PINX:ABKI Annual Report 10-K Filing - 5/31/2012

Effective Date 5/31/2012

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

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

For the fiscal  year ended May 31, 2012.

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)

Registrants 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  registrants  knowledge,  in  definitive  proxy  or  information  statements

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

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

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

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

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

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

affiliates  (38,755,445  shares)  was  $61,233,603  based  on  the  average  of  the  bid  and  ask  price  ($1.58)  for  the  common  stock  on

September 11, 2012.

At  September  11,  2012,  the number  of  shares  outstanding  of  the registrants  common  stock,  $0.0001  par  value  (the only  class  of

voting stock),  was 61,465,445.

1




TABLE OF CONTENTS

PART I

Item1.

Business

3

Item 1A.      Risk Factors

24

Item 1B.      Unresolved Staff Comments

28

Item 2.

Properties

28

Item 3.

Legal Proceedings

30

Item 4.

Mine Safety Disclosure

30

PART II

Item 5.

Market  for Registrants Common Equity, Related Stockholder Matters, and Issuer Purchases of

31

Equity Securities

Item 6.

Selected Financial Data

36

Item 7.

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

36

Item 7A.      Quantitative and Qualitative Disclosures about Market Risk

44

Item 8.

Financial Statements and Supplementary Data

44

Item 9.

Changes in and Disagreements with Accountants on Accounting and  Financial Disclosure

45

Item 9A.

Controls and Procedures

45

Item 9B.      Other Information

46

PART III

Item 10.

Directors, Executive Officers, and Corporate Governance

47

Item 11.

Executive Compensation

55

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

59

Item 13.

Certain Relationships and Related Transactions, and Director Independence

60

Item 14.

Principal Accountant  Fees and Services

61

PART IV

Item 15.

Exhibits, Financial Statement  Schedules

62

Signatures

63

2




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

indicates otherwise.

ITEM 1.

BUSINESS

Corporate History

The Company was incorporated in the State of Nevada on June 27, 2006 under the name Your Digital

Memories Inc.

Waste to Energy Group Inc., a wholly-owned  subsidiary of the Company, was incorporated  in the state

of Nevada on August 13, 2008. Waste to Energy Group Inc., and the Company entered into an

Agreement and Plan of Merger on August 14, 2008. The board of directors of Waste to Energy Group

Inc. and that of the Company deemed it advisable in the best interests of their respective shareholders

that Waste to Energy Inc. be merged into the Company with the Company being the surviving entity as

Waste to Energy Group Inc.

Abakan Inc., a wholly-owned subsidiary of the Company, was incorporated in the state of Nevada on

November 6, 2009. Abakan Inc. and the Company entered into an Agreement and Plan of Merger on

November 6, 2009. The board of directors of Abakan Inc. and that of the Company deemed it advisable

in the best interests of their respective shareholders that Abakan Inc. be merged into the Company with

the Company being the surviving entity as Abakan Inc.

We are a development stage company.

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 intends to become a leader in the multi-billion dollar advanced coatings and metal

formulations markets by assembling controlling interests in a small number of next generation technology

firms. We expect to achieve this goal by investing in R&D firms and technology start-ups that have the

potential to substantially impact the surface engineering and energy management needs of Fortune 1000

companies and government entities.  The Company is actively involved in supporting the R&D, market

development, and commercialization efforts of those entities in which it has invested. We have to date

acquired a 51% controlling interest in MesoCoat, Inc. (MesoCoat) and a 41% non-controlling interest

in Powdermet,  Inc. (Powdermet). Since Powdermet owns 49% of MesoCoat, the Companys interest in

Powdermet represents a 20% indirect interest in MesoCoat.

3




MesoCoat, Inc.

On December 11, 2009, the Company executed an Investment Agreement, dated  December 9, 2009, with

MesoCoat and Powdermet in order to purchase 79,334 newly issued MesoCoat shares, equal to a fully

diluted 34% equity interest in MesoCoat for $1,400,030. Prior to the acquisition of the MesoCoat shares,

Powdermet was owned 52% by Andrew Sherman (the CEO and a director of both MesoCoat and

Powdermet who became a director of the Company on August 20, 2010), 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 equal to a

41% interest in Powdermet.

On July 11, 2011 the Company placed MesoCoat and Powdermet on notice of its intent to complete the

purchase of an additional equity interest in MesoCoat in accordance with the Investment Agreement. The

Company completed the purchase of 86,156 newly issued shares, equal to a fully diluted 17% equity

interest for $2,800,000 on July 13, 2011 thereby increasing its direct ownership of MesoCoat to a fully

diluted 51% interest.

The Company has to date acquired  a 51% controlling interest in MesoCoat and a 41% non-controlling

interest in Powdermet. Since Powdermet owns 49% of MesoCoat, the Companys interest in Powdermet

represents a 20.1% indirect interest in MesoCoat equal to a 71.1% combined interest in MesoCoat.

The Investment Agreement provided us with additional options to increase our equity interest in

MesoCoat, as follows:

    An option which entitled the Company to purchase an additional 24% equity interest in exchange

for $16,000,000. The exercise of this option would increase the Companys direct holdings to a

fully diluted 75% of MesoCoat and entitle the Companys management to appoint a fourth

member to MesoCoats five person board of directors (the Company currently has a right to

appoint three of MesoCoats directors, one of which must be independent).

    An option which entitles minority shareholders of MesoCoat, for a period of 12 months after the

exercise of the option detailed above, to cause the Company to pay an aggregate amount of

$14,600,000, payable in shares of the Companys common stock or a combination of cash and

shares, in exchange for all remaining outstanding shares of MesoCoat.

MesoCoats Business

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

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

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

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

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

commercialization of Powdermets nanocomposite coatings technologies. The company was renamed as

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

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

manufacturing support agreement.

4




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

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

nano-engineered cermet materials with proprietary high-speed application systems. The result is

protective cladding applications that will be offered on a competitive basis with existing market solutions.

The coating materials unite high strength, hardness, fracture toughness, and a low coefficient of friction

into one product structure. MesoCoats products are currently undergoing extensive testing by the U.S.

Air Force, U.S. Navy and Marine Corp, oil field service companies, and original equipment

manufacturers (OEMs).

CermaCladTM cladding applications are nearing commercialization and commercial sales of PComP  TM, a

cermet-metallic composite powder for thermal spray applications have commenced.

CermaClad

CermaClad is a premier metallurgically bonded clad carbon steel solution 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, ships, and bridges.  In corrosive environments, including seawater, road salt, mining slurry transport

lines, unprocessed oil containing water and carbon dioxide, chemical processing and transportation

equipment, metals production, and other large industrial applications, asset owners and operators either

need to continually maintain and replace major assets, or fabricate these assets using expensive, corrosion

resistant alloy (CRA) materials, which substantially run up costs.  CermaClad offers a competing,

lower cost solution allowing the owner  or operator to clad their carbon steel with a corrosion resistant

alloy coating at typically less than ½ the cost of using solid  CRA. Cladding solutions such as

CermaClad can save up to 80% of the cost of using solid alloys, while providing equivalent

maintenance free corrosion lifetimes equal to the life of the asset. Clad metals are widely used in oil and

gas exploration and production, marine transportation, mining, petrochemical processing and refining,

nuclear, paper and pulp, desalination, and power generation industries. Each industry sector has slightly

different needs and requirements. For instance, to meet growing global energy demands, oil companies

continue to extend their offshore drilling efforts into deeper seas. The higher temperatures and corrosivity

(carbon dioxide and hydrogen sulfide content) of these deeper reserves eliminate plastics and other

competing material solutions from consideration, resulting in a significantly increased use of corrosion

resistant alloys -  and lower-cost clad pipe alternatives.

CermaClad is MesoCoats proprietary cladding process which utilizes a high density infrared fusion

heat source an arc lamp to melt, fuse, and metallurgically bond (make inseparable) metals, corrosion

resistant alloys and/or cermets onto metal substrates such as plate, pipe, or large components. Using this

process, products like risers and flowlines can be protected against harsh operating environments with

great efficiency and speed compared to competing weld overlay products. Today, clad steel is a

specialized segment of the steel industry where it is projected that demand will outstrip supply in the next

few years.   The CermaClad process and equipment offers the lowest capital cost per unit production,

and is scalable to large volumes with low to modest capital investment and plant requirements.

The competitive advantages of CermaClad over current competing technologies and products are:

    CermaClad and other clad overlays can be produced at a 50-80% lower cost than alternative

solid alloy products.

5




    CermaClad produces a metallurgically bonded overlay, reducing the risk of catastrophic failure

and the buckling of mechanically lined pipes such as those supplied by industry leader Butting in

its BuBi bimetallic pipe.

    CermaClad can be applied to seamless pipe, or after pipe welding, eliminating 90% of special

metal welds which are difficult, expensive, and also a common source of early failure.

    CermaClad application technology occurs with a 30-40cm wide infrared torch compared to

less than 1 cm wide for laser or inert gas welding torches, resulting in application rates over an

order of magnitude faster than current weld overlay technologies.

    Due to its high productivity compared to traditional weld overlay, and the elimination of the need

for deformation processing (steel mill) of bulk metals, CermaClad capital and start-up costs are

two to ten times lower than competing technologies.

    Compared to weld overlay, CermaClad produces a smooth overlay that is virtually free of base

metal dilution, improving inspectability and corrosion resistance. This characteristic enables the

use of thinner, even lower cost cladding alternatives in many applications.  Smooth surfaces also

decrease flow resistance, enabling reduced friction losses in pipeline applications.

The CermaClad product line in development today is as follows:

    CermaClad CR (Corrosion Resistant Alloys). Product line that offers a lower cost alternative to

solid nickel and stainless steel alloys for oil and gas, pulp and paper, and chemical process

industry vessels, pipes, flowlines, risers, jumpers, valves, and components.

    CermaClad WR (Wear Resistant). Product line of metal matrix composite and nanocomposite

wear resistant materials to extend life of steel structures such as hydrotransport slurry lines,  pump

components, valve components, spools, Ts, and elbows for mining, mineral processing, and oil

sands/heavy oil production.

    CermaClad HT (High Temperature). Product line of high temperature claddings for heat

exchanger tubing, boiler, and other energy production components offering greater compositional

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

    CermaClad LT (Low Thickness). Exploits the unique high purity capabilities of the

CermaClad process to provide thin (less than 0.5mm) claddings for providing 50-200 year

corrosion free life in atmospheric and seawater corrosion environments and applicable to marine

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

PComP

PComP is a series of nanocomposite cermet coatings that are used to impart wear and corrosion

resistance, and to restore dimensions, of metal components.  PComP competes against chrome and

nickel plating, and tungsten carbide in the multibillion dollar inorganic metal finishing market.

Competing materials like hexavalent chrome, carbides and tungsten carbide cobalt have become major

headaches for industrial producers in the metal finishing industry since these materials are on the EPAs

hazardous materials watch list and are legally banned in several countries.  Industry currently spends

billions annually on these hazardous materials, and MesoCoats customers can gain a competitive

advantage while mitigating environmental liabilities by adopting green products and processes such as

PComP thermal spray coatings into their product offerings. While businesses grapple with the need to

transition away from these harmful products, MesoCoat has developed a performance leading solution

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

performance testing.

6




PComP, named for its particulate composite powders, is one of the few economically viable industry

replacement solutions for hard chrome and carbides due to the product lines advanced corrosion, friction,

wear and thermal barrier properties.

MesoCoat scientists have developed and patented a family of corrosion resistant coating solutions that

combine extreme wear resistance, fracture toughness (resiliency), and a low friction coefficient all in one

product. In conventional materials science toughness normally decreases as hardness and wear resistance

increase. By combining nano-level structure control and advanced  ductile phase toughening materials

science, MesoCoat has developed a patented coating structure that can be both very tough and very wear

resistant. Equally important, the hardness of a wear coating normally limits the ease with which it can be

machined. The unique nanostructural design of the PComP coating solutions results in a coatings that

can be machined through a finish grinder much faster than a product with a traditional carbide coating.

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

metal finishing operations.

The unique nano-structure of the PComP coatings also result in friction properties approaching those of

diamond-like carbon films and solid lubricants, but with the ability to be used structurally and applied to

large components at a fraction of the cost of coatings such as diamond-like carbon.  The low friction

reduces wear, and improved energy efficiency and life in sliding components such as drilling rotors,

plungers, mandrels, ball and gate valves, and metal processing equipment.

The PComP product line is currently positioned to compete with two dominant product alternatives:

hard chrome plating and tungsten carbide thermal spray coatings. The PComP family of nanocomposite

coatings consists of five products, 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 most of todays alternatives.

The PComP product platform, combined with the CermaClad large area weld overlay technologies

provide a high degree of product differentiation and a sustainable competitive advantage in the $10 billion

inorganic metal finishing markets, which include OEM components and the maintenance, repair, and

overhaul of industrial assets and machinery in the components and coatings segment of MesoCoats

business (as opposed to the clad steel business lines discussed under the CermaClad product line

above).

MesoCoat is selling these products through different channels appropriate to the specific market. The

majority of commercial sector accounts will have access to these advanced coatings and coating processes

by buying coating application services from MesoCoat.  This is generally a regional business. Large

OEMs and Government agencies like the U.S. Air Force would procure raw powders and apply them for

their specific products under license as they are vertically integrated to do their own thermal spray and

coating applications using dedicated maintenance and repair depots. Recently, several defence

organizations have been given congressional mandates to make better use of their existing equipment

(planes, helicopters, jets, tanks and other armoured vehicles, etc.) as budgets for the purchase of new

equipment will be limited over the next few years. MesoCoats low-cost, long-life coating materials

should appeal to government buyers striving to meet budgetary restrictions.  Finally, to achieve more

rapid penetration of a territorial (geographic) market for coating services, MesoCoat is actively qualifying

licensed application partners in certain territories (Houston, Alberta, and Los Angeles as three examples)

to provide services in territories it is not currently able to service.  This strategy will lead eventually to

acquisition or market entry into these markets,  while supporting economies of scale for the powder

production needed to meet product cost targets.

7




The competitive advantages of PComP for each of its initial target markets are as follows:

    Wear and corrosion resistance and dimensional restoration

    PComP T-HT (High Toughness) is a titanium carbon-nitride based  high corrosion/wear

resistant, low friction high velocity oxygen fuel (HVOF) coating that competes with hard

chrome and diamond like carbone PVD (physical vapor deposition) alternatives for

hydraulic cylinders, piston rings, bearings, rotating shafts, and valve components where

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

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

environmental safety and health liabilities.  Furthermore, in many applications, thermal

spray coatings such as PComP provide life multiples over chrome (80 times in cylinder

liner application in testing reported by Caterpiller).  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.   PComP T-HT has

significantly higher build-up rates than that of carbides, and grinding and finishing can be

done faster and cheaper with conventional grinding techniques compared to the

expensive diamond finishing process used for competing carbide coatings.

    PComP T-HH (High Hardness) is a higher wear resistance, cobalt based version of

PComP T-HT coating for hard chrome replacement in environments that need better

wear resistance but have less severe corrosion requirements. PComP T-HH also

provides good corrosion resistance in non-water environments and its low coefficient of

friction and lack of coarse by-products also protects seals and mating surfaces from

premature wear.

    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.

    PComPW is MesoCoats nano-engineered tungsten carbide coating solution that

offers industry leading toughness and wear resistance for thermal spray coatings, making

it better for critical high wear applications such as gate valves and downhole drilling

tools. PComP W replaces conventional tungsten carbide cobalt in the thermal spray

industry and provides increased wear resistance, design allowable (stress levels), and

reduced friction in abrasive wear applications,  with higher toughness and impact

resistance than ceramic alternatives such as alumina-titania. PComPW is also

significantly more robust and lower cost than competing detonation gun and alternate

coatings, achieving excellent results with much higher throughput and lower operating

cost equipment such as standard  HVOF guns.

8




    Metals processing equipment

    PComP-MB is a metal boride coating designed for use in molten metal processing.

PComP-MB has completed laboratory testing showing greater than two and one half

times the life of the state of the art molybdenum boride coatings in galvanizing lines, and

ten times the resistance of conventional WC coatings to molten metal erosion and wear.

PComP-MB is preparing for market launch in the $60 million zinc pot roll and bearing

coatings market, while also of interest to the diecasting, paper and pulp, and other related

industries

    Thermal barrier coatings

    ZComP is MesoCoats nanocomposite thermal barrier coatings that offer 50% lower

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

conventionally structured thermal barrier coatings in the $500 million thermal barrier

coatings market.  MesoCoat is actively forming partnerships to introduce these

performance-leading materials into the turbine engine market, working with both the U.S.

Department of Defense as well as supply chain partners in the turbine industry.

Stage of Development

None of MesoCoats materials are currently produced on a full-scale commercial production basis even

though some materials have been produced on a small scale. Even though some of the materials are in

limited release, certain of MesoCoats materials are expected to be ready for commercial market entry and

production within the next twelve months. The following table indicates our estimated timeline for the

commercial introduction of those products that are most imminent:

PRODUCT

COMMERCIAL TIMELINE

TIME (MONTHS)

PComP T

Initial Partner Sales

Current

PComP W

Initial Partner Sales

Current

PComPMB

Market Entry

6

PComP Coating Services

Market Entry

3

CermaClad CR

Market Entry

6

CermaClad CR

Full Scale Production

16-18

CermaClad WR

Market Entry

9

CermaClad WR

Full Scale Production

18-20

9




License agreement with Powdermet, Inc.

