes, such as

manifolds and “Christmas trees” used in oil and gas, although weld overlay is a dominant technology for

wear resistant overlays that cannot be produced by the other techniques. A significant demand for thicker-

walled clad pipes also exists driven by higher pressure oilfields in Gulf of Mexico, and for large-diameter

clad pipes driven by large gas filed in Asia-Pacific. The current cladding technologies have several

quality and supply concerns regarding thick-walled and large-diameter clad pipes, and CermaClad

provides the ideal solution for these clad pipes.

Clad steel is a specialized, profitable segment of the steel industry where demand has outstripped supply

and margins are high as a result. Historically, the typical contract for clad pipe was for 3 to 5 kilometers

of product with larger contracts for 20 to 30 kilometers of product. Typical requirements today, even for

those projects that will be put on hold or reevaluated with the recent drop in energy prices, are for tens of

kilometers with a number of long term projects needing hundreds of kilometers per project. As a result the

clad pipe market has grown rapidly and the limitations of current solutions in terms of installation,

inspectability, quality, and availability are inhibiting growth. The expected commercialization of

CermaClad clad pipes should be able to address these constrains to clad pipe market growth.

Management believes the competitive advantages of CermaClad over current competing technologies and

products are:

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

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

bonded clad pipes.

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

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

§ CermaClad application technology utilizes a 30cm wide, high density, infrared, plasma arc lamp

compared to a 0.7cm wide laser beam or inert gas welding systems, resulting in application rates

much faster than current weld overlay technologies.

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

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

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

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

currently established alternatives.

§ CermaClad is the only cladding technology that we are aware of that allows metallurgical

cladding of layers as thin as 0.15mm that meets all the required metallurgical and mechanical

specifications. Conversely, CermaClad has also demonstrated cladding as thick as 15mm.

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

standard requirements for clad pipes used in oil and gas applications.

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

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

The CermaClad clad steel product lines under development include:

§ CermaCladCRA (Corrosion Resistant Alloys): 1-3mm thick CRA clad steel in a single pass, that

offers a lower cost alternative to solid nickel, stainless steel, and titanium alloys for oil and gas,

mining, desalination, pulp and paper, and chemical process.

§ CermaCladWR (Wear Resistant): 1-15mm thick carbide, metal matrix composite, structurally

amorphous metal, and nano-composite wear resistant clad steel that extends the life of steel

structures such as hydro-transport slurry lines, pump components, valve components, spools, T’s,

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

§ CermaClad LT (Low Thickness): Lower cost thin-clad (0.15-1mm) steel that exploits the unique

high purity capabilities of the CermaClad application process to provide thin claddings that

should provide 50-200 year corrosion free life for steel components exposed to atmospheric and

seawater corrosion environments.

§ CermaCladHT (High Temperature): Steel clad with nickel-chromium and metal-chromium-

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

waterwalls, and other energy production components offering greater compositional control

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

§ CermaCladAM (antimicrobial). Durable antimicrobial clad steel for medical devices,

institutional architecture, and touch surfaces. Enables 30-50 year life, sterilizable and durable

antimicrobial clad steel structures at a fraction of the cost of copper and silver alloys.

Recent Developments -CermaClad

MesoCoat continues to receive significant interest from oil and gas majors, national oil companies,

engineering firms, and steel companies globally due to quality and delivery concerns associated with the

current manufacturers of clad pipes. Meanwhile MesoCoat’s continues to progress towards the

development and qualification of its CermaClad clad pipes. MesoCoat expects to ship clad pipe sections

to prospective end users for testing by the end of fiscal year 2016, and expects to have full-length clad

pipe ready for qualification by the end of calendar year 2016, subject to the MesoCoat realizing adequate

funding.

Since announcing its partnership with UP Scientech, MesoCoat has accelerated development of its clad

plate products. MesoCoat has been cladding small clad plates/samples since 2010 and is now scaling-up

to larger plates to eventually clad plates that are 3 meter X 2.5 meter (which is the largest clad plate being

sold at high volume in the industry currently). MesoCoat expects to have mid-sized clad plates ready for

sale within the next 6-9 months. MesoCoat has also decided to take commercial orders for smaller clad

plates and flat components and has already delivered wear-resistant clad plates that are currently being

field tested at one of the largest steel manufacturing plants in Mexico.

MesoCoat Inc., along with the lead project partner, Northern Alberta Institute of Technology (NAIT)

embarked on an 18 month collaborative effort to establish a prototype demonstration facility for

developing, testing and commercializing wear-resistant clad pipe and components. Western Economic

Diversification Canada is also supporting this initiative through a $1.5 million investment toward NAIT.

Improvements in wear resistance are expected to make a significant impact in reducing maintenance and

downtime costs while increasing productivity in oil sands and other mining applications. The Edmonton

facility is intended to serve as a pilot-scale wear-resistant clad pipe manufacturing facility for the

development and qualification of wear-resistant clad pipes, and as a stepping stone for setting-up a full-

scale wear-resistant clad pipe manufacturing facility in Alberta. The new facility will also serve as a

platform for the Company's introduction to the Alberta oil sands market, which, with proven reserves

estimated at more than 169 billion barrels is one of the largest oil resources in the world and a major

source of oil for Canada, the United States and Asia. Since Alberta oil sands production is expected to

increase significantly over the next decade, producers want to extend the life of the carbon steel pipes

used for the hydro-transportation of tailings with harder, tougher coatings that protect pipes from the

abrasiveness of tar-like bituminous oil sands.

MesoCoat shipped its CermaClad high-speed large-area cladding system for installation at the Northern

Alberta Institute of Technology's (NAIT) campus in Edmonton, Alberta in early 2015. MesoCoat expects

the installation to be complete within the next 1-2 moths, and will then begin operations at this joint

development facility in Edmonton, Alberta.

The Company has received commitments from oil sands producers in Canada and mining companies in

Mexico and Brazil to field-test CermaClad wear-resistant clad pipe products as soon as our products are

ready for testing. Apart from our work with conventional less expensive chrome carbide and the more

expensive tungsten carbide wear-resistant cladding on pipes, the Company also expects to introduce new

iron-based structurally amorphous metal (SAM) alloy cladding that in testing has exhibited performance

similar to tungsten carbide cladding, but at a fraction of the cost. Although more expensive than the more

widely used chrome carbide cladding, the new SAM alloy cladding is expected to be a significantly better

value proposition when you consider an estimated life of three times that of chrome carbide cladding and

those cost efficiencies that correspond to less downtime revenue losses, and lower maintenance and

replacement costs.

Current Grants

MesoCoat has consistently received highly-competitive funding from several federal and state agencies,

which has significantly assisted it in developing a robust product pipeline. MesoCoat’s PComP family of

nano-composite thermal spray coating materials was incubated and developed using federal funding.

Below is a brief summary of recently completed and ongoing federally funded projects that also provide

an overview of the product pipeline.

Joining Dissimilar Metals

MesoCoat and Oak Ridge National Laboratory (ORNL), have been awarded $1 million by the

Department of Energy (DOE) to develop a process to join dissimilar metal alloys. The $1 million award is

shared equally by ORNL and MesoCoat. The primary objective of this project is to develop functional

gradient transition joints between carbon steel and austenitic stainless steel for nuclear reactors. The

research will directly address the needs described in development of advanced joining techniques for

materials for nuclear fission reactor applications. This collaborative project capitalizes on recent advances

made by each organization in the field of dissimilar metal joining and application of high-energy density

plasma arc lamp processing. This project will use our CermaClad plasma arc lamp to build gradient

transition joint for dissimilar metal welding.

In order to add new design and functionalities to metal components, equipment, and structures; it is

essential that engineers are provided with the tools to join dissimilar metals. For example, on the inside

the reactor may need corrosion or wear protection and on the outside heat-resistance or toughness. By

providing the technology to join dissimilar metals, MesoCoat is providing designers and engineers the

capabilities to explore, design, and develop new material systems. The uniqueness of MesoCoat’s

CermaClad process is the ability to melt, fuse, and metallurgically bond dissimilar materials.

Improving the ability to join dissimilar materials with engineered properties is enabling new approaches

to add limitless functionalities to metals, light-weighting automotive structures, improving methods for

energy production, creating next generation medical products and consumer devices, and many other

manufacturing and industrial uses. CermaClad technology is ideally-suited for additive manufacturing,

the newest trend in manufacturing to add layers of metals one upon the other for dimensional restoration

and extending the useable life of metal assets. Not many are aware of the problems caused by metal

components, equipment, and structures that do not last long enough. Apart from the massive cost

involved with infant failure of metals which includes downtime, maintenance, and replacement costs; it is

estimated that every tonne of metal production leads to 2.4 tonnes of CO2 emission. The impact of metals

that could last three to six times longer would be significant development that could lead to a paradigm

shift in metal asset protection and life extension.

Antimicrobial Coating for Healthcare

The National Institute of Health (NIH) provided $150,000 funding to MesoCoat to develop copper-based

antimicrobial coatings primarily for contact surfaces like door knobs, handles, rails, carts, poles, sinks,

etc. In addition to hospital use, these coatings could also be applied to many other public areas such as

airports, bus and railway stations, schools, restaurants and work places. Antimicrobial coatings could

have a significant positive impact on public health by preventing the onset of infections and diseases.

Under this program, MesoCoat intends to demonstrate the technical and manufacturing feasibility and

capabilities of producing durable, aesthetically pleasing and cost-effective, antimicrobial touch surfaces

for hospitals and public places. This development combines known antimicrobial copper alloys with a

low cost high volume process such as CermaClad capable of achieving touch surface market penetration

by offering a corrosion resistant aesthetically pleasing solution that is lower cost than stainless steel

components currently used with the known benefit of being anti-microbial. The project is designed to

provide the evidence and experience to verify the technical and economic feasibility of producing and

using copper-alloy cladded steel as a cost-effective, visually attractive antimicrobial material for touch

surfaces in the medical and healthcare and other industries.

Our initial test results have shown that after exposure to 1.25 x 108 colonies forming unit (CFU) of

Staphylococcus aureus bacteria, there was an 83% reduction in CFUs on the copper-based cladded

surfaces compared to the stainless steel surface actually used in hospitals.

Based on the extremely promising test results from Phase I of the development program and the huge

market need, the Company expects to receive a Phase II funding of $1,000,000 from NIH to complete

development and commercialize this application.

Anticipated Product Development Timeline

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

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

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

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

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

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

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

availability of financing.

TIME TO

PRODUCT

COMMERCIAL STATUS

COMMERCIALIZE

(MONTHS)

PComP W

Growth and Expansion

Current

PComP T

Market Entry

Current

PComP M

Market Entry

Current

PComP S

Prototype Qualification

12 to 24

PComP Coating Services

Market Entry

Current

ZComP

Development

On Hold

CermaClad CRA

Development

12 for qualification 18

for full scale production

CermaClad WR

Development

6 for plate sales from

Ohio plant

CermaClad LT

Development

12 to 24

CermaClad HT

Incubation

Product Commercial Expansion Timeline

The Company has announced plans to set-up a 160 tons/year PComP powder production facility which

would enable it to meet the growing demand for PComP’s. The Company expects to begin construction of

this facility in November, 2015 and dependent on adequate funding the facility could be fully operational

in May, 2016. The Company also plans to expand the presence of its products in North and South

America and the Asia-Pacific market in the near term. MesoCoat De Mexico has been working to get

financial support from local government and corporate entities to build a PComP coating services and

clad pipe production facility in Mexico. The Company also expects to set-up sales, distribution, and

manufacturing in the Asian market with UP Scientech and other prospective partners.

License agreement with Powdermet, Inc.

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

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

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

supporting confidential and trade secret information, including formulations, processes, customer lists and

contracts, in the field of wear and corrosion resistant coatings. The license agreement also included

Powdermet’s commitment to provide manufacturing expertise and technical capabilities supporting

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

license agreement between MesoCoat and Powdermet was amended and restated in its entirety on May

31, 2014, in connection with the Company increasing its majority interest in MesoCoat. The amended and

restated license agreement includes all manufacturing rights, and the direct assignment of additional

grants of intellectual property provided in the earlier license agreement taking into account subsequent

developments. The amended and restated license agreement will end upon the last valid claim of licensed

patents to expire unless terminated earlier with the terms of the agreement.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

$15,000 annual payment.

Cooperation agreement with Petroleo Brasileiro S.A

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

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

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

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

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

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

the CermClad process and resultant coatings were compliant with industry standards and acceptable for

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

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

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

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

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

section lengths of 12 meters.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

production facility.

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

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

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

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

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

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

expanded program in the 1^st 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.

AMP Distributors Inc. SEZC and AMP Distributors, Inc.

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

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

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

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

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

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

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

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

Company’s international transactions. AMP SEZC has secured the services of a qualified individual to act

as General Manager of AMP. As a long term resident of the Cayman Islands, he is already in possession

the required Work Certificate and local health insurance. The new General Manager has many years of

experience in project management in Latin America and other jurisdictions.

Industry Overview

External Environment: Corrosion

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

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

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

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

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

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

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

world’s GDP.

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

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

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

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

painting, coating and other methods of surface preparation;

utilizing more expensive corrosion resistant materials;

downtime costs;

larger spare parts inventories; and

increased maintenance costs.

cost of failure.

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

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

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

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

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

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

External Environment: Wear

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

particles.

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

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

accuracy.

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

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

may eventually dissolve metal parts.

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

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

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

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

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

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

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

promotes this type of wear.

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

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

oxidation.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

required.

Metal Coating – PComP

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

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

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

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

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

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

and prepared surface.

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

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

conditions often lead to the premature loss of component or system function. . Thermal spray coatings and

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

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

semiconductor, computer, defense and medical/dental industries, etc. to protect metal components and

equipment from corrosion and wear

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

$7.6 billion (for 2006), and with a modest 5% CAGR the market size is expected to be approximately $12

billion per annum globally at the end of 2015. The thermal spray coatings market can be divided into

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Metal Cladding – CermaClad

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

pipes, flat plates and sheets. MesoCoat’s development and qualification efforts are currently focused on

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

sands and the mining industry and wear-resistant plates. Cladding refers to a process where a metal,

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

through some other high pressure and temperature process onto another dissimilar metal (the substrate) to

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

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

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

the environment in which it resides. Estimates and industry experts suggest that metal cladding is a $4

billion market globally, which can be further segmented as $2 billion for clad pipes and $2 billion for clad

plates and components. Clad pipes are primarily used to protect against corrosion and wear in offshore oil

and gas, petrochemical, and mining industries; whereas the clad plates are used to form equipment and

components such as pressure vessels, reactors, tanks, etc. for a variety of industries including oil and gas,

petrochemical, nuclear, desalination, chemical, concrete, etc. It is estimated that over 50% of the clad

products are used in the oil and gas industry.

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

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

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

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

present in these reserves. Until the early 1990s, offshore exploration and drilling in deepwater areas was

considered an economically unattractive option for the production of hydrocarbons from offshore reserves

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

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

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

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

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

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

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

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

Recently we have seen rapid adoption of some of the unconventional and extremely challenging resources

such as oil sands, shale, pre-salts, along with increased adoption of enhanced oil and gas recovery

processes. Significant technical advancements have enabled us to not only explore some of these

resources that have been known for decades, but also to make exploration and production from these

reserves economical thus propelling massive adoption and growth. However, all these unconventional

resources pose a serious challenge in corrosion and wear. For example, hydro-transportation of very

abrasive slurry from the mining site to the processing facility leads to such massive wear that the pipes

carrying these abrasive slurries have to be rotated 1/3rd every 3-4 months and then replaced every 15-18

months; leading to massive maintenance, downtime, and repair costs. In 2011, the estimated cost of

downtime and losses to oil sands industry was estimated to be $11 billion; almost 40% of these losses can

be attributed to maintenance, repair, and replacement of pipes. The demand for clad pipes is expected to

grow by 3-5X in the Canadian oil sands market spearheaded by 3X increase in production of oil sands

through the mining process. On the other hand enhanced oil recovery processes involve injecting

corrosive chemicals and CO2 at high pressures which leads to accelerated corrosion. Also many of the

larger shale reserves with tighter formations have higher levels of sulfur, creating hydrogen sulfide (H2S),

a corrosive gas. The adoption of unconventional energy sources substantiates the need for corrosion- and

wear-resistant clad pipes and components for safe and efficient production from these reserves.

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 1/5^th cost thus making several of

these challenging reserves economically viable.

About a few years ago, the average requirement for clad pipes was for 3 to 5 kilometers whereas the

largest requirement was 20 to 30 kilometers for each project. Today, we are seeing the average

requirement being in the tens of kilometers and the higher end to be hundreds of kilometers for single

projects, approximately $1.6 billion worth of corrosion-resistant clad pipe was ordered for the Kashagan

project. The clad pipe market is growing at a rapid pace and the current solutions have several limitations

in terms of inspectability, installation, quality, and productivity.

Competition

MesoCoat can expect to face intense competition within their respective market segments with product

commercialization. The industrial coatings and engineered materials sectors are highly fragmented by

companies with competing technologies each seeking to develop standards for respective industries.

Industrial coatings research and development has been ongoing for some time and several firms are

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

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

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

MesoCoat

PComP

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

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

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

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

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

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

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

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

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

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

are able to bend more without breaking.

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

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

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

carbide based coatings while being stronger than the conventional carbide coatings. High toughness

tolerates more flexing of the part than other HVOF WC-based coatings without the usual cracking of the

coating. The structure of the PComP coatings generally also allow for conventional grinding techniques.

PComP thermal spray powders are the only thermal spray powders that lead to coatings that are both hard

and tough, and hence despite the high hardness the coatings do not flake when bent. Additionally,

MesoCoat is the only company in the world that manufactures titanium nitride and silicon nitride based

PComP thermal spray powders; despite decades of research no other company has been able to make

titanium nitride and silicon nitride based powders that can be sprayed using thermal spray coating

systems.

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

CermaClad

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

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

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

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

companies participating in the cladding market have very similar technologies and impact the market

mostly on their scale of production (availability), relationships, and price.

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

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

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

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

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

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

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

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

local shops and faster turnaround times.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Time and productivity

§ Much higher material application rate than weld/laser cladding, application rate - more

scalable for production volume

§ Capital investment significantly lower than mechanical cladding or metallurgical cladding

(roll bonding) for similar capacity, reducing fixed costs

§ Ability to provide local content in scalable manner at reasonable capital investment levels

§ Reduces lead times for new capacity compared to current market, and provides high

scalability for market flexibility. Potentially enables distribution and customization of pipe

for fast-turnaround project needs

§ CermaClad solves many industry limitations for large diameter (14” diameter and up) and

thick walled (more than 1” wall thickness) where both the mechanically clad and

metallurgical clad plate to pipe do not provide an ideal solution.

Performance risk

§ True metallurgical bond coupled with a smoother surface enables easier inspection thus

reducing risk of failure

§ Smoother surface enables ease in fluid flow reducing operating costs incurred in

transportation of fluids

§ Crack-free hard coatings up to 15mm thickness enable performance multiples in hardfacing

§ CermaClad enables superior thermal treatment, preventing underlying substrate damage of

sensitive materials such as white iron. CermaClad has proven capable of cladding limited

ductility materials without cracking or coating spallation.

§ Better properties than weld overlay due to lower dilution or dissolution.

§ CermaClad enables improved metallurgy, including the ability to retain amorphous and

nanocrystalline content in overlay coatings in addition to low dilution with base metal for

improved wear and corrosion resistance.

§ CermaClad enables the use of metallurgically bonded clad seamless pipe, eliminating 90% or

more of the welds compared to other product offerings.

Cost

§ Faster Application and high throughput lowers cost basis for metallurgically bonded clad

product

§ Technology allows the application of thinner clad layers, potentially enabling dramatic cost

reduction at sustained margins

§ High productivity and scalability can enable reduced lead times, reducing capital costs for

large projects.

§ Lower capital costs also enable the set-up of regional clad pipe manufacturing facilities to

meet the growing local content requirement, positioning us as the preferred vendor for the

region and to avoid import duties.

General Company Competitive Advantages

The following general factors serve as keys to the Company’s success:

§ Management – A well-balanced, experienced management team provides the Company and its

subsidiaries with the guidance and strategic direction to successfully gain market entry.

§ Products – The Company’s products represent innovations in multi-billion dollar markets.

§ Intellectual Property – The intellectual property of MesoCoat includes owned patents, exclusive

licensing rights, and proprietary processes that make market penetration effective and feasible.

§ Qualification and Testing – As leading companies in multiple industries, as well as U.S.

government agencies, test and qualify MesoCoat’s products, significant barriers to entry are

automatically created for potential competitors.

§ Fundraising - As a publicly traded entity, the Company can access financing from public equity

markets which can provide liquidity and access to required capital.

The Company has also constructed the following barriers for potential competitors:

§ Product development expertise in MesoCoat;

§ Exclusive global license for the high density fusion cladding process from Oak Ridge National

Laboratory; and several additional design and utility patents filed by the companies coupled with

several product and process trade secrets

§ Strong products in the development pipeline that are expected to be ready for market in the next

2-3 years;

§ Strong research and development programs.

The Company will encounter the following barriers to entry:

§ American Petroleum Institute (API) certification for its CermaClad products. In order to

successfully sell to the oil and gas industry, MesoCoat’s coatings must receive official approval

and certification, a process that generally requires major oil and gas entities to qualify our

products for use, followed by qualification for specific projects. MesoCoat’s cooperation

agreement with Petroleo Brasileiro S.A. has demonstrated product suitability at the laboratory

scale, and is in the final stages of a prototype clad pipe product qualification. The construction of

our Euclid, Ohio 12 meter pipe plant, at a cost of over $6,000,000 (including funding from joint

development agreements and federal grants) and subsequent quality certification of the facility

and its products represent significant steps towards introducing the Company’s pioneering

products in the oil and gas sector.

§ Market acceptance of MesoCoat’s CermaClad’s product line that would encourage entry into

markets such as the oil sands development in Alberta, Canada. MesoCoat is in the process of

establishing a research and development facility in Alberta, Canada to accelerate qualification of

its CermaCladWR clad pipe and components.

§ Developing the best products with the best value and protecting proprietary technology.

Marketability

The ultimate success of any product will depend on market acceptance in its many forms, including cost,

efficiency, production capability, convenience and application. The market for MesoCoat’s prospective

products is potentially enormous and will require the Company to apply a significant portion of its focus

on how to best initiate market introductions and into which segments..

MesoCoat

A tremendous need exists today to find better corrosion protection and wear prevention technologies to

replace many of the limited life, high cost coating and alloy materials used today to solve operational

problems in industrial and infrastructure applications. A general trend exists across several industries of

operating in increasingly challenging environments where components and equipment have to withstand

the assault of high degree of corrosion and wear.

The inorganic metal finishing industry currently is one of the largest industrial users of hazardous and

carcinogenic chemicals, and produces hundreds of millions of gallons of contaminated wastewater and

toxic by-products annually. Hazardous metals such as lead, cadmium, chromium, and to a lesser extent,

cobalt, tungsten carbide, and volatile organic compounds used to strip rust and repair large steel structures

are being phased out or subjected to increasingly strict environmental regulations, creating opportunities

for innovation. U.S. companies annually spend billions of dollars on coatings and surface treatments

made from hazardous materials. Private companies and government defense agencies often use harmful

products like chrome because these solutions have been the lowest cost, most available corrosion and

wear resistant products available for the last 50 years. However, private and public users are now

recognizing the environmental problems these materials cause and the potential safety issues for those

who come in contact with these materials. Many companies would stop using these hazardous materials

if a cost effective substitute product could be brought to market. Legally, users may soon have no choice

but to desist from using hazardous materials as the EPA and other international environmental

organizations are moving to ban their use.

Manufacturers are now modifying their product’s bill of materials list and seeking substitute coating

products with similar or better corrosion and wear resistant properties in advance of impending legal

changes. Many are turning to next generation coatings made from alternative technologies like

nanotechnology-based materials to accomplish their goals. Innovative companies, such as MesoCoat, that

can develop non-toxic and longer life coating alternatives that have equal or superior corrosion and wear

protection capability at equal or lower cost relative to today’s solutions stand to reap significant financial

rewards in the next several decades.

PComP

MesoCoat has been working with major fortune 100 clients, and several equipment manufacturers from

the oil and gas industry for product insertion. In addition to these large clients which have long sell

cycles (2-5 years not atypical), MesoCoat has worked through certified application partners in Calgary,

and Houston to capture short cycle sales and gain initial market exposure. The company has established

relationships with several coating application shops, end users, and has a sales representative in Houston,

and Canada to drive product adoption. Application services will be sold on a “per square inch” basis and

pricing will be reflective of market pressures and the volume of work received from each commercial

customer. Pricing variables will be taken into consideration for each application service order.

MesoCoat has a full-functional thermal spray coating facility with one large capacity spray booth,

completed with a Fanuc robot, DJ 2600, DJ 2700 and JP 5000 HVOF spray systems, and intends to set-up

two additional thermal spray coating booths along with the associated surface preparation, component

handling, and finishing equipment. Our staff has over 50 years of thermal spray experience coating parts

for several industries including aerospace, chemical & plastics, oil & gas, mining, primary metals,

industrial, and paper. MesoCoat has also secured commitment for a $1.5 million match loan from the

State of Ohio for scaling-up powder production capability and setting-up two additional thermal spray

coating cells in Ohio. Meanwhile, MesoCoat will continue to work with several thermal spray coating

facilities that are pre-qualified with the largest OEM’s in the Gulf Coast, Midwest, and Canada.

CermaClad

MesoCoat’s market entry plans for CermaClad are to clad the interior diameter of full length oil and gas

pipes with corrosion resistance alloys, and initially Alloy 625 using high productivity CermaClad

application technology. In this market, MesoCoat is qualifying Cermaclad625 to current industry

standards, working with Petrobras, other oil and gas majors, offshore pipe manufacturers, and

engineering, procurement, and construction (EPC) companies to ensure industry acceptance of

qualification data as the path to market acceptance. Due to the large order size for clad pipes, ranging

from $2-1,500+ million per project, successful introduction of CermaCladCRA clad pipes is expected to

result in an immediate market success. MesoCoat expects to send shorter section of clad pipe for

qualification to oil and gas majors within the next 6 months, and to begin commercial corrosion-resistant

clad pipe production at the Euclid plant before the end of calendar year 2016.

In addition, MesoCoat along with its partner Northern Alberta Institute of Technology (NAIT) received a

$2.75 million dollar funding commitment from Alberta’s Ministry of Innovation and Advanced Education

(IAE) and Western Economic Diversification Canada (WD) for an 18 month collaborative effort to

establish a prototype demonstration facility for developing, testing and commercializing wear-resistant

clad pipe and components. Improvements in wear resistance are expected to make a significant impact in

reducing losses due to maintenance and downtime while increasing productivity in oil sands and other

mining applications. The development of Alberta’s oil sands has been slowed by the lack of resistant

materials for transport lines, and components that are subjected to corrosion from the highly abrasive

slurry. Currently, pipes that transport the highly abrasive oil sands slurry have to be rotated every three to

four months and are replaced every 12 to 15 months. The cost of maintenance and its associated

downtime in the Alberta Oil Sands industry is estimated at more than $10 billion annually. According to

the Materials and Reliability in Oil Sands (MARIOS) consortium in Alberta, this figure is expected to

increase significantly as production expands in the coming years. Improvements in wear resistance are

expected to make a significant impact in reducing losses due to maintenance and downtime while

increasing productivity in oil sands and other mining applications. This new facility will serve as a

platform for MesoCoat’s to introduce its products to the Alberta oil sands market, which, with proven

reserves estimated at more than 169 billion barrels, is one of the world’s largest oil resources. The oil

sands are a major source of oil for Canada, the United States and Asia. Alberta’s Energy Resources

Conservation Board expects output from the province’s oil sands to double to 3.8 million barrels per day

(bpd) by 2022, from the 1.9 million bpd in 2012. Producers are looking to extend the life of carbon steel

transport pipes with harder, tougher coatings that protect them from the abrasiveness and high acidity of

the tar-like bituminous oil sands. CermaClad wear-resistant clad products could provide that

economically viable, long-term solution. MesoCoat is collaborating with several oil sands majors and

expects to complete development and qualification of wear-resistant clad pipes within the next 18 months,

and commercial production within the next 24 months.

Management has made sizeable investments in redesigning and miniaturizing the technology to commit to

this initial market solution. The initial Cermaclad system has a very large footprint, 4 feet cube, and

MesoCoat and partners had to make substantial modifications to the system to make it fit inside a 10”

inner diameter pipe. The new inside diameter CermaClad lamp head has now been operating for over

three years integrated into a subscale 6-ft CermaClad pipe coating system, and for close to 2 years in a

production-scale 40 feet CermaClad pipe cladding system. The 6-feet prototype cladding system was

used for initial product demonstration, sub-scale prototype development, and industry-standard product

qualification milestones. In April, 2013, MesoCoat completed the installation of a 11,000 sq.ft

production-scale cladding set-up to demonstrate full scale manufacturing, develop clad pipe sections for

product and process qualification, and get certified for supplying clad pipes to oil and gas majors.

Completion of the full scale product facility followed by subsequent product certifications will enable

MesoCoat to begin market roll-out and sales of clad pipe to the oil and gas industry.

MesoCoat’s expansion within the market place will be tied to its ability to attract growth capital for

project financing to undertake global expansion, or attracting appropriate joint venture partners to build

fabrication plants to serve global demand. Given the projected profitability of such plants and the

anticipated short payback period anticipated, management foresees no problem attracting interested

partners.

Patents, Trademarks, Licenses, Franchises, Concessions, Royalty Agreements and Labor Contracts

The Company has no patents, trademarks, licenses, franchises, concessions, royalty agreements or labor

contracts other than those held by MesoCoat.

MesoCoat's patents include: six exclusively licensed patents from Powdermet, the earliest of which

expires May 30, 2020 (see dates below); two exclusively licensed patents from UT Battelle LLC which

expire on March 15, 2019 and July 30, 2024; and four pending U.S. Patents and three pending global

patents, all of which expire in 2030 or after.

Patents in general remain in place 20 years from application and 17 years from issuance.

Governmental and Environmental Regulation

The Company is subject to local, state and national taxation. Additionally, the Company’s operations are

subject to a variety of national, federal, state and local laws, rules and regulations relating to, among other

things, worker safety and the use, storage, discharge and disposal of environmentally sensitive materials.

We believe that the Company is in full compliance will all laws, rules, regulations and requirements that

affect its business.

We believe that MesoCoat is in full compliance with the Resource Conservation Recovery Act, the key

legislation dealing with hazardous waste generation, management and disposal. Nonetheless, under some

of the laws regulating the use, storage, discharge and disposal of environmentally sensitive materials, an

owner or lessee of real estate may be liable for the costs of removal or remediation of certain hazardous or

toxic substances located on or in, or emanating from, such property, as well as related costs of

investigation and property damage.

Laws of this nature often impose liability without regard to whether the owner or lessee knew of, or was

responsible for, the presence of hazardous or toxic substances. We further believe that MesoCoat is in

compliance in all material respects with all laws, rules, regulations and requirements that affect their

respective businesses and that such compliance does not impose a material impediment on either entities

ability to conduct business.

Climate Change Legislation and Greenhouse Gas Regulation

A majority of the climate change related studies over the past couple decades have indicated that

emissions of certain gases contribute to warming of the Earth’s atmosphere. In response to these studies,

many nations have agreed to limit emissions of “greenhouse gases” or “GHGs” pursuant to the United

Nations Framework Convention on Climate Change, and the “Kyoto Protocol.” Although the United

States did not adopt the Kyoto Protocol, several states have adopted legislation and regulations to reduce

emissions of greenhouse gases.

The United States Supreme Court ruled, in Massachusetts, et al. v. EPA, that the EPA abused its

discretion under the Clean Air Act by refusing to regulate carbon dioxide emissions from mobile sources.

As a result of the Supreme Court decision the EPA issued a finding that serves as the foundation under

the Clean Air Act to issue other rules that would result in federal greenhouse gas regulations and

emissions limits under the Clean Air Act, even without Congressional action. Finally, acts of Congress,

the decisions of lower courts, large numbers of states, and foreign governments could widely affect

climate change regulation. Greenhouse gas legislation and regulation could have a material adverse effect

on our business, financial condition, and results of operations.

Research and Development

The Company is focused on the research and development of those entities in which it holds an interest.

MesoCoat has a history of working on critical research and development projects for the private and

public sector over a broad range of research fields, with further work extending into peripheral areas.

MesoCoat has adopted this approach because it believes that excellent products can be created when a

backdrop of diversified sciences and technologies exist. From this broad range, their respective research

and development staffs work closely with sales and operations management teams to establish priorities

and effectively manage individual projects.

Currently, MesoCoat is working on several critical and high risk-high reward research and development

projects funded by the federal government, state government and end users. MesoCoat’s PComP product

line is the end result of federally funded research and development.

Employees

As of May 31, 2015, the Company and its subsidiary, MesoCoat has 25 employees. We use additional

consultants, attorneys, and accountants as necessary to assist in the development of our business.

ITEM 1A.

RISK FACTORS

The Company’s operations and securities are subject to a number of risks. Below we have identified and

discussed the material risks that we are likely to face. Should any of the following risks occur, they will

adversely affect our business, financial condition, and/or results of operations as well as the future trading

price and/or the value of our securities.

The Company is the subject of a formal inquiry by the Commission which inquiry may harm our business

and results of operations.

On or about November 21, 2014, the Company received a subpoena related to a non-public fact finding

inquiry from the Securities and Exchange Commission (“Commission”). The Company responded to the

formal order of investigation and subpoena by collecting, preserving and producing documentation to the

Commission. Although the Commission does not explain the motivation or focus of an enforcement

investigation, we believe that the Commission seeks to determine whether there have been any violations

of federal securities laws. The mere existence of an inquiry does not mean that the Commission has

concluded that the Company or anyone associated with the Company has violated federal securities laws

or that the Commission has a negative opinion of any Company related person, entity or security.

Furthermore, it is impossible at this stage of the inquiry to assess the likelihood of an action being

threatened or filed against the Company or any Company related person or entity. Therefore, it is

impracticable to formulate any opinion about the likelihood of an unfavorable outcome or estimate of the

amount or range of potential losses. The Company is cooperating with the Commission’s investigation.

The Company and MesoCoat failed to satisfy certain loan amounts due to a secured creditor as of April

of 2015, pursuant to which failure a court appointed receiver has been designated to administer

repayment.

Since MesoCoat was unable to repay amounts due to a secured third party creditor of approximately

$1,341,963 that was due on April 27, 2015, a court order was issued on August 18, 2015, in which the

control over substantially all of MesoCoat’s assets became subject to the determination of a court

appointed receiver designated to administer the repayment of a default amount of $1,770,932.03. The

Company is in the process of securing a financing sufficient to repay said creditor though as of yet no

financing for this purpose has been secured nor can any commitment for such financing be assured.

The Company has a history of significant operating losses and such losses may continue in the future.

The Company incurred net losses of $26,954,336 for the period from June 27, 2006 (inception) to May

31, 2015. Since we have been without significant revenue since inception and have only recently started

to producing revenue, such revenue being insufficient to support operations, losses will likely continue for

the foreseeable future.

The Company has a history of uncertainty about continuing as a going concern.

The Company’s audits for the periods ended May 31, 2015 and 2014 expressed an opinion as to its ability

to continue as a going concern as a result of net losses since inception and a working capital deficit of

$11,203,578 as of May 31, 2015. Until the Company is able to produce net income over successive future

periods its ability to continue as a going concern will remain in jeopardy.

The Company requires capital funding.

The Company must raise additional funds, either through equity offerings, debt placements or joint

ventures, to maintain operations and meet our long term financial commitments. Additional capital, if in

the form of equity, will result in dilution to our current shareholders. Should the Company be unable to

realized future income it ability to continue as a going concern will remain in jeopardy.

The Company has defaulted on certain unsecured and secured debt obligations.

The Company has defaulted on certain significant unsecured debt obligations due prior to or subsequent

to the end of this annual reporting period, which defaults have caused the original obligations to increase

and creditors to seek satisfaction of amounts owed. The Company does intend to address its obligations

but without additional capital funding it may be unable to satisfy the debt holders which in turn

potentially subjects the Company to additional legal actions.

The Company’s success is dependent on its ability to commercialize proprietary technologies to the point

of generating sufficient revenues to sustain and expand operations.

The Company’s near term future operation is dependent on its ability to commercialize proprietary

technologies to produce sufficient revenue to sustain and expand operations. The success of these

endeavors will require that sufficient funding be available to assist in the development of its business

interests. However the Company’s financial resources are limited, which limitation may slow the pace at

which proprietary technologies can become commercial. Should the Company be unable to improve its

financial condition through debt or equity offerings, the ability to successfully advance its business plan

will be severely challenged.

We face significant commercialization risks related to technological businesses.

The industries in which MesoCoat operates and plans to operate are characterized by the continual search

for higher performance at lower cost. Our growth and future financial performance will depend on the

ability of MesoCoat to develop and market products that keep pace with technological developments and

evolving industry requirements. Further, the research and development involved in commercializing

products requires significant investment and innovation to keep pace with technological developments.

Should we be unable to keep pace with outside technological developments, respond adequately to

technological developments or experience significant delays in product development, our products might

become obsolete. Should these risks overcome our ability to keep pace there is a good likelihood that our

ability to successfully advance our business will be severely limited.

The coatings industry is likely to undergo technological change so our products and processes could

become obsolete at any time.

Evolving technology, updated industry standards, and frequent new product and process introductions are

likely to characterize the coatings industry going forward so our products or processes could become

obsolete at any time. Competitors could develop products or processes similar to or better than our own,

finish development of new technologies in advance of our research and development, or be more

successful at marketing new products or processes, any of which factors may hurt us.

Market acceptance of the products and processes produced by MesoCoat is critical to our growth.

We expect to generate revenue and realize a gain on our interest in MesoCoat from the development and

sale of products and processes produced by MesoCoat. Market acceptance of those products is therefore

critical to our growth. If our customers do not accept or purchase those products o processes produced by

MesoCoat, then our revenue, cash flow and operating results will be negatively impacted.

MesoCoat competes with larger and better financed corporations.

Competition within the industrial coatings industry and other high technology industries is intense. While

each of MesoCoat’s products are distinguished by next-generation innovations that are more sophisticated

and cost effective than many competitive products currently in the market place, a number of competitive

entities may enter the market in the future. Some of MesoCoat’s existing and potential competitors have

longer operating histories, greater name recognition, large customer bases and significantly greater

financial, technical and marketing resources than we do, including well known multi-national

corporations. Accordingly, MesoCoat’s products could become obsolete at any time. Competitors could

develop products similar to or better than our own, finish development of new technologies in advance of

either MesoCoat’s research and development, or be more successful at marketing new products, any of

which factors may hurt our prospects for success.

General economic conditions will affect our operations.

Changes in the general domestic and international climate may adversely affect the financial performance

of the Company. Factors that may contribute to a change in the general economic climate include

industrial disputes, interest rates, inflation, international currency fluctuations and political and social

reform. Further, the delayed revival of the global economy is not conducive to rapid growth, particularly

of technology companies with newly commercialized products.

MesoCoat relies upon patents and other intellectual property.

MesoCoat relies on a combination of patent applications, trade secrets, trademarks, copyrights and

licenses, together with non-disclosure and confidentiality agreements, to establish and protect proprietary

rights to technologies they develop. Should MesoCoat be unable to adequately protect their intellectual

property rights or become subject to a claim of infringement, their businesses and that of the Company

may be materially adversely affected.

MesoCoat expects to prepare patent applications in accordance with their respective worldwide

intellectual property strategies on acquiring new technologies. However, neither it nor the Company can

be certain that any patents will be issued with respect to future patents pending or future patent

applications. Further, neither it nor the Company know whether any future patents will be upheld as valid,

proven enforceable against alleged infringers or be effective in preventing the development of

competitive patents. The Company believes that MesoCoat has implemented a sophisticated internal

intellectual property management system to promote effective identification and protection of their

products and know-how in connection with the technologies they have developed and may develop in the

future

Environmental laws and other governmental legislation may affect our business.

Should the technologies which MesoCoat has under development not comply with applicable

environmental laws then the Company’s business and financial results could be seriously harmed.

Furthermore, changes in legislation and governmental policy could also negatively impact us. Although

we are currently unaware of any introduced or proposed bills, or policy, that might cause us to make

specific changes to our operations, no assurance can be given that if new legislation is passed we will be

able to make the changes to comport our technologies with future regulatory requirements.

We may not be able to effectively manage our growth.

We expect considerable future growth in our business. Such growth will come from the addition of new

plants, the increase in global personnel, and the commercialization of new products. Additionally, our

products should have an impact on the cladding industry; as companies learn that they can receive

materials with a short lead time at a higher quality and lower price, market demand should grow

expanding the overall market itself. To achieve growth in an efficient and timely manner, we will have to

maintain strict controls over our internal management, technical, accounting, marketing, and research and

development departments. We believe that we have retained sufficient quality personnel to manage our

anticipated future growth though we are still striving to improve financial accounting oversight to ensure

that adequate reporting and control systems in place. Should we be unable to successfully manage our

anticipated future growth by adherence to these strictures, costs may increase, growth could be impaired

and our ability to keep pace with technological advances may be impaired which failures could result in a

loss of future customers.

The Company and those entities in which it holds an interest may face liability claims.

Although MesoCoat intends to implement exhaustive testing programs to identify potential material

defects in technology each develops, any undetected defects could harm their reputation and that of the

Company, diminish their customer base, shrink revenues and expose themselves and us to product

liability claims. Any imposition of liability that is not covered by insurance or is in excess of insurance

coverage could have a material adverse effect on our business, results of operations and financial

condition.

The market for our stock is limited and our stock price may be volatile.

The market for our common stock has been limited due to low trading volume and the small number of

brokerage firms acting as market makers. Due to the limitations of our market and the volatility in the

market price of our stock, investors may face difficulties in selling shares at attractive prices when the

want to sell. The average daily trading volume for our stock has varied significantly from week to week

and from month to month, and the trading volume often varies widely from day to day.

The Company’s common stock is deemed to be “penny stock”, which determination may make it more

difficult for investors to sell their shares.

The Company’s common stock is and will be subject to the “penny stock” rules adopted under section

15(g) of the Exchange Act. The penny stock rules apply to companies whose common stock is not listed

on the NASDAQ Stock Market or other national securities exchange and trades at less than $5.00 per

share or that have tangible net worth of less than $5,000,000 ($2,000,000 if the company has been

operating for three or more years). These rules require, among other things, that brokers who trade penny

stock to persons other than “established customers” complete certain documentation, make suitability

inquiries of investors and provide investors with certain information concerning trading in the security,

including a risk disclosure document and quote information under certain circumstances. Many brokers

have decided not to trade penny stocks because of the requirements of the penny stock rules and, as a

result, the number of broker-dealers willing to act as market makers in such securities is limited. If the

Company remains subject to the penny stock rules for any significant period, it could have an adverse

effect on the market, if any, for our securities. If the Company’s securities are subject to the penny stock

rules, investors will find it more difficult to dispose of our securities.

The elimination of monetary liability against the Company’s directors, officers and employees under

Nevada law and the existence of indemnification rights to our directors, officers and employees may

result in substantial expenditures by the Company and may discourage lawsuits against our directors,

officers and employees.

The Company’s certificate of incorporation contains a specific provision that eliminates the liability of

directors for monetary damages to us and our stockholders; further, the Company is prepared to give such

indemnification to its directors and officers to the extent provided by Nevada law. The Company may

also have additional contractual indemnification obligations under employment agreements with its

executive officers and indemnification obligations to its directors. The foregoing indemnification

obligations could result in our incurring substantial expenditures to cover the cost of settlement or damage

awards against directors and officers, which the Company may be unable to recoup. Although the

Company does carry Director’s & Officers liability insurance, which coverage may mitigate the financial

expense associated with indemnification claims, these provisions and resultant costs may also discourage

us from bringing a lawsuit against directors and officers for breaches of their fiduciary duties and may

similarly discourage the filing of derivative litigation by our stockholders against the Company’s directors

and officers even though such actions, if successful, might otherwise benefit us and our stockholders.

ITEM 1B.

UNRESOLVED STAFF COMMENTS

None.

ITEM 2.

PROPERTIES

The Company maintains 800 sq. ft. of executive office space at 2665 S. Bayshore Drive, Suite 450,

Miami, Florida, 33133 on a month to month basis at a cost of $2,491 a month paid to Cool Grove Realty.

The Company does not believe that it will need to maintain a larger office at any time in the foreseeable

future in order to carry out its operations. MesoCoat maintains 16,000 sq. feet of the research and

development space located at 24112 Rockwell Drive, Euclid, Ohio 44117 which is leased from

Powdermet on a sub-lease basis that runs through May 31, 2020. The cost of the sub-lease for MesoCoat

is $4,500 paid to Powdermet per month.