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

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

equipment, and contracts and business lists, including seven supporting patents, the trademark, and

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

contracts, for all Powdermet technologies in the field of wear and corrosion resistant coatings. MesoCoat

was at the time of licensing a wholly owned subsidiary of Powdermet, and Powdermet currently retains a

49% ownership position in MesoCoat.  The agreement also includes Powdermets commitment to provide

manufacturing expertise and technical capabilities supporting PcomP powders on a priority basis.

Powdermet retains the exclusive manufacturing rights for the first 50 tons of PComP powders through

July 1, 2013. The license agreement will end upon the last to expire valid claim of licensed  patents, unless

terminated earlier within the terms of the agreement.

MesoCoat's exclusivity agreement with Mattson Technology,  Inc.

Mattson Technology,  Inc. (Mattson) is the developer and manufacturer of the Vortek high power

plasma arc lamps, and is a high energy plasma arc lamp developer.  The principal provisions of an

exclusivity agreement dated April 7, 2011 between MesoCoat and Mattson Technology, Inc. are as

follows:

    Mattson has provided the exclusive right and license to MesoCoat to use the high intensity Vortek

lamp in MesoCoats products in the wear reducing and corrosion resistant coatings, claddings and

related surface treatments market.

    The exclusivity period runs to the end of 2017 and is conditional on an escalating minimum

number of  5 lamps being ordered on an annual basis starting in 2012.

    In return for these rights MesoCoat will pay to Mattson a fee of $2 million in five equal

instalments starting from the date of the successful performance of the first unit.

    Included in this agreement is a sliding scale price discount based upon the number of units to be

ordered each year.

    A supply agreement between the two parties is currently being negotiated to fully complete some

of the detailed commercial points of this relationship.

MesoCoats exclusive patent license agreement with UT-Battelle LLC.

MesoCoat has obtained 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 licence, executed on March 7, 2011, 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 both the

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

personnel hours and $350,000 in expenditures which conditions have been met.

10




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. A royalty payment of $10,000 has been

made pursuant to this agreement through May 31, 2012.

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 cooperative 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 designed to verify that the

CermaClad process and the resultant materials for compliance with industry standards and acceptability

for clad pipe use in order to modify the existing system for the internal coating of pipes. Phase II was

designed to develop a prototyping facility that could coat the inner surface of a 10 inch diameter pipe and

verify that the CermaClad process was suitable for application to line pipe in accordance with current

industry standards. The prospective third phase would be designed to finalize the design and construction

of a coating facility in Brazil with the capacity for producing cladding on the interior diameter of pipes

and tubes with section lengths of at least 12 meters.

The immediate objective of the cooperation agreement, subject to obtaining successful results, in each of

Phase I and  II, is that the materials and processes tested result in American Petroleum  Institute (API) and

Det Norte Veritas (DNV) approval for the CermaClad process. API and DNV approvals would,

assuming the completion of a suitable manufacturing facility as anticipated by the prospective third

phase, permit MesoCoat market entry into the oil and gas industry and cause full scale production

activities.

MesoCoat has successfully completing Phase I of the cooperation agreement by demonstrating that the

CermaClad process is capable of producing pipe products that meet API 5LD -Specifications for CRA

clad steel pipe on flat coupons. Phase II seeks to demonstrate the suitability of the CermaClad process

for producing a superior pipe product by meeting or exceeding the requirements of API-5LD and DNV

OS-F-101 submarine pipeline systems which achievement would verify the manufacturing process and

exhibit the risk reduction assurances required to fulfill Petrobras requirements for clad pipe.

Phase II has caused MesoCoat and its partners, including Mattson, to redesign and manufacture a

miniaturized CermaClad fusing system that is able to operate inside an 8 diameter pipe that is

integrated into a pipe manipulation and coating control system.  The completion of Phase II still requires

MesoCoat to verify the parameters for CRA material deposition and produce short pipe prototypes that

meet the verified parameters. Due to the challenges associated with manipulating a complex design at

very high temperatures within a confined fume-laden environment MesoCoats process development,

debugging and coating system integration efforts took more time than originally anticipated. A four

month extension to the project timeline was requested of Petrobras and approved.  Phase II is now

expected to be successfully completed by the end of October, with the tool mechanism operating

successfully for extended periods of time while producing acceptable coatings.

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Additional cooperative efforts with Petrobras are envisioned as a means to reduce product insertion risk

and qualify MesoCoat as a supplier for Petrobras project needs, including collaboration in the areas of

quality assurance, secondary operations, process improvement, product production and cost reduction.

Powdermet Inc.

On March 21, 2011, the Company fulfilled the terms of a Stock Purchase Agreement with Kennametal

Inc., dated June 28, 2010, as amended  on September 7, 2010 and replaced on March 25, 2011 by an

Accord and Satisfaction Agreement, to complete the purchase of Kennametals 596,813 shares of

Powdermet equal to a 41% interest for $1,650,000.

Powdermets Business

Powdermet was formed in 1996 and has since developed a product platform of advanced materials

solutions derived from nano-engineered particle agglomerate technology and derived hierarchically

structured materials. These advanced materials include energy absorbing ultra-lightweight syntactic- and

nano-composite metals in addition to the PComP nanocomposite cermets exclusively licensed to

MesoCoat. The business has historically financed itself through corporate engineering consulting fees,

government contracts and grants (over 90), and recently through partnerships with prime contractors and

systems integrators. Powdermet now expects to transition from an engineered nano-powder R&D

laboratory and toll powder manufacturer into a commercial sector company.

While MesoCoats product focus is on developing advanced cermets to address corrosion and wear

coating needs, Powdermets product differentiation is based on its ability to build advanced  nano-

structured metal formulations to address energy efficiency, reduction in hazardous materials,  and life

cycle cost reduction. Powdermets technologies are particularly useful in crash and ballistic energy

management markets since they offer weight reduction and the ability to dissipate substantially more

impact energy than the aluminum alloys and foamed metals currently available.

Powdermet has four materials solution families under development:

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

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

weight savings over aluminum and magnesium alloys without magnesiums corrosion and wear

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

and transportation applications.

    MComP - A family of hierarchically structured, rare earth free, nanocomposite metal and metal

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

aluminium and magnesium allows. MComP is designed to be a market replacement for

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

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

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

distribution.

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    EnComP - A diverse family of nano-engineered particle based solutions for energy

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

capacitors, structured nanocomposite anode and cathode materials for thermal and lithium ion

batteries, and inflatable hydrogen storage media capable of energizing power fuel cells down to -

34C.

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

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

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

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

heat treatment furnaces.

Powdermets two developmental products closest to commercialization are SynFoam and  EnComP.

Powdermet also produces custom-engineered powders and nanopowders, provides advanced materials

contract research and development services, and derives significant revenues from tolls and contract

development and manufacturing services.

AMP  Distributors Inc.

AMP Distributors Inc. (AMP) was formed by the Company in June of 2011 as a Cayman Island

company for the primary purpose of negotiating, executing and administrating international sales of

MesoCoat's products. AMP will also be tasked with acquiring equipment and coating materials for

Companys international transactions.   The company has appointed a managing director with over 15

years of experience in the offshore financial services industry and retained Kariola Limited, a consultancy

organization, to assist it with technical advice and entry into the Far East markets.

Future Acquisition Targets

The Company utilizes multiple resources to identify future acquisition targets in addition to a professional

network of senior management and relationships with national laboratories, such as the Oak Ridge

National Laboratory .We also use the methods below to search for innovative technologies and

companies, which could lead us to additional acquisitions:

    Patent Search We conduct bi-monthly searches for provisional patents and published patents on

the U.S. Patent and Trademark Office and World Intellectual Property Organization patent

websites to keep a track on any new patents published or licensed by our competitors and

partners, and also any new patents filed/published by universities and early stage companies that

might be of interest to us.

    Conferences, Events, and Tradeshows Teams from the Company, MesoCoat, and Powdermet

attend close to 50 technology conferences, tradeshows, and events every year. We have found

these to be an excellent resource for learning about new technologies, especially since these

events center on our interests and expertise as well as that of potential acquisitions.

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    Universities We are on the mailing list of several universities that focus on research in

nanotechnology, advanced materials, surface engineering, and advanced processing. These

universities send us regular updates on the technologies currently in development, as well as any

new patents or products that culminate from the research work. In addition to interacting with

universities tech transfer departments,  we are in regular contact with professors that manage

research projects in our areas of interest who are certain that their technology has high potential

but their universities patent offices have insufficient budgets.

    Press Releases Our most recent press releases have begun to generate external interest in our

firms and operations. As such, outside parties proactively engage us in a dialogue about their

technology and/or company.

    LinkedIn We are active participants in several LinkedIn groups related to new technologies,

venture capital, angel investors, and early stage capital. We regularly evaluate new technologies

in the surface engineering arena that are posted on various LinkedIn groups and then continue

further discussion with them.

Every future opportunity will be evaluated based on several investment criteria. Prospective companies

must have individual market solutions intended to solve critical industry problems and have the potential

to generate at least a $100 million in revenue within five years of investment. Most companies that are

ultimately included in the Companys investments will have more than one market solution.  We are

therefore restricted to firms that have established R&D programs, with a preference for firms that have

solutions in final stages of R&D or in pilot-scale production. The Company is directing its attention to

owners that are willing to accept a multi-phased investment option while guaranteeing operational

control. We plan to support these technology-centric R&D opportunities and investments with our own

corporate strategy, market development, licensing and contracted support.

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 worlds 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.

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.

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

generated by firms fixing metallic degradation problems. 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, alkalies, 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.

    Metalto-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.

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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 products 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.

Competition

The companies in which the Company has invested can expect to face intense competition within their

respective market segments upon product commercialization. The industrial coatings industry is highly

fragmented by companies with competing technologies each seeking to develop a standard for the

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

are perceived as the industry leaders.

MesoCoat

A handful of large companies cater to this market segment JSW Steel Co. controls the clad  plate market

with majority of the market share, Butting GmbH and Cladtek International Pty Ltd. are the largest

players in the mechanically clad pipe market,  whereas ProClad Group is the majority player in the

metallurgically clad pipe market. Most of these large companies participating in the cladding market have

very similar technologies and control 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, all of which offer weld overlay services for

the oil and gas industry which we believe generate less than $15 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 huge amounts of clad pipe and components, and the emphasis is on local shops and faster

turnaround times.

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CermaClad is being positioned as a lower overall risk option between the lower mechanical risk (but

low capacity, and higher corrosion risk) weld overlay products, and the higher mechanical (buckling) risk

of lined products.    Market indicators evidence that the overall market for metallurgically bonded clad

products will grow dramatically if the price point for these types of products can be reduced and capacity

increased significantly.  When offered on a commercial basis the CermaClad process is expected to

disrupt the traditional market for cladding products and compete from with an advantage over current

producers based on the following factors:

   Time and productivity

o     Much faster than weld/laser cladding, more scaleable for production volume

o     Capital investment significantly lower than mechanical cladding for similar capacity

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

o     Reduces  lead  times  compared  to  current  market,  and  provides  high  scalability  for  market

flexibility.    Potentially  enables  distribution  and  customization  of  pipe  for  fast-turnaround

project needs

o     CermaClad  can  be  applied  to  very  large  pipes  (above  18),  where  lined  pipe  cannot

currently   be   produced,   and   where   current   weld   overlay   technology   by   comparison   is

considered too slow and expensive.

    Performance risk

o     True metallurgical bond, reduces potential for catastrophic failure.

o     Smoother  surface  (high  flow,  easier  inspection),  reduces  perceived  risk  by  being  easily

inspected

o     Crack-free hard coatings to 10mm thickness enable performance multiples in hardfacing

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

o     Cermaclad  enables  the  use  of  metallurgically  bonded  clad  seamless  pipe,  eliminating  90%

or more of the welds compared to other product offerings.

    Cost

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

product

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

reduction at sustained margins

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

large projects.

PComP nanoenginered cermet products have relatively few competitors.  Although there are a few

companies like Nanosteel,  Integran,  Inframat, Xtallic, and Modumetal that offer similar solutions; no

competitor has been able to engineer the properties that MesoCoat has built into its PComP product

line.  The company has been able to manufacture a corrosion resistant product that has high strength,

hardness and fracture toughness.  Toughness and hardness are normally inversely proportional

characteristics and no other company has been able to reverse the nature of these properties which is what

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

factor in the PComP products so basically not only has PComP shown to provide a harder coating

surface, but the hard objects are able to  bend more without breaking.

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In order to understand the type of market impact these materials could have if launched successfully, it is

important to note that PComP-W, MesoCoats tungsten cobalt carbide replacement solution, exhibits

high deposition efficiency and at aVickers hardness similar to that of tungsten carbide while being

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

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

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

diamond finishing process needed for conventional materials used in tungsten carbide and cobalt coating

solutions.

Powdermet

Powdermet has recently demonstrated considerable success in providing a record setting energy density

of over 10J/cc in its nanocomposite films for film-foil capacitors, and expects to be invited to bid on full

scale device development.  Also in the ENComP product line, the company has received a long term

commercial production contract for its engineered materials used for well perforation devices.

Powdermet is receiving significant interest in its nanocomposite lithium anode and cathode production

capabilities, and has secured a defense contract to produce prototype nanocomposite silicon anode

materials for thermal batteries used in missile systems.  Working with Purdue University and Michigan

State University, Powdermet is scaling up its reversible nanocomposite liquid hydrogen storage media

that has exhibited tremendous promise as a transportable, renewable source for hydrogen fuel cells.

Another product in Powdermets ENComP product line has completed the final stages of testing as an

obscurant for the Marine Corp with a higher smoke density than baseline red phosphorous though the

product still needs improved burn rates for qualification as an environmentally friendly smoke screen

product for combat troops.

Powdermets SComP solution addresses a large market need for crash energy management and reduced

weight for fuel economy and portability.  Todays engineered materials market offers nothing like

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

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

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

impacts and ballistic events through deformation.  Powdermet is aware of one firm, APS, Inc., started by

a former employee, that offers a similar product. Powdermets current development focus for SComP

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

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

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

features using this type of technology but without the same property characteristics as Powdermets

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

to the commercial market.

General Company Competitive Advantages

The following factors serve as keys to the Companys 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 Companys products represent innovations in key, multi-billion dollar markets.

    Intellectual  Property    The  intellectual  property  of  MesoCoat  and  Powdermet  include  exclusive

licensing rights to technologies that make market penetration effective and feasible.

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    Qualification  and  Testing    As  U.S.  government  agencies  and  private  sector  entities  qualify  and

test MesoCoats and  Powdermets products,  significant barriers to  entry  are  automatically  created

for potential competitors.

    Fundraising  -  As  a  publicly  traded  entity,  the  Company  gains  financing  from  public  equity

markets which provide more liquidity and easier access to capital in the fundraising process.

The Company has also constructed the following barriers for potential competitors:

    product development expertise in both MesoCoat and Powdermet;

    exclusive license for the high density fusion cladding process from Oak Ridge National

Laboratory;

    strong product pipeline that would be ready for market in the next 2-3 years;

    exclusive access to arc lamp technology developed by Mattson Technologies; and

    R&D innovation.

Based on the engineered composite powders developed by Powdermet, as well as the sponsorship and

engineering support of Petrobras, MesoCoat expects to successfully introduce its application services for

corrosion-resistant alloys and wear-resistant coatings in the coming year. Central to the MesoCoat coating

process is its use of Mattsons arc lamp technology. Mattsons lamp acts as a high intensity heat source

which replicates conditions at the surface of the sun, fusing the coating materials with a products surface

area to create a smoother finish. The arc lamp also covers a much larger surface area than competing laser

cladding technology, allowing coatings to be applied at a much faster rate.  Finally, MesoCoats continued

investment in R&D is expected to  improve its current technology and service offerings and spur further

innovation. MesoCoat is currently installing equipment for the production of 12.2 meter clad pipe, which

is the industry requirement.

MesoCoat does face its own barriers to entry in the coatings industry. The most immediate challenge

consists of achieving American Petroleum  Institute certification for its CermaClad products.  In order to

successfully sell to the oil and gas industry, MesoCoats 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.  MesoCoats 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 and

subsequent quality certification of the facility and its products represent the final steps towards entry of

this pioneering product in the oil and gas sector.

CermaClads second major product line, CermaCladWR wear-resistant coatings do not require any

certification or approval from any industry or government entity, allowing MesoCoat to enter markets

such as the oil sands development with minimal resistance once the product is perfected. Powdermet is

delivering final independent verification samples to an industry major in September, 2012, to be followed

by field testing prototypes for the high performance WC MMC (highest performance and cost) product

offering, and through a cooperative development agreement with Oak Ridge National Laboratory, we

continue to advance the industrys highest performance/cost nanocomposite steel for large scale

applications. The barriers to entry in the coatings industry rely primarily on developing the best value

technology and protecting it through intellectual property measures and consistent research and

development.

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Marketability

The ultimate success of any product will depend on market acceptance in its many forms, including cost,

efficiency, convenience and application.  The market for MesoCoats prospective products is potentially

enormous and will require the Company to apply a significant portion of its focus on how to best initiate

market introductions and into which segments. The commercial possibilities for those products currently

under development at Powdermet are no less expansive and will likewise require that significant

resources are dedicated to an effective marketing strategy as commercialization draws near.

MesoCoat Overview

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 currently used  to solve operational

problems in industrial and infrastructure applications.  The Companys two business models include clad

steel products that compete with special alloys and high alloy steels, and component manufacturing and

remanufacturing (inorganic metal finishing) for extending the life and restoring dimensions of

components including steel rolls, valves, shafts, rotors, plungers, mandrels, wheel hubs, etc.