The Company owns an 11,000 sq ft custom-engineered CermaClad manufacturing facility located at

24220 Rockwell Drive, Euclid Ohio, 44060. The facility includes 3 CermaClad arc lamps, one for plate

and development work, and one prototype pipe cladding system, and has 3MW of power available to

support CermaClad development and production. MesoCoat entered into a ground lease with Sherman

properties for $3,000/month for the land underlying the facility, for a 12 year lease with a purchase

option. As part of the Settlement and Exchange Agreement with Powdermet dated July 23, 2015,

Powdermet agreed to purchase the land under the purchase contract for $410,000 and convey title free

and clear to MesoCoat. MesoCoat has several obligations to separate utilities from Powdermet and

provide additional access prior to title transfer, agreed to be completed before November 30, 2015.

The Company maintains approximately 4000 sq ft of powder production and support facilities operated

on the Powdermet shop floor under a “use and services agreement” finalized May 31, 2014, and

extending through May 2016. Under the use and services agreement, MesoCoat continues to have

exclusive access to all PComP powder production and support equipment, floor space, most utilities, and

other support from Powdermet along with the right to purchase PComP production and analytical

equipment and liquidation (ebay) value at any time. The use and services agreement is set at

$8000/month. Under the settlement and stock repurchase agreement with Powdermet, title to all PComP

manufacturing and analytical support equipment with an estimated liquidation value of $120,000 was

transferred to MesoCoat on July 23, 2015.

ITEM 3.

LEGAL PROCEEDINGS

George Town Associates S.A.

On May 4, 2015, George Town Associates, S.A. (“George Town”) initiated legal proceedings against the

Company and MesoCoat, Inc. in the United States District Court for the Southern District of New York

alleging that they had defaulted on a secured promissory note due to George Town in the original

principal amount of $1,341,963.34. The complaint sought recovery of the principal amount of the loan in

addition to default interest, attorney’s fees and costs of collection.

On August 14, 2015, further to a hearing on a motion filed by George Town asserting that the Company

and MesoCoat had violated a temporary injunction entered previously in the case, the Court announced

that it would appoint a receiver for Mesocoat. On August 18, 2015, the Court appointed a receiver for

MesoCoat, granted George Town summary judgment on its claims, and denied the Company’s

counterclaims with leave to file a third party complaint. The Court entered a final judgment against the

Company and MesoCoat for $1,770,932.03.

On August 28, 2015, George Town filed a motion seeking an award of attorney’s fees in the amount of

$27,918.04. The Company and MesoCoat intend to oppose this motion. The Company and MesoCoat also

intend to appeal the Court’s order and final judgment along with all previously issued Court orders in this

case. The Company has until September 17, 2015 to file a notice of appeal.

Sonoro Invest S.A.

On October 2, 2014, Sonoro Invest, S.A. (“Sonoro”) initiated legal proceedings against the Company

alleging that it defaulted on two convertible debt obligations and a promissory note due to Sonoro in the

principal aggregate amount of $2,105,000. The complaint sought $3,187,057 which amount included

interest, penalties and legal fees.

On May 15, 2015, Sonoro and the Company entered into a settlement agreement resolving the litigation.

The settlement agreement included execution of a new senior convertible promissory note and related

loan documents which provided that the Company would pay Sonoro $2,915,000 on or before February

29, 2016. In the event that the promissory note is not paid on a timely basis, the amount due to Sonoro

would increase to $3,215,000 plus interest at 5.0% per annum. The litigation was dismissed with

prejudice.

Sonoro Demand Derivative Demand

On July 31, 2015, the Company received notice that Sonoro had filed a statement of claim for arbitration

through JAMS in New York, New York. Sonoro alleges that the Company breached the senior

convertible promissory note and related loan documents as a result of its transaction with Powdermet as

described in Abakan’s press release dated July 27, 2015. Sonoro claims damages in the default amount of

the senior convertible promissory note of $3,215,000, interest at 10% in addition to an award of attorney’s

fees and costs in an unspecified amount. The Company has filed a response to Sonoro’s statement of

claim and has asserted defenses. No final hearing date has been set as of this date.

Joe T. Eberhard

On August 28, 2014, Joe Eberhard (“Eberhard”) filed a complaint in the United States District Southern

District of Florida alleging that the Company defaulted on a convertible note and promissory note in the

principal aggregate amount of $550,000. The complaint sought $720,699 plus interest, penalties and legal

fees. On September 11, 2015, the parties entered into a settlement agreement resolving the litigation. The

Company agreed pursuant to the settlement agreement to pay Eberhard $550,000 on December 31, 2015

and $100,000 on April 30, 2016, in addition to providing a consent judgment in the amount of $750,000

and a consent judgment in the amount of $100,000, to be filed with the court in the event that Abakan

fails to satisfy the agreed payments..

Paloma Capital Group Ltd.

The Company initiated legal proceedings against Paloma Capital Group Ltd (“Paloma”) on July 2, 2013,

in the Circuit Court in and for Miami-Dade County. The claim was based on Paloma’s failure to perform

according to the terms of a consulting agreement dated May 2, 2011. The Company no longer intends to

proceed with its complaint and expects that the legal proceedings will be dismissed without prejudice.

Securities and Exchange Commission

On or about November 21, 2014, the Company received a subpoena related to a non-public fact finding

inquiry from the Commission. The Company responded to the formal order of investigation and subpoena

by collecting, preserving and producing documentation to the Commission. Although the Commission

does not explain the motivation or focus of an enforcement investigation, we believe that the Commission

seeks to determine whether there have been any violations of federal securities laws. The mere existence

of an inquiry does not mean that the Commission has concluded that the Company or anyone associated

with the Company has violated federal securities laws or that the Commission has a negative opinion of

any Abakan related person, entity or security. Furthermore, it is impossible at this stage of the inquiry to

assess the likelihood of an action being threatened or filed against the Company or any Company related

person or entity. Therefore, it is impracticable to formulate any opinion about the likelihood of an

unfavorable outcome or estimate of the amount or range of potential losses. The Company is cooperating

with the Commission’s investigation.

ITEM 4.

MINE SAFETY DISCLOSURE

Not applicable.

ITEM 5.

MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED

STOCKHOLDER MATTERS, AND BUSINESS ISSUER PURCHASES OF

EQUITY SECURITIES

The Company’s common stock is quoted on the OTCQB electronic quotation system under the symbol

“ABKI”. These prices reflect inter-dealer prices without retail mark-up, mark-down, or commission, and

may not necessarily reflect actual transactions. The following table sets forth the high and low bid prices

for the common stock as reported for each quarterly period over the last two fiscal years.

High and Low Bid Prices

Year

Quarter Ended

High

Low

2015

May 31

$0.57

$0.31

2015

February 28

$0.58

$0.25

2014

November 30

$1.21

$0.60

2014

August 31

$1.36

$0.86

2014

May 31

$1.21

$0.60

2014

February 28

$1.36

$0.86

2013

November 30

$2.57

$0.86

2013

August 31

$3.20

$2.16

Reports to Security Holders

We are a reporting company pursuant to the Securities and Exchange Act of 1934. As such, we make

available our annual report which includes audited financial statements, and our quarterly reports which

include unaudited financial statements.

Capital Stock

The following is a summary of the material terms of the Company’s capital stock. This summary is

subject to and qualified by our articles of incorporation and bylaws.

Common Stock

As of September 14, 2015, there were approximately 1,200 shareholders of record holding a total of

80,391,088 shares of fully paid and non-assessable common stock of the 2,500,000,000 shares of

common stock, par value $0.0001, authorized. The board of directors believes that the number of

beneficial owners is greater than the number of record holders because a portion of our outstanding

common stock is held in broker “street names” for the benefit of individual investors. The holders of the

common stock are entitled to one vote for each share held of record on all matters submitted to a vote of

stockholders. Holders of the common stock have no pre-emptive rights and no right to convert their

common stock into any other securities. There are no redemption or sinking fund provisions applicable to

the common stock.

Preferred Stock

As of September 14, 2015, there were 50,000,000 shares of preferred stock, par value $0.0001 authorized

of which none were outstanding. The Company’s preferred stock may have such rights, preferences and

designations and may be issued in such series as determined by the board of directors.

Dividends

The Company has not declared any cash dividends since inception and does not anticipate paying any

dividends in the near future. The payment of dividends is within the discretion of the board of directors

and will depend on our earnings, capital requirements, financial condition, and other relevant factors.

There are no restrictions that currently limit the Company’s ability to pay dividends on its common stock

other than those generally imposed by applicable state law.

Warrants

As of September 14, 2015, there were zero warrants outstanding to purchase shares of the Company’s

common stock.

Stock Options

As of September 14, 2015, there were 3,725,000 stock options outstanding to purchase shares of our

common stock.

Convertible Debt Securities

As of September 14, 2015, there were ten convertible debt securities convertible into the shares of its

common stock for an aggregate principal amount of $5,614,713 plus accrued interest and penalties.

One convertible debt security, in the principal amount of $500,000, due on or before July 14, 2014,

accrued interest at 5% per annum, convertible at $1.00 per conversion unit, which unit consists of one

share of our common stock and one half share warrant to purchase an additional share of our common

stock at $1.50 per share, for a period of two years following the conversion date. The Company did not

satisfy this unsecured obligation as of the stated maturity date subjecting the amount due thereunder to

additional interest charges and penalties.

One convertible debt security, in the principal amount of $2,915,000, due on or before February 29, 2016,

accrued interest at 5% per annum, convertible at $1.00 per conversion unit, which unit consists of one

share of our common stock and one half share warrant to purchase an additional share of our common

stock at $1.50 per share, for a period of two years following the conversion date.

One secured convertible debt security, in the principal amount of $1,341,963, due on or before April 27,

2015, bore no interest and was convertible at $0.80 per conversion unit (subject to decrease in the event of

dilutive issuances), which unit consisted of one share of our common stock and one half share warrant to

purchase an additional share of our common stock at $1.20 per share for a period of two years following

the conversion date. The Company did not satisfy this unsecured obligation as of the stated maturity date

subjecting the amount due thereunder to additional interest charges and penalties. On August 18, 2015, a

summary judgment was entered in favor of the holder in the amount of $1,770,932.03.

One convertible debt security, in the principal amount of $78,750, due on or before June 1, 2016, accrued

interest at 6% per annum, convertible at 60% of the lowest trading price for 20 prior trading day from the

date of conversion per conversion unit, which unit consists of one share of our common stock. The

Company shall pay interest in common stock “interest shares”. The Company has reserved 1,458,000

shares in the name of the holder for conversion.

One convertible debt security, in the principal amount of $52,500, due on or before June 3, 2016, accrued

interest at 6% per annum, convertible at 60% of the lowest trading price for 20 prior trading day from the

date of conversion per conversion unit, which unit consists of one share of our common stock. The

Company shall pay interest in common stock “interest shares”. The Company has reserved 1,053,000

shares in the name of the holder for conversion.

One convertible debt security, in the principal amount of $52,500, due on or before June 3, 2016, accrued

interest at 6% per annum, convertible at 60% of the lowest trading price for 20 prior trading day from the

date of conversion per conversion unit, which unit consists of one share of our common stock. The

Company shall pay interest in common stock “interest shares”. The Company has reserved 1,053,000

shares in the name of the holder for conversion.

One convertible debt security, in the principal amount of $125,000 due on or before December 10, 2016,

carries an original issue discount of $20,000, bears no interest and is convertible at 60% of the lowest

trading price for 20 prior trading day from the date of conversion per conversion unit, which unit consists

of one share of our common stock. The Company has reserved 2,000,000 shares in the name of the

holder for conversion.

One convertible debt security, in the principal amount of $50,000 due on or before June 15, 2016,

extendable for 9 month, accrued interest at 10% per annum, and has a variable conversion price,

convertible at 60% of the three lowest closing bid price for 20 prior trading day from the date of

conversion per conversion unit, which unit consists of one share of our common stock. The note contains

certain restrictive covenants. The Company has reserved 1,000,000 shares in the name of the holder for

conversion.

One convertible debt security, in the principal amount of $60,000 due on or before July 7, 2017, carries an

original issue discount of $6,000, bears no interest and is convertible at the lessor of $0.55 or 60% of the

lowest trading price for 25 prior trading day from the date of conversion and can convert all or any part of

the outstanding and unpaid principal sum and accrued interest into fully paid and non-assessable shares of

common stock as per the conversion formula, which consists of a number of shares receivable upon

conversion equals the dollar conversion amount divided by the conversion price. The holder may advance

additional consideration under the agreement to the Company up to aggregate principal amount of

$400,000. The Company has reserved 5,000,000 shares in the name of the holder for conversion.

One convertible debt security, in the principal amount of $100,000 due on or before February 6, 2016,

accrued interest at 12% per annum, and is convertible at a 42% discount to the average of the 5 lowest

closing bid prices for 10 prior trading day from the date of conversion into fully paid and non-assessable

shares of common stock as per the conversion unit, which unit consists of one share of common stock.

The note contains certain restrictive covenants. The Company has reserved 2,500,000 shares in the name

of the holder for conversion.

Securities Authorized for Issuance Under Equity Compensation Plans

As of September 30, 2014, the Company has issued 82,941 restricted common shares under equity

compensation plans to the MesoCoat, Inc. Supplemental Discretionary Tax Qualified Profit Sharing and

Trust (57,242) and the Powdermet, Inc. Supplemental Discretionary Tax Qualified Profit Sharing and

Trust (25,699). There were no additional shares issued as of May 31, 2015.

Purchases of Equity Securities made by the Issuer and Affiliated Purchasers

The Company did not repurchase any shares of its common stock during the fiscal year ended May 31,

2015.

On July 23, 2015, the Company and Powdermet, its minority owned subsidiary, entered into a settlement

and exchange agreement, pursuant to which agreement the Company increased its ownership of

MesoCoat to 100%. The settlement and exchange agreement also caused the Company to decrease its

minority ownership in Powdermet from 24.1% to 3.6% in exchange for the remaining 11.9% of

MesoCoat owned by Powdermet, $1,000,000 in cash payment in one payment of $250,000 and five

monthly installments of $150,000, land and equipment worth $600,000, the extinguishment of existing

intercompany debt of $486,000, and the return of 400,000 outstanding Company common shares to

authorized capital for cancellation.

Recent Sales of Unregistered Securities; Use of Proceeds from Registered Securities

On August 13, 2015, our board of directors authorized the issuance of 361,875 shares of its common

stock with a one year downside protection such that if the Company completes any form of equity or

convertible debt financing at a sale price or conversion price that is lower than the per share purchase

price, which additional shares would be provided to decrease the investor’s cost basis in the shares to

equal that of the lower priced equity or convertible debt financing:

Name

Consideration

Basis

Exemption

Lorenza Barroso Rivera

$50,000 Subscription

125,000 Sec. 4(2)/Reg D

Alejandra Barroso Rivera

$50,000 Subscription

125,000 Sec. 4(2)/Reg D

Jose Vicente Estevez Barroso

$11,250 Subscription

28,125 Sec. 4(2)/Reg S

Guillermo Espinosa Barroso

$22,500 Subscription

56,250 Sec. 4(2)/Reg S

Fernando Estevez Barroso

$11,000 Subscription

27,500 Sec. 4(2)/Reg S

The Company complied with the exemption requirements of Section 4(2) of the Securities Act based on

the following factors: (1) the issuances were isolated private transactions by the Company which did not

involve a public offering; (2) the offerees had access to the kind of information which registration would

disclose; and (3) the offerees are financially sophisticated.

The Company complied with the requirements of Regulation D of the Securities Act by: (i) foregoing any

general solicitation or advertising to market the securities; (ii) offering only to accredited offerees; (iii)

having not violated antifraud prohibitions with the information provided to the offerees; (iv) being

available to answer questions by the offerees; and (v) providing restricted common shares and warrants to

the offeree.

On August 13, 2015 our board of directors authorized the issuance of 260,000 shares of its common stock

in reliance upon the exemptions from registration provided by Section 4(2), of the Securities Act:

Name

Value

Consideration

Exemption

Ryan Owen

$32,000

Accounts Payable

100,000 Sec. 4(2)

Anupam Ghildyal

$32,000

Bonus

100,000 Sec. 4(2)

Financial Insights

$19.200

Service

60,000 Sec. 4(2)

The Company complied with the exemption requirements of Section 4(2) of the Securities Act based on

the following factors: (1) the issuances were isolated private transactions by the Company which did not

involve a public offering; (2) the offerees had access to the kind of information which registration would

disclose; and (3) the offerees are financially sophisticated.

Trading Information

The Company’s common stock is quoted on the OTCQB under the symbol “ABKI”.

The information for our transfer agent is as follows:

Island Stock Transfer

100 Second Avenue South, Suite 300

St. Petersburg, Florida 33701

Tel: (727) 289-0010.

ITEM 6.

SELECTED FINANCIAL DATA

Not required.

ITEM 7.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATION

This Management’s Discussion and Analysis of Financial Condition and Results of Operations and other

parts of this current report contain forward-looking statements that involve risks and uncertainties.

Forward-looking statements can also be identified by words such as “anticipates,” “expects,” “believes,”

“plans,” “predicts,” and similar terms. Forward-looking statements are not guarantees of future

performance and our actual results may differ significantly from the results discussed in the forward-

looking statements. Factors that might cause such differences include but are not limited to those

discussed in the subsection entitled Forward-Looking Statements and Factors That May Affect Future

Results and Financial Condition below. The following discussion should be read in conjunction with our

financial statements and notes thereto included in this current report. Our fiscal year end is May 31.

The Company’s plan of operation for the coming year is to scale-up production and increase sales for our

PComP products and to complete the development and qualification of our CermaClad clad pipe products

and begin sales of our CermaClad wear-resistant clad plate products. Meanwhile, the Company will

continue internal research and development efforts and collaborate with development partners to ensure

the continuity of our product pipeline. Mentioned below are a few key efforts and milestones

accomplished by the Company and its subsidiaries during the twelve month period ended May 31, 2015,

in pursuing the fulfillment of our plan:

§ The Company secured a $3 million strategic investment from one of the world’s largest wear-

resistant clad plate manufacturer, UP Scientech . In addition to the investment, UP Scientech have

entered into an agreement to develop, manufacture, and sell the Company’s PComP thermal spray

coating and CermaClad clad metal products in Taiwan, China, Japan, and Korea on a joint

venture basis.

§ MesoCoat along with Oak Ridge National Laboratory won a $1 million award from the

Department of Energy to develop a process to join dissimilar metal alloys. The primary objectives

of the DOE project are to develop functional gradient transition joints between carbon steel and

austenitic stainless steel for nuclear reactors, and to develop advanced joining techniques for

dissimilar materials used in nuclear fission reactors.

§ MesoCoat won a $150,000 SBIR (Small Business Innovation Research), award from the National

Institute of Health (NIH) to develop antimicrobial coatings using its high-speed large-area metal

cladding technology CermaClad. The primary objective of the NIH project is to develop copper-

based antimicrobial coatings primarily for contact surfaces in hospitals that could also be applied

to many other public areas such as airports, bus and railway stations, schools, restaurants and

work places. Antimicrobial coatings could have a significant impact on public health by

preventing the outbreak of infections and diseases. MesoCoat has demonstrated exceptional initial

results and expects follow-on funding from NIH to further develop and commercialize this

product.

§ The Company appointed Mr. Stephen Goss as its Chief Operating Officer

§ The Company appointed Mr. Robert Miller as its interim Chief Financial Officer

§ MesoCoat incorporated a wholly owned subsidiary in Mexico, MesoCoat de Mexico S.A. de

C.V., and appointed Mr. Jose Maria Ribot Barroso as its President and CEO.

§ The Company entered into a Settlement Agreement with Sonoro in connection with a dispute

regarding promissory notes for an aggregate principal amount of $2,105,000, which caused

Sonoro to file a lawsuit against the Company on October 1, 2014, in the United States District

Court for the Southern District of Florida.

§ The Company completed initial field-testing, on full-sized production equipment, of its

proprietary nanocomposite liquid metal corrosion-resistant coating, PComP-M, with a leading

steel producer. The Company is also working with several of the world’s largest steel and

aluminum companies to validate component life extension on zinc pot rolls used extensively in

the continuous hot dip galvanizing process, as well as other components used in the handling and

processing of molten metals.

§ The Company secured initial sales and test orders for PComP coatings from some of Mexico’s

largest steel manufacturers. The Company also made significant progress in driving the oil and

gas industry in Mexico towards early commercial adoption of its CermaClad pipe cladding

products.

§ The Company completed field testing of a PComP coating at one of the largest steel companies in

Mexico and as a result anticipates repeat commercial order of the product. The Company is also

testing its PComP coatings in Taiwan in cooperation with its partner in Asia, UP Scientech.

Furthermore, The Company has received its first repeat orders from an international oil field

services customer in Canada.

§ The Company’s partner in Asia, one of the largest international wear-plate manufacturers, UP

Scientech has completed initial testing of CermaClad wear-resistant clad plates. The outstanding

metallurgical and mechanical properties of CermaClad wear-resistant clad plates, coupled with

UP Scientech’s sales and marketing channels in 35 countries, is expected to accelerate market

adoption and drive growth for the Company’s CermaClad wear-resistant clad plate products.

§ The Company has surpassed the initial goal for Phase I scale-up of its PComP thermal spray

powder production, from 6,000 pounds/year to 36,000 pounds/year and has actually increased its

PComP production capacity to 60,000 pounds/year. At the current sales price, the Company's

60,000 pounds/year production could translate to approximately $5 million in annual thermal

spray powder sales and help facilitate the Company's expansion of its PComP thermal spray

coating services business, which could add an additional $1.5 million in annual revenues by fully

utilizing our existing thermal spray cell and adding another eight hour shift.

§ The Company exhibited at the largest thermal spray conference and trade show, International

Thermal Spray Conference and Exposition, and secured over 15 trial and test orders from

industry leaders for PComP powders and coatings from the exposition

Subsequent to the twelve month period ended May 31, 2015:

§ The Company increased its ownership of MesoCoat to 100% in exchange for decreasing the

Company's minority ownership in Powdermet from 24.1% to 4.5%. The Company acquired from

Powdermet the remaining 11.9% of MesoCoat, along with land and equipment worth $550,000,

the extinguishment of existing inter-company debt of $486,000, the return of 400,000 outstanding

Company common shares to authorized capital and $1,000,000 in cash.

§ The Company received its first commercial PComP order for the coating large roller screens from

one of the largest steel manufacturing and iron ore processing companies in Mexico. The initial

order is expected to be followed by repeat orders and an annual contract to coat all of the rolls

used at this facility as we earn their confidence with outstanding material results in critical areas.