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 defence 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 products 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 todays solutions stand to reap significant financial

rewards in the next several decades.

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CermaClad

The Companys two flagship products are PComP nanocomposite coatings, and CermaClad high

speed cladding technology.   MesoCoats market entry plans for Cermaclad are to clad the interior

diameter of  12.2 meter oil and gas pipes with corrosion resistance alloys, and initially Alloy 625 using

high productivity CermaClad application technology.  In this market, MesoCoat is qualifying

Cermaclad 625 to current industry standards, working with Petrobras to ensure industry acceptance of

qualification data as the path to market acceptance.  Due to the large order size for clad pipes, ranging

from $2-200 million per project, successful introduction of CermaClad CRA clad pipes would result in

an immediate market success.

Management has made sizeable investments in redesigning and miniaturizing the technology to commit to

this initial market solution. The internationally acclaimed engineering firm, Mattson Technology, has

delivered a new inside diameter HDIR lamp head which has now been successfully operating for several

months as integrated into a Cermaclad pipe coating system.  MesoCoat has completed initial product

demonstration milestones, and the tool is being used to clad prototype 2-meter pipes for final acceptance,

which is anticipated by November, 2012.  MesoCoat will soon complete the construction of a new 11,000

sq ft facility, has received initial equipment, and is awaiting delivery and installation of pipe handling

robots and support equipment in its second fiscal quarter. The end result is that MesoCoat expects to be

able to accomplish high speed cladding of pipe diameter interiors in sizes ranging from 8 to 36 inches for

lengths up to 40 feet by the middle of next year.  Completion of the production facility and achieving

product quality certifications enable MesoCoat to market launch and begin product sales to the oil and gas

industry.

MesoCoat is positioning its CermaClad market solution at approximately 20% below the market price

of todays metallurgically bonded  CRA clad materials, positioning the product in between metallurgically

bonded and mechanically lined pipe, but with product production capacities eventually competing with

todays mechanically lined and solid alloy pipe capability. The ability to decrease below the market price

of current offerings is due primarily to the speed and productivity of the process, combined with the low

capital investment relative to competing technologies.  Allowing for a 20% discount, MesoCoat still

expects a gross profit margin of approximately 40% on this product line. MesoCoats expansion within

the market 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 market partners. The Companys

management is interested in marketing CermaClad in certain geographical locations.

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PComP

MesoCoat has been working with major fortune 100 clients like Boeing, Caterpillar, B.F. Goodrich, and

several OEM's from the oil and gas industry for product insertion into their product lines.   In addition to

these large clients which have long sell cycles (2-5 years not atypical), MesoCoat has worked through

certified application partners in Alberta,  Los Angeles, and Houston to capture short cycle sales and gain

initial market share.  MesoCoat has signed a long term production agreement in Alberta, and is in

advanced field testing with partners in Houston.  With the robust pipeline of major OEMs well

underway, MesoCoat is now entering the short cycle job shop application services (coatings) market in

the Midwest, and preparing to launch is PComPMB (metal boride) nanocomposite coatings for the

metals processing industry.  The company has recently added regional sales forces in western Canada and

the Midwest to drive coating application service sales beginning next quarter.   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.

MesoCoats forecast for PComP growth is conservative due to the initial emphasis placed on sales of

the CermaClad product line, and the long sell cycle of major multimillion accounts. Nevertheless,

managements forecast could be understated if sales adoption times to large OEMs and military

maintenance and repair organizations exceed expectations. The military spends billions each year to

address wear and corrosion issues associated with new and used equipment. The U.S. Department of

Defense has widely publicized that in the future its budgets will be focused on sustaining current

platforms rather than developing or producing new ones. Based on input received from government

agencies, MesoCoat expects that it will be able to offer ideal environmentally friendly anti-corrosion/wear

resistant material solutions needed today to sustain current platforms.

Patents, Trademarks, Licenses, Franchises, Concessions, Royalty Agreements and Labor Contracts

The Company has no patents, trademarks, licenses, franchises, concessions, royalty agreements or labor

contracts other than those held by MesoCoat and Powdermet.

MesoCoat's patents include: one non-exclusively licensed patent which remains in place until February

21, 2016; six exclusively licensed patents from Powdermet, the earliest of which expires May 30, 2020

(see dates below); two exclusively licensed patents from Oak Ridge National Laboratory, which expire on

March 15, 2019 and July 30, 2024; and three pending U.S. Patents and two pending global patents, all of

which expire in 2030 or after.

Powdermet's patents include: six U.S. Patents,  which have expiry dates of May 30, 2020, December 7,

2020, July 12, 2022, August 22, 2022, April 6, 2025 and June 23, 2026; and an exclusively licensed

patent from Ultramet Inc., which expires on February 21, 2016. Powdermet also has trademarks and

licenses which it will use to protect its assets as necessary.

Patents in general remain in place 20 years from application and 17 years from issuance.

22




Governmental and Environmental Regulation

The Company is subject to local, state and national taxation. Additionally, the Companys operations are

subject to a variety of national, federal, state and local laws, rules and regulations relating to, among other

things,  worker safety and the use, storage, discharge and disposal of environmentally sensitive materials.

We believe that the Company is in full compliance will all laws, rules, regulations and requirements that

affect its business.

We believe that MesoCoat and Powdermet are in full compliance with the Resource Conservation

Recovery Act, the key legislation dealing with hazardous waste generation, management and disposal.

Nonetheless, under some of the laws regulating the use, storage, discharge and disposal of

environmentally sensitive materials, an owner or lessee of real estate may be liable for the costs of

removal or remediation of certain hazardous or toxic substances located on or in, or emanating from, such

property, as well as related costs of investigation and property damage. Laws of this nature often impose

liability without regard to whether the owner or lessee knew of, or was responsible for, the presence of

hazardous or toxic substances.

We further believe that MesoCoat and Powdermet are in compliance in all material respects with all laws,

rules, regulations and requirements that affect their respective businesses and that such compliance does

not impose a material impediment on either entities ability to conduct business.

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 Earths atmosphere.  In response to these studies,

many nations have agreed to limit emissions of greenhouse gases or GHGs pursuant to the United

Nations Framework Convention on Climate Change, and the Kyoto Protocol. Although the United

States did not adopt the Kyoto Protocol, several states have adopted legislation and regulations to reduce

emissions of greenhouse gases.

The United States Supreme Court ruled, in Massachusetts, et al. v. EPA, that the EPA abused its

discretion under the Clean Air Act by refusing to regulate carbon dioxide emissions from mobile sources.

As a result of the Supreme Court decision the EPA issued a finding that serves as the foundation under

the Clean Air Act to issue other rules that would result in federal greenhouse gas regulations and

emissions limits under the Clean Air Act, even without Congressional action. Finally, acts of Congress,

the decisions of lower courts, large numbers of states, and foreign governments could widely affect

climate change regulation. Greenhouse gas legislation and regulation could have a material adverse effect

on our business, financial condition, and results of operations.

Research and Development

The Company is focused on the research and development of those entities in which it holds an interest.

MesoCoat and Powdermet have a history of working on critical R&D projects for the private and public

sector over a broad range of research fields, with further work extending into peripheral areas. MesoCoat

and Powdermet have adopted this approach because they believe that excellent products can be created

when a backdrop of diversified sciences and technologies exist. From this broad range, their respective

R&D staffs work closely with sales and operations management teams to establish priorities and

effectively manage individual projects.

23




Grants to MesoCoat from the Federal Government, Departments of Energy and Commerce totaled

$1,895,230 and $1,765,924 for the years ended May 31, 2012 and 2011, respectively. Grants to MesoCoat

from State Governments were $71,447 and $82,852 for the years ended May 31, 2012 and 2011,

respectively. MesoCoat revenues from end users of $1,170,752  and $486,164 were realized for the years

ended May 31, 2012 and 2011, respectively.

Currently, MesoCoat and Powdermet are working on several critical and high risk-high reward R&D

projects primarily funded by the federal government, state government and end users. MesoCoats

PComP and Powdermets SComP product lines that are the end product of federally funded R&D.

Employees

As of September 11, 2012 the Company has five Directors, five Advisors, one bookkeeper, one

administrative assistant and five contracted consultants. We use additional consultants, attorneys, and

accountants as necessary to assist in the development of our business.

As of September 11, 2012 MesoCoat had  24 employees.

As of September 11, 2012 Powdermet had  26 employees.

ITEM 1A.

RISK FACTORS

The Companys 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 has a history of significant operating losses and such losses may continue in the future.

The Company incurred net losses of $6,322,365 for the period from June 27, 2006 (inception) to May 31,

2012. Since we have been without significant revenue since inception and currently have no  revenue

producing operations outside of that produced by MesoCoat, historical losses may continue into the

future.

The Companys success is dependent on its ability to assist MesoCoat and Powdermet to commercialize

proprietary technologies to the point of generating sufficient revenues to sustain and expand operations.

The Companys near term future operation is dependent on its ability to assist MesoCoat and Powdermet

in the commercial application of proprietary technologies to produce sufficient revenue to sustain and

expand operations. The same successful efforts criteria will be required for any additional targets that are

acquired by the Company. The success of these endeavours will require that sufficient funding be

available to the Company to assist in the development of its investments. Currently, the Companys

financial resources are limited, which limitation may slow the pace at which proprietary technologies can

be commercialized and deter the prospect of additional acquisitions. Should we be unable to  improve our

financial condition through debt or equity offerings, our ability to successfully advance our business plan

will be severely limited.

24




We face significant commercialization risks related to technological businesses.

The industries in which MesoCoat and Powdermet operate and plan to operate are characterized by the

continual search for higher performance at lower cost. Our growth and future financial performance will

depend on the ability of MesoCoat and Powdermet to develop and market products that keep  pace with

technological developments and evolving industry requirements. Further, the research and development

involved in commercializing products requires significant investment and innovation to keep pace with

technological developments. Should we be unable to keep pace with outside technological developments,

respond adequately to technological developments or experience significant delays in product

development, our products might become obsolete. Should these risks overcome our ability to keep pace

there is a significant likelihood that our ability to successfully advance our business will be severely

limited.

The coatings industry is likely to undergo technological change so our products and processes could

become obsolete at any time.

Evolving technology, updated industry standards, and frequent new product and process introductions are

likely to characterize the coatings industry going forward so our products or processes could  become

obsolete at any time. Competitors could develop products or processes similar to or better than our own,

finish development of new technologies in advance of our research and development, or be more

successful at marketing new products or processes, any of which factors may hurt our prospects for

success.

Market acceptance of the products and processes produced by MesoCoat and Powdermet is critical to our

growth.

We expect to generate revenue from the development and sale of products and processes produced by

MesoCoat and Powdermet. Market acceptance of those products is therefore critical to our growth.  If our

customers do not accept or purchase those products or processes produced by MesoCoat and Powdermet,

then our revenue, cash flow and operating results will be negatively impacted.

The Company competes with larger and better financed corporations.

Competition within the industrial coatings industry and other high technology industries is intense. While

the Companys products are distinguished by next-generation innovations that are more sophisticated and

cost effective than many competitive products currently in the market place, a number of entities and new

competitors may enter the market in the future. Some of our existing and potential competitors have

longer operating histories, greater name recognition, larger customer bases and significantly greater

financial, technical and marketing resources than we do, including well known multi-national

corporations. Accordingly, our products could become obsolete at any time. Competitors could develop

products similar to or better than our own, finish development of new technologies in advance of the

Companys research and development, or be more successful at marketing new products, any of which

factors may hurt our prospects for success.

25




General economic conditions will affect our operations.

Changes in the general domestic and international climate may adversely affect the financial performance

of the Company, MesoCoat and Powdermet. Factors that may contribute to a change in the general

economic climate include industrial disputes, interest rates, inflation, international currency fluctuations

and political and social reform. Further, the delayed revival of the global economy is not conducive to

rapid growth, particularly of technology companies with newly commercialized products.

MesoCoat and Powdermet rely upon patents and other intellectual property.

MesoCoat and Powdermet rely on a combination of patent applications, trade secrets, trademarks,

copyrights and licenses, together with non-disclosure and confidentiality agreements, to establish and

protect proprietary rights to technologies they develop. Should either of MesoCoat or Powdermet be

unable to adequately protect their intellectual property rights or become subject to a claim of

infringement, their businesses and that of the Company may be materially adversely affected.

MesoCoat and Powdermet expect to prepare patent applications in accordance with their respective

worldwide intellectual property strategies on acquiring new technologies. However, neither they nor the

Company can be certain that any patents will be issued with respect to future patents pending or future

patent applications. Further, neither they nor the Company know whether any future patents will be

upheld as valid, proven enforceable against alleged infringers or be effective in preventing the

development of competitive patents. The Company believes that MesoCoat and Powderment have each

implemented a sophisticated internal intellectual property management system to promote effective

identification and protection of their products and know-how in connection with the technologies they

have developed and may develop in the future

We may not be able to effectively manage our growth.

We expect considerable future growth in our business. Such growth will come from the addition of new

plants, the increase in global personnel, and the commercialization of new products. Additionally, our

products should have an impact on the cladding industry; as companies learn that they can receive

materials with a short lead time at a higher quality and lower price, market demand should grow,

expanding the overall market itself. To achieve growth in an efficient and timely manner, we will have to

maintain strict controls over our internal management, technical, accounting, marketing, and research and

development departments. We believe that we have retained sufficient quality personnel to manage our

anticipated future growth though we are still striving to improve financial accounting oversight to ensure

that adequate reporting and control systems in place. Should we be unable to successfully manage our

anticipated future growth by adherence to these strictures, costs may increase, growth could  be impaired

and our ability to keep pace with technological advances may be impaired which failures could result in a

loss of future customers.

Environmental laws and other governmental legislation may affect our business.

Should the technologies which each of MesoCoat and Abakan have under development not comply with

applicable environmental laws the Companys 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.

26




The Company and those subsidiaries in which it holds an interest may face liability claims on future

products.

Although MesoCoat and Powdermet intend to implement exhaustive testing programs to identify

potential material defects in technology they develop, any undetected defects could harm their reputation

and that of the Company, diminish their customer base, shrink revenues and expose themselves and us to

product liability claims. Any imposition of liability that is not covered by insurance or is in excess of

insurance coverage could have a material adverse effect on our business, results of operations and

financial condition.

The market for our stock is limited and our stock price may be volatile.

The market for our common stock has been limited due to low trading volume and the small number of

brokerage firms acting as market makers. Due to the limitations of our market and the volatility in the

market price of our stock, investors may face difficulties in selling shares at attractive prices when they

want to sell. The average daily trading volume for our stock has varied significantly from week to week

and from month to month, and the trading volume often varies widely from day to day.

Our common stock is currently deemed to be penny stock, which makes it more difficult for investors

to sell their shares.

Our common stock is 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 the

Companys securities.  If the Companys securities are subject to the penny stock rules, investors will find

it more difficult to dispose of the Companys securities.

27




The elimination of monetary liability against the Companys directors, officers and employees under

Nevada law and the existence of indemnification rights to the Companys directors, officers and

employees may result in substantial expenditures by the Company and may discourage lawsuits against

the Companys directors, officers and employees.

The Companys articles of incorporation contains a specific provision that eliminates the liability of

directors for monetary damages to the Company and the Companys stockholders; further, the Company

is prepared to give such indemnification to its directors and officers to the extent provided by Nevada law.

The Company may also have contractual indemnification obligations under its employment agreements

with its executive officers. The foregoing indemnification obligations could result in the Company

incurring substantial expenditures to cover the cost of settlement or damage awards against directors and

officers, which the Company may be unable to recoup. These provisions and resultant costs may also

discourage the Company from bringing a lawsuit against directors and officers for breaches of their

fiduciary duties and may similarly discourage the filing of derivative litigation by the Companys

stockholders against the Companys directors and officers even though such actions, if successful, might

otherwise benefit the Company and its stockholders.

ITEM 1B.

UNRESOLVED STAFF COMMENTS

Not applicable to smaller reporting companies.

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  $2,280 a month paid to Prosper Financial,

Inc., a related party. 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.

Powdermet maintains 48,000 sq. ft. of research and development space located at 24112 Rockwell Drive,

Euclid, Ohio 44117. The cost of the lease is $13,500  per month, adjustable on an annual basis,  paid to

Sherman Properties LLC., a related party and  the term of the lease runs through October 31, 2020 with

the right to sub-lease the premises.

MesoCoat maintains 22,000 sq. feet of the research and development space located at 24112 Rockwell

Drive, Euclid, Ohio 44117 of that space leased by Powdermet on a sub-lease basis that runs through May

31, 2020. The cost of the sub-lease for MesoCoat is $6,700 paid to Powdermet per month.

MesoCoat is close to completing the building  of a $6-million, 11,000 sq. ft. plant in Euclid, Ohio. The

plant will include a CermaClad production line that will manufacture up to 10,000 square meters per

year of corrosion and wear-resistant clad tubes, pipes and plates. The plant will also be equipped with a

thermal spray system to commercialize MesoCoats PComP family of products and qualify them for

use in the aerospace, oil and gas, mining, and chemical processing industries. Workers broke ground on

the plant on April 7, 2011. MesoCoat had expected to  complete construction by February, 2012 but due to

financing and equipment delivery delays the completion of the facility is now expected to be the end of

October 2012. Installation and setup of production equipment will take a further three to four months,

with production commencing by the end of May,  2013.

The CermaClad portion of the plant will include:

28




    Blasting Automatic

    Big Application System

    Crane

    Lamphead

    Power Supply

    Longitudinal Conveyor

    Side Conveyor

    Rotation For Lamp

    Rotation For Precursor Application

    Rotation For Ndt

    Side Loader (Truck-Forklift)

    Compressor

    Electrical Installation

    Small Application Rotation System

    EC Thickness Gauge

    PMI (Positive Material Identification)

    Phase Array UT (Ultrasonic Test Lamination)

    Laser Mapping (Surface Porosity)

    Potential Hydro Testing

    Compress Air Equipment

    Pipe Manipulation Systems

    Material Feeding System

    Shielding Gas System

    Extraction System

    Safety Equipment & Fencing

    Security System

    Final Inspection and Packing Rack

The PComP portion of the plant will include:

    Robot

    Lathe

    Ventilation Makeup Air

    Dust Collector

    DJ Multicoat (Thermal Sprayer)

    Grit Blast

    Air Compressor

    Material Handling Base

    Material Handling Per Cube

    Ducting

    Met Laboratory

    Inspection Area

    Computer Phone

    Stripping Tank

    Small Grinder

    Large Grinder

    Misc Electric

    Misc Plumbing

29




ITEM 3.

LEGAL PROCEEDINGS

None.

ITEM 4.

MINE SAFETY DISCLOSURE

Not applicable.

30




PART II

ITEM 5.

MARKET FOR REGISTRANTS COMMON EQUITY, RELATED

STOCKHOLDER MATTERS, AND BUSINESS ISSUER PURCHASES OF

EQUITY SECURITIES

The Companys 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

2012

May 31

$2.75

$1.00

2012

February 29

$1.25

$0.75

2011

November 30

$1.60

$0.95

2011

August 31

$1.65

$1.20

2011

May 31

$1.76

$0.70

2011

February 28

$1.25

$0.90

2010

November 30

$1.15

$0.40

2010

August 31

$1.08

$0.26

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 Companys capital stock. This summary is

subject to and qualified by our articles of incorporation and bylaws.

Common Stock

As of September11, 2012, there were 464 shareholders of record holding a total of 61,465,445 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.

31




Preferred Stock

As of September 11, 2012, there were 50,000,000 shares of preferred stock, par value $0.0001 authorized

of which none were outstanding. The Companys 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 Companys ability to pay dividends on its common stock

other than those generally imposed by applicable state law.

Warrants

As of September 11, 2012, there were 780,465 half-share warrants outstanding to purchase  390,233

shares of our common stock, at $1.50 per share with an expiration date of June 13, 2013, 80,000 half-

share warrants outstanding to purchase 40,000 shares of our common stock, at $1.50 per share with an

expiration date of July 15, 2013, 706,595 full-share warrants outstanding to purchase 706,595 shares of

our common stock, at $1.25 per share with an expiration date of February 20, 2014,600,000 full share

warrants outstanding to purchase 600,000 shares of our common stock, at $2.00 per share with an

expiration date of April 17, 2014 and 698,925 half-share warrants outstanding to purchase 349,463

shares of our common stock, at $2.00 per share with an expiration date of May 30, 2014.

Stock Options

As of September 11, 2012, there were 5,910,000  stock options outstanding to purchase shares of our

common stock, as follows:

    2,000,000 options have an exercise price of $0.60 per shares, expire on December 11, 2019, and

vest in equal increments over three years beginning on December 11, 2010

    300,000  options  have  an  exercise  price  of  $0.60  per  shares,  expire  on  December  11,  2019,  and

vest in equal increments over three years beginning December 11, 2009.

    100,000  options  have  an  exercise  price  of  $0.75  per  share,  expire  on  March  15,  2020,  and  vest

in equal increments over three years to beginning March 15, 2010.

    50,000  options  have  an  exercise  price  of  $0.75  per  share,  expire  on  March  8,  2020,  and  vest  in

equal increments over three years beginning March 8, 2010.

    100,000  options  have  an  exercise  price  of  $0.75  per  share,  expire  on  March  15,  2020,  and  vest  in

equal increments over three years beginning March 15, 2011.

    400,000  options  have  an  exercise  price  of  $0.60  per  share,  expire  on  April  26,  2020,  and  vest  in

equal increments over three years to beginning April 26, 2011.

    250,000  options  have  an  exercise  price  of  $1.30  per  share,  expire  on  April  29,  2020,  and  vest  in

equal increments over three years to beginning April 29, 2011.

    150,000  options  have  an  exercise  price  of  $1.05  per  share,  expire  on  May  2,  2020,  and  vest  in

equal increments over three years beginning May 2, 2011.

    200,000 options have an  exercise price of $0.65 per share,  expire on August 20, 2020,  and vest in

equal increments over three years to beginning August 20, 2011.

32




    845,000 options have an exercise price of $0.65 per share, expire on October 19, 2020, and vest

in equal increments over three years beginning on October 19, 2011.

    25,000 options have an exercise price of $1.01 per share, expire on November 17, 2020, and

vest in equal increments over three years beginning on November 17, 2011.

    20,000  options have  an  exercise price of  $1.05  per share,  expire on March 16,  2021,  and  vest in

equal increments over three years beginning on March 16, 2012.

    100,000 options have an exercise price of  $1.05  per share,  expire on April 13,  2021,  and  vest in

equal increments over three years beginning on April 13, 2012.

    50,000  options  have  an  exercise  price  of  $1.02  per  share,  expire  on  May  13,  2021,  and  vest  in

equal increments over three years beginning on May 13, 2012.

    150,000 options have an exercise price of $1.05 per share, expire on May 2, 2021, and vest in

equal increments over three years beginning on May 2, 2012.

    25,000 options have an exercise price of $1.25 per share, expire on August 15, 2021, and vest in

equal increments over three years beginning on January 25, 2012.

    100,000 options have an exercise price of $1.20 per share, expire on October 24, 2016, and are

vested as of October 24, 2011.

    100,000 options that have an exercise price of $1.00 per share, expire on January 2, 2022, and

vest in equal increments over three years beginning on January 2, 2013.

    150,000 options that have an exercise price of $1.02 per share, expire on January 5, 2022, and

vest in equal increments over three years beginning on January 5, 2013.

    70,000  options have an exercise price of  $1.07  per share,  expire on  February 15,  2022,  and vest

in equal increments over two periods being July 1, 2012 and January 1, 2013.

    25,000  options have an exercise price of  $1.07  per share,  expire on  February 15,  2022,  and vest

in equal increments over two periods being February 6, 2012 and August 6, 2012.

    50,000  options have an exercise price of  $1.03  per share,  expire on  February 15,  2022,  and vest

in equal increments over three years beginning on February 15, 2013

    75,000  options  have  an  exercise  price  of  $2.30  per  share,  expire  on  June  12,  2022,  and  vest  in

equal increments over three years beginning on June 12, 2012.

    100,000  options  have  an  exercise  price  of  $2.30  per  share,  expire  on  June  12,  2022,  and  vest  in

equal increments over three years beginning on June 1, 2013.

    150,000  options  have  an  exercise  price  of  $2.30  per  share,  expire  on  June  15,  2022,  and  vest  in

equal increments over three years beginning on September 15, 2012.

    50,000  options  have  an  exercise  price  of  $2.05  per  share,  expire  on  June  20,  2022,  and  vest  in

equal increments over three years beginning on June 20, 2013.

    75,000  options  have  an  exercise  price  of  $1.95  per  share,  expire  on  July  27,  2022,  and  vest  in

equal increments over three years beginning on August 1, 2013.

    150,000 options have an exercise price of $1.90 per share, expire on August 7, 2022, and vest in

equal increments over three years beginning on August 7, 2013.

Convertible Securities

As of September 11, 2012, the Company has two debt instruments convertible into the shares of its

common stock for an aggregate total of $2,700,000, bearing an interest rate of 5% per annum. The notes

are convertible at $1.00 per conversion unit, which consists of one share of our common stock and one-

half share warrant to purchase an additional share at $1.50 per share,  with an expiration date of two years

following the conversion date. The maturity dates of these notes are two years from the date of issuance,

March 16, 2013, April 13, 2013, June 7, 2013 and July 14, 2013 respectively.

33




Securities Authorized for Issuance Under Equity Compensation Plans

The Company has not authorized any securities for issuance under any equity compensation plan.

Purchases of Equity Securities made by the Issuer and Affiliated Purchasers

The Company has not repurchased any shares of its common stock during the fiscal year ended May 31,

2012 or since that date through September 11, 2012.

Recent Sales of Unregistered Securities; Use of Proceeds from Registered Securities

On May 30, 2012 the board of directors of the Company authorized the issuance of 698,925 shares of its

common stock and  349,463 warrants to purchase 349,463 shares of our common stock at an exercise price

of $2.00 until May 30, 2014 to the following entities and individuals for $1.60 each, or an aggregate of

$1,118,280, in reliance upon the exemptions from registration provided by Section 4(2), Regulation D

and Regulation S of the Securities Act:

Name

Consideration

Basis

Shares

Warrants

Exemption

Dorothy DEwart

$25,000

Subscription

15,625

7,813

Reg D/Sec 4(2)

Douglas, DEwart

$50,080

Subscription

31,300

15,650

Reg. D/Sec 4(2)

Peter, DEwart

$25,000

Subscription

15,625

7,813

Reg D/Sec. 4(2)

Walter, Duerr

$19,200

Subscription

12,000

6,000

Reg D/Sec 4(2)

Steven R. Ferris

$13,500

Subscription

8,438

4,219

Reg. D/Sec 4(2)

Steven R. Ferris

$42,500

Services

26,562

13,281

Reg D/Sec 4(2)

Kevin M. Mc Donnell

$16,000

Subscription

10,000

5,000

Reg D/Sec. 4(2)

Orsa & Company

$16,000

Services

10,000

5,000

Reg D/Sec 4(2)

Jayne E. Price

$25,000

Subscription

15,625

7,813

Reg. D/Sec 4(2)

Gary Polestra

$320,000

Subscription      200,000

100,000

Reg D/Sec. 4(2)

Edward Steinback

$8,000

Services

5,000

2,500

Reg D/Sec 4(2)

Costas M. Takkas

$32,000

Services

20,000

10,000

Reg D/Sec 4(2)

Costas M. Takkas

$24,000

Subscription

15,000

7,500

Reg D/Sec 4(2

Joe Eberhard

$80,000

Subscription

50,000

25,000

Reg S/Sec 4(2)

Kosson Ventures Ltd.

$160,000

Subscription      100,000

50,000

Reg S/Sec. 4(2)

River Fish Holdings Ltd.

$190,000

Subscription      118,750

59,375

Reg S/Sec. 4(2)

Stratton SA

$72,000

Subscription

45,000

22,500

Reg S/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 and grants were isolated private transactions by the Company

which did not involve a public offering; (2) the offerees have access to the kind of information which

registration would disclose; and (3) the offerees are financially sophisticated.

The Company complied with the requirements of Rule 506 of Regulation D of the Securities Act by: (i)

foregoing any general solicitation or advertising to market the securities; (ii) selling only to accredited

offerees; (iii) having not violated antifraud prohibitions with the information provided to the offerees; (iv)

being available to answer questions by the offerees;  and (v) issuing restricted securities to the offerees.

34




The Company complied with the exemption requirements of Regulation S by having directed no offering

efforts in the United States, by offering common shares only to offerees who were outside the United

States at the time of the offering, and ensuring that the offerees to whom the common shares and warrants

were offered and authorized were non-U.S. offerees with addresses in foreign countries.

On March 31, 2012 the Company authorized the issuance of 600,000 restricted common shares and

600,000 share purchase warrants, each warrant convertible into an additional share at an exercise price of

$1.25 for a two year period from the date of issue, for cash and other valuable consideration of $600,000

in reliance upon the exemptions from registration provided by Section 4(2), Regulation D and Regulation

S of the Securities Act of 1933, as amended (Securities Act) as follows:

Name

Consideration

Basis

Shares

Warrants

Exemption

Stratton SA

$450,000

Subscription     450,000      450,000

Sec. 4(2)/Reg S

River Fish Holdings Ltd.

$100,000

Subscription     100,000      100,000

Sec. 4(2)/Reg S

Costas Takkas

$50,000

Services

50,000

50,000

Sec. 4(2)/Reg D

The Company complied with the exemption requirements of Section 4(2) of the Securities Act based on

the following factors: (1) the issuances 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.

The Company complied with the exemption requirements of Regulation S by having directed no offering

efforts in the United States, by offering common shares only to offerees who was outside the United

States at the time of the offering, and ensuring that the offerees to whom the restricted common shares

and warrants were offered and authorized were non-U.S. offerees with addresses in a foreign country.

On March 20, 2012 the Company authorized the issuance of 27,500 restricted common shares for services

rendered pursuant to the terms and conditions of their respective agreements in reliance upon the

exemptions from registration provided by Section 4(2), and Regulation D of the Securities Act as follows:

Name

Basis

Shares

Exemption

Financial Insights

Services

12,500

Sec. 4(2)/Reg D

Livingston Securities

Services

15,000

Sec. 4(2)/Reg D

The Company complied with the exemption requirements of Section 4(2) of the Securities Act based on

the following factors: (1) the issuances 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.

35




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.

Trading Information

The Companys common stock is currently approved for quotation 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 applicable.

ITEM 7.

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATION

This Managements 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.

Plan of Operation

MesoCoats plan of operation for the coming year is to position itself to succeed in commercialization

efforts focused on its CermaClad and PComP products. To achieve this success Abakan aims to:

    Establish overseas subsidiaries and plants while supporting their management teams.

    Gain market entry by creating awareness and establishing relationships with key investors.

    Increase  its  investment  in  MesoCoat  and  acquire  a  controlling  interest  in  Powdermet  by  fiscal

year-end 2013.

    Target  existing  coating  companies  to   qualify  and   use   powders  produced   by  MesoCoat  and

Powdermet.

    Assist MesoCoat in achieving the following objectives:

o     Becoming American Petroleum  Institute (API) compliant for CermaClad corrosion and

wear  resistant  alloys  products  through  a  joint  development  agreement  with  Petrobras  and

ongoing development work.

36




o     Gaining  another  joint  venture  agreement  with  one  or  two  other  major  oil  corporations  by

fourth quarter 2012.

o     Completing  construction  of  its  first  operating  plant  in  Euclid,  Ohio  and  begin  producing

work  samples  for  certification  and  approval  by  potential  clients  by  the  fourth  quarter

2012, with work to be split 60%/40% between samples and commercial sales.

o     Continuing   a   plan   of   constructing   CermaClad   and   PComP   operating   plants   in

strategic market locations (Houston, Alberta, Brazil and the Far East).

o     Continuing  the  formation  of  strategic  partnerships  and  a  pipeline  of  potential  clients  for

the CermaClad and PComP product lines.

Growth Strategy

The Company intends to grow MesoCoat over the next five years by applying the expertise of its board of

directors and board of advisors to the expansion of operations on a global basis. Management will rely on

both project and investor financing to build new production facilities in emerging markets in a manner

dedicated to capturing market share and enhancing shareholder value.

The accomplishment of these objectives relies on either of two growth strategies: i) a conservative or

organic strategy that requires an additional $16,000,000 in financing and ii) a moderate strategy which

requires early market acceptance and an additional $45,000,000 to $50,000,000 in financing (dependent

on the level of cash flow achieved and the level of project debt financing secured). On realizing sufficient

financing, MesoCoat plans to launch between six and fifteen operating plants worldwide. Given the wide

range of the Companys assumptions, the growth strategy depends largely upon the successful execution

of both marketing plans and plant openings for CermaClad and PComP. Given our strategy of

targeting strategic global regions with multiple potential clients with multiple product lines, we believe

that it is feasible for us to meet our expectations. Nonetheless, the Company will carefully monitor the

risks associated with achieving the goals in each growth scenario to ensure that MesoCoat can meet client

expectations.

MesoCoat believes that its first offshore plant will be constructed on a build to suit basis in agreement

with a full service construction company, which arranges architectural designs, permits, and  offers a

leasing or financing arrangement for the cost of the land and the building. The Company has also had

discussions with State Development Boards in several jurisdictions which have indicated interest in

attracting high technology companies like MesoCoat to their respective areas, with the possibility of

offering incentives such as grants and loan guarantees. Another key component of plant location lies in

strategic global positioning. We expect to construct production facilities in locations where we can

service multiple corporations in multiple industry sectors.  We have identified Brazil as a region of focus

due to the significant oil and mining sectors in that country. West Africa is another part of the world that

would benefit significantly from the application of MesoCoats products since the oil industry in that

region has problems of corrosion and high pressure that are similar to those encountered in offshore

Brazilian oil fields.  Locations in the Far East will offer additional opportunities for MesoCoat.

While the Company explores each opportunity it is aware of the inherent risks that often come with

operating in offshore markets. Risks might include those associated with politics, currency or even the

environment about which we will seek advice from experienced professionals in each offshore

jurisdiction. Further, we expect that recent additions to our board of directors and our board of advisors

will assist us in successfully navigating these prospective pitfalls based on years of experience within the

international arena.

37




Operational Logistics

CermaClad, PComP SComP, MComP and ENComP are platform technologies with extensive

product potential in multiple large market verticals. The Company and related operations will play a

major role in six distinct product segments of the value chain: raw materials/consumables, application

equipment, coating (cladding) services, casting, fabrication, and maintenance & repair of existing assets.