The Company has also received orders for coating lances which are used heavily in iron ore

production and anticipates trial orders for coating tuyeres, pumps, clad plates, turbines and other

manufacturing components.

§ The Company and its technology development partner, Northern Alberta Institute of Technology,

begun operations at the prototype demonstration facility for developing, testing and

commercializing wear-resistant clad pipe and components. This facility is intended to serve as a

pilot-scale wear-resistant clad pipe manufacturing facility for the development and qualification

of wear-resistant clad pipes, and as a stepping stone for setting-up a full-scale wear-resistant clad

pipe manufacturing facility in Alberta. The new facility will also serve as a platform for the

Company's introduction to the Alberta oil sands market, which, with proven reserves estimated at

more than 169 billion barrels, is one of the largest oil resources in the world and a major source of

oil for Canada, the United States and Asia. Since Alberta oil sands production is expected to

increase significantly over the next decade, producers want to extend the life of the carbon steel

pipes used for the hydro-transportation of tailings with harder, tougher coatings that protect pipes

from the abrasiveness of tar-like bituminous oil sands.

§ The United States District Court of the Southern District of New York granted a summary

judgment motion in favor of George Town against the Company and MesoCoat. The Court's

ruling focused on the contractual basis of the loan obligation, and declined to consider the

Company's wider defenses. The Court issued an order finding the Company and MesoCoat liable

for the full principal and interest due in the amount of $1,770,932. On August 19, 2015, the Court

appointed a receiver over MesoCoat to administer payment of the judgment. The Company is

seeking to refinance all of its outstanding debt, and if unsuccessful, will on appeal seek relief

from the judgment and the order appointing a receiver.

§ The Company secured $518,750 in convertible debt financing from multiple lenders to finance

ongoing operations and growth at MesoCoat.

§ The Company received a notice of default from the Ohio Development Services Agency in

respect to amounts due to the Innovation Ohio Loan Fund in connection with a Loan Agreement

dated July 20, 2012. The loan is secured by certain equipment owned by MesoCoat.

§ MesoCoat and Metalsol secured initial sales and test orders for PComP coatings from some of

Mexico’s largest steel manufacturers.

§ MesoCoat began initial field-testing, on full-sized production equipment, of its proprietary nano-

composite liquid metal corrosion-resistant coating, PComP-M, with a leading steel producer.

§ The Company settled a complaint lodged by Eberhard.

Results of Operations

(000’s)

For the years ended

May 31,

Change

Revenues

2015

2014

Commercial

296 $

553 $

(257)

(46)

Contract and grants

642

284

358

126

Other income

102

500

1,040

854

186

Cost of revenues

563

298

265

Gross profit

477

556

(79)

(14)

General and administrative

5,916

6,329

(413)

(7)

Stock options expense

1,052

1,120

(68)

(6)

Operation Loss

(6,491)

(6,893)

402

Interest exp & amortization of discount on debt

(594)

(449)

(145)

Other income (expense)

(708)

(237)

(471)

199

Loss before non-controlling interest

(7,793)

(7,579)

(214)

Non-controlling interest in MesoCoat loss

341

1,623

(1,282)

(79)

Loss before income taxes

(7,452)

(5,956)

(1,496)

Income taxes

Net Income

$ (7,452) $ (5,956) $

(1,496)

Revenues

Revenues for the year ended May 31, 2015, were $1,040,069 as compared to $853,566 for the year ended

May 31, 2014, a increase of 22%. Revenues for the two periods can be wholly attributed to the operations

of MesoCoat.

Revenue in the current year was derived from commercial revenues of $296,135 as compared to $552,952

in the prior year, contract and grant revenues of $642,228 in the current year as compared to $283,748 in

the prior year, and other income of $101,706 as compared to $16,866 in the prior year. Commercial

revenue in the current year decreased by 46% when compared to the prior year due to the expiration of

the Petrobras contract in fiscal year end 2014. However, after taking into consideration the expiration of

the Petrobras contract in 2014, commercial revenue otherwise increased by 14% in 2015. Commercial

revenue in 2015 was also hindered by the temporary closure of the Ohio manufacturing facility in fiscal

2015, while equipment was installed and reconfigured to increase the production capacity of PComP.

Meanwhile, contract and grant revenue increased 126% in the current year over the prior year is due in

part to an increase in grant applications.

We expect commercial revenue to increase over the next twelve months as MesoCoat’s implements its

PComP expansion plan while continuing to focus on the development of existing and anticipated

products.

Gross Profit

Gross profit for the twelve month period ended May 31, 2015 was $477,060 or 46% of revenue compared

to $556,009 or 65% of revenue for the twelve month period ended May 31, 2014, a decrease of 14%.

Gross profits in both annual periods can be wholly attributed to the operations of MesoCoat. Gross profit

decreased in the current year over the comparative year when compared to the prior period, much of the

decrease can be attributed to the expiration of the Petrobras contract which contract realized a higher

gross margin in 2014. With the exclusion of this revenue, the gross profit margin percentage remained at

46% for both periods. The increase in gross profit dollar amount as compared to the prior period was the

direct result of increased grant revenue.

We expect gross profit to decrease over the next twelve months as a result of the reduction in grant

applications. This reduction is expected to be offset at an increase margin throughout the year as the

Company expands its PComP product line.

Net Losses

Net losses attributed to the Company for the year ended May 31, 2015, were $7,452,239 compared to a

net loss of $5,956,310 for the year ended May 31, 2014, an increase loss of $1,492,929 or 25%.

This change in net losses in the current year as compared to net losses in the prior year can be attributed

to the minority interest allocation of the MesoCoat loss. The increase ownership of MesoCoat by the

Company on May 31, 2014, resulted in a lower percentage of the MesoCoat loss being allocated to the

minority interest. The allocation for the year ending May 31, 2015 was $341,302 compared to

$1,622,593 for the period ending May 31, 2014, a $1,281,291 difference. The remaining differences

relate to the increased costs attributed to other expenses/income which accounted for $616,000 in

additional expense in large part due to a $815,853 penalty expense recorded on two loans for the period

ending May 31, 2015, net of a gain from our ownership of Powdermet. In addition, general and

administrative expenses decreased by $480,311 while we continue the development and implementation

of commercial applications.

We do not expect to realize net income in the near term as anticipated operational expenses associated

most significantly with research and development, consulting, payroll expenses and the depreciation and

amortization of existing assets. The increase in expenses are expected to be the direct result of continued

research and development costs associated with the CermClad product line in addition to costs anticipated

for the building of a manufacturing plant.

Despite management’s focus on ensuring operating efficiencies, we expect to continue to operate at a loss

through fiscal 2015.

Expenses

Operating expenses for the year ended May 31, 2015 were $6,968,443 compared to $7,448,754 for the

year ended May 31, 2014, a decrease of $480,311 or 6.4%. The decrease in operating expenses over the

prior year can be attributed to decreases in administrative costs, professional fees – related party, payroll

and benefits, research & development and stock option expenses. These reduction where largely offset

by higher professional fees, consulting, consulting related party and depreciation and amortization. Stock

option expense and stock expense on note conversion also decreased during the current year. The

professional fees increased by $590,834 as result of litigation expenses related to loans and the

Commission inquiry. These expenses were offset by $578,039 in lower payroll,$678,802 in lower

research & development costs and cash contracts.

We expect that operating expenses will continue to pursue our growth strategy over the next five years

will require significant increases in personnel and facilities along with significant research and

development to ensure that products nearing commercialization are brought to market as quickly and as

effectively as possible.

Other Expense

Other expense for the year ended May 31, 2015 was $1,302,158 as compared to $686,158 for the year

ended May 31, 2014. The increase in other expense of $616,000 in the current year over the prior year

can be primarily attributed to a penalty recorded on a loan settlement of $480,363 in the current year. The

Company also accrued $335,490 loan default penalty for the current year relating to an August 2015

default judgment against the company. The Company also recorded a profit associated with our equity

interest in Powdermet of $140,735 in the current year versus a loss in the prior year of $126,519. Other

significant transactions include a loss on intangible impairment of $110,600 in the prior year compared to

zero for the current year and a zero gain.

We expect to continue to incur other expense in future periods due to the interest accruing on convertible

debt and the anticipated increase in interest on new debentures that are required for future growth.

Income Tax Expense (Benefit)

The Company may have a prospective income tax benefit resulting from a net operating loss carry-

forward and start up costs that will offset any future operating profit.

Capital Expenditures

The Company has spent significant amounts of capital expenditures for the period from June 27, 2006

(inception) to May 31, 2015, which amounted to $9,693,815. A large portion of these expenditures are

related to plant, property and equipment in the construction of the manufacturing facility in Euclid, Ohio,

minority interest in Powdermet.

Liquidity and Capital Resources

The Company has experienced changes in liquidity, capital resources, and stockholders’ equity.

As of May 31, 2015, the Company had current assets of $160,949 and total assets of $14,220,770.

As of May 31, 2014, the Company had current liabilities of $11,364,527 and total liabilities of

$11,411,239.

The Company had stockholders’ equity of $2,809,531 and a working capital deficit of $11,203,578 at

May 31, 2015.

Net cash used in operating activities for the year ended May 31, 2015 was $3,478,862 as compared to

$2,808,036 for the year ended May 31, 2014. Net cash used in operating activities is the result of the

current year income plus a number of items that are book expense items which do not affect the total

amount relative to actual cash used including depreciation, amortization of discount on debt, stock issued

for services and stock option expense offset by equity in investee profit. Balance sheet accounts that

actually affect cash but are not income statement related items and thus are added or deducted to arrive at

cash used include accrued liabilities, accounts payable, accrued interest on loans payable, and prepaid

expenses offset by changes in accounts receivable.

We expect to continue to generate negative cash flow in operating activities until such time as net losses

transition to net income.

Net cash used in investing activities for the year ended May 31, 2015, was $487,486 as compared to net

cash used in investing activities of $698,040 for the year ended May 31, 2014. Net cash used in investing

activities in the current period can be primarily attributed to the purchase of property, plant and

equipment, and capitalized patents and licenses.

We expect to continue to generate negative cash flow in investing activities as the Company increases its

investment in property, plant and equipment through MesoCoat.

Net cash provided by financing activities for the year ended May 31, 2015 was $3,959,983 as compared

to $3,304,147 the year ended May 31, 2014. Net cash provided by financing activities in the current

period is attributable to proceeds from the sale of common stock and loans payable, offset by payments on

loans payable, and repayments on capital leases.

We expect to continue to generate positive cash flow from financing activities as the Company seeks new

rounds of financing to build its business.

Our current assets are insufficient to meet our current obligations or to satisfy our cash needs over the

next twelve months and as such the Company will require additional debt or equity financing.

Management to this end initiated private equity placements, debt financing and debt settlements prior to

period end pursuant to which the Company had raised $4,728,385 during the twelve month period ended

May 31, 2015. Nevertheless, additional capital will be required to meet obligations and needs over the

next twelve months. Except for the private equity placements noted, we had no other commitments or

arrangements for financing at May 31, 2015, though we continue to pursue a number of prospective

sources that include industry or strategic partners, sale of additional equity, the sale of additional equity,

the procurement of long term debt, shareholder loans or the settlement of additional debt for equity. We

face certain financial obstacles to attracting new financing due to our historical record of net losses and

working capital deficits. Therefore, we can provide no assurance that the Company will be able to obtain

the financing required to meet its stated objectives or even to continue as a going concern.

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

The Company has a defined stock option plan titled “The Abakan Inc., 2009 Stock Option Plan” and

contractual commitments with all of its officers and directors.

The Company has plans for the purchase of plant or equipment in connection with expansion of the

PComP powder production commercial line.

The Company intends to increase the number of employees engaged by MesoCoat on completion on the

PComP product line expansion and commercialization of the CermaClad product at the new Euclid, Ohio

manufacturing facility.

Off Balance Sheet Arrangements

As of May 31, 2015, the Company had no off-balance sheet arrangements that have or are reasonably

likely to have a current or future effect on our financial condition, changes in financial condition,

revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources that is

material to stockholders.

Going Concern

The Company’s auditors have expressed an opinion that refers to our ability to continue as a going

concern as a result of net losses since inception and a working capital deficit of $11,203,578 as of May

31, 2015. Our ability to continue as a going concern is dependent on realizing net income from

operations, gains on investment, obtaining funding from outside sources or realizing some combination of

these objectives. Management’s plan to address the Company’s ability to continue as a going concern

includes: (i) obtaining funding from the private placement of debt or equity; (ii) revenue from operations;

(iii) converting debt to equity; and (iv) obtaining loans and grants from financial or government

institutions. Management believes that it will be able to obtain funding to allow the Company to remain a

going concern through the methods discussed above, though there can be no assurances that such methods

will prove successful.

The statements contained in the section titled Results of Operations and Description of Business, with the

exception of historical facts, are forward looking statements. Forward looking statements reflect our

current expectations and beliefs regarding our future results of operations, performance, and

achievements. These statements are subject to risks and uncertainties and are based upon assumptions and

beliefs that may or may not materialize. These statements include, but are not limited to, statements

concerning:

§ our anticipated financial performance;

§ uncertainties related to the commercialization of proprietary technologies held by entities in which

we have an investment interest;

§ our ability to generate revenue from operations or gains on investments;

§ our ability to raise additional capital to fund cash requirements for operations and the satisfaction

of outstanding debt;

§ the volatility of the stock market; and

§ general economic conditions.

We wish to caution readers that our operating results are subject to various risks and uncertainties that

could cause our actual results to differ materially from those discussed or anticipated including the factors

set forth in the section entitled Risk Factors included elsewhere in this report. We also wish to advise

readers not to place any undue reliance on the forward looking statements contained in this report, which

reflect our beliefs and expectations only as of the date of this report. We assume no obligation to update

or revise these forward looking statements to reflect new events or circumstances or any changes in our

beliefs or expectations, other that is required by law.

Critical Accounting Policies

The notes to the audited financial statements for the Company for the years ended May 31, 2015 and

2014, included in this Form 10-K, discusses those accounting policies that are considered to be significant

in determining the results of operations and financial position. Our management believes that their

accounting principles conform to accounting principles generally (GAAP) accepted in the United States

of America.

The preparation of financial statements in conformity with GAAP requires management to make

estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of

contingent assets and liabilities at the date of the financial statements and the reported amounts of

revenues and expenses during the year. The more significant areas requiring the use of estimates include

asset impairment, stock-based compensation, beneficial conversion features on debt instruments, and

future income tax amounts. Management bases its estimates on historical experience and on other

assumptions considered to be reasonable under the circumstances. Actual results may differ from the

estimates.

Stock-Based Compensation

We have adopted Accounting Standards Codification Topic (“ASC”) 718, Share-Based Payment, which

addresses the accounting for stock-based payment transactions in which an enterprise receives employee

services in exchange for (a) equity instruments of the enterprise or (b) liabilities that are based on the fair

value of the enterprise’s equity instruments or that may be settled by the issuance of equity instruments.

We account for equity instruments issued in exchange for the receipt of goods or services from other than

employees in accordance with ASC 505. Costs are measured at the estimated fair market value of the

consideration received or the estimated fair value of the equity instruments issued, whichever is more

reliably measurable. The value of equity instruments issued for consideration other than employee

services is determined on the earliest of a performance commitment or completion of performance by the

provider of goods or services.

Recent Accounting Pronouncements

New Accounting Standards

In April 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update

(“ASU”) No. 2015-03, Simplifying the Presentation of Debt Issuance Costs. The new standard requires

that debt issuance costs be presented in the balance sheet as a direct reduction from the carrying value of

the associated debt liability, consistent with the presentation of a debt discount. The standard is effective

for public entities for annual and interim periods beginning after December 15, 2015. Early adoption is

permitted. The Company is currently assessing the impact that these standards will have on its financial

statements.

In August 2015, FASB issued ASU No. 2015-15, Presentation and Subsequent Measurement of Debt

Issuance Costs Associated with Line-of Credit Arrangements. This standard stated that the SEC staff

would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently

amortizing these costs. The Company is currently assessing the impact that these standards will have on

its financial statements.

In August 2014, FASB issued ASU No. 2014-15, Disclosure of Uncertainties about an Entity’s Ability to

Continue as a Going Concern. ASU 2014-15 requires management to assess an entity's ability to continue

as a going concern by incorporating and expanding upon certain principles that are currently in U.S.

auditing standards. Specifically, ASU 2014-15 provides a definition of the term substantial doubt and

requires an assessment for a period of one year after the date that the financial statements are issued (or

available to be issued). It also requires certain disclosures when substantial doubt is alleviated as a result

of consideration of management's plans and requires an express statement and other disclosures when

substantial doubt is not alleviated. We do not expect the adoption of ASU 2014-15 to have material

impact on our consolidated financial statements, although there may be additional disclosures upon

adoption.

In May 2014, FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-

09”). ASU 2014-09 will supersede nearly all existing revenue recognition guidance. The standard’s core

principle is that a company will recognize revenue when it transfers promised goods or services to

customers in an amount that reflects the consideration to which the company expects to be entitled in

exchange for those goods or services. In doing so, the standard creates a five-step model that requires a

company to exercise judgment when considering the terms of the contracts and all relevant facts and

circumstances. The five steps require a company to identify customer contracts, identify the separate

performance obligations, determine the transaction price, allocate the transaction price to the separate

performance obligations and recognize revenue when each performance obligation is satisfied. In August,

FASB issued ASU 2015-14 to defer the effective date so that the standard is effective for public entities

for annual and interim periods beginning after December 15, 2017. The standard allows for either full

retrospective adoption, where the standard is applied to all periods presented, or modified retrospective

adoption where the standard is applied only to the most current period presented in the financial

statements. Early adoption is permitted. The Company is currently assessing the impact that these

standards will have on its financial statements.

Other pronouncements issued by the FASB or other authoritative accounting standards groups with future

effective dates are either not applicable or are not expected to be significant to the financial statements of

the Company.

ITEM 7A.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET

RISK

Not required.

ITEM 8.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Our audited financial statements for the years ended May 31, 2015 and 2014 are attached hereto as F-1

through F-50.

Abakan Inc.

Index to Financial Statements

Reports of Independent Registered Public Accounting Firms

F-2

Consolidated Balance Sheets for the years ended May 31, 2015 and 2014

F-4

Consolidated Statements of Operations for the years ended May 31, 2015 and 2014

F-5

Consolidated Statements of Stockholders' Equity (Deficit) for the years ended May 31, 2015 and 2014

F-6

Consolidated Statements of Cash Flows for the years ended May 31, 2015 and 2014

F-8

Notes to the Consolidated Financial Statements

F-10

F-1

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of

Abakan Inc.

We have audited the accompanying consolidated balance sheets of Abakan Inc. and Subsidiaries

(the "Company") as of May 31, 2015, and the related consolidated statements of operations, stockholders'

equity (deficit), and cash flows for the year then ended. These consolidated financial statements are the

responsibility of the Company's management. Our responsibility is to express an opinion on these

consolidated financial statements based on our audit.

We conducted our audit in accordance with standards of the Public Company Accounting

Oversight Board (United States). Those standards require that we plan and perform the audit to obtain

reasonable assurance about whether the consolidated financial statements are free of material

misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its

internal control over financial reporting. Our audit included consideration of internal control over

financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but

not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over

financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a

test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An

audit also includes assessing the accounting principles used and significant estimates made by

management, as well as evaluating the overall consolidated financial statement presentation. We believe

that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all

material respects, the financial position of Abakan Inc. and Subsidiaries as of May 31, 2015, and the

results of their operations and their cash flows for the year then ended, in conformity with accounting

principles generally accepted in the United States of America.

The accompanying consolidated financial statements have been prepared assuming that the

Company will continue as a going concern. As discussed in Note 3 to the financial statements, the

Company has incurred net losses since inception in the amount of $26,954,336 and a working capital

deficit of $11,203,578. Management’s plans concerning these matters are also described in Note 3. The

accompanying financial statements do not include any adjustments that might result from the outcome of

this uncertainty.

/s/ Maloney Novotny LLC

Cleveland, Ohio

September 15, 2015

F-2

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of

Abakan, Inc.

We have audited the accompanying consolidated balance sheets of, Inc. and Subsidiaries (together the

“Company”) as of May 31, 2014 and the related consolidated statement of operations, stockholders’ equity

(deficit) and cash flows for the year then ended. These financial statements are the responsibility of the

Company’s management. Our responsibility is to express an opinion on these consolidated financial

statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight

Board (United States). Those standards require that we plan and perform the audits to obtain reasonable

assurance about whether the financial statements are free of material misstatement. The Company is not

required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.

Our audits included consideration of internal control over financial reporting as a basis for designing audit

procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion of

the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no

such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and

disclosures in the financial statements, assessing the accounting principles used and significant estimates

made by management, as well as evaluating the overall financial statement presentation. We believe that

our audits provide a reasonable basis for our opinions.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects,

the consolidated financial position of Abakan Inc. and Subsidiaries at May 31, 2014 and the consolidated

results of their operations and their cash flows for the years then ended in conformity with accounting

principles generally accepted in the United States of America.

The accompanying financial statements have been prepared assuming that the Company will continue as a

going concern. As discussed in the 2014 financial statements, the Company has incurred net losses since

inception in the amount of $19,502,097 and a working capital deficiency of $7,927,372. Management’s

plans concerning these matters are also described in the 2014 financial statements. The accompanying

financial statements do not include any adjustments that might result from the outcome of this uncertainty.

/s/ Skoda Minotti

Skoda Minotti

Cleveland, Ohio

September 30, 2014

F-3

ABAKAN INC.