By playing a major role in these six segments of the value chain, the Company and its partners may prove

to be an influential player in defining market prices and trends in the structural composites, steel plate,

sheet, bar, and tubular products industries. Our vision is to form partnerships, and set up captive or

regional facilities with the power players in the target industry. Most of these large manufacturers have

project management and installation capabilities besides fabrication, and thus partnerships with these

companies would help us build one-stop-shops for customers, where the customers define the

specifications/requirements and we, and our value chain partners would take care of the steel fabrication,

coating/cladding operations, casting, assembly integration, and inspection activities. We intend to partner

with a major suppliers or end users within geographic regions. Depending on the amount of financing

available,  we are considering three approaches to this market:

    High Capital Intensity:  The Company will continue to self-finance and act as owner-operator.

    Medium Capital Intensity: The Company intends to enter into joint venture partnerships, with the

Company being the operator at 51% ownership and the partner at 49% ownership.

    Low  Capital  Intensity:  The  Company  expects  to  enter  into  joint  ventures  with  supply  chain

partners  which  would  act  as  operators  and  financiers  with  51%  ownership  while  the  Company

would  act  as  the  technology  supplier  with  49%  ownership.  Within  these  arrangements  we  do  not

intend to be a licensor but rather participate in the operations and service end of the businesses.

Additional Funding

MesoCoat will require additional funding over the next twelve months to fulfill its business plan. Not all

of the funding sought is currently available though MesoCoat expects to receive additional funding from

the Company on the prospective exercise of the second option under the Investment Agreement. Should

MesoCoat be unable to secure additional financing from outside sources or the Company, MesoCoat will

most likely be unable to meet its milestones and may need to scale back operations. Any shortfall in

minimum funding will adversely affect MesoCoats ability to expand or even continue operations.

Results of Operations

During the year ended May 31, 2012:

    We increased our interest in MesoCoat to 51% on a fully diluted basis.

     We focused our efforts on our interest on the continued development of MesoCoat and its

products.

     We strengthened our management team with industry experts.

     We prepared corporate governance charters.

     We completed debt and equity financing in the amount of $3,239,975.

     We commenced negotiations with prospective joint venture partners in regions, such as Russia,

in which we do not intend to operate on our own.

     We commenced negotiations with prospective joint venture partners in respect to technological

applications that we do not intend to develop on our own.

38




During the year ended May 31, 2012, the Company assisted MesoCoat with the following developments:

    Redefining its marketing strategy.

    Hiring new senior management.

    Improving its branding.

    Beginning communication with several new potential joint commercialization partners.

    Working with Petrobras on fulfilling the terms of the Cooperation Agreement.

    Accelerating R&D schedules by negotiating favorable engineering contracts with third parties.

    Breaking ground on a new 11,000 sq. ft. manufacturing plant in Euclid, Ohio; full-scale

production from the plant is expected to begin during the first half of 2013; the plant will be able

to coat 20,000 square meters of steel pipe with CermaClad per year and will be able to

fabricate PComP products for application in the aerospace, oil and gas, mining and chemical

processing industries.

    Developing relationships with technology incubators like the Houston Technology Center and

other industry/trade associations.

    Entering into an Assignment Agreement to transfer a distribution agreement granted to

Polythermics, LLC to the Company providing it with the exclusive right to distribute MesoCoats

products intended for application specific to the oil and gas pipeline industry.

    Completing the initial milestones of the Cooperation Agreement with Petrobras to develop and

qualify the CermaClad process for the application of CRA (corrosion resistant alloys) to the

internal and external surfaces of pipes using proprietary High Density InfraRed (HDIR) lamp

technology; Petrobras is a leading integrated oil and gas company headquartered in Rio de

Janiero, Brazil, and is the largest company in Latin America.

    Continuing a collaborative effort with the University of Akron (UA) to develop and accelerate

commercialization of advanced inorganic coatings directed at reducing the nations $300 billion

corrosion problem; UAs Corrosion and Reliability Engineering (CAREs) program and MesoCoat

will perform development, testing and risk reduction of advanced inorganic coatings; MesoCoat

will provide development engineers and technicians to supervise and train students and new staff

to apply CermaClad to various metal surfaces.

    Receiving, along with UA,  a $2 million award  from Ohio Third Frontier (OTF) under the

Advanced Energy Program (AEP) to accelerate the commercial demonstration of CermaClad; a

portion of the award will be used to construct a new powder coating and high speed cladding

facility at UA,  which will be used for advanced coating development; the facility and researchers

at UA will assist MesoCoat with research and development tasks, freeing up resources at

MesoCoat to focus on deploying coating solutions and serving commercial customers.

    Securing a $1 million low interest loan from the State of Ohio to partially fund the construction of

the new 11,000 sq. ft. CermaClad clad piping manufacturing plant in Euclid.

    Securing a long term supply contract for PComP nanocomposite tungsten carbide thermal

spray coating materials with a large industrial pump manufacturer in Canada.

Management has also spent significant time developing an extensive deal sourcing network,  including top

international university materials sciences laboratories,  government sponsored laboratories, industry

brokers, lawyers and materials sciences association executives, as well enlarging its advisory board with

specific technology skills.

39




Net Losses

For the period from June 27, 2006 (inception) until May 31, 2012, the Company incurred net losses of

$6,322,365. Net losses for the year ending May 31, 2012 were $1,119,249 as compared to net losses of

$3,184,984 for the year ending May 31, 2011. The decrease in net losses over the comparative annual

periods can be primarily attributed to the realization of an unrecognized gain on the acquisition of

MesoCoat of $1,764,345 and a gain of $988,533 as a result of our equity interest in Powdermet. We do

not expect to transition to net profits in the near term as increases in revenue and gross profit are outpaced

by increases in operational expenses associated most significantly with increases in general and

administrative expenses, professional fees, payroll expenses, research and development costs and

depreciation and amortization of existing assets. Although management is constantly evaluating the

Companys business to ensure operating efficiencies, any expectation of net profit going forward will

require further commercialization of products to market. We expect to continue to operate at a loss

through fiscal 2013.

Operating Expenses

For the period from inception until May 31, 2012, the Company incurred operating expenses of

$9,901,809. Operating expenses for the year ended May 31, 2012 were $5,413,032 as compared to

$2,679,969 for the year ended May 31, 2011. The increase in operating expenses over the comparative

periods can be primarily attributed to increases in general and administrative expenses which increased to

$625,301 for the year ended May 31, 2012 from $163,562 for the year ended May 31, 2011, consulting

costs which increased to $928,449 for the year ended May 31, 2012 from $533,876 for the year ended

May 31, 2011, increases in payroll and benefits expense which increased to $741,436 for the year ended

May 31, 2012 from $190,608 for the year ended May 31, 2011, depreciation and amortization for the year

ended May 31, 2012 to $302,858 from $5,790 for the year ended May 31, 2011, research in development

from $0 for the year ended May 31, 2011 to $737,316 for the year ended May 31, 2012 and stock option

expense which increased to $1,311,032 for the year ended May 31, 2012 from $964,439 for the year

ended May 31, 2011.

We expect that operating expenses will continue to increase as the Companys aggressive growth strategy

over the next five years will require significant increases in personnel and facilities along with significant

research and development to ensure that our products nearing commercialization are brought to market as

quickly and as effectively as possible.

Income Tax Expense (Benefit)

The Company may have a prospective income tax benefit resulting from a net operating loss carry-

forward and start up costs that will offset any future operating profit.

Impact of Inflation

The Company believes that inflation has not had a material effect on operations for the period from June

27, 2006 (inception) to May 31, 2012.

40




Capital Expenditures

The Company has not spent any significant amounts on capital expenditures for the period from June 27,

2006 (inception) to May 31, 2012  except for those amounts spent on plant, property and equipment in the

construction of the manufacturing facility in Euclid, Ohio, which amount was $1,312,832 as of May 31,

2012.

Liquidity and Capital Resources

The Company has been in the development stage since inception, and has experienced significant changes

in liquidity, capital resources, and stockholders equity.

As of May 31, 2012 the Company current assets of $1,070,054 consisting of cash, accounts receivable, a

note receivable from a related party and prepaid expenses, and total assets of $15,192,030  consisting of

current assets, investments in property, plant and equipment, patents and licenses, an assignment

agreement, its investment in Powdermet and goodwill.

As of May 31, 2012 the Company had current  liabilities of $3,508,908, consisting of accounts payable,

accounts payable to related parties, capital leases, loans payable and accruals, and accrued liabilities, and

total liabilities of $4,727,361 consisting of current liabilities, loans payable net of discounts and the non-

current portion of capital leases.

The Company had stockholders equity of $10,464,669 and a working capital deficit of $2,438,854 at

May 31, 2012.

For the period from inception until May 31, 2012, the Companys net cash used in development stage

activities was $2,959,135.  Net cash used in development stage activities for the period ending May 31,

2012 were $1,319,285  as compared to $912,198 for the year ended May 31, 2011. Net cash used in

development stage activities in the current period can be attributed primarily to 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, and stock option expense offset by equity in investee

profit, and the unrealized gain on the MesoCoat acquisition. Actual cash items used, that are not income

statement related items, include changes in accounts receivable, accrued liabilities, accrued interest on

loans payable, gain on the sale of a capital asset and prepaid expenses. We expect to continue to generate

negative cash flow in operating activities until such time as net losses transition to net income.

For the period from inception until May 31, 2012, the Companys net cash used in investing activities was

$5,805,395. Net cash used in investing activities for the year ending May 31, 2012, was $391,509 as

compared to $3,804,394 for the year ending May 31, 2011. Net cash used in investing activities in the

current period can be primarily attributed to the purchase of property, plant and equipment, investments in

MesoCoat and capitalized patents and licenses offset by proceeds from the sale of capital assets and net

cash assumed in the acquisition of MesoCoat. We expect to continue to generate negative cash flow in

investing activities as we increase our investment in MesoCoat and in property, plant and equipment.

41




For the period from inception until May 31, 2012, the Companys net cash provided by financing

activities was $9,624,096. Net cash provided by financing activities for the year ending May 31, 2012 was

$2,570,360 as compared to $4,676,028 for the year ending May 31, 2011. Net cash flow 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. 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 debt or equity financing. We had no

commitments or arrangements for financing at May 31, 2012 though we are pursuing a number of

prospective sources that include shareholder loans, the sale of equity, the procurement of long term debt

or the settlement of additional debt for equity. We face certain financial obstacles to attracting new

financing due to our historical and current record of net losses and working capital deficits.  Therefore,

despite our efforts we can provide no assurance that we will be able to obtain the financing required to

meet our 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 and contractual commitments with all of its officers and

directors.

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

in connection with the completion of the manufacturing facility under construction in Euclid, Ohio.

MesoCoat has obtained verbal commitments for future capital expenditures from the Company and

Powdermet to fund any shortfalls (including plant and equipment) in the construction of the Euclid

facility should it not be able to raise funds in the normal course of business.  Further, MesoCoat has

secured a $1,000,000 loan from the Ohio Third Frontier program that can be drawn down at any time in

connection with the new manufacturing facility should such action be necessary to complete the building.

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

Off Balance Sheet Arrangements

As of May 31, 2012, 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 Companys auditors have expressed an opinion as to its ability to continue as a going concern as a

result of net losses of $6,322,365 and a working capital deficit of $2,438,854 as of May 31, 2012. 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.

Managements plan to address the Companys ability to continue as a going concern includes: (i)

obtaining funding from the private placement of debt or equity; (ii) net income from operations; (iii)

realizing a gain from its investment in Powdermet; (iv) converting debt to equity; and (v) 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.

42




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

The statements contained in the section titled  Results of Operations and Description of Business, with the

exception of historical facts, are forward looking statements. We are ineligible to rely on the safe-harbor

provision of the Private Litigation Reform Act of 1995 for forward looking statements made in this

current report. Forward looking statements reflect our current expectations and beliefs regarding our

future results of operations, performance, and achievements. These statements are subject to risks and

uncertainties and are based upon assumptions and beliefs that may or may not materialize.  These

statements include, but are not limited to, statements concerning:

         our anticipated financial performance;

         uncertainties  related  to  the  commercialization  of  proprietary  technologies  held  by  entities  in  which

we have an investment interest;

         our ability to generate revenue from operations or gains on investments;

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

         the volatility of the stock market; and

         general economic conditions.

We wish to caution readers that our operating results are subject to various risks and uncertainties that

could cause our actual results to differ materially from those discussed or anticipated including the factors

set forth in the section entitled Risk Factors included elsewhere in this report. We also wish to advise

readers not to place any undue reliance on the forward looking statements contained in this report, which

reflect our beliefs and expectations only as of the date of this report. We assume no obligation to update

or revise these forward looking statements to reflect new events or circumstances or any changes in our

beliefs or expectations, other that is required by law.

Critical Accounting Policies

The notes to the audited financial statements for the Company for the years ended May 31, 2012 and

2011, 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 enterprises equity instruments or that may be settled by the issuance of such equity

instruments.

43




We account for equity instruments issued in exchange for the receipt of goods or services from other than

employees in accordance with ASC 505. Costs are measured at the estimated fair market value of the

consideration received or the estimated fair value of the equity instruments issued, whichever is more

reliably measurable. The value of equity instruments issued for consideration other than employee

services is determined on the earliest of a performance commitment or completion of performance by the

provider of goods or services.

Recent Accounting Pronouncements

We have examined all recent accounting pronouncements and believe that none of them will have a

material impact on the financial statements of the Company.

ITEM 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, 2012 and 2011 are attached hereto as F-1

through F-54.

44




Abakan Inc.

(A Development Stage Company)

Index to Financial Statements

Report of Independent Registered Public Accounting Firm

F-2

Consolidated Balance Sheets for the years ended May 31, 2012 and 2011

F-3

Consolidated Statements of Operations for the years ended May 31, 2012 and 2011, and cumulative

amounts from development stage activities (June 27, 2006 (Inception) through May 31, 2012)

F-4

Consolidated Statements of Stockholders' Equity (Deficit) for the period from inception on

June 27, 2006 through May 31, 2012

F-5

Consolidated Statements of Cash Flows for the years ended May 31, 2012 and 2011, and cumulative

amounts from development stage activities (June 27, 2006 (Inception) through May 31, 2012)

F-10

Notes to the Consolidated Financial Statements

F-12

F-1




SKODA MINOTTI

CPAs, BUSINESS & FINANCIAL ADVISORS

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of

Abakan, Inc. (a development stage company)

We  have  audited  the  accompanying  consolidated  balance  sheets  of  Abakan,  Inc.  as  of  May  31,  2012  and

2011,  and  the  related  consolidated  statements  of  operations,  stockholders  equity  (deficit)  and  cash  flows

for the years  then  ended  and  for the period  from  June 27, 2006  (date of  inception) through  May 31,  2012.

These  financial  statements  are  the  responsibility  of  the  Companys  management.   Our  responsibility  is  to

express  an  opinion  on  these  consolidated  financial  statements  based  on  our  audits.   We  did  not  audit  the

financial  statements  for  the  period  June  27,  2006  (date  of  inception)  through  May  31,  2010.    Those

statements  were  audited  by  other  auditors  whose  report  has  been  furnished  to  us,  and  our  opinion  on  the

statements  of  operations,  stockholders  equity  (deficit),  and  cash  flows  for  the  period  June  27,  2006  (date

of inception) through May 31, 2012, insofar as it relates to  the amounts for prior periods through May 31,

2010, is based solely on the report of the other auditors.

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  on

the  effectiveness  of  the  Companys  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 opinion.

In  our  opinion,  the  consolidated  financial  statements  referred  to  above  present  fairly,  in  all  material

respects,  the  financial  position  of  Abakan,  Inc.  at  May  31,  2012  and  the  results  of  their  operations  and

their  cash  flows  for  the  periods  described  above  in  conformity  with  accounting  principles  generally

accepted in the United States of America.

The accompanying financial statements have been prepared assuming that the Company will continue as a

going  concern.   As  discussed  in  Note  3  to  the  financial  statements,  the  Company  has  incurred  net  losses

since   inception   in   the   amount   of   $6,322,365   and   a   working   capital   deficiency   of   $2,438,854.

Managements  plans  concerning  these  matters  are  also  described  in  Note  3.   The  accompanying  financial

statements do not include any adjustments that might result from the outcome of this uncertainty.

/s/ Skoda Minotti

Skoda Minotti

Mayfield Village, Ohio

September 11, 2012

Cleveland /  6685 Beta Drive, Mayfield Village, Ohio 44143 / ph 440 449 6800 / fx 440 646 1615

Akron / 3875 Embassy Parkway, Suite 200, Fairlawn, Ohio 44333 / ph 330 668 1100 / fx 440 646 1615

Skoda Minotti / Certified Public Accountants / www.skodaminotti.com

F-2




ABAKAN, INC.

(A DEVELOPMENT STAGE ENTERPRISE)

CONSOLIDATED BALANCE SHEETS

May 31,

May 31,

2012

2011

ASSETS

Current  assets

Cash and cash equivalents

$

859,566     $

-

Accounts receivable

22,854

-

Note receivable - related parties

4,500

4,500

Prepaid expenses (Note 7)

183,134

16,200

Prepaid expenses - related parties

-

1,485

Total current  assets

1,070,054

22,185

Noncurrent  assets

Property, plant  and equipment, net  (Note 4)

3,021,088

4,630

Patents and  licenses, net  (Note 5)

7,776,315

-

Assignment  agreement MesoCoat (Note 6)

250,000

250,000

Investment  deposit  on MesoCoat investment  (Note 8)

-

2,050,000

Investment  - MesoCoat  (Note 8)

-

858,418

Investment  - Powdermet  (Note 8)

2,710,189

1,721,656

Goodwill

364,384

-

Total Assets

$

15,192,030     $

4,906,889

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities

Accounts payable

$

425,868    $

202,017

Accounts payable - related parties (Note 13)

80,773

79,214

Capital leases - current portion

42,999

-

Loans payable,  net of discounts of $456,164 (Note 10)

2,465,165

70,600

Accrued interest - loans payable (Note 10)

183,106

41,532

Accrued liabilities

310,997

139,689

Total current liabilities

3,508,908

533,052

Non-current liabilities

Loans payable, net of discounts of $601,940 (Note 10)

1,146,277

1,400,914

Capital leases - non-current portion

72,176

-

Total liabilities

4,727,361

1,933,966

Commitments and contingencies (Note 15)

Stockholders' equity (Note 11)

Preferred stock, $0.0001 par value, 50,000,000 shares

authorized, none issued and outstanding

-

-

Common stock, par value $0.0001, 2,500,000,000 shares

authorized, 61,465,445 issued and outstanding - May 31, 2012,

59,247,425 issued and outstanding - May 31, 2011

6,147

5,924

Paid-in capital

13,321,527

8,330,530

Subscription receivable

-

(165,465)

Contributed capital

5,050

5,050

Accumulated deficit during the development stage

(6,322,365)

(5,203,116)

7,010,359

2,972,923

Non-controlling interest

3,454,310

-

Total stockholders' equity

10,464,669

2,972,923

Total liabilities and stockholders' equity

$

15,192,030    $

4,906,889

See accompanying notes to the consolidated financial statements.

F-3




ABAKAN, INC.

(A DEVELOPMENT STAGE ENTERPRISE)

CONSOLIDATED STATEMENTS OF OPERATIONS

Cumulative

amounts from

development stage

activities

For the years ended

June 27, 2006

May 31,

(Inception) to

2012

2011

May 31, 2012

Revenues

Commercial

$

77,391     $

-     $

77,391

Contract  and grants

2,098,754

-

2,098,754

Other income

763,283

-

764,879

2,939,428

-

2,941,024

Cost of Revenues

1,049,198

-

1,049,198

Gross profit

1,890,230

-

1,891,826

Expenses

General and administrative

625,301

163,562

895,267

Professional fees

246,743

172,504

569,801

Professional fees - related parties

60,000

60,000

165,000

Consulting

928,449

533,876

1,704,295

Consulting  - related parties

306,580

393,900

1,239,980

Payroll and  benefits expense

741,436

190,608

998,305

Depreciation and amortization

302,858

5,790

332,084

Research and development

737,316

-

737,316

Impairment  of asset

-

-

180,000

Stock expense on note conversion

153,317

195,290

490,977

Stock options expense

1,311,032

964,439

2,588,784

Total expenses

5,413,032

2,679,969

9,901,809

Loss from operations

(3,522,802)

(2,679,969)

(8,009,983)

Other (expense)  income

Interest expense:

Interest - loans

(273,117)

(36,000)

(325,745)

Interest - related parties

(1,118)

(811)

(6,560)

Liquidated damages

-

(250,000)

(250,000)

Amortization of discount  on debt

(475,374)

(137,490)

(612,864)

Total interest  expense

(749,609)

(424,301)

(1,195,169)

Interest income

242

2,125

4,371

Loss on debt  settlement

--

(5,257)

(5,257)

Gain on debt  settlement

56,543

200,709

257,252

Gain on sale of assets

429,717

-

429,717

Unrealized gain on MesoCoat  acquisition

1,764,345

-

1,764,345

Equity in Powdermet  income

988,533

71,656

1,060,189

Equity in MesoCoat loss

(44,408)

(349,947)

(586,020)

Total Other (expense)  income

2,445,363

(505,015)

1,729,428

Net (loss) before non-controlling  interest

(1,077,439)

(3,184,984)

(6,280,555)

Non-controlling  interest  in MesoCoat Loss

(41,810)

-

(41,810)

Net (loss) attributable to  Abakan Inc.

(1,119,249)

(3,184,984)

(6,322,365)

Provision for income taxes

-

-

-

Net (loss)

$

(1,119,249)     $

(3,184,984)     $

(6,322,365)

Net (loss) per share - basic

$

(0.02)     $

(0.06)

Net (loss) per share - diluted

$

(0.02)     $

(0.06)

Weighted average  number of common

shares outstanding  - basic

59,752,413

57,058,470

Weighted average  number of common

shares outstanding  - diluted

59,752,413

57,058,470

See accompanying notes to the consolidated financial statements.

F-4




ABAKAN, INC.

(Formerly  known as Waste to Energy Group, Inc.)

(A DEVELOPMENT STAGE ENTERPRISE)

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFECIT)

Accumulated

Deficit

Non-

During

Total

Contributed

Subscription

controlling

Development

Stockholders

Shares

Amount

Capital

Capital

Receivable

Interest

Stage

Equity

Inception, June 27, 2006

-     $

-     $

-     $

-     $

-     $

-     $

-     $

-

Common Shares issued to director for cash

June 27, 2006

2,500,000

250

(150)

-

-

-

-

100

Common Shares issued to director for cash

June 27, 2006

125,300,000

12,530

(7,518)

-

-

-

-

5,012

Common Shares issued to director for cash

October 31, 2006

62,500,000

6,250

(3,750)

-

-

-

-

2,500

Private placement  closed April 30, 2007

35,265,000

3,527

67,003

-

-

-

-

70,530

Net (loss) for the period

(28,079)

(28,079)

Balance, May 31, 2007

225,565,000     $

22,557     $

55,585     $

-     $

-     $

-     $

(28,079)     $

50,063

Net (loss) for the year

(28,993)

(28,993)

Balance, May 31, 2008 (Restated)

225,565,000     $

22,557     $

55,585     $

-     $

-     $

-     $

(57,072)     $

21,070

Common Shares  cancelled to directors

(17,531)

17,531

-

-

-

September 2, 2008

(175,300,000)

-

Contributed Capital

-

-

-

5,050

-

-

-

5,050

Net (loss) for the year

(354,363)

(354,363)

Balance, May 31, 2009

50,265,000     $

5,026     $

73,116     $

5,050     $

-     $

-     $

(411,434)     $

(328,242)

Private placement, closed December 16,

2009 for $0.50 per share

4,200,000

420

2,099,580

-

-

-

-

2,100,000

Debt Converted into stock December 16,

2009 for $0.60 per share, including costs

of $102,370

400,000

40

342,330

-

-

-

-

342,370

Subscription receivable from above private

placement

-

-

-

-

(1,750)

-

-

(1,750)

Common shares issued services on April

26, 2010

150,000

15

89,985

-

-

-

-

90,000

Common shares issued services on April

30, 2010

100,000

10

99,990

-

-

-

-

100,000

Stock options  expense

-

-

313,313

-

-

-

-

313,313

Net (loss) for the year

(1,606,698)

(1,606,698)

Balance, May 31, 2010

55,115,000     $

5,511     $

3,018,313     $

5,050     $

(1,750)     $

-     $

(2,018,132)     $

1,008,992

See accompanying  notes to the consolidated  financial statements.

F-5




ABAKAN, INC.

(Formerly  known as Waste to Energy Group, Inc.)

(A DEVELOPMENT STAGE ENTERPRISE)

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFECIT) - CONTINUED

Accumulated

Deficit

Non-

During

Total

Contributed

Subscription

controlling

Development

Stockholders

Shares

Amount

Capital

Capital

Receivable

Interest

Stage

Equity

Balance forwarded, May 31, 2010

55,115,000     $

5,511     $

3,018,313     $

5,050     $

(1,750)     $

-    $

(2,018,132)     $

1,008,992

Private placement for  cash, closed

October 21, 2010 for $0.75 per share

566,667

57

424,943

-

-

-

-

425,000

Debt Converted into stock October 21,

2010 for $0.82 per share, including

costs of $37,333

533,333

53

437,280

-

-

-

-

437,333

Private placement for  cash, closed

October 22, 2010 for $0.75 per share

1,660,000

166

1,244,834

-

-

-

-

1,245,000

Common shares issued for services  on

November 16, 2010

60,000

6

60,594

-

-

-

-

60,600

Debt Converted into stock December

10, 2010 for $0.75 per share,

including costs of $23,400

90,000

9

90,891

-

-

-

-

90,900

Common shares issued for services  on

December 10, 2010

150,000

15

152,985

-

-

-

-

153,000

Private placement for  cash, closed

January 27, 2011 for $1.00 per share

160,000

16

159,984

-

-

-

-

160,000

Common shares issued for assignment

agreement on March 15, 2011

150,000

15

149,985

-

-

-

-

150,000

Debt Converted into stock March 25,

2011 for $1.00 per share, including

costs of $4,557

56,960

6

61,511

-

-

-

-

61,517

Common shares issued for services  on

May 2, 2011

50,000

5

49,995

-

-

-

-

50,000

Common shares issued for services  on

May 11, 2011

60,000

6

49,194

-

-

-

-

49,200

Private placement for  cash, closed May

17, 2011 for $1.00 per share

115,000

11

114,989

-

-

-

-

115,000

Common shares issued for services  on

May 20, 2011

15,000     $

1     $

18,599     $

-     $

-     $

-    $

-     $

18,600

May 31, 2011 continued on following

page

See accompanying  notes to the consolidated  financial statements.

F-6




ABAKAN, INC.

(Formerly  known as Waste to Energy Group, Inc.)

(A DEVELOPMENT STAGE ENTERPRISE)

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFECIT) CONTINUED

Accumulated

Deficit

Non-

During

Total

Common Stock

Paid-in

Contributed

Subscription

controlling

Development

Stockholders

Shares

Amount

Capital

Capital

Receivable

Interest

Stage

Equity

May 31, 2011 continued from previous

page

Private placement for  cash, closed May 25,

2011 for $1.00 per share

65,465     $

7     $

65,458    $

-   -  $

-     $

-     $

$

65,465

Subscription receivable from above private

placement

-

-

-

-

(65,465)

-

-

(65,465)

Private placement for  cash, closed May 26,

2011 for $1.00 per share

50,000

5

49,995

-

-

-

-

50,000

Debt Converted into stock May 29, 2011

for $1.00 per share, including  costs of

$15,600

30,000

3

45,597

-

-

-

-

45,600

Private placement for  cash, closed May 29,

2011 for $1.00 per share

100,000

10

99,990

-

-

-

-

100,000

Subscription receivable from above private

placement

-

-

-

-

(100,000)

-

-

(100,000)

Debt Converted into stock May 31, 2011

for $1.00 per share, including  costs of

$114,400

220,000

22

334,378

-

-

-

-

334,400

Subscription receivable write off from

December 16, 2009

-

-

-

1,750

-

-

1,750

Beneficial conversion warrant valuation

for convertible debts

-

-

736,576

-

-

-

-

736,576

Stock options  expense

-

-

964,439

-

-

-

-

964,439

Net (loss) for the year

(3,184,984)

(3,184,984)

Balance, May 31, 2011

59,247,425     $

5,924     $

8,330,530     $

5,050     $

(165,465)     $

-     $

(5,203,116)     $

2,972,923

Private placement for  cash closed June 6,

2011 for $1.00 per share

20,000

2

19,998

-

-

-

-

20,000

Private placement for  cash closed June 10,

2011 for $1.00 per share

20,000

2

19,998

-

-

-

-

20,000

Debt  converted into stock June 10, 2011

for $1.00 per share, including  costs of

$5,500

10,000

1

15,499

-

-

-

-

15,500

May 31, 2012 continued on following

page

See accompanying  notes to the consolidated  financial statements.

F-7




ABAKAN, INC.

(Formerly  known as Waste to Energy Group, Inc.)

(A DEVELOPMENT STAGE ENTERPRISE)

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFECIT) CONTINUED

Accumulated

Deficit

During

Total

Common Stock

Paid-in

Contributed

Subscription

Non-controlling

Development

Stockholders

Shares

Amount

Capital

Capital

Receivable

Interest

Stage

Equity

May 31, 2012 continued from previous

page

Common shares issued for services  on

June29, 2011

50,000     $

5      $

75,995     $

-     $

-     $

-    $

-    $

76,000

Private placement for  cash, closed July 6,

2011 for $1.00 per share

30,000

3

29,997

-

-

-

-

30,000

Common shares issued for services  on

December 2, 2011

20,000

2

23,598

-

-

-

-

23,600

Private placement for  cash, closed February

20, 2012 for $1.00 per share

300,000

30

299,970

-

-

-

-

300,000

Debt  converted into stock February 20, 2012

for $1.00 per share, including  costs of

$12,648

421,595

42

434,201

-

-

-

-

434,243

Common shares issued for services  on

February 20, 2012

20,000

2

20,598

-

-

-

-

20,600

Private placement for  cash, closed March 16,

2012 for $1.00 per share

382,000

38

381,962

-

-

-

-

382,000

Debt  converted into stock March 16, 2012

for $1.00 per share, including  costs of

$76,300

218,000

22

294,278

-

-

-

-

294,300

Common shares issued for services  on March

20, 2012

27,500

3

39,047

-

-

-

-

39,050

Private placement for  cash, closed April 20,

2012 for $1.60 per share

18,438

2

29,498

-

-

-

-

29,500

Debt  converted into stock April 20, 2012 for

$1.60 per share, including costs of $29,219

26,562

3

71,716

-

-

-

-

71,719

Private placement for  cash, closed April 23,

2012 for $1.60 per share

200,000

20

319,980

-

-

-

-

320,000

Private placement for  cash, closed April 24,

2012 for $1.60 per share

74,550

7

119,193

-

-

-

-

119,200

Debt  converted into stock April 24, 2012,

including costs of $5,650

5,000

1

13,649

-

-

-

-

13,650

May 31, 2012 continued on following page

See accompanying  notes to the consolidated  financial statements.

F-8




ABAKAN, INC.

(Formerly  known as Waste to Energy Group, Inc.)

(A DEVELOPMENT STAGE ENTERPRISE)

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFECIT) CONTINUED

Accumulated

Deficit

During

Total

Common Stock

Paid-in

Contributed

Subscription

Non-controlling

Development

Stockholders

Shares

Amount

Capital

Capital

Receivable

Interest

Stage

Equity

May 31, 2012 continued from

previous page

Private placement for  cash,

closed April 25, 2012 for $1.60

per share

15,625    $

2     $

24,998     $

-     $

-      $

-

$

-    $

25,000

Private placement for  cash,

closed May 29, 2012 for $1.60

50,000

5

79,995

-

-

-

-

80,000

Private placement for  cash,

closed May 30, 2012 for $1.60

per share

268,750

27

429,973

-

-

-

-

430,000

Debt  converted into stock May

30, 2012 for $1.60 per share,

including costs of $24,000

40,000

4

87,996

-

-

-

-

88,000

Subscription receivables received

from May 25 and 29, 2011

-

-

-

-

165,456

-

-

165,456

Purchase of controlling interest

from non-controlling interest

on July 13, 2011

-

-

-

-

-

3,412,500

-

3,412,500

Beneficial conversion warrant

valuation  for convertible debts

-

-

846,133

-

-

-

-

846,133

Stock options expense

-

-

1,312,725

-

-

-

-

1,312,725

Net  loss for the year

-

-

-

-

-

41,810

(1,119,249)

(1,077,439)

Balance May 31, 2012

61,465,445     $

6,147   $

13,321,527     $

5,050    $

-      $

3,454,310    $

(6,322,365)    $

$10,464,669

See accompanying  notes to the consolidated  financial statements.

F-9




ABAKAN, INC.

(A DEVELOPMENT STAGE ENTERPRISE)

CONSOLIDATED STATEMENTS OF CASH FLOWS

Cumulative

amounts from

development stage

activities

For the years ended

June 27, 2006

May 31,

(Inception) to

2012

2011

May 31, 2012

CASH FLOWS FROM DEVELOPMENT STAGE ACTIVITIES

Net (loss) before non-controlling interest

$

(1,077,439)    $

(3,184,984)      $

(6,280,551)

Adjustments to reconcile net (loss) to net

cash provided by (used in) development stage activities:

Depreciation and amortization

302,858

5,790

332,084

Amortization of discount on debt

475,374

137,490

612,864

Stock options  expense

1,311,032

964,439

2,588,784

Stock expense from note conversion

153,317

195,290

490,977

Stock issued for services

159,250

331,401

680,651

Equity in investee loss

44,408

278,292

514,365

Equity in investee profit

(988,533)

-

(988,533)

Unrealized gain on MesoCoat acquisition

(1,764,345)

-

(1,764,345)

Gain  on sale of capital asset

(429,717)

-

(429,717)

Changes in operating assets and liabilities:

Accounts receivable

148,603

-

148,603

Notes receivable - related parties

-

4,000

(4,500)

Prepaid expenses

(166,934)

8,951

(197,287)

Prepaid expenses  - related parties

1,485

12,667

14,152

Accounts payable

299,070

129,118

639,558

Accounts payable - related parties

1,562

97,073

163,504

Accrued interest - related parties

-

-

2,664

Accrued interest - loans payable

104,961

35,847

159,404

Accrued liabilities

105,763

72,428

178,191

Waste to Energy Group Inc.