CONSOLIDATED BALANCE SHEETS

May 31,

2015

2014

ASSETS

Current assets

Cash and cash equivalents

23,487 $

31,111

Accounts receivable

66,749

119,122

Inventory

34,560

Prepaid expenses

36,153

185,770

Total current assets

160,949

336,003

Non-current assets

Deferred finance fees, net

15,865

14,070

Property, plant and equipment, net (Note 4)

5,139,803

5,539,549

Patents and licenses, net (Note 5)

6,115,636

6,106,686

Assignment agreement - MesoCoat (Note 6)

131,581

171,055

Investment – Powdermet (Note 7)

2,292,552

2,151,817

Goodwill (Note 2)

364,384

Total Assets

14,220,770 $

14,683,564

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities

Accounts payable

1,603,670 $

1,552,402

Accounts payable - related parties

506,808

675,041

Capital leases - current portion (Note 13)

31,994

31,465

Loans payable (Note 8)

6,743,456

4,820,816

Accrued interest - loans payable

331,470

306,160

Loan payable- related parties

369,468

224,799

Accrued interest - related parties

29,094

480

Deferred rental revenue

167,272

Accrued liabilities

1,581,295

652,212

Total current liabilities

11,364,527

8,263,375

Non-current liabilities

Loans payable (Note 8)

1,056,106

Capital leases - non-current portion (Note 13)

46,712

54,040

Total liabilities

11,411,239

9,373,521

Commitments and contingencies

Stockholders' equity

Preferred stock, $0.0001 par value, 50,000,000 shares

authorized, none issued and outstanding

Common stock, par value $0.0001, 2,500,000,000 shares

79,501,088 issued and outstanding – May 31, 2015,

68,374,815 issued and outstanding - May 31, 2014

7,952

6,840

Subscription receivable

(28,000)

Paid-in capital

29,738,682

24,530,074

Contributed capital

5,050

Accumulated deficit

(26,954,336)

(19,502,097)

Accumulated other comprehensive income

(1,259)

2,796,089

5,011,867

Non-controlling interest

13,442

298,176

Total stockholders' equity

2,809,531

5,310,043

Total liabilities and stockholders' equity

14,220,770 $

14,683,564

SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.

F-4

ABAKAN INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

For the years ended May 31,

Revenues

2015

2014

Commercial

296,135

552,952

Contract and grants

642,228

283,748

Rental revenue and other income

101,706

16,866

1,040,069

853,566

Cost of revenues

563,009

297,557

Gross profit

477,060

556,009

Expenses

General and administrative

995,302

749,001

Professional fees

1,258,374

667,540

Professional fees - related parties

47,572

63,028

Consulting

1,038,249

989,952

Consulting - related parties

286,503

237,397

Payroll and benefits expense

685,325

1,263,364

Depreciation and amortization

879,414

784,057

Research and development

648,846

1,327,648

Stock expense on debt conversion

76,500

246,390

Stock options expense

1,052,358

1,120,377

Total operating expenses

6,968,443

7,448,754

Loss from operations

(6,491,383)

(6,892,745)

Other (expense) income

Interest expense:

Interest – loans

(440,885)

(310,067)

Interest - related parties

(29,991)

(1,113)

Amortization of discount on debt

(123,387)

(137,364)

Total interest expense

(594,263)

(448,544)

Interest income

Loss on intangible impairment

(110,600)

Loss on sale of assets

(32,783)

(510)

Loan default penalty

(815,853)

Equity in Powdermet gain (loss)

140,735

(126,519)

Total other (expense) income

(1,302,158)

(686,158)

Net loss before non-controlling interest

(7,793,541)

(7,578,903)

Non-controlling interest in MesoCoat loss

341,302

1,622,593

Net loss attributable to Abakan Inc.

(7,452,239)

(5,956,310)

Provision for income taxes

Net loss

$ (7,452,239) $

(5,956,310)

Net loss per share - basic

(.10)

(.09)

Net loss per share - diluted

(.10)

(.09)

Weighted average number of common

shares outstanding - basic

74,797,346

64,663,650

Weighted average number of common

shares outstanding - diluted

74,797,346

64,663,650

Net loss attributable to Abakan Inc.

$ (7,452,239)

$ (5,956,310)

Other comprehensive income (loss)

Change in foreign currency translation, net

of tax effects of $0 and $0, respectively

(1,259)

Total comprehensive income (loss)

attributable to Abakan Inc.

$ (7,453,498)

$ (5,956,310)

SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.

F-5

ABAKAN INC
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
													Non-controlling				Other		Total
					Paid-in		Contributed		Subscription		Subscription		Accumulated				Comprehensive		Stockholders'
	Shares		Amount		Capital		Capital		Receivable		Payable		Interest		Deficit		Income (loss)		Equity
Balance, May, 2013	64,284,855	$	6,430	$	20,833,426	$	5,050	$	(76,244)	$	-	$	2,413,697	$	(13,545,788)	$	-	$	9,636,572
Subscription receivables received from
May 29, 2013 and December 20, 2012	-		-		-		-		76,244		-		-		-		-		76,244
Common shares issued for services on
October 25, 2013 at $3.03 per share	19,802		2		59,998		-		-		-		-		-		-		60,000
Common shares issued for services on
October 25, 2013 at $2.94 per share	25,000		3		73,498		-		-		-		-		-		-		73,501
Shares issued for retirement plan on
October 25, 2013 at $2.83 per share	82,941		8		234,715		-		-		-		-		-		-		234,723
Non-cash exercise of warrants on
December 4, 2013 at $0.65 per share including costs of $30,500	50,000		5		62,995		-		-		-		-		-		-		63,000
Common shares issued for services on
December 4, 2013 at $1.20 per share	10,000		1		11,999		-		-		-		-		-		-		12,000
Common shares issued for services on
January 3, 2014 at $1.18 per share	16,949		2		19,998		-		-		-		-		-		-		20,000
Subscription payable deposit payable stock
Subscription on February 21, 2014	-		-		-		-		-		20,000		-		-		-		20,000
Subscription payable deposit payable stock
Subscription on February 24, 2014	-		-		-		-		-		216,000		-		-		-		216,000
Private placement for cash, closed April 9,
2014 at $1.00 per share	40,000		4		39,996		-		-		(20,000)		-		-		-		20,000
Common shares issued for services on
April 9, 2014 at $1.00 per share	70,000		7		69,993		-		-		-		-		-		-		70,000
Accounts payable debt converted into stock
April 9, 2014 for $1.00 per share including costs of $0.00	216,000		22		215,978		-		-		(216,000)		-		-		-		-
Accounts payable debt converted into stock
April 9, 2014 for $0.80 per share including costs of $7,500	50,000		5		47,495		-		-		-		-		-		-		47,500
Accounts payable debt converted into stock
April 9, 2014 for $0.80 per share including costs of $208,390	1,389,268		139		1,319,666		-		-		-		-		-		-		1,319,805
Common shares issued for services on
April 22, 2014 at $0.80 per share	30,000		3		23,997		-		-		-		-		-		-		24,000
Common shares issued for services on
May 6, 2014 at $0.71 per share	20,000	$	2	$	14,198	$	-	$	-	$	-	$	-	$	-	$	-	$	14,200

May 31, 2014 continued on following

page

SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.

F-6

ABAKAN INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) -CONTINUED
													Non-controlling				Other		Total
					Paid-in		Contributed		Subscription		Subscription		Accumulated				Comprehensive		Stockholders'
May, 31 2014 continued from previous page	Shares		Amount		Capital		Capital		Receivable		Payable		Interest		Deficit		Income (loss)		Equity
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)		-		-		-		-		-		-		(2,750,976)
Stock option expense	-		-		1,120,377		-		-		-		(561,944)		-		-		1,120,377
MesoCoat stock option expense allocated to minimum interest	-		-		(69,016)		-		-		-		-		-		-		-
Net loss for the year	-		-		-		-		-		-		(1,622,593)		(5,956,310)		-		(7,578,903)
Balance, May, 2014	68,374,815	$	6,840	$	24,530,074	$	5,050	$	(28,000)	$	-	$	2,98,176	$	(19,502,097)	$	-	$	5,310,043
Subscription receivables received from May 30, 2014	-		-		-		-		28,000		-		-		-		-		28,000
Common shares issued for services on July 29, 2014 at $0.71 per share	43,800		4		31,094		-		-		-		-		-		-		31,094
Private placement for cash, closed October 6, 2014 at $0.40 per share	1,069,500		107		427,693		-		-		-		-		-		-		427,800
Common shares issued for downside protection on October 6, 2014	1,792,973		179		(179)		-		-		-		-		-		-		-
Private placement for cash, closed November 11, 2014 at $0.40 per share	7,500,000		750		2,999,250		-		-		-		-		-		-		3,000,000
Private placement for cash, closed November 16, 2014 at $0.40 per share	270,000		27		107,973		-		-		-		-		-		-		108,000
Account payable debt converted into stock November 26, 2014 for $0.40 per share including costs of $17,000	100,000		10		56,988		-		-		-		-		-		-		56,998
Note payable converted into stock November 26, 2014 for $0.40 per share including costs of $59,500	350,000		35		199,465		-		-		-		-		-		-		199,500
Beneficial warrant conversion valuation for convertible debt	-		-		390,534		-		-		-		-		-		-		390,534
Stock option expense	-		-		1,052,358		-		-		-		-		-		-		1,052,358
MesoCoat stock option expense allocated to minimum interest	-		-		(56,568)		-		-		-		56,568		-		-		-
Comprehensive loss for the year	-		-		-		-		-		-		-		-		(1,259)		(1,259)
Net loss for the year	-		-		-		-		-		-		(341,302)		(7,452,239)		-		(7,793,541)
Balance, May, 2015	79,501,088	$	7,952	$	29,738,682	$	5,050	$	-	$	-	$	13,442	$	(26,954,336)	$	(1,259)	$	2,809,53

SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

F-7

ABAKAN INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the years ended

May 31,

2015

2014

CASH FLOWS FROM OPERATING ACTIVITIES

Net (loss) before non-controlling interest

(7,793,541) $

(7,578,903)

Adjustments to reconcile net (loss) to net

cash (used in) operating activities:

Depreciation and amortization

879,414

784,057

Amortization of discount on debt

123,387

137,364

Amortization of deferred financing fees

3,764

1,729

Stock options expense

1,052,359

1,120,377

Stock expense on note conversion

76,500

246,390

Stock issued for services

31,099

285,700

Stock issued for retirement plan expense

234,723

Equity in investee (profit)/ loss

(140,735)

126,519

Loss on intangible impairment

110,600

Loan default penalty

815,853

Loss on sale of capital asset

32,783

510

Changes in operating assets and liabilities:

Accounts receivable

52,373

(13,599)

Inventory

(34,560)

Prepaid expenses

149,617

(68,742)

Accounts payable

292,084

1,133,234

Accounts payable - related parties

(168,233)

424,037

Accrued interest – related parties

28,614

Accrued interest - loans payable

359,496

213,759

Deferred rental revenue

167,272

Accrued liabilities

593,592

34,209

Total adjustments

4,314,679

4,770,867

NET CASH (USED IN) OPERATING ACTIVITIES

(3,478,862)

(2,808,036)

CASH FLOWS FROM INVESTING ACTIVITIES

Purchase of property, plant, equipment and website

(470,890)

(662,703)

Proceeds from sale of capital assets

18,000

Capitalized patents and licenses

(34,596)

(35,337)

NET CASH (USED IN) INVESTING ACTIVITIES

(487,486)

(698,040)

CASH FLOWS FROM FINANCING ACTIVITIES

Proceeds from sale of common stock

3,535,800

110,000

Proceeds from loans payable

1,153,084

3,144,692

Payments on loans payable

(696,603)

(161,591)

Proceeds from loans payable - related parties

11,501

185,648

Payments on loans payable - related parties

(65,000)

(44,470)

Repayments of capital leases

(6,799)

(6,376)

Stock issuable

28,000

76,244

NET CASH PROVIDED BY FINANCING ACTIVITIES

3,959,983

3,304,147

EFFECT OF EXCHANGE RATE CHANGES ON CASH

(1,259)

NET DECREASE IN CASH AND CASH EQUIVALENTS

(7,624)

(201,929)

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD

31,111

233,040

CASH AND CASH EQUIVALENTS, END OF PERIOD

23,487 $

31,111

SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.

F-8

ABAKAN INC

CONSOLIDATED STATEMENTS OF CASH FLOWS – CONTINUED

For the years ended

May 31,

2015

2014

Supplemental Disclosures:

Cash paid for income taxes

- $

Cash paid for interest

79,750 $

57,119

Supplemental Non-cash Disclosures:

Notes and accounts payable converted to stock

Accounts payable

(42,650) $

Accounts payable - related parties

(288,500)

Loans payable

(132,800)

(1,048,483)

Accrued interest

(4,548)

(10,694)

Accrued interest - related parties

(2,237)

Common stock

179,998

1,349,914

Subscription receivable

- $

Write off of assets acquired in MesoCoat acquisition

Patents and licenses

- $

1,336,281

Long term debt

(1,576,892)

Accrued liabilities

240,611

- $

Share exchange agreement with Powdermet and MesoCoat

Investment – Powdermet

- $

170,976

Common stock

390,968

Noncontrolling interest – MesoCoat

(561,944)

- $

Accounts payable & accrued interest converted to notes payable

Accounts payable

- $

233,121

Accounts payable - related parties

(198,168)

Accrued interest and penalty

(357,315)

Notes payable

357,315

Notes payable - related parties

198,168

(233,121)

- $

SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.

F-9

ABAKAN INC.

NOTES TO FINANCIAL STATEMENTS

FOR THE YEARS ENDING MAY 31, 2015 AND 2014

NOTE 1 – BUSINESS

Your Digital Memories, Inc. was incorporated in the state of Nevada on June 27, 2006.

Waste to Energy Group Inc., a wholly-owned subsidiary of Your Digital Memories Inc., was

incorporated in the state of Nevada on August 13, 2008. Waste to Energy Group Inc. and Your Digital

Memories Inc. entered into an Agreement and Plan of Merger on August 14, 2008. The board of

directors of Waste to Energy Group Inc. and Your Digital Memories Inc. deemed it advisable and in the

best interest of their respective companies and shareholders that Waste to Energy be merged with and

into Your Digital Memories Inc. with Your Digital Memories Inc. remaining as the surviving

corporation under the name Waste to Energy Group Inc.

Abakan Inc., a wholly-owned subsidiary of Waste to Energy Group Inc., was incorporated in the state of

Nevada on November 6, 2009. Abakan Inc. and Waste to Energy Group Inc. entered into an Agreement

and Plan of Merger on November 6, 2009. The board of directors of Abakan Inc. and Waste to Energy

Group Inc. deemed it advisable and in the best interest of their respective companies and shareholders

that Abakan Inc. be merged with and into Waste to Energy Group Inc. with Waste to Energy Group Inc.

remaining as the surviving corporation under the name “Abakan Inc.”.

Unless the context indicates otherwise, all references herein to the “Company”, “we,” “us,” and “our”

refer to Abakan Inc. and its consolidated subsidiaries.

On December 10, 2009 the Company purchased a thirty-four percent (34.59%) interest in MesoCoat,

Inc. ("MesoCoat"), and on July 13, 2011 purchased an additional eighteen percent (17.86%), and on

May 31, 2014 (please see Note 7) purchased an additional thirty-six percent (35.63%), for an aggregate

total of eighty-eight percent (88.08%) of the outstanding stock of MesoCoat.

MesoCoat (formerly “Powdermet Coating Technologies, Inc.”) was incorporated in Nevada as a wholly

owned subsidiary of Powdermet, Inc. (“Powdermet”) on May 18, 2007. Operations began in 2008 and

effective March 31, 2008, it was renamed as MesoCoat Inc. Future success of operations is subject to

several technical hurdles and risk factors, including satisfactory product development, regulatory

approval and market acceptance of MesoCoat’s products and its continued ability to obtain future

funding. MesoCoat is currently in the development stage, as operations consist primarily of research and

development expenditures, and revenues from planned principal operations that have not yet been

realized. MesoCoat has invested heavily in intellectual property, machinery and equipment to initiate

the research and development of its core technology. Currently, MesoCoat’s revenue consists of

government grants, cooperative reimbursement agreements and commercial contracts.

On March 21, 2011, the Company purchased 596,813 shares of Powdermet from Kennametal, Inc., an

unrelated party, equal to a fully diluted 41% interest in Powdermet. On May 31, 2014, we participated

in a share exchange agreement in which we exchanged 310,000 shares of Powdermet’s common stock

in exchange for 98,000 shares of common stock of MesoCoat and 2,000,000 shares of the Company’s

common stock. Because of this transaction our interest is now a fully diluted 24.1% interest in

Powdermet.

F-10

ABAKAN INC.

NOTES TO FINANCIAL STATEMENTS

FOR THE YEARS ENDING MAY 31, 2015 AND 2014

NOTE 1 – BUSINESS - continued

Powdermet was formed in 1996 as a Delaware corporation and has since developed a product platform

of advanced materials solutions derived from nano-engineered particle agglomerate technology and

derived hierarchically structured materials. Powdermet also owned 47.50% of MesoCoat, on May 31,

2014, we completed a share exchange agreement that we exchanged shares of Powdermet for shares of

Mesocoat reducing Powdermet’s interest in MesoCoat to twelve percent (11.92%).

On June 8, 2011, the Company formed a wholly owned subsidiary company named, AMP Distributors,

Ltd. (“AMP Distributors”), a Grand Cayman corporation. AMP Distributors was formed to distribute

MesoCoat products to consumer markets.

On July 27, 2012, the Company formed a wholly owned subsidiary company named, AMP Distributors,

Inc. (“AMP FL”), a Florida corporation. AMP Distributors was formed to distribute MesoCoat products

to consumer markets.

On May 15, 2012, MesoCoat formed a wholly owned subsidiary company named, MesoCoat

Technologies Canada Corporation (“MST TECH”), an Alberta Canada corporation. MesoCoat

Technologies was formed to develop, market, and sell wear-resistant clad pipes and components in

Canada.

On June 13, 2013, MesoCoat formed a wholly owned subsidiary company named, MesoCoat Coating

Services Inc. (“MSTC”), a Nevada corporation. MesoCoat Coatings was formed to extract maximum

value from the PComP family by offering high margin coating services.

On October 23, 2013, MesoCoat formed a wholly owned subsidiary company named, PT. MesoCoat

Indonesia (“MSTIND”), an Indonesian corporation. PT. MesoCoat Indonesia was formed to

manufacture and sell wear-resistant clad pipes and components in Indonesia.

On July 29, 2014, MesoCoat formed a wholly owned subsidiary company named MesoCoat de Mexico

S.A. de C.V., a Mexican corporation. MesoCoat de Mexico S.A. de C.V. was formed to generate sales

in Mexico.

The Company’s plan of operations is to develop and commercialize their products in advanced coatings

and metal formulations markets as a result of its investment in MesoCoat, Inc. (“MesoCoat”) and

Powdermet, Inc. (“Powdermet”). The Company is actively involved in supporting their research and

development “R&D”, market development, and commercialization efforts. Since the Company is in the

pre-commercialization phase for the majority of its products, the Company will need successive rounds

of financing to fund R&D, lengthy qualification periods, sales and marketing efforts.

F-11

ABAKAN INC.

NOTES TO FINANCIAL STATEMENTS

FOR THE YEARS ENDING MAY 31, 2015 AND 2014

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Accounting Basis

These financial statements are prepared on the accrual basis of accounting in conformity with

accounting principles generally accepted in the United States of America (GAAP).

We follow accounting standards set by the Financial Accounting Standards Board, commonly referred

to as the FASB. The FASB sets GAAP that we follow to ensure we consistently report our financial

condition, results of operations, and cash flows. References to GAAP issued by the FASB in these

footnotes are to the FASB Accounting Standards Codification, sometimes referred to as the Codification

or ASC.

Cash and Cash Equivalents

For the purposes of the statements of cash flows, cash equivalents include all highly liquid investments

with a maturity of three months or less.

Concentration in Sales to Few Customers

For the year ended May 31, 2015 and 2014, our government contracts accounted for 62% and 33% of our

revenues, respectively.

Cash in Excess of FDIC Insured Limits

We maintain our cash in bank deposit accounts which, at times, may exceed federally insured limits.

Accounts are guaranteed by the Federal Deposit Insurance Corporation (FDIC) up to $250,000. As of

May 31, 2015 and 2014, we had no amounts in excess of FDIC insured limits. We have not experienced

any losses in such accounts.

Consolidation Policy

The accompanying May 31, 2015 financial statements include the Company’s accounts and the accounts of

its subsidiaries. All significant intercompany transactions and balances have been eliminated in

consolidation. The Company’s ownership of its subsidiaries as of May 31, 2015, is as follows:

Name of Subsidiary

Percentage of Ownership

AMP Distributors (Cayman)

100.00%

AMP Distributors (Florida)

100.00%

MesoCoat, Inc.

88.08%

MesoCoat’s ownership of its subsidiaries as of May 31, 2015, is as follows:

Name of Subsidiary

Percentage of Ownership

MesoCoat Technologies Canada Corporation

100.00%

MesoCoat Coating Services, Inc. (Nevada)

100.00%

PT. MesoCoat Indonesia

100.00%

MesoCoat de Mexico S.A. de C.V.

100.00%

F-12

ABAKAN INC.

NOTES TO FINANCIAL STATEMENTS

FOR THE YEARS ENDING MAY 31, 2015 AND 2014

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued

Fair Value of Financial Instruments

In January 2008, the Company adopted FASB ASC 820, Fair Value Measurements and Disclosures

(“ASC 820”) (Formerly referenced as SFAS No. 157, Fair Value Measurements), to value its financial

assets and liabilities. The adoption of ASC 820 did not have a significant impact on the Company’s

results of operations, financial position or cash flows. ASC 820 defines fair value, establishes a

framework for measuring fair value under GAAP and expands disclosures about fair value

measurements. ASC 820 defines fair value as the exchange price that would be paid by an external party

for an asset or liability (exit price).

ASC 820 also establishes a fair value hierarchy which requires an entity to maximize the use of

observable inputs and minimize the use of unobservable inputs when measuring fair value. Three levels

of inputs may be used to measure fair value:

Level 1 – Active market provides unadjusted quoted prices for identical assets or liabilities that the

company has the ability to access;

Level 2 – Quoted prices for similar assets or liabilities in active markets or quoted prices for identical

or similar assets or liabilities in inactive markets. Level 2 inputs include those other than quoted

prices that are observable for the asset or liability and that are derived principally from, or

corroborated by, observable market data by correlation of other means. If the asset or liability has a

specified term the Level 2 input must be observable for substantially the full term of the asset or

liability; and

Level 3 – Inputs to the valuation methodology are unobservable and significant to the fair value

measurement.

Fair value estimates discussed herein are based upon certain market assumptions and pertinent

information available to management as of May 31, 2015. The Company uses the market approach to

measure fair value for its Level 1 financial assets and liabilities. The market approach uses prices and

other relevant information generated by market transactions involving identical or comparable assets or

liabilities.

The respective carrying value of certain on-balance-sheet financial instruments approximated their fair

values. These financial instruments which include cash, accounts receivable, accounts payable, and notes

payable are valued using Level 1 inputs and are immediately available without market risk to

principal. Fair values were assumed to approximate carrying values for these financial instruments since

they are short term in nature and their carrying amounts approximate fair values or they are receivable or

payable on demand. The carrying value of note payable to stockholder approximates its fair value

because the interest rates associated with the instrument approximates current interest rates charged on

similar current borrowings. The Company does not have other financial assets that would be

characterized as Level 2, but we do feel that our investment in Powdermet would be characterized as

Level 3 assets.

F-13

ABAKAN INC.

NOTES TO FINANCIAL STATEMENTS

FOR THE YEARS ENDING MAY 31, 2015 AND 2014

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued

Non-Controlling Interest

Non-controlling interest represents the minority members’ proportionate share of the equity of MesoCoat,

Inc. The Company’s controlling interest in MesoCoat requires that its operations be included in the

consolidated financial statements. The equity interest of MesoCoat that is not owned by the Company is

shown as non-controlling interest in the consolidated financial statements.

Equity Method

Investee companies that are not consolidated, but over which the Company exercises significant

influence, are accounted for under the equity method of accounting, in accordance with ASC 323.

Whether or not the Company exercises significant influence with respect to an investee depends on an

evaluation of several factors including, among others, representation on the investee company’s board of

directors and ownership level, which is generally a 20% to 50% interest in the voting securities of the

investee company. Under the equity method of accounting, an investee company’s accounts are not

reflected within the Company’s Balance Sheets and Statements of Operation; however, the Company’s

share of the earnings or losses of the investee company is reflected in the caption “Equity in (Investee)

income (loss)” in the Statements of Operation. The Company’s carrying value in an equity method

investee company is reflected in the caption “Investment – (Investee)” in the Company’s Balance Sheets.

Occasionally, we may make payments towards our investment in investee companies. As we make those

deposits on our total investment, we account for those payments on our balance sheet as “Investment

deposits in (investee).” When we complete the total investment amount, these amounts are moved into the

individual investment accounts discussed above.

Earnings (Loss) Per Common Share

The Company computes net earnings (loss) per share in accordance with FASB ASC 260-10, "Earnings

per Share". FASB ASC 260 requires presentation of both basic and diluted earnings per share (EPS) on

the face of the Statements of Operation. Basic EPS is computed by dividing net earnings (loss)

available to common stockholders (numerator) by the weighted average number of shares

outstanding (denominator) during the period. Diluted EPS gives effect to all potentially dilutive common

shares outstanding during the period. Diluted EPS excludes all potentially dilutive shares if their effect is

anti-dilutive. The only potentially dilutive common shares outstanding are stock options and warrants

from inception (Note 10).

Development Stage Enterprise

At May 31, 2015, the Company’s business operations had not fully developed and the Company is highly

dependent upon funding and therefore is considered a development stage enterprise. The Company has

also adopted early the FASB released ASU 2014-10 concerning our development stage enterprise

financial statement presentation.

F-14

ABAKAN INC.

NOTES TO FINANCIAL STATEMENTS

FOR THE YEARS ENDING MAY 31, 2015 AND 2014

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued

Accounts Receivable

Accounts receivable are stated at face value, less an allowance for doubtful accounts. The Company

provides an allowance for doubtful accounts based on management's periodic review of accounts,

including the delinquency of account balances. Accounts are considered delinquent when payments have

not been received within the agreed upon terms, and are written off when management determines that

collection is not probable. As of May 31, 2015 and 2014 management has determined that no allowance

for doubtful accounts is required.

Property, Plant and Equipment

Property, plant and equipment are stated at cost less accumulated depreciation and amortization.

Maintenance and repairs are charged to operations as incurred. Depreciation and amortization are based

on the straight-line method over the estimated useful lives of the related assets. When assets are retired or

otherwise disposed of, the cost and accumulated depreciation and amortization are removed from the

accounts, and any resulting gain or loss is reflected in operations in the period realized.

Asset Construction in Progress

Construction in progress assets, represent assets that are in process of construction and rehabilitation in

order to bring them to operational status. All costs are captured in a separate Construction in Progress

account, and are included in the “Property, plant and equipment – net” amounts, and when the asset is

ready to enter service, the total costs are capitalized and depreciation commences per the schedule below.

Depreciation

Depreciation is computed on the straight-line method net of salvage value with useful lives as follows:

Computer equipment and software

3 - 5 years

Office furniture and equipment

5 - 7 years

Machinery and equipment

7 - 10 years

Leasehold improvements

balance of lease term

Patent and Technology Licenses

Patent costs are recorded at the cost to obtain the patent and are amortized on a straight-line basis over their estimated

useful lives up to 20 years, beginning when the patent is secured by the Company. License costs are recorded at

the cost to obtain the license and are amortized on a straight-line basis over effective term of the license, up to 15

years.

Goodwill

In accordance with GAAP, goodwill in the amount of $364,384 related to the acquisition of MesoCoat will be

evaluated for impairment on an annual basis starting fiscal year ending May 31, 2013. We evaluated our

goodwill for impairment and determined that no adjustment is necessary as of May 31, 2015 or 2014.

F-15

ABAKAN INC.

NOTES TO FINANCIAL STATEMENTS

FOR THE YEARS ENDING MAY 31, 2015 AND 2014

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued

Dividends

The Company has not adopted any policy regarding payment of dividends. No dividends have been

paid during the periods shown.

Income Taxes

Income taxes are provided for using the liability method of accounting. A deferred tax asset or liability

is recorded for all temporary differences between financial and tax reporting. Deferred tax expense

(benefit) results from the net change during the year in deferred tax assets and liabilities. Valuation

allowances are established when necessary to reduce deferred tax assets to the amount expected to more

likely than not be realized in future tax returns. Tax law and rate changes are reflected in income in the

period such changes are enacted.

Revenue Recognition

The Company recognizes revenue when there is persuasive evidence of an arrangement, delivery has

occurred or services have been rendered, the sales price if fixed or determinable, and collectability is

reasonably assured.

Revenue Recognition – Rental Revenue

Operating leases arise from leasing of the Company’s equipment to a customer in Canada. The initial

lease term is 24 months. The Company recognizes revenue ratably over the lease term. Amounts

received in excess of the leasing revenue recognized are reported as a deferred rental revenue liability on

the balance sheet. Depreciation expense for assets subject to operating leases is provided on a straight-

line method.

Grant Revenue

Revenue from grants is generally recorded when earned as defined under the terms of the agreements. Each

grant document sets the timing of amounts that are allowed to be billed and how to bill those amounts. We generally

look at a two week time period to bill from and work on the incurred costs for the same time period and bill according

to preset amounts that are allowed to be billed for per the grant documents. This is then billed through a government

billing system, reviewed by the government department, and then payment is sent to us.

Research and Development Costs

Research and development costs are charged to expense as incurred and are included in operating expenses. Total

research and development costs were $648,846 and $1,327,648 for the years ended May 31, 2015 and 2014,

respectively.

Advertising Expenses

Advertising costs are expensed as incurred. Advertising expenses are included in general and

administrative expense in the Statements of Operation. For both the years ended May 31, 2015 and 2014

no advertising expenses was incurred.

F-16

ABAKAN INC.

NOTES TO FINANCIAL STATEMENTS

FOR THE YEARS ENDING MAY 31, 2015 AND 2014

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued

Shipping and Handling Costs

The Company’s shipping and handling costs are included in cost of revenues for all periods presented.

Stock-Based Compensation

The Company adopted FASB ASC 718-10 and valued our employee stock based awards based on the

grant-date fair value estimated in accordance with the provisions of FASB ASC 718-10. The Company

accounts for equity instruments issued in exchange for the receipt of goods or services from other than

employees in accordance with FASB ASC 718-10 and the conclusions reached in FASB ASC 505-

10. Costs are measured at the estimated fair market value of the consideration received or the estimated

fair value of the equity instruments issued, whichever is more reliably measurable. The value of equity

instruments issued for consideration other than employee services is determined on the earliest of a

performance commitment or completion of performance by the provider of goods or services as defined

by FASB ASC 505-10.

Foreign Currency Translation

Assets and liabilities of non-U.S. subsidiaries that operate in a local currency environment are translated

to U.S. dollars at exchange rates in effect at the balance sheet date with the resulting translation

adjustments recorded directly to a separate component of shareholders' equity. Income and expense

accounts are translated at average exchange rates during the year. Where the U.S. dollar is the functional

currency, translation adjustments are recorded in income.

Derivatives

The Company occasionally issues financial instruments that contain an embedded instrument. At

inception, the Company assesses whether the economic characteristics of the embedded derivative

instrument are clearly and closely related to the economic characteristics of the financial instrument (host

contract), whether the financial instrument that embodies both the embedded derivative instrument and

the host contract is currently measured at fair value with changes in fair value reported in earnings, and

whether a separate instrument with the same terms as the embedded instrument would meet the definition

of a derivative instrument.

If the embedded derivative instrument is determined not to be clearly and closely related to the host

contract, is not currently measured at fair value with changes in fair value reported in earnings, and the

embedded derivative instrument would qualify as a derivative instrument, the embedded derivative

instrument is recorded apart from the host contract and carried at fair value with changes recorded in

current-period earnings.

The Company determined that all embedded items associated with financial instruments at this time do

not qualify for derivative treatment, nor should those be separated from the host.

F-17

ABAKAN INC.

NOTES TO FINANCIAL STATEMENTS

FOR THE YEARS ENDING MAY 31, 2015 AND 2014

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued

Indefinite-lived Intangible Assets

In accordance with GAAP, Intellectual Property – Research and Development in the amount of $6,120,200

related to the acquisition of MesoCoat, will not be amortized and is reviewed annually for impairment due to its

indefinite life.

Impairment of Long Lived Assets

We evaluate whether events and circumstances have occurred which indicate the remaining estimated

useful life of long lived assets, including other intangible assets, may warrant revision or the remaining

balance of an asset may not be recoverable. The measurement of possible impairment is based on a

comparison of the fair value of the related assets to the carrying value using discount rates that reflect the

inherent risk of the underlying business. Impairment losses, if any, would be recorded to the extent the

carrying value of the assets exceeds the implied fair value resulting from this calculation. As of May 31,

2015, the Company determined there was no impairment and at May 31, 2014, the Company recorded an

impairment (see Note 5).

General Accounting Policy for Contingencies

Certain conditions may exist which may result in a loss to the Company, but which will only be resolved

when one or more future events occur or fail to occur. The Company’s management and its legal counsel

assess such contingent liabilities, and such assessment inherently involves an exercise of judgment. In

assessing loss contingencies related to legal proceedings that are pending against the Company, or

unasserted claims that may result in such proceedings, the Company’s legal counsel evaluates the

perceived merits of any legal proceedings or unasserted claims as well as the perceived merits of the

amount of relief sought or expected to be sought therein.

If the assessment of a contingency indicates that it is probable that a material loss has been incurred and

the amount of the liability can be estimated, the estimated liability would be accrued in the Company’s

financial statements. If the assessment indicates that a potentially material loss contingency is not

probable but is reasonably possible, or is probable but cannot be estimated, the nature of the contingent

liability, together with an estimate of the range of possible loss if determinable and material, would be

disclosed.

Loss contingencies considered remote are generally not disclosed unless they arise from guarantees, in

which case the guarantees would be disclosed.

As of May 31, 2015 and 2014, the Company’s management believes that there are certain outstanding

legal proceedings which could have a material adverse effect on the financial position of the Company.

F-18

ABAKAN INC.

NOTES TO FINANCIAL STATEMENTS

FOR THE YEARS ENDING MAY 31, 2015 AND 2014

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued

Use of Estimates in the Preparation of Financial Statements

The preparation of financial statements in conformity with GAAP requires management to make

estimates and assumptions that affect the reported amounts of assets, the disclosure of contingent assets

and liabilities at the date of the financial statements and the reported amounts of revenues and expenses

during the reporting periods. The more significant areas requiring the use of estimates include asset

impairment, stock-based compensation, beneficial conversion features on debt instruments, and future

income tax amounts. Management bases its estimates on historical experience and on other assumptions

considered to be reasonable under the circumstances. Actual results may differ from the estimates.

NOTE 3 – GOING CONCERN

The accompanying financial statements have been prepared assuming that the Company will continue as

a going concern. The Company has net losses for the period of June 27, 2006 (inception) to the year

ended May 31, 2015, of $26,954,336, and a working capital deficit of $11,203,578. These conditions

raise substantial doubt about the Company’s ability to continue as a going concern. The Company’s

continuation as a going concern is dependent on its ability to develop additional sources of capital,

and/or achieve profitable operations and positive cash flows. Management’s plan is to aggressively

pursue its present business plan. Since inception, we have funded our operations through the issuance of

common stock, debt financing, and related party loans and advances, and we will seek additional debt or

equity financing as required. The accompanying financial statements do not include any adjustments

that might result from the outcome of this uncertainty.

NOTE 4 – PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consisted of the following:

May 31, 2015

May 31, 2014

Machinery and equipment

5,031,635

4,298,705

Construction in progress

942,782

1,282,370

Computer equipment and office furniture

54,139

Leasehold improvements

835,593

6,864,149

6,470,807

Less accumulated depreciation and amortization

(1,724,346)

(931,258)

5,139,803

5,539,549

Depreciation and amortization expense was $819,853 and $718,161 for the years ended May 31, 2015 and

2014, respectively. The Company recognized a loss of $32,783 and $510 for equipment sold during the

years ending May 31, 2015 and 2014, respectively.

F-19

ABAKAN INC.

NOTES TO FINANCIAL STATEMENTS

FOR THE YEARS ENDING MAY 31, 2015 AND 2014

NOTE 5 – PATENTS AND L ICENSES

Patents and licenses consist of the following:

May 31, 2015

May 31, 2014

Patents

206,316 $

171,720

Website

21,000

Intellectual property - research and development

6,009,600

6,236,916

6,202,320

Less accumulated amortization

(121,280)

(95,634)

6,115,636 $

6,106,686

Amortization expense was $25,646 and $26,423 for the years ended May 31, 2015 and 2014,

respectively. In the years ended May 31, 2015 and 2014, we have capitalized an additional $34,596 and

$35,337, respectively, on patents and licenses, and have begun amortizing those according to our policy.

On May 31, 2014, we analyzed our long lived intangibles for impairment and found that an adjustment of

$110,600 in our Intellectual property - research and development was needed in order to reflect the true

value of our intangibles.

Future amortization patents and licenses are presented in the table below:

For the years ended May 31,

2016

13,754

2017

13,754

2018

13,754

2019

13,754

2020 and beyond

51,020

$ 106,036

Patent license agreement

The Company has an exclusive commercial patent license agreement with a third party which requires the

Company to invest in the research and development of technology and the market for products by

committing to a certain level of personnel hours and $350,000 of expenditures.

The patent license agreement required a total of $50,000 in execution fees which are included in

intangible assets. The patent license agreements requires royalty payments equal to 2.5% of net sales of

the product sold by the Company beginning after the first commercial sale. For the first calendar year

after the achievement of a certain milestone and the following two calendar years during the term of the

agreement, the Company will pay a minimum annual royalty payment of $10,000, $15,000 and $20,000

respectively. During the year ended May 31, 2015 and 2014, no royalty payments were made.

F-20

ABAKAN INC.

NOTES TO FINANCIAL STATEMENTS

FOR THE YEARS ENDING MAY 31, 2015 AND 2014

NOTE 6 – ASSIGNMENT AGREEMENT – MESOCOAT

On March 25, 2011, the Company entered into an assignment agreement (the Agreement) whereby it

would assume the exclusive rights to distribute MesoCoat’s products intended for applications specific to

the oil and gas pipeline industry in consideration of $250,000. The Agreement was entered into with a

company who entered into an exclusive distribution agreement with MesoCoat dated October 10, 2008

which was in effect for 10 years following the original date of the exclusive distribution agreement. On

May 31, 2011, the Company completed the transfer of consideration and assumed all rights to the

agreement. We commenced amortization on June 1, 2012, over the remaining term of 76 months, and

have recorded $39,474 in amortization expense for both of the years ended May 31, 2015 and 2014.

NOTE 7 – INVESTMENT IN NON-CONTROLLING INTEREST

Powdermet, Inc.

The Company purchased a forty one percent (41%) interest in Powdermet, Inc. (“Powdermet”), on June

28, 2010 from Kennametal in exchange for one million six hundred fifty thousand dollars ($1,650,000).

On May 31, 2014, we participated in a share exchange agreement in which we exchanged 310,000 shares

of Powdermet’s common stock in exchange for 98,000 shares of common stock of MesoCoat and

2,000,000 shares of the Company’s restricted common shares. Because of this transaction our interest is

now a fully diluted 24.1% interest in Powdermet.

Powdermet was formerly the parent company of MesoCoat, owning 66% of MesoCoat at May 31, 2011.

Andy Sherman serves as the chief executive officer of Powdermet, in addition to his duties as a member

of the Company’s board of directors. Through the Company’s purchase of 41% of Powdermet, it also

gained indirect ownership of the additional shares of MesoCoat that Powdermet owns. On June 13, 2013,

Powdermet formed a wholly owned subsidiary, Terves Inc. The results for Terves Inc. have been

consolidated in the results of Powdermet.

We have analyzed our investment in accordance of “Investments – Equity Method and Joint Ventures”

(ASC 323), and concluded that when the stock purchase agreement was completed our 24% minority

interest investment gave us significant influence over Powdermet’s business actions, board of directors,

and its management, and therefore we account for our investment using the Equity Method. The table

below reconciles our investment amount and equity method amounts to the amount on the accompanying

balance sheet.

Investment balance, May 31, 2013

2,449,312

Equity in loss for the year ended May 31, 2014

(126,519)

Reduction in Investment for Share Exchange

(170,976)

Investment balance, May 31, 2014

2,151,817

Equity in gain for year ended May 31, 2015

140,735

Investment balance, May 31, 2015

2,292,552

Powdermet’s ownership in MesoCoat was diluted when the Company exercised its initial option to

purchase 86,156 shares of common stock from MesoCoat, and was further diluted when the Company

completed the additional purchase of 120,710 shares of MesoCoat on May 31, 2014. Powdermet’s

ownership in MesoCoat as of May 31, 2014 and May 31, 2015 is 11.92%.

F-21

ABAKAN INC.

NOTES TO FINANCIAL STATEMENTS

FOR THE YEARS ENDING MAY 31, 2015 AND 2014

Below is a table with summary financial results of operations and financial position of Powdermet:

NOTE 7 – INVESTMENT IN NON-CONTROLLING INTEREST - continued

Powdermet Inc. and Subsidiary

For the year ended

May 31, 2015

May 31, 2014

Equity Percentage

24.1%

Condensed income statement information:

Total revenues

4,594,761

1,952,591

Total cost of revenues

2,130,308

975,149

Gross margin

2,464,453

977,442

Total expenses

(1,469,383)

(995,945)

Other (expense)

(518)

(1,584,970)

Non-controlling interest in Terves

(109,760)

(Provision) for/benefit from income taxes

(300,829)

1,294,889

Net income (loss)

583,963

(308,584)

Company’s equity in net profit

140,735

(126,519)

Condensed balance sheet information:

May 31, 2015

May 31, 2014

Total current assets

2,759,756

624,299

Total non-current assets

3,435,558

2,884,479

Total assets

6,195,314

3,508,778

Total current liabilities

2,192,461

426,849

Total non-current liabilities

1,248,565

925,521

Total equity

2,754,288

2,156,408

Total liabilities and equity

6,195,314

3,508,778

Share Exchange and Purchase Transaction

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

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

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

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

MesoCoat of $6,169,236 to equity, and exchange a portion of its Powdermet shares and 2,000,000 of the

Company’s shares for a portion of Powdermet’s MesoCoat shares. The effect of the transaction was that

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

indirect ownership, respectively, in exchange it decreased its ownership position in Powdermet to 24.1%

from 40.5%.

In accordance with ASC 810-10, whenever a parent who has control of a subsidiary increases their

ownership in the subsidiary, any difference between the consideration paid over the adjustment to the

carrying amount of the Non-Controlling Interest is recognized as a change directly into Paid In

Capital. As a result, we reduced the non-controlling interest in our balance sheet by $561,944 and also

recorded a direct charge against paid in capital of $2,189,032.

F-22

ABAKAN INC.

NOTES TO FINANCIAL STATEMENTS

FOR THE YEARS ENDING MAY 31, 2015 AND 2014

NOTE 8 – LOANS PAYABLE

As of May 31, 2015 and 2014, the loans payable balance comprised of:

Description

May 31, 2015

May 31, 2014

Convertible demand note to an unrelated entity bearing 5% interest per annum which matured $

- $

1,500,000

on September 14, 2014, which converted to a senior promissory note on May 15, 2015.

Convertible demand note to an unrelated entity bearing 5% interest per annum which matured

200,000

on September 14, 2014, which converted to a senior promissory note on May 15, 2015.

Convertible demand note to an unrelated entity bearing 5% interest per annum which matured

500,000

on July 14, 2014

Senior convertible promissory note to an unrelated entity bearing 5% interest per annum

2,647,853

which matures on February 29, 2016. The note is shown net of a discount of $267,147,

attributable to the beneficial conversion feature, and an effective interest rate of 18.33%.

Uncollateralized demand note to an unrelated entity bearing 8% interest per annum

70,000

Uncollateralized demand note to an unrelated entity bearing 8% interest per annum

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

Uncollateralized demand note to an unrelated entity bearing 8% interest per annum

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

80,994

79,494

Uncollateralized demand note to an unrelated entity bearing 5% interest per annum

50,000

Uncollateralized demand note to an unrelated entity bearing 6% interest per annum

20,000

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

406,766

130,000

Uncollateralized demand note to an unrelated entity bearing 6% interest per annum

59,950

Uncollateralized demand note to an unrelated entity bearing 6% interest per annum

24,950

Secured convertible promissory note to an unrelated entity bearing 18% default interest per

1,341,963

annum which matured on April 27, 2015

Collateralized term note to an unrelated entity bearing 5.15% interest per annum which

104,250

132,157

matures on September 7, 2018.

Uncollateralized demand note to a related entity bearing 8% interest per annum

21,308

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

33,201

35,000

Uncollateralized demand note to an unrelated entity bearing 7% interest per annum

20,000

Uncollateralized term note to a related entity bearing 5% interest per annum which matured

198,168

on February 28, 2015

Collateralized note to an unrelated entity bearing 1% interest for the first year and then 7%

920,103

1,000,000

per annum for years two – seven.

Uncollateralized demand note to a related entity bearing 6% interest per annum

60,000

Convertible demand note to an unrelated entity bearing 7.5% imputed interest per annum

31,753

40,134

which matures on July 10, 2018.