-

-

180,000

Total adjustments

(241,846)

2,272,786

3,321,420

NET CASH PROVIDED BY/ (USED IN) DEVELOPMENT

STAGE ACTIVITIES

(1,319,285)

(912,198)

(2,959,135)

CASH FLOWS FROM INVESTING ACTIVITIES

Purchase of property, plant, equipment and website

(1,073,018)

(4,394)

(1,106,874)

Proceeds  from sale of capital assets

470,000

-

470,000

MesoCoat - minority interest, net of cash assumed in business

combination

1,059,764

(2,050,000)

(2,390,266)

Investment in Mesocoat

(750,070)

--

(750,070)

Powdermet  - minority interest

-

(1,650,000)

(1,650,000)

Assignment agreement - MesoCoat

-

(100,000)

(100,000)

Capitalized patents and licenses

(98,185)

-

(98,185)

Waste to Energy Group Inc.

-

-

(180,000)

NET CASH USED IN INVESTING ACTIVITIES

(391,509)

(3,804,394)

(5,805,395)

CASH FLOWS FROM FINANCING ACTIVITIES

Proceeds  from sale of common stock

1,755,700

1,997,999

5,931,841

Proceeds  from loans payable

1,079,485

2,625,769

3,851,287

Payments  on loans payable

(375,651)

-

(375,651)

Proceeds  from loans payable - related parties

-

79,680

79,680

Payments  on loans payable - related parties

-

(27,420)

21,063

Repayments  of capital leases

(54,639)

-

(54,639)

Stock issuable

165,465

--

165,465

Proceeds  from capital contributed

-

-

5,050

NET CASH PROVIDED BY FINANCING ACTIVITIES

2,570,360

4,676,028

9,624,096

NET INCREASE (DECREASE)  IN CASH AND CASH

EQUIVALENTS

859,566

(40,564)

859,566

CASH AND CASH EQUIVALENTS, BEGINNING OF

PERIOD

-

40,564

-

CASH AND CASH EQUIVALENTS, END OF PERIOD

$

859,566     $

-     $

859,566

See accompanying notes to the consolidated financial statements.

F-10




ABAKAN, INC.

(Formerly  known as Waste to Energy Group, Inc.)

(A DEVELOPMENT STAGE ENTERPRISE)

CONSOLIDATED STATEMENTS OF CASH FLOWS CONTINUED

Supplemental Disclosures:

Cash paid for income taxes

$

-

$

-

$

-

Cash paid for interest

$

-

$

964

$

964

Supplemental Non-cash Disclosures:

Notes and accounts payable converted to stock

Accounts payable - related parties

$

(188,460)

$

(141,960)     $

(394,431)

Loans payable

(567,895)

(625,169)

(1,218,064)

Accrued interest

(7,737)

(4,331)

(12,068)

Notes payable - related parties

--

-

(99,515)

Accrued interest  - related parties

--

-

(9,724)

Common stock

764,092

774,460

1,738,552

Subscription payable

-

(3,000)

(3,000)

Subscription receivable

-

-

(1,750)

$

-

$

-

$

-

Stock issued for assignment agreement - MesoCoat

Assignment agreement - MesoCoat

$

-

$

(150,000)

$

(150,000)

Common stock

-

150,000

150,000

$

-

$

-

$

-

Capital lease equipment acquired

Property, plant and equipment

$

126,907

$

-

$

126,907

Capital lease payable

(126,907)

-

(126,907)

$

-

$

-

$

-

Non-cash write off of balances

Accounts payable - related parties

$

-

$

52,030

$

52,030

Loans payable

-

(156)

(156)

Accrued interest

-

(553)

(553)

Notes payable - related parties

-

(52,260)

(52,260)

Accrued interest  - related parties

-

(811)

(811)

Subscription receivable

-

1,750

1,750

$

-

$

-

$

-

Accounts payable converted to Notes Payable

Accounts payable

$

155,161

$

-

$

155,161

Notes payable

$

(155,161)

$

-

$

(156,161)

$

-

$

-

$

-

Beneficial conversion valuation

Additional paid-in capital

$

815,669

$

736,576

$

1,241,449

Discount on convertible debts

(815,669)

(736,576)

(1,241,449)

$

-

$

-

$

-

Stock issued for consideration for subscription receivable

Subscription receivable

$

-

$

165,465

$

165,465

Common stock

-

(17)

(17)

Paid in capital

-

(164,448)

(164,448)

$

-

$

-

$

-

Controlling interest purchase - MesoCoat

Accounts receivable

$

171,457

$

-

$

171,457

Property and equipment, net

1,899,598

-

1,899,598

Patents and licenses, net

7,938,206

-

7,938,206

Total assets

$

10,009,261      $

-

$

10,009,261

Accounts payable

(268,398)

-

(268,398)

Capital leases

(42,907)

-

(42,907)

Loans Payable and accrued interest

(2,233,474)

-

(2,233,474)

Other accrued liabilities

(65,545)

-

(65,545)

Total liabilities

$

(2,610,324)      $

-

$

(2,610,324)

Net assets

7,398,937

-

7,398,937

Non-controlling interest equity

(3,412,500)

-

(3,412,500)

Goodwill

364,384

-

364,384

Investment in MesoCoat

(1,849,665)

-

(1,849,665)

MesoCoat net assets received

$

2,501,156

$

-

$

2,501,156

See accompanying notes to the consolidated financial statements.

F-11




Abakan Inc.

(Formerly Waste to Energy Group Inc.)

(A Development Stage Enterprise)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended May 31, 2012 and 2011

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. The Company is in the development stage as

defined  under FASB ASC 915-10, "Development Stage Entities."

On December 10, 2009 the Company purchased a thirty-four percent (34%) interest in MesoCoat, Inc.

("MesoCoat"), and on July 13, 2011 purchased an additional seventeen percent (17%), for an aggregate

total of fifty-one percent (51%) 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. Future success of operations is subject to several

technical hurdles and risk factors, including satisfactory product development, regulatory approval and

market acceptance of MesoCoats 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, MesoCoats revenue consists almost entirely of

government grants and cooperative reimbursement agreements.

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.

Powdermet was formed in 1996 as an Ohio 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 owns 49% of MesoCoat.

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.

F-12




Abakan Inc.

(Formerly Waste to Energy Group Inc.)

(A Development Stage Enterprise)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended May 31, 2012 and 2011

NOTE 1 BUSINESS - continued

The Companys plan of operation is to acquire interests in early stage companies. Since those firms are

typically pre-commercialization, it is anticipated that each firm the Company decides to acquire will need

successive rounds of financing to fund research & development, lengthy qualification periods, sales and

marketing efforts. However, this may not necessarily be the case if the Company acquires a new

technology company with existing sales or we agree to a licensing strategy.

The Companys acquisition strategy is to make sure it negotiates upfront future ownership based on a

series of value creating steps whereby we have the right to continue or discontinue investing based on an

investee meeting those milestone steps. Our approach allows management to forecast potential financing

needs of any given firm in stages to plan for present and future fundraising efforts.  Further,  our approach

also enables the Company to hedge its investing if it feels a company is not performing up to the goals

that were anticipated during the negotiating process. By taking this approach, each investee company is

expected to reach certain operating milestones prior to receiving the next round of fundraising or us

exercising our next round of acquisition.

NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Accounting Basis

These financial statements are prepared on the accrual basis of accounting in conformity with

accounting principles generally accepted in the United States of America (GAAP).

We follow accounting standards set by the Financial Accounting Standards Board, commonly referred

to as the FASB.  The FASB sets GAAP that we follow to ensure we consistently report our financial

condition, results of operations, and cash flows.  References to GAAP issued by the FASB in these

footnotes are to the FASB Accounting Standards Codification, sometimes referred to as the Codification

or ASC.

Cash and Cash Equivalents

For the purposes of the statements of cash flows, cash equivalents include all highly liquid investments

with a maturity of three months or less.

Concentration in Sales to Few Customers

In the year ended May 31, 2012, our government contracts accounted for 71% of our revenues.

Cash in Excess of FDIC Insured Limits

We maintain our cash in bank deposit accounts which, at times, may exceed federally insured limits.

Accounts are guaranteed by the Federal Deposit Insurance Corporation (FDIC) up to $250,000. At May

31, 2012 and 2011, we had approximately $207,239 and none, respectively, in excess of FDIC insured

limits. We have not experienced any losses in such accounts.

F-13




Abakan Inc.

(Formerly Waste to Energy Group Inc.)

(A Development Stage Enterprise)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended May 31, 2012 and 2011

NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES continued

Consolidation Policy

The accompanying May 31, 2012 financial statements include the Companys accounts and the accounts of

its subsidiaries. All significant intercompany transactions and balances have been eliminated in

consolidation. The Companys ownership of its subsidiaries as of May 31, 2012 is as follows:

Name of Subsidiary

Percentage of Ownership

AMP Distributors

100%

MesoCoat, Inc.

51%

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 Companys

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, 2012.  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.

F-14




Abakan Inc.

(Formerly Waste to Energy Group Inc.)

(A Development Stage Enterprise)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended May 31, 2012 and 2011

NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued

Fair Value of Financial Instruments - continued

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.

Non-Controlling Interest

Non-controlling interest represents the minority members proportionate share of the equity of MesoCoat,

Inc.  The Companys 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 companys 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 companys accounts are not

reflected within the Companys Balance Sheets and Statements of Operations; however, the Companys

share of the earnings or losses of the investee company is reflected in the caption Equity in (Investee)

income (loss) in the Statements of Operations. The Companys carrying value in an equity method

investee company is reflected in the caption Investment (Investee) in the Companys 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.

F-15




Abakan Inc.

(Formerly Waste to Energy Group Inc.)

(A Development Stage Enterprise)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended May 31, 2012 and 2011

NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued

Earnings (Loss) Per Common Share

The Company computes net loss per share in accordance with FASB  ASC 260-10, "Earnings per Share".

FASB ASC 260 requires presentation of both basic and diluted earnings per share (EPS) on the face of

the statement of operations. Basic  EPS  is  computed   by  dividing  net  loss  available to common

stockholders  (numerator)  by  the   weighted  average  number  of  shares outstanding (denominator)

during the period.  Diluted EPS gives effect to all potentially dilutive common shares outstanding during

the period. Diluted EPS excludes all potentially dilutive shares if their effect is anti-dilutive.  The only

potentially dilutive common shares outstanding are stock options and warrants from inception (Note 10).

Development Stage Enterprise

At May 31, 2012, the Companys business operations had not fully developed and the Company is highly

dependent upon funding and therefore is considered a development stage enterprise.

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, 2012 management has determined that no allowance for

doubtful accounts is required.

Notes Receivable

Notes receivable are stated at face value, plus any accrued interest earned. The Company analyzes each

note receivable each period for probability of collectability. Notes are considered in default when

payments have not been received within the agreed upon terms, and are written off when management

determines that collection is not probable. As of May 31, 2012 and 2011, management has determined

that no occurrence of default exists.

Property, plant and equipment

Property, plant and equipment are stated at cost less accumulated depreciation and amortization.

Maintenance and repairs are charged to operations as incurred. Depreciation and amortization are based

on the straight-line method over the estimated useful lives of the related assets. When assets are retired or

otherwise disposed of, the cost and accumulated depreciation and amortization are removed from the

accounts, and any resulting gain or loss is reflected in operations in the period realized.

Asset construction in progress

Construction in progress assets, represent assets that are in process of construction and rehabilitation in

order to bring them to operational status. All costs are captured in a separate Construction in Progress

account, and are included in the Property, plant and equipment net amounts, and when the asset is

ready to enter service, the total costs are capitalized and depreciation commences per the schedule below.

F-16




Abakan Inc.

(Formerly Waste to Energy Group Inc.)

(A Development Stage Enterprise)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended May 31, 2012 and 2011

NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued

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.

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 will be reviewed for impairment on an annual

basis starting fiscal year ending May 31, 2013, due to its indefinite life.

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.

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.

F-17




Abakan Inc.

(Formerly Waste to Energy Group Inc.)

(A Development Stage Enterprise)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended May 31, 2012 and 2011

NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued

Revenue Recognition

The Company recognizes revenue when there is persuasive evidence of an arrangement, delivery has

occurred or services have been rendered, the sales price if fixed or determinable, and collectability is

reasonably assured.

Grant Revenue

Revenue from grants is generally recorded when earned as defined under the terms of the agreements. Each

grant document sets the timing of amounts that are allowed to be billed and how to bill those amounts. We generally

look at a two week time period to bill from and work on the incurred costs for the same time period and bill according

to preset amounts that are allowed to be billed for per the grant documents. This is then billed through a government

billing system, reviewed by the government department, and then payment is sent to us.

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 $737,316 and none for the years ended May 31, 2012 and 2011,

respectively.

Advertising Expenses

Advertising costs are expensed as incurred. Advertising expenses are included in general and

administrative expense in the accompanying statement of operations. Total advertising expenses were

$14,376 and $950 for the years ended May 31, 2012 and 2011, respectively.

Shipping and Handling Costs

The Companys shipping and handling costs are included in cost of sales for all periods presented.

Stock-Based Compensation

The Company adopted FASB ASC 718-10 and valued our employee stock based awards based on the

grant-date fair value estimated in accordance with the provisions of FASB ASC 718-10.  The Company

accounts for equity instruments issued in exchange for the receipt of goods or services from other than

employees in accordance with FASB ASC 718-10 and the conclusions reached in FASB ASC 505-10.

Costs are measured at the estimated fair market value of the consideration received or the estimated fair

value of the equity instruments issued, whichever is more reliably measurable.  The value of equity

instruments issued for consideration other than employee services is determined on the earliest of a

performance commitment or completion of performance by the provider of goods or services as defined

by FASB ASC 505-10.

F-18




Abakan Inc.

(Formerly Waste to Energy Group Inc.)

(A Development Stage Enterprise)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended May 31, 2012 and 2011

NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued

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.

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,

2012 and 2011, the Company has not recognized any impairment associated with long lived  assets.

F-19




Abakan Inc.

(Formerly Waste to Energy Group Inc.)

(A Development Stage Enterprise)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended May 31, 2012 and 2011

NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued

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 Companys 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 Companys 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 Companys

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, 2012 and 2011, the Companys management believes that there are no outstanding legal

proceedings which would have a material adverse effect on the financial position of the Company.

Use of Estimates in the Preparation of Financial Statements

The preparation of financial statements in conformity with GAAP requires management to make

estimates and assumptions that affect the reported amounts of assets, the disclosure of contingent assets

and liabilities at the date of the financial statements and the reported amounts of revenues and expenses

during the reporting periods. The more significant areas requiring the use of estimates include asset

impairment, stock-based compensation, beneficial conversion features on debt instruments,  and future

income tax amounts. Management bases its estimates on historical experience and on other assumptions

considered to be reasonable under the circumstances.  Actual results may differ from the estimates.

Subsequent Events

In accordance with ASC 855-10 Subsequent Events, the Company has evaluated subsequent events and

transactions for potential recognition or disclosure in the financial statements through the date the

financial statements were issued (Note 19).

F-20




Abakan Inc.

(Formerly Waste to Energy Group Inc.)

(A Development Stage Enterprise)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended May 31, 2012 and 2011

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, 2012, of $6,322,365, and a working capital deficit of $2,438,854.  These conditions raise

substantial doubt about the Companys ability to continue as a going concern. The Companys

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. Managements 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, 2012

May 31, 2011

Machinery and equipment

$

427,641

$

-

Construction in progress

2,617,196

-

Computer equipment and office furniture

35,369

12,856

Leasehold improvements

53,818

-

3,134,024

12,856

Less accumulated depreciation and amortization

(112,936)

(8,226)

$

3,021,088

$

4,630

Depreciation and amortization expense was $42,782 and $2,290 for the years ended May 31, 2012 and

2011, respectively. On July 13, 2011 we completed our second purchase of ownership in MesoCoat, Inc,

as more fully discussed in Note 8. Because of consolidation of MesoCoats accounting with ours we

acquired  $1,961,526 of property and equipment, and accumulated depreciation of $61,928.

NOTE  5    PATENTS  AND L ICENSES

Patents and licenses consist of the following:

May 31, 2012

May 31, 2011

Patents

$

72,991    $

-

Website

21,000

21,000

Intellectual Property Research and Development

6,120,200

-

Licenses

1,843,200

-

8,057,391

21,000

Less accumulated amortization

(281,076)

(21,000)

$

7,776,315    $

-

F-21




Abakan Inc.

(Formerly Waste to Energy Group Inc.)

(A Development Stage Enterprise)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended May 31, 2012 and 2011

NOTE  5    PATENTS  AND L ICENSES  continued

Amortization expense was $260,076  and $3,500 for the years ended May 31, 2012 and 2011,

respectively. In the year ended May 31, 2012, we have capitalized an additional $98,185 on patents and

licenses, and have begun amortizing those according to our policy. On July 13, 2011 we completed our

second purchase of ownership in MesoCoat, Inc., as more fully discussed in Note 8. Due to the consolidation

of MesoCoats accounts with our own we gained all of the above assets.

Future amortization patents and licenses are presented in the table below:

For the years ended May 31,

2013

288,398

2014

288,398

2015

288,398

2016

288,398

2017 and beyond

502,523

$   1,656,115

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. A total of $15,000 in royalty payments have been made through May 31, 2012.

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 MesoCoats products intended for applications specific to

the oil and gas pipeline industry in consideration of $250,000 (Note 11).  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.  As of May 31, 2012, the Company will amortize the Agreement over the remaining term of

88 months.

F-22




Abakan Inc.