Uncollateralized demand note to an unrelated entity bearing 8% interest per annum

30,000

Uncollateralized demand note to an unrelated entity bearing 6% interest per annum

15,000

Uncollateralized demand note to an unrelated entity bearing 6% interest per annum

20,000

Uncollateralized demand note to an unrelated entity bearing 6% interest per annum

25,000

Uncollateralized demand note to a related entity bearing 6% interest per annum

10,000

Uncollateralized demand notes to an unrelated entity bearing 5% interest per annum

405,000

Capital leases payable to various vendors expiring in various years through September 2016;

78,706

85,505

collateralized by certain equipment with a cost of $205,157.

7,191,630

6,187,226

Less current liabilities

7,144,918

5,077,080

Total long term liabilities

46,712 $

1,110,146

F-23

ABAKAN INC.

NOTES TO FINANCIAL STATEMENTS

FOR THE YEARS ENDING MAY 31, 2015 AND 2014

NOTE 8 – LOANS PAYABLE -continued

We owed $360,564 and $306,540 in accrued interest for the above notes as of May 31, 2015 and 2014,

respectively. We also amortized $123,387 and $137,364 in discount on debt for the years ended May 31,

2015 and 2014, respectively. All long-term maturities represent capitalized leases and will be due in

fiscal year 2017. The collateralized notes are secured by the MesoCoat assets per their respective loan

agreements.

As of May 31, 2015 and 2014, we had no restrictive covenants attached to any of the above referenced

notes except for the $1,000,000 ($920, 103 as of May 31, 2015) IOLF loan which requires MesoCoat to

create or maintain 46 jobs by the 3^rd anniversary date of the completion of the project in Euclid, Ohio. If

the 46 jobs are not created or maintain by such date, the interest rate will increase from 7% to 10% per

annum.

The Company recorded $815,853 default penalty expense during the period ending May 31, 2015. The

penalty is related to a settlement with Sonoro Invest S.A. (“Sonora”) and default judgment entered by the

court on the George Town Associates, S.A loan. The additional penalty recorded for Sonoro above the

accrued interest was $480,362 and is financed in the new $2,915,000 note as discussed below. The

Company accrued $335,490 penalty as of May 31, 2015 as result of the default judgment entered into by

the court on August 19, 2015 on the George Town Associates, S.A.

On May 19, 2015, the Company entered into a settlement agreement (“Settlement”) with Sonoro Invest

S.A. (“Sonoro”), in connection with a dispute that arose under certain amended convertible promissory

notes and a promissory note for an aggregate principal amount of $2,105,000, which caused Sonoro to file

a lawsuit against the Company on October 1, 2014 in the United States District Court for the Southern

District of Florida, alleging defaults on the promissory notes. The Settlement provides that all existing

promissory notes between the parties be cancelled and replaced with a new senior convertible promissory

note in the amount of $2,915,000 with interest at 5% payable in full on February 29, 2016 (“Note”). The

Note is convertible, at the sole option of Sonoro, for each dollar converted into one share of the

Company’s common stock and a ½ warrant that entitles the holder of one full warrant to purchase an

additional share of the Company at $1.50 until repayment. The Note ranks senior to any other

indebtedness, except with respect to existing secured creditors including George Town Associates S.A.

(“George Town”). Nevertheless, the Settlement allows the Company to enter into additional secured

indebtedness, on substantially the same terms as it has with George Town, for the purpose of satisfying

amounts due to George Town, if such indebtedness is secured from certain lenders or from within a

certain classification of lenders.

F-24

ABAKAN INC.

NOTES TO FINANCIAL STATEMENTS

FOR THE YEARS ENDING MAY 31, 2015 AND 2014

NOTE 8 – LOANS PAYABLE -continued

On May 4, 2015, George Town initiated legal proceedings against the Company and MesoCoat, Inc. in

the United States District Court for the Southern District of New York alleging that they had defaulted on

a secured promissory note due to George Town in the original principal amount of $1,341,963.34. The

complaint sought recovery of the principal amount of the loan in addition to default interest, attorney’s

fees and costs of collection. On August 14, 2015, at a hearing on a motion filed by George Town asserting

that the Company and MesoCoat had violated a temporary injunction entered previously in the case, the

Court announced that it was appointing a receiver for MesoCoat. On August 18, 2015, the Court entered

a written order appointing a receiver for MesoCoat. On August 18, 2015, the Court entered an order

granting George Town summary judgment on its claims, granting summary judgment in favor of George

Town on the Company and MesoCoat’s counterclaim and denying the Company and MesoCoat leave to

file a third party complaint. On August 18, 2015, the Court entered a final judgment against the Company

and MesoCoat for $1,770,932.03. The Company and MesoCoat intend to appeal this order and judgment

(and all prior orders). The Company has until September 17, 2015 to file its notice of appeal.

As result of a receiver being appointed on August 18, 2015, the Company reviewed MesoCoat’s loan

agreements with their lenders. The appointment would be considered a default under other loan

agreements. Thereof, the Company has reclassified three loans totaling $1,057,554 as current liabilities

for the period ending May 31, 2015. The Company is discussing methods to cure the default with the

largest lender of the three.

F-25

ABAKAN INC.

NOTES TO FINANCIAL STATEMENTS

FOR THE YEARS ENDING MAY 31, 2015 AND 2014

NOTE 9 – STOCKHOLDERS' EQUITY

Common Shares – Authorized

The Company has 2,500,000,000 common shares authorized at a par value of $0.0001 per share and

50,000,000 shares of preferred stock, par value $0.0001 per share. All common stock shares have equal

voting rights, are non-assessable and have one vote per share. Voting rights are not cumulative and,

therefore, the holders of more than 50% of the common stock could, if they choose to do so, elect all the

directors of the Company.

Common Stock Issuances

Private placements

For the years ended May 31, 2015 and 2014, we issued the following shares:

On April 9, 2014, we closed a private placement for $40,000, or 40,000 units consisting of one share of

our restricted common stock and one-half common stock warrant to purchase shares of our common

stock, with a purchase price of $1.50 per share and an expiration date of two years from the closing. In

connection with this placement we had no offering costs for a net of $40,000.

On May 30, 2014, we closed several private placements for an aggregate $48,000, or 60,000 units

consisting of one share of our restricted common stock and one-half common stock warrant to purchase

shares of our common stock, with a purchase price of $1.50 per share and an expiration date of two years

from the closing. In connection with this placement we had no offering costs for a net of $48,000.

On October 7, 2014, we issued 557,000 shares of our common stock for private placement valued at

$222,800. The Company also issued 512,500 shares of our common stock for subscription payable

valued at $205,000. In connection with this placement we had no offering costs.

On October 7, 2014, we issued 1,792,973 restricted shares due to a downside protection provision and the

placees agreed to cancel warrants to purchase 832,487 additional restricted share. The Company offered

downside stock price protection in two private placements that totaled 1,664,973 shares that closed in

April 2014 and May 2014. The down-side protection offered additional shares if new private placements

were offered within one year at a lower price. After receipt of these additional shares, the placees would

hold the same quantity of shares as if they would have had participated in any subsequent lower priced

private placement. As of the date of the issuance of this report, all private placements with downside

protection discussed in this paragraph are past the one year anniversary.

On November 11, 2014, we issued 7,500,000 shares of our common stock for private placement valued at

$3,000,000. In connection with this placement we had no offering costs.

On November 26, 2014, we issued 270,000 shares of our common stock for private placement valued at

$108,000. In connection with this placement we had no offering costs.

F-26

ABAKAN INC.

NOTES TO FINANCIAL STATEMENTS

FOR THE YEARS ENDING MAY 31, 2015 AND 2014

NOTE 9 – STOCKHOLDERS' EQUITY - continued

Conversion of debt to shares

For the years ended May 31, 2015 and 2014, we issued the following shares for conversion of debt to

On December 4, 2013, we issued 50,000 shares of our common stock for exercise of stock warrants

converted valued at $32,500, and paid for by an outstanding balance of accounts payable. In connection

with this placement we incurred stock expense on conversion of $30,500.

On April 9, 2014, we agreed to issue $216,000 or 216,000 units consisting of one share of our restricted

common stock and one-half common stock warrant to purchase shares of our common stock, with a

purchase price of $1.50 per share and an expiration date of two years from the closing for services to be

rendered. In connection with this placement we had no offering costs for a net of $216,000.

On April 9, 2014, we converted several debt obligations for an aggregate total of $751,414, or 939,268

units consisting of one share of our restricted common stock and one-half common stock warrant to

purchase shares of our common stock, with a purchase price of $1.20 per share and an expiration date of

two years from the closing. In connection with these placements we incurred stock expense on conversion

of $140,890.

On April 9, 2014, we converted a note for $400,000, or 500,000 units consisting of one share of our

restricted common stock and one-half common stock warrant to purchase shares of our common stock,

with a purchase price of $1.20 per share and an expiration date of two years from the closing. In

connection with this placement we incurred stock expense on conversion of $75,000.

On November 26, 2014, we converted a debt obligation of $140,000, for 350,000 shares of our restricted

common stock. In connection with this placement we incurred stock expense on conversion of $59,500.

On November 26, 2014, we converted accounts payable obligations for $40,000, or 100,000 shares of our

restricted common stock. In connection with this placement we incurred stock expense on conversion of

$17,000.

F-27

ABAKAN INC.

NOTES TO FINANCIAL STATEMENTS

FOR THE YEARS ENDING MAY 31, 2015 AND 2014

NOTE 9 – STOCKHOLDERS' EQUITY - continued

Share based compensation

For the years ended May 31, 2015 and 2014, the Company issued the following shares for services and

compensation:

On October 25, 2013, we issued 19,802 shares of our common stock for services performed valued at

$60,000.

On October 25, 2013, we issued 25,000 shares of our common stock for services performed valued at

$73,500.

On October 25, 2013, we issued 57,242 shares of our common stock to the MesoCoat Inc. Supplemental

Discretionary Tax-Qualified Profit Sharing Plan and Trust valued at $161,995.

On October 25, 2013, we issued 25,699 shares of our common stock to the Powdermet, Inc. Supplemental

Discretionary Tax-Qualified Profit Sharing Plan and Trust valued at $72,728.

On December 4, 2013, we issued 10,000 shares of our common stock for services performed valued at

$12,000.

On January 3, 2014, we issued 16,649 shares of our common stock per the terms of employee’s

employment agreement valued at $20,000.

On April 9, 2014, we agreed to issue, and aggregate amount of $70,000 or 70,000 share of our restricted

common stock, debt owed to two unrelated vendors. In connection with this placement we had no offering

costs for a net of $70,000.

On April 22, 2014, we issued 30,000 shares of our common stock for services performed valued at

$24,000.

On May 6, 2014, we issued 20,000 shares of our common stock for services performed valued at $14,200.

On May 30, 2014, we issued 10,000 shares of our common stock for services performed valued at

$12,000.

On July 31, 2014, we issued 43,800 shares of our common stock for services to be performed valued at

$31,098. In connection with this placement we had no offering costs.

F-28

ABAKAN INC.

NOTES TO FINANCIAL STATEMENTS

FOR THE YEARS ENDING MAY 31, 2015 AND 2014

NOTE 9 – STOCKHOLDERS' EQUITY - continued

Common Stock Warrants

In connection with the above private placements we valued the common stock warrants granted during

the years ended May 31, 2015 and 2014, using the Black-Scholes model with the following

assumptions:

April 9,

May 30,

2014

Expected volatility (based

135.66%

135.39%

on historical volatility)

Expected dividends

0.00

Expected term in years

2.00

Risk-free rate

0.37%

The expected volatility assumption was based upon historical stock price volatility measured on a daily

basis. The risk-free interest rate assumption is based upon U.S. Treasury bond interest rates appropriate

for the term of the Company’s warrants. The dividend yield assumption is based on our history and

expectation of dividend payments. All warrants are immediately exercisable upon granting.

A summary of the common stock warrants granted, forfeited or expired during the year ended May 31,

2015 and the year ended May 31, 2014 is presented below:

Weighted

Average

Weighted

Remaining

Average

Contractual

Number of

Exercise

Terms (In

Warrants

Price

Years)

Balance at June 1, 2013

2,842,992

1.80

1.00 years

Granted

877,634

1.41

Exercised

Forfeited or expired

(1,681,058)

1.89

Balance at May 31, 2014

2,039,568

1.89

1.15 years

Granted

Exercised

Forfeited or expired

(2,039,568)

1.89

Balance at May 31, 2015

Exercisable at May 31, 2015

Weighted average fair value of

warranted granted during the three

months ended May 31, 2015

F-29

ABAKAN INC.

NOTES TO FINANCIAL STATEMENTS

FOR THE YEARS ENDING MAY 31, 2015 AND 2014

NOTE 10 – EARNINGS-PER-SHARE CALCULATION

Basic earnings per common share for the years ended May 31, 2015 and 2014 are calculated by dividing

net income (loss) by weighted-average common shares outstanding during the period. Diluted earnings

per common share for the years ended May 31, 2015 and 2014 are calculated by dividing net income

(loss) by weighted-average common shares outstanding during the period plus dilutive potential common

shares, which are determined as follows:

For the year ended

May 31, 2015

May 31, 2014

Net loss

(7,452,239) $

(5,956,310)

Weighted-average common shares

74,797,346

64,663,650

Warrants

Options to purchase common stock

Dilutive potential common shares

74,797,346

64,663,650

Net earnings per share from operations:

Basic

(0.10) $

(0.09)

Diluted

(0.10) $

(0.09)

Dilutive potential common shares are calculated in accordance with the treasury stock method, which

assumes that proceeds from the exercise of all warrants and options are used to repurchase common stock

at market value. The amount of shares remaining after the proceeds are exhausted represents the

potentially dilutive effect of the securities. The increasing number of warrants used in the calculation is a

result of the increasing market value of the Company’s common stock.

In periods where losses are reported the weighted-average number of common shares outstanding

excludes common stock equivalents because their inclusion would be anti-dilutive.

These securities below were excluded from the calculations above because to include them would be anti-

dilutive:

For the year ended

May 31, 2015

May 31, 2014

Common Stock Equivalents:

Warrants

2,039,568

Options to purchase common stock

3,475,000

3,419,994

Total of Common Stock Equivalents:

3,475,000

5,459,562

F-30

ABAKAN INC.

NOTES TO FINANCIAL STATEMENTS

FOR THE YEARS ENDING MAY 31, 2015 AND 2014

NOTE 11 – RELATED PARTY TRANSACTIONS

Due to the common control between the Company and its related parties, the Company is exposed to the

potential that ownership risks and rewards could be transferred among the parties.

In addition to related party transactions mentioned elsewhere, we have the below agreements and

transactions:

Board of Directors

On May 6, 2014, we appointed a new member to our Board of Directors. The new Director’s

compensation agreement provides for the issuance of 20,000 restricted shares authorized as of his

appointment to the Board of Directors and the grant of 150,000 stock options that vest equally over three

years, to purchase shares of the Corporation’s common stock in accordance with the Abakan Inc. 2009

Stock Option Plan, at an exercise price of $1.00 per share.

On November 11, 2014, we appointed a new member to our Board of Directors.

Employment agreement

On December 20, 2014, we entered into an employment agreement effective January 1, 2015, with a

related individual to perform duties as the Chief Operating Officer of the Company and to continue to

serve as the Chief Executive Officer of MesoCoat. The individual also serves as a director of the

Company and MesoCoat. The employee retains previously granted stock options for his service as a

director. The terms of the employment agreement include a $20,000 per month salary of which $7,500

is deferred until the Company raises $3,000,000 in aggregate debt and equity. In addition, the executive

received a 1,000,000 stock options grant with an exercise price of $0.60 per share that will expire ten

years from the option grant date that vest in equal parts on May 31, 2015 and May 31, 2016. The

employment agreement will end on December 31, 2016 and at which time it can be renewed for two one

year periods. In the event that this agreement is terminated early, the employee may be eligible for a

severance payment.

Consulting Agreements

On August 20, 2010, we entered into a consulting agreement commencing August 1, 2010 with a related

individual to perform duties as our Chief Financial Officer. On May 11, 2011, this individual resigned

his position as Chief Financial Officer. Effective May 10, 2011, this agreement was amended to change

the consultant’s role from Chief Financial Officer to general consultant, and all other provisions remain

the same. On February 10, 2014, we re-appointed this individual as our Chief Financial Officer, we did

not make any changes to the existing agreement. On May 29, 2015, this individual was removed from

his position for cause. The terms of the consulting agreement were $8,000 per month payable in

consulting fees and reimbursement for all reasonable business expenses incurred by him in the

performance of his duties, and was in effect until July 31, 2012. The agreement also had a provision to

automatically renew for subsequent annual terms unless terminated in writing by either party. The

consultant was also granted 200,000 stock options with an exercise price of $0.65 per share; that were to

vest equally over 3 years (see Note 12). For the years ended May 31, 2015 and 2014, we expensed

$96,000 and $96,000, respectively, in connection with this contract which amounts are included in

consulting – related party. As of May 31, 2015 and 2014, we owed $79,293 and $188,978, respectively,

and is included in accounts payable - related party.

F-31

ABAKAN INC.

NOTES TO FINANCIAL STATEMENTS

FOR THE YEARS ENDING MAY 31, 2015 AND 2014

NOTE 11 – RELATED PARTY TRANSACTIONS - continued

Consulting Agreements - continued

On June 1, 2010, we entered into a consulting agreement with a company controlled by the spouse of

our Chief Executive Officer. The terms of the consulting agreement were $2,500 per month payable in

consulting fees and reimbursement to the consultant for all reasonable business expenses incurred by it

in the performance of its duties, and rental of office space for $1,200 per month, and was in effect until

June 1, 2011. On December 1, 2010, we entered into a revised consulting agreement to supersede the

above agreement, with the same company as above. The terms of the consulting agreement are $2,500

per month payable in consulting fees and reimbursement to the consultant for all reasonable business

expenses incurred by it in the performance of its duties, and rental of office space for $2,213 per month,

and was in effect until December 1, 2011 and continued until May 31, 2014. For the years ended May

31, 2014 we expensed $25,000, in connection with this contract and are included in consulting – related

party. As of May 31, 2015 and 2014, we owed none and $5,515, respectively, and is included in

accounts payable - related party.

On June 1, 2011, we entered into a consulting agreement commencing June 1, 2011, with a related

individual to provide services as our Chief Executive Officer. The terms of the consulting agreement are

the consultant will be paid $10,000 per month. This amount increased to $12,500 on June 1, 2014. We

also agreed to reimburse the consultant for all reasonable business expenses incurred by him in the

performance of his duties, and was in effect until June 1, 2012. The agreement also had a provision to

automatically renew for subsequent annual terms unless terminated in writing by either party. For the

year ended May 31, 2015 and 2014, we expensed $150,000 and $120,000, respectively, in connection

with this contract, which amount is included in consulting – related party. As of May 31, 2015 and

2014, we owed $96,863 and $85,660, respectively, which amounts are included in accounts payable -

related party.

On May 31, 2014, we entered into a consulting agreement with a company owned by a related

individual to provide services as a consultant on business and grant matters. The terms of the consulting

agreement are the consultant will be paid $6,175 per month. We also agreed to compensate this

individual 5% of net proceeds secured from his efforts on behalf of the company. We also agreed to

reimburse the consultant for all reasonable business expenses incurred by him in the performance of his

duties, and was in effect until February 28, 2015. For the year ended May 31, 2015 and 2014, we

expensed $49,400 and none, respectively, in connection with this contract, which amount is included in

consulting – related party.

On February 1, 2015, we entered into a consulting agreement with a related individual to provide

services as a consultant on introducing the Company to key industry players in the oil and gas industry

and assisting the Company in the identification of areas of mutual interest and setup of joint

development agreements, joint venture agreements, funding or other associations. The terms of the

consulting agreement are the consultant will be paid $5,000 per month plus reasonable expenses. The

term of this agreement is until January 31, 2016, unless terminated early with a 30 day notice. As of

May 31, 2015 we owed $20,000, which amount is included in accounts payable - related party.

F-32

ABAKAN INC.

NOTES TO FINANCIAL STATEMENTS

FOR THE YEARS ENDING MAY 31, 2015 AND 2014

NOTE 11 – RELATED PARTY TRANSACTIONS - continued

Notes Payable – Related Party

On February 24, 2014, we entered into an uncollateralized demand note to a related individual, bearing

8% interest per annum for a total of $21,308. As of May 31, 2015, and 2014, we owed $21,308 and

$21,308 of principal, and $4,166 and $445 of accrued interest.

On March 7, 2014 and April 17, 2014 we entered into two uncollateralized demand notes to a related

individual, bearing 8% interest per annum for an aggregate total of $90,000. For the periods ending May

31, 2015, and 2014, we repaid an aggregate total of $65, 000 and $25,000. As of May 31, 2015 and

2014, we owed none and $65,000 of principal, and none and $864 of accrued interest.

During the year ended May 31, 2014, we entered into two uncollateralized demand notes to a related

individual, bearing 8% interest per annum for an aggregate total of $106,179. During the year ended

May 31, 2015, $11,500 additional was loaned. As of May 31, 2015 and 2014, we owed $107,679 and

$106,178 of principal, and $12,183 and $779 of accrued interest.

During the year ended May 31, 2014, we entered into an uncollateralized demand note to a related

individual, bearing 7% interest per annum for an aggregate total of $32,313. As of May 31, 2015 and

2014 we owed $32,313 and $32,313 of principal and $2,837 and none of accrued interest.

During the year ended May 31, 2015, we converted $198,168 of accounts payable due to a related party

to an uncollateralized term note, bearing 5% interest per annum and due on February 28, 2015. As of

May 31, 2015 we owed $198,168 of principal and $9,908 of accrued interest.

License agreement – Related Party

The Company has a license agreement with Powdermet, Inc., a related party, which grants the

Company an exclusive license to the use of technical information, proprietary know-how, data and patent

rights assigned to and/or owned by Powdermet, Inc. The agreement will end upon the last to expire valid

claim of licensed patents, unless terminated within the terms of the agreement.

As part of the agreement, the Company had a commitment to purchase consumable powders from

Powdermet, Inc. through July 1, 2014. Also, as part of the agreement the Company receives technology

transition and development service to support its research and development activities on a cost

reimbursement basis. Total expense related to the cost reimbursement was none and $181,457 for the

years ended May 31, 2015 and 2014, respectively.

F-33

ABAKAN INC.

NOTES TO FINANCIAL STATEMENTS

FOR THE YEARS ENDING MAY 31, 2015 AND 2014

NOTE 12 – STOCK – BASED COMPENSATION

2009 Stock Option Plan – The Company

Our board of directors adopted and approved our 2009 Stock option Plan (“Plan”) on December 14, 2009,

which provides for the granting and issuance of up to 10 million shares of our common stock.

For the year ended May 31, 2014, the Company granted the following stock options:

For the year ended May 31, 2014

Options

Exercise

Expiration

Grant Date

Granted

Price

term in years

To Whom Granted

Vesting Terms

Will vest in equal one third parts

June 14,

Granted to a

on the anniversary date of the

2013

80,000

2.94

10.00

consultant

option grant date

Will vest in equal one third parts

December

Granted to a

on the anniversary date of the

5, 2013

100,000

1.25

10.00

consultant

option grant date

Will vest in equal one third parts

December

Granted to a

on the anniversary date of the

5, 2013

50,000

1.25

10.00

consultant

option grant date

Granted to our new

Will vest in equal one third parts

December

Chief Financial

on the anniversary date of the

5, 2013

200,000

1.25

10.00

Officer

option grant date

Will vest in equal one third parts

December

Granted to a

on the anniversary date of the

5, 2013

100,000

1.25

10.00

consultant

option grant date

December

Granted to a

Will vest in equal one half parts

5, 2013

50,000

1.25

10.00

consultant

on December 5, 2013 and 2014

Will vest in equal one third parts

May 6,

Granted to a new

on the anniversary date of the

2014

150,000

1.00

10.00

Director

option grant date

Will vest in equal one third parts

May 30,

Granted to a

on the anniversary date of the

2014

20,000

1.14

10.00

consultant

option grant date

Will vest in equal one third parts

May 30,

Granted to a

on the anniversary date of the

2014

100,000

1.14

10.00

consultant

option grant date

Total

Granted

850,000

On May 31, 2014, 1,163,328 stock options were forfeited or rescinded by mutual agreement between

the Company and five respective holders. From June 1, 2013 to May 31, 2014, 66,678 stock options

expired without exercise according to the option agreement. After these grants and expirations there are

6,580,006 stock options available for future grant.

F-34

ABAKAN INC.

NOTES TO FINANCIAL STATEMENTS

FOR THE YEARS ENDING MAY 31, 2015 AND 2014

NOTE 12 – STOCK – BASED COMPENSATION - continued

2009 Stock Option Plan – The Company – continued

For the year ended May 31, 2015, the Company granted the following stock options:

For the year ended May 31, 2015

Options

Exercise

Expiration

To Whom

Grant Date

Granted

Price

term in years

Granted

Vesting Terms

Will vest in equal one third parts on

December

Granted to a

the anniversary date of the option

11, 2014

100,000

0.65

10.00

consultant

grant date

January 1,

Granted to an

Will vest in equal one half parts on

2015

1,000,000

0.60

10.00

employee

May 31, 2015 and 2016

Total

Granted

1,100,000

From June 1, 2014 to May 31, 2015, 994,994 stock options either expired without exercise according to

the option agreement or were rescinded by mutual agreement between the Company and respective

holders. One respective shareholder exercised 50,000 in stock options. After these grants and

expirations there are 6,525,000 stock options available for future grant.

Our board of directors administers our Plan, however, they may delegate this authority to a committee

formed to perform the administration function of the Plan. The board of directors or a committee of the

board has the authority to construe and interpret provisions of the Plan as well as to determine the terms

of an award. Our board of directors may amend or modify the Plan at any time. However, no

amendment or modification shall adversely affect the rights and obligations with respect to outstanding

awards unless the holder consents to that amendment or modification.

The Plan permits us to grant Non-Statutory stock options to our employees, directors and consultants.

The options issued under this Plan are intended to be Non-Statutory Stock Options exempt from Code

Section 409A.

The duration of a stock option granted under our Plan cannot exceed ten years. The exercise price of an

incentive stock option cannot be less than 100% of the fair market value of the common stock on the

date of grant.

The Plan administrator determines the term of stock options granted under our Plan, up to a maximum

of ten years, except in the case of certain events, as described below. Unless the terms of an optionee's

stock option agreement provide otherwise, if an optionee's relationship with us ceases for any reason

other than disability or death, the optionee may exercise any vested options for a period of ninety days

following the cessation of service. If an optionee's service relationship with us ceases due to disability

or death the optionee or a beneficiary may exercise any vested options for a period of 12 months in the

event of disability or death.

Unless the Plan administrator provides otherwise, options generally are not transferable except by will,

the laws of descent and distribution, or pursuant to a domestic relations order. An optionee may

designate a beneficiary, however, who may exercise the option following the optionee's death.

F-35

ABAKAN INC.

NOTES TO FINANCIAL STATEMENTS

FOR THE YEARS ENDING MAY 31, 2015 AND 2014

NOTE 12 – STOCK – BASED COMPENSATION - continued

2009 Stock Option Plan – The Company - continued

The value of employee and non-employee stock warrants granted during the year ended May 31, 2015

was estimated using the Black-Scholes model with the following assumptions:

May 6,

May 30,

December 11,

January 1,

2014

2013

2014

2015

Expected volatility (based on historical

134.49%

135.46%

135.97%

volatility)

Expected dividends

0.00

Expected term in years

Risk-free rate

2.61%

2.48%

2.19%

2.12%

The expected volatility assumption was based upon historical stock price volatility measured on a daily

basis. The risk-free interest rate assumption is based upon U.S. Treasury bond interest rates appropriate

for the term of the Company’s employee stock options. The dividend yield assumption is based on our

history and expectation of dividend payments.

F-36

ABAKAN INC.

NOTES TO FINANCIAL STATEMENTS

FOR THE YEARS ENDING MAY 31, 2015 AND 2014

NOTE 12 – STOCK – BASED COMPENSATION - continued

2009 Stock Option Plan – The Company - continued

A summary of the options granted to employees and non-employees under the plan and changes during

the years ended May 31, 2015 and 2014 is presented below:

Weighted

Average

Weighted

Remaining

Average

Contractual

Aggregate

Number of

Exercise

Terms

Intrinsic

Options

Price

(In Years)

Value

Balance at June 1, 2013

3,800,000

1.26

Granted

850,000

1.35

Exercised

Forfeited or expired

(1,230,006)

1.35

Balance at May 31, 2014

3,419,994

1.36

7.90 years

126,750

Exercisable at May 31, 2014

1,901,666

1.24

7.90 years

120,620

Weighted average fair value of

options granted during the year ended

May 31, 2014

1.35

Balance at June 1, 2014

3,419,994

1.36

Granted

1,100,000

0.60

Exercised

(50,000)

0.65

Forfeited or expired

(994,994)

1.46

Balance at May 31, 2015

3,475,000

1.16

7.84 years

68,500

Exercisable at May 31, 2015

2,333,335

1.23

7.84 years

51,000

Weighted average fair value of

options granted during the year ended

May 31, 2015

0.60

F-37

ABAKAN INC.

NOTES TO FINANCIAL STATEMENTS

FOR THE YEARS ENDING MAY 31, 2015 AND 2014

NOTE 12 – STOCK – BASED COMPENSATION - continued

2009 Stock Option Plan – The Company - continued

The following table summarizes information about employee stock options under the 2009 Plan

outstanding at May 31, 2015:

Options Outstanding

Options Exercisable

Weighted

Number

Average

Weighted

Number

Weighted

Range of

Outstanding

Remaining

Average

Exercisabl

Average

Aggregate

Exercise

at May 31,

Contractual

Exercise

Intrinsic

e at May

Exercise

Intrinsic

Price

2015

Life

Price

Value

31, 2015

Price

Value

$ 0.60

1,100,000

7.0 Years

$ 0.60

600,000 $ 0.60

$ 0.65

325,000

6.7 Years

$ 0.65

2,500

258,334 $ 0.65

2,500

$ 0.75

100,000

4.5 Years

$ 0.75

15,000

100,000 $ 0.75

15,000

$ 1.00

300,000

7.7 Years

$ 1.00

200,000 $ 1.00

$ 1.02

50,000

5.9 Years

$ 1.02

10,000

50,000 $ 1.02

10,000

$ 1.05

120,000

5.8 Years

$ 1.05

120,000 $ 1.05

$ 1.07

95,000

6.6 Years

$ 1.07

95,000 $ 1.07

$ 1.14

100,000

9.0 Years

$ 1.14

15,000

33,333 $ 1.14

5,000

$ 1.20

100,000

6.4 Years

$ 1.20

100,000 $ 1.20

$ 1.25

525,000

8.1 Years

$ 1.25

1,250

225,002 $ 1.25

1,250

$ 1.95

75,000

7.1 Years

$ 1.95

9,000

50,000 $ 1.95

6,000

$ 2.30

225,000

7.0 Years

$ 2.30

225,000 $ 2.30

$ 2.61

175,000

6.9 Years

$ 2.61

15,750

125,000

$ 2.61

11,250

$ 2.70

85,000

7.7 Years

$ 2.70

85,000 $ 2.70

$ 2.80

100,000

7.8 Years

$ 2.80

66,666 $ 2.80

3,475,000

7.8Years

$ 1.36

68,500

2,333,335 $ 1.24

51,000

The total value of employee and non-employee stock options granted during the years ended May 31,

2015 and 2014, was $424,623 and $1,089,451, respectively. During years ended May 31, 2015 and 2014

the Company recorded $1,052,358 and $1,120,377, respectively, in stock-based compensation expense

relating to stock option grants.

At May 31, 2015 and 2014 there was $898,692 and $1,696,214, respectively, of total unrecognized

compensation cost related to stock options granted under the plan. That cost is expected to be

recognized pro-rata through May 30, 2017. The following table represents the stock options expense for

the each of the next two fiscal years ended May 31:

For years ended May 31,

Expense

2016

601,240

2017

297,452

898,692

F-38

ABAKAN INC.

NOTES TO FINANCIAL STATEMENTS

FOR THE YEARS ENDING MAY 31, 2015 AND 2014

NOTE 12 – STOCK – BASED COMPENSATION - continued

Stock Option Plan - MesoCoat

MesoCoat accounts for equity awards using the grant-date fair value.

MesoCoat’s stock option plan (the Stock Option Plan) is intended to advance the interest of MesoCoat

and its shareholders. Options granted under the Stock Option Plan can be either incentive stock options or

non-qualified stock options. The Stock Option Plan authorized the issuance of a maximum of 9,000

shares of MesoCoat’s common stock. These options have a term of six years and will expire beginning

July 2017 through November 2018.

There were no stock options granted for the years ending May 31, 2015 and 2014.

A summary of MesoCoat’s stock option plan as of May 31, 2015 and 2014, and the changes during the

years then ended is presented in the table below:

Options Outstanding

Number of

Weighted

Average Exercise

Price

Outstanding at May 31, 2013

5,520 $

24.78

Granted

Exercised

Forfeited

(2,620)

18.11

Outstanding at May 31, 2014

2,900 $

30.80

Options exercisable at May 31, 2014

1,450 $

30.80

Number of

Weighted

Average Exercise

Price

Outstanding at May 31, 2014

2,900 $

30.98

Granted

Exercised

Forfeited

Outstanding at May 31, 2015

2,900 $

30.80

Options exercisable at May 31, 2015

1,896 $

30.24

F-39

ABAKAN INC.

NOTES TO FINANCIAL STATEMENTS

FOR THE YEARS ENDING MAY 31, 2015 AND 2014

NOTE 12 – STOCK – BASED COMPENSATION - continued

Stock Option Plan – MesoCoat - continued

The following table summarizes information about employee stock options under the MesoCoat Stock

Option Plan outstanding at May 31, 2015:

Options Outstanding

Options Exercisable

Weighted

Number

Average

Weighted

Number

Weighted

Range of

Outstanding

Remaining

Average

Exercisable

Average

Aggregate

Exercise

at May 31,

Contractual

Exercise

Intrinsic

at May 31,

Exercise

Intrinsic

Price

2015

Life

Price

Value

2015

Price

Value

$ 18.11

250

2.0 Years

$ 18.11

240 $ 18.11

$ 32.00

2,650

5.0 Years

$ 32.00

1,656 $ 32.00

2,900

4.74 Years

$ 30.80

1,896 $ 30.24

During years ended May 31, 2015 and 2014 MesoCoat recorded $56,568 and $69,015, respectively, in

stock-based compensation expense relating to stock option grants.

At May 31, 2015 and 2014 there was $82,143 and $134,168, respectively, of total unrecognized

compensation cost related to stock options granted under the plan. That cost is expected to be

recognized pro-rata through May 2017.

The following table represents the stock options expense for the each of the next three fiscal years ended

May 31:

For years ended May 31,

Expense

2016

54,875

2017

27,268

82,143

F-40

ABAKAN INC.

NOTES TO FINANCIAL STATEMENTS

FOR THE YEARS ENDING MAY 31, 2015 AND 2014

NOTE 13 –COMMITMENTS

Contribution Agreement

The Company and MesoCoat entered into a Contribution Agreement with Northern Alberta Institute of

Technology to establish a prototype demonstration facility for developing, testing and commercializing

wear-resistant clad pipe and components in Alberta, Canada. Out of the total project cost of $4,110,000;

CDN $2,750,000 is being provided by Alberta’s Ministry of Innovation and Advanced Education and

Western Economic Diversification Canada, CDN$160,000 by Northern Alberta Institute of Technology,

and the rest has been committed by MesoCoat and the Company. The agreement requires the Company

and MesoCoat to contribute cash of CDN$870,000 to the operating expenses and payroll of the facility

which will be invoiced quarterly with equal payments through January 2017. In addition, the Company

has committed to spend CDN$330,000, either by itself or with industry partners, for product testing,

qualification, and the hiring of a sales person in Canada during the two year term of this project. The

Company’s commitments in the agreement are a necessary precursor to commencing sales of CermaClad

wear resistant clad plate and pipe in Canada. MesoCoat has delivered equipment and will lease the

equipment over 24 months for a total rental value of CDN$500,000 of which CDN$333,333 has been

received as of May 31, 2015 and reflected in both rental revenue and deferred revenue liability. For the

year ending May 31, 2015 and 2014, the Company has recorded no operating expense reimbursement as

the facility is not yet commissioned. The amounts are to be settled in Canadian dollars and will be

converted from US dollars at the exchange rate in effect at the time of payment.

Leases

In August 2011, the Company entered into a non-cash leasing arrangement where services are provided in

exchange for an asset. The Company has an obligation to provide 600 hours of services at a fair value of

$120,000 as consideration during the period from August 2011 to August 2017. The Company has

provided a total of 194 hours of service since inception. The Company has recorded this capital lease at

its fair value. During the years ended May 31, 2015 and 2014, the Company was not requested to

complete any of the required services.

The Company leases its office space in Florida on a month to month basis at a cost of $2,491 a month paid

to an unrelated party.

MesoCoat subleases its research and development and laboratory space, in Ohio, from Powdermet, a related

party. The cost of the sub-lease to MesoCoat is $4,500 per month that expires on May 31, 2020. MesoCoat

also leases from Powdermet a portion of Powdermet’s production facility for use of floor space and specialty

equipment for $8,000 per month through May 31, 2016. MesoCoat also rents land from a related party on which

the Company’s Cermaclad R&D and production facility is located for $3,500 per month through May 31, 2020.

MesoCoat also leases machinery and equipment under various capital lease arrangements, which expires

through September 2016. These leases are included in long-term and short-term debt and the related assets have

been capitalized.

Total expense related to the operating leases was $237,715 and $147,289 for the year ending May 31,

2015 and May 31, 2014, respectively. Interest expense for the capitalized leases for the year ending May 31,

2015 and May 31, 2014 was $906 and $619, respectively.

F-41

ABAKAN INC.

NOTES TO FINANCIAL STATEMENTS

FOR THE YEARS ENDING MAY 31, 2015 AND 2014

NOTE 13 –COMMITMENTS -continued

Minimum annual rental commitments are as follows at May 31, 2015:

For the years ended May 31,

Capital Leases

Operating Leases

2016

33,371 $

199,394

2017

56,659

103,394

2018

103,394

2019

96,000

2020 and thereafter

96,000

Total minimum lease payments

90,030 $

598,182

Less amount representing interest

( 11,324)

Present value of net minimum capital lease

payments

78,706

Less current maturities

(31,994)

Long-term obligations under capital leases

46,712

Operating Leases – Lessor

Future minimum rental payments as of May 31, 2015, to be received on non-cancelable operating lease in

Alberta, Canada are contractually due in Canadian dollars and will be converted to US dollars at the

exchange rate in effect at the time of payment are as follows:

Year Ending

May 31,

2016

CDN$

166,667

CDN$

166,667

F-42

ABAKAN INC.

NOTES TO FINANCIAL STATEMENTS

FOR THE YEARS ENDING MAY 31, 2015 AND 2014

NOTE 14 – INCOME TAXES

The following is an analysis of deferred tax assets as of May 31, 2015 and 2014:

Deferred Tax

Valuation

Assets

Allowance

Balance

Net deferred tax assets at May 31, 2013

3,508,802

(3,508,802)

Provision to tax return true ups

333,123

(333,123)

Subtractions for the year

(179,899)

179,899

Deferred tax assets at May 31, 2014

3,662,026

(3,662,026)

Provision to tax return true ups

742,797

(742,797)

Additions for the year

2,468,782

(2,468,782)

Deferred tax assets at May 31, 2015

6,873,605

(6,873,605)

Deferred income taxes are provided to recognize the effects of temporary differences between financial

reporting and income tax reporting. These differences arise principally from federal net operating losses,

stock compensation expense, basis differences in investments in affiliates and the use of accelerated

depreciation methods for tax purposes as opposed to the straight-line depreciation method for financial

reporting purposes and Federal net operating losses.

F-43

ABAKAN INC.

NOTES TO FINANCIAL STATEMENTS

FOR THE YEARS ENDING MAY 31, 2015 AND 2014

NOTE 14 – INCOME TAXES – continued

Temporary differences between financial statement carrying amounts and tax basis of assets and

liabilities that give rise to significant deferred tax assets and liabilities are presented below at May 31:

2015

2014

Deferred tax assets:

Current:

Compensation accruals

18,893

32,365

Non-current:

Deferred tax assets:

Net operating loss carry forward

6,776,092

4,037,738

Stock options

2,212,970

1,867,488

Research and Development Credit

494,947

443,659

Equity loss in affiliates, net

199,247

Impairment of intangibles

13,379

33,121

Other

Total non-current deferred tax assets

9,696,642

6,581,260

Deferred tax liabilities:

Fixed asset & intangible basis

(2,052,503)

(2,122,999)

Equity profit in affiliates, net

(276,600)

(228,854)

Book fair value adjustment in affiliate

(512,527)

(599,746)

Total non-current deferred tax liabilities

(2,841,630)

(2,951,599)

Net non-current deferred tax assets

6,855,012

3,629,661

Net deferred tax assets before valuation

6,873,605

3,662,026

allowance

Valuation allowance

(6,873,605)

(3,662,026)

Net deferred tax asset

The following is reconciliation from the expected statutory Federal income tax rate to the Company’s

actual income tax rate for the years ended May 31:

2015

2014

Expected income tax (benefit) at

Federal statutory tax rate – 34% and 34%

(2,533,761) $

(2,155,099)

Gain on Exchange transaction

1,966,771

Other permanent differences

72,164

112,532

Research and Development Credit

(7,185)

(70,331)

Other adjustments

(742,797)

(146,917)

Change in valuation allowance

3,211,579

153,224

Income tax expense

F-44

ABAKAN INC.

NOTES TO FINANCIAL STATEMENTS

FOR THE YEARS ENDING MAY 31, 2015 AND 2014

NOTE 14 – INCOME TAXES – continued

We currently have three years of tax returns that are subject to examination, including the fiscal years

ended May 31, 2014, 2013 and 2012, based on their filing dates by taxing authorities.

We currently have no uncertainty of the tax positions that we have taken and believe that we can defend

them to any tax jurisdiction. The Company would recognize interest accrued related to unrecognized

tax benefits in interest expense and penalties in operating expenses. During the years ended May 31,

2015 and 2014, the Company did not recognize any interest and penalties related to uncertain tax

positions.

The net operating loss and research and development carry forward as of May 31, 2015 expires as

follows:

Research and

Expiring

Abakan

Development

Year

Amount

MesoCoat Amount

Combined Amount

Credit

2027

2028

2029

96,736

10,360

2030

1,395,110

109,528

2031

27,101

56,673

83,774

7,179

2032

2,359,640

89,194

2033

4,097,256

2,315,874

6,413,130

152,127

2034

3,390,110

119,374

2035

3,318,736

2,872,445

6,191,181

7,185

Total

$ 9,802,733

$ 10,126,948

19,929,681

494,947

These loss carryovers could be limited under the Internal Revenue Code should a significant change in

ownership occur. These net operating losses include 88.08% of losses related to MesoCoat. The entire

research and development credit is directly related to MesoCoat.

F-45

ABAKAN INC.

NOTES TO FINANCIAL STATEMENTS

FOR THE YEARS ENDING MAY 31, 2015 AND 2014

NOTE 15 - EMPLOYEE BENEFIT PLANS

The Company has a 401(k) Plan (the Plan) covering substantially all of its employees who are at least age

21 and have completed three months of service. Participating employees may elect to contribute, on a tax

deferred basis, a portion of their compensation in accordance with Section 401(k) of the Internal Revenue

Code. Additional matching contributions may be made to the Plan at the discretion of the Company. For

the years ended May 31, 2015 and 2014, the Company contributed $13,230 and $24,607, respectively.

MesoCoat established a “MESOCOAT, INC. SUPPLEMENTAL DISCRETIONARY TAX-QUALIFED

PROFIT SHARING PLAN AND TRUST” (Plan) on January 1, 2013. All employees are eligible to

participate after one thousand (1,000) service hours, including self-employed individuals performing

consulting services to MesoCoat. Excluded employees include those covered within a bargaining unit,

since they will be covered by separate benefits. All employees vest after their one thousand hours of

service, 100% of the employer contributions for their benefit. The Trustee of the Plan is A. Sherman, and

the maximum amount that can be contributed to the plan is $40,000 per year of service, or as updated to

the maximum allowable by Internal Revenue Code. For the year ended May 31, 2015 and 2014, the

Company contributed 0 and 57,242 shares of its common stock to the Plan with a value of $0 and

$161,995, respectively.

F-46

ABAKAN INC.

NOTES TO FINANCIAL STATEMENTS

FOR THE YEARS ENDING MAY 31, 2015 AND 2014

NOTE 16 – RECENT ACCOUNTING PRONOUNCEMENTS

ABAKAN, INC 10-K/A