(Formerly Waste to Energy Group Inc.)

(A Development Stage Enterprise)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended May 31, 2012 and 2011

NOTE 7 PREPAID EXPENSES

Prepaid expenses consisted of the following at May 31, 2012:

Name

Description

Amount

Steven Ferris

Prepayment retainer for services

$

7,500

Better Investing

Prepayment retainer for services

4,125

Urish Popeck & Co

Prepayment retainer for valuation

8,000

Optiminera SA

Prepayment retainer for services

76,500

The Money Channel

Prepayment retainer for services

8,775

Crystal Research Associates

Prepayment retainer for services

41,667

Hall, Lamb, & Hall

Prepayment retainer for legal fees

29,572

Deposits

Prepayment retainer for services

6,995

Total

$

183,134

Prepaid expenses consisted of the following at May 31, 2011:

Name

Description

Amount

Steven Ferris

Prepayment retainer for services

$

16,200

NOTE 8 INVESTMENT IN NON-CONTROLLING INTEREST

MesoCoat, Inc.

MesoCoat, Inc. (MesoCoat) is an Ohio based nanotechnology materials science business in which the

Company previously held a fully diluted  thirty four percent (34%) equity interest, 79,334 shares of

common stock, with the option to acquire up to a seventy five percent (75%) interest.

On December 8, 2010, the Company amended the Investment Agreement with MesoCoat to extend the

time frame in which we hold the exclusive option to acquire a fully diluted 51% interest in MesoCoat

until the later of January 31, 2011 or five business days subsequent to the completion of MesoCoats May

31, 2010 audit. As of May 31, 2011, we made the above discussed deposits on the next stage of our

investment, and we completed our next stage of investment on July 13, 2011, and have acquired an

additional 86,156 shares of common stock from MesoCoat in exchange for $2,800,000. Accordingly, in

subsequent periods since our ownership has increased to a fully diluted 51% and we can affect control, we

have consolidated the financials of MesoCoat into ours.

As of May 31, 2012, we advanced to MesoCoat, $787,550, which represent deposits on our next stage of

investment in their company. These amounts are offset by the corresponding equity on MesoCoats books

and are eliminated through the consolidation as intercompany accounts.

F-23




Abakan Inc.

(Formerly Waste to Energy Group Inc.)

(A Development Stage Enterprise)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended May 31, 2012 and 2011

NOTE 8 INVESTMENT IN NON-CONTROLLING INTEREST continued

We have analyzed our investment for the period of June 1 through July 12, 2011 in accordance of

Investments Equity Method and Joint Ventures (ASC 323), and concluded that our 34% minority

interest investment did give us significant influence over MesoCoats business actions, board of directors,

or its management, and therefore we did 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.

December 10, 2009, initial investment

$

1,400,030

Equity in loss for year ended May 31, 2010

(191,665)

Investment balance, May 31, 2010

$

1,208,365

Equity in loss for year ended May 31, 2011

(349,947)

Investment balance, May 31, 2011

$

858,418

Equity in loss for period ended July 12, 2011

(44,408)

Investment balance, July 12, 2011

$

814,010

Below is a table with summary financial results of operations and financial position of MesoCoat:

MesoCoat Inc.

UNAUDITED

For the period June 1

For the year ended

July 12, 2011

May 31, 2011

Equity Percentage

34%

34%

Condensed income statement information:

Total revenues

$

245,389     $

2,334,940

Total cost of revenues

229,641

993,393

Gross margin

15,748

1,341,547

Total expenses

146,356

2,370,804

Net loss

$

(130,611)    $

(1,029,257)

Companys equity in net loss

$

(44,408)    $

(349,947)

For the year ended

For the year ended

July 12, 2011

May 31, 2011

Condensed balance sheet information:

Total current assets

$

1,199,061     $

980,635

Total non-current assets

4,073,596

4,019,646

Total assets

$

5,272,657

5,000,281

Total current liabilities

$

691,771     $

1,005,334

Total non-current liabilities

2,100,547

2,104,092

Total equity

2,480,339

1,890,855

Total liabilities and equity

$

5,272,657     $

5,000,281

F-24




Abakan Inc.

(Formerly Waste to Energy Group Inc.)

(A Development Stage Enterprise)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended May 31, 2012 and 2011

NOTE 8 INVESTMENT IN NON-CONTROLLING INTEREST continued

Please see below for a discussion as to  how our ownership in Powdermet affects our investment in

MesoCoat.

Powdermet, Inc.

Under the terms of our September 7, 2010 amendment to our stock purchase agreement dated June 28,

2010, the Company entered into a stock purchase agreement with Kennametal Inc. (Kennametal) to

purchase from Kennametal five hundred and ninety six thousand eight hundred and thirteen (596,813)

shares, representing a forty one percent (41%) interest in Powdermet,  Inc. (Powdermet), in exchange

for one million six hundred fifty thousand dollars ($1,650,000).

The terms and conditions of the stock purchase agreement required the Company to pay an initial

payment of five hundred thousand dollars ($500,000) to Kennametal on September 7, 2010, and the

remainder on or before September 30, 2010. The stock purchase agreement contains additional terms

related to monthly liquidated damages in the amount of fifty thousand ($50,000) per month starting

October 1, 2010. The transaction was to  close no later than December 31, 2010.

We made the initial payment of $500,000 on September 7, 2010 and did not make the payment on the

balance as agreed; accordingly we recorded liquidating damages of $50,000 per month beginning October

1, 2010, for a total of $250,000 as of the period ended February 28, 2011.

On January 19, 2011, we amended the Stock Purchase Agreement with Kennametal to complete the

purchase of Powdermet shares from Kennametal no later than February 15, 2011 for $1,150,000. We did

not make our payment on the balance as agreed. On March 21, 2011, we entered into an accord and

satisfaction agreement to fulfill the terms of our agreement and settled our debt in full to Kennametal in

the amount of $1,200,000.

Powdermet was the parent company of MesoCoat, owning 66% of MesoCoat at May 31, 2011. Andy

Sherman serves as the chief executive officer of both Powdermet and MesoCoat in addition to his duties

as a member of the Companys board of directors. Through the Companys purchase of 41% of

Powdermet, we also gain indirect ownership of the additional shares that Powdermet owns.

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 41% minority

interest investment gave us significant influence over Powdermets 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.

March 21, 2011, initial investment

$   1,650,000

Equity in profit for period of March 21

through May 31, 2011

71,656

Investment balance, May 31, 2011

$   1,721,656

Equity in profit for year ended May 31, 2012

988,533

Investment balance, May 31, 2012

$   2,710,189

F-25




Abakan Inc.

(Formerly Waste to Energy Group Inc.)

(A Development Stage Enterprise)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended May 31, 2012 and 2011

NOTE 8 INVESTMENT IN NON-CONTROLLING INTEREST continued

Powdermets ownership in MesoCoat was diluted when the Company exercised its initial option to

purchase 86,156 shares of common stock from MesoCoat. Powdermets ownership in MesoCoat as of

May 31, 2012 is 47.50%.

Below is a table with summary financial results of operations and financial position of Powdermet:

Powdermet Inc.

For the year ended

For the period of March

May 31, 2012

21 through May 31, 2011

Equity Percentage

41%

41%

Condensed income statement information:

Total revenues

$

2,053,959     $

475,597

Total cost of revenues

941,441

164,267

Gross margin

1,112,518

311,330

Total expenses

1,055,386

136,560

Other income/ (expense)

3,515,113

-

Provision for income taxes

1,161,190

-

Net profit

$

2,411,055     $

174,770

Companys equity in net profit

$

988,533     $

71,656

Condensed balance sheet information:

May 31, 2012

May 31, 2011

Total current assets

$

578,725     $

438,869

Total non-current assets

4,234,600

857,866

Total assets

$

4,813,325     $

1,296,735

Total current liabilities

$

395,614     $

648,351

Total non-current liabilities

2,105,370

745,599

Total equity

2,312,341

(97,215)

Total liabilities and equity

$

4,813,325     $

1,296,735

NOTE 9 - MATERIAL BUSINESS COMBINATION

On December 10, 2009, the Company acquired a fully diluted  34% of the outstanding common shares of

MesoCoat, Inc. (MesoCoat). On July 13, 2011, the Company acquired 17% of the outstanding common

shares of MesoCoat for an aggregate total of 51% of the outstanding common shares. The goodwill of

$364,384 arising from the acquisition of a non-controlling interest consists largely of the excess fair value

paid due to the added values associated with progress associated with ongoing research and development

completed, values credited to the product and intellectual property portfolio owned by MesoCoat and

scientific recognition over and above that recorded in relation to the credibility attached to government

and university grants. The Company believes that the MesoCoat acquisition is in line with its business

plan and the amount paid will be supported on completion of independent valuations. None of the

goodwill recognized is expected to be deductible for income tax purposes.

F-26




Abakan Inc.

(Formerly Waste to Energy Group Inc.)

(A Development Stage Enterprise)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended May 31, 2012 and 2011

NOTE 9 - MATERIAL BUSINESS COMBINATION - continued

The following table summarizes the consideration paid for MesoCoat and the amounts of the estimated

fair values of the identifiable assets acquired and liabilities assumed recognized at the acquisition date, as

well as the fair value at the acquisition date of the noncontrolling interest in MesoCoat at July 13, 2011:

Consideration:

Cash paid for 17% equity

$

2,800,070

Fair value of Companys 34% equity interest in MesoCoat held before

business combination

2,578,355

$

5,378,425

Recognized amounts of identifiable assets acquired and liabilities assumed:

Financial assets

$

1,199,061

Property, plant and equipment

1,899,598

Intellectual property research and development

6,120,200

Identifiable intangible assets

1,818,006

Financial liabilities

(2,610,324)

Total identifiable net assets

8,426,541

Non-controlling interest in MesoCoat

(3,412,500)

Goodwill

364,384

$

5,378,425

The fair value of the financial assets acquired includes cash and cash equivalents and accounts receivables

with an aggregate fair value of $1,199,061.

We recently completed an independent valuation of the assets of MesoCoat in order to have actual

numbers to allocate the acquisition price to. We have updated the figures contained here in this Note from

past filings which were estimates to the final actual numbers from the valuation report. Based on the

valuation report we redistributed from previous classifications to final classifications.

The fair value of the non-controlling interest in MesoCoat, a private company, was estimated by applying

the negotiated share price per share and applying that to the outstanding shares of MesoCoat. This fair

value measurement is based on significant inputs that are not observable in the market and, therefore,

represents a Level 3 measurement as defined in FASB ASC 820. Key assumptions include (a) negotiated

share price, (b) financial multiples of companies deemed to be similar to MesoCoat, and (d) adjustments

because of the lack of control or lack of marketability that market participants would consider when

estimating the fair value of the non-controlling interest in MesoCoat.

The Company recognized a gain of $1,764,345 as a result of remeasuring to fair value its 34% equity

interest in MesoCoat held before the business combination. The gain is included in other income in the

Companys statement of operations for the year ended May 31, 2012.

The following (unaudited) pro forma consolidated results of operations have been prepared as if the

acquisition of MesoCoat had occurred at June 1, 2010:

F-27




Abakan Inc.

(Formerly Waste to Energy Group Inc.)

(A Development Stage Enterprise)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended May 31, 2012 and 2011

NOTE 9 - MATERIAL BUSINESS COMBINATION continued

UNAUDITED PROFORMA CONSOLIDATED CONDENSED

STATEMENTS OF OPERATIONS

For the years ended

June 1 - May 31,

2012

2011

Revenues

Commercial

$

99,572     $

82,852

Contract and grants

2,304,275

1,765,924

Other income

780,931

486,164

Total revenues

3,184,778

2,334,940

Cost of Revenues

1,178,280

2,029,109

Gross profit

2,006,498

305,831

Expenses

General and administrative

661,267

582,822

Professional fees

309,682

172,504

Professional fees - related parties

60,000

45,000

Consulting

954,222

921,552

Consulting - related parties

306,580

393,900

Payroll and benefits expense

789,524

403,298

Depreciation and amortization

326,171

31,058

Research and development

838,264

-

Stock expense on note conversion

153,317

60,733

Stock options expense

1,311,032

964,439

Total expenses

5,710,059

3,575,306

Loss from operations

(3,703,561)

(3,269,475)

Other (expense) income

Interest expense:

Interest  - loans

(275,407)

(58,644)

Interest   related parties

(1,118)

(811)

Amortization of discount on debt

(765,784)

(40,044)

Liquidated damages

-

(250,000)

Total interest expense

(1,042,309)

(349,499)

Interest income

303

2,125

Loss on debt settlement

--

(5,257)

Gain on debt settlement

56,543

200,709

Gain on sale of assets

429,717

-

Unrealized gain on MesoCoat acquisition

1,764,345

-

Equity in Powdermet income

988,533

71,656

Non-controlling interest in MesoCoat loss

--

-

Loss before provision for income taxes

(1,506,429)

(3,349,741)

Provision for income taxes

-

-

Net profit/ (loss) before minority interest

$

(1,506,429)     $

(3,349,741)

Non-controlling minority interest

29,715

-

Net Profit/ (loss)

$

(1,476,714)     $

(3,349,741)

Net profit/ (loss) per share - basic

$

(0.02)     $

(0.07)

Net profit/ (loss) per share - diluted

$

(0.02)     $

(0.07)

F-28




Abakan Inc.

(Formerly Waste to Energy Group Inc.)

(A Development Stage Enterprise)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended May 31, 2012 and 2011

NOTE 9 - MATERIAL BUSINESS COMBINATION - continued

The pro forma information is presented for informational purposes only and is not necessarily indicative

of the results of operations that actually would  have been achieved had the acquisition been consummated

as of that time, nor is it intended to be a projection of future results.

NOTE 10 LOANS PAYABLE

As of May 31, 2012 and 2011, the loans payable balance comprised of:

Description

May 31, 2012

May 31, 2011

Convertible demand note to an unrelated entity bearing  5% interest per annum which  matures

$

400,231      $

337,256

on April 13, 2013. The note is shown net of a discount of $99,769 and $162,744, respectively,

attributable to the beneficial conversion feature, and an effective interest rate of 30.19%.

Convertible demand note to an unrelated entity bearing  5% interest per annum which  matures

1,214,917

1,063,658

on March 17, 2013. The note is shown net  of a discount  of $285,083 and $436,342,

respectively, attributable to the beneficial conversion feature, and an effective interest rate of

31.19%.

Convertible demand note to an unrelated entity bearing  5% interest per annum which  matures

38,531

-

on June 7, 2013. The note is shown net of a discount of $161,469 attributable to the beneficial

conversion feature, and an effective interest rate of 175.84%.

Convertible demand note to an unrelated entity bearing  5% interest per annum which  matures

70,671

-

on July 14, 2013. The note is shown net of a discount of $429,329 attributable to the

beneficial  conversion feature, and an  effective interest rate of 142.77%.

Uncollateralized demand note to an unrelated  entity bearing 8% interest per annum

70,000

70,000

Uncollateralized demand note to an unrelated  entity bearing 8% interest per annum

3,850

600

Uncollateralized demand note to an unrelated  entity bearing 8% interest per annum

303

-

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

-

Convertible demand note to an unrelated entity bearing  7.5% imputed interest per annum

56,043

-

which matures on July 10, 2018.

Capital leases payable to various  vendors  expiring in various  years through September 2016;

115,175

-

collateralized by certain equipment  with a cost of $205,157.

Uncollateralized demand note to an unrelated  entity for royalties show net of discount  of

1,717,546

-

$82,454

$

3,726,617      $

1,471,514

Less  current liabilities

2,508,164

70,600

Total long term liabilities

$

1,218,453      $

1,400,914

We also owed $183,106 and $41,532 in accrued interest for the above notes as of May 31, 2012 and

2011, respectively.

As of May 31, 2012 and 2011, we had no restrictive covenants attached to any of the above referenced

notes.

F-29




Abakan Inc.

(Formerly Waste to Energy Group Inc.)

(A Development Stage Enterprise)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended May 31, 2012 and 2011

NOTE 10 LOANS PAYABLE - continued

Future maturity of our notes payable is presented in the table below:

For the years ended May 31,

2013

$

2,508,164

2014

928,928

2015

228,969

2016

29,563

2017 and beyond

30,993

$   3,726,617

Convertible Debentures - 2011

On March 17 and April 13, 2011 we signed two convertible debentures for a total of $2,000,000, due

March 17 and April 13, 2013, respectively. As of May 31, 2011, we received all of the proceeds from

these debentures. The notes bear an interest rate of 5% per annum, if any amounts are not paid when due

the interest rate will adjust and will be 10% per annum until paid.

The notes have a provision for conversion of the outstanding amounts owed  into conversion units for

$1.00 per unit; units consists of one share of our common stock and one-half share common stock

warrant to purchase shares of stock for $1.50 per share, with an expiration date of two years from the

conversion date. We have analyzed these detachable warrants in accordance with FASB  ASC 470-20-

25-4, Debt with conversion options, and have determined that they have a beneficial conversion feature.

Accordingly we have valued these using the Black-Scholes method and have arrived at an aggregate

total $736,576, of relative fair value and was recorded as additional paid-in capital and has been

recorded as a discount on debt against the corresponding convertible note payable.  In our valuation of

the warrant value we used the following terms:

March 17 and April 13, 2011

Expected volatility (based on historical

178.10%

volatility)

Expected dividends

0.00

Expected term in years

2.0

Risk-free rate

0.95%

In accordance with FASB ASC 470-20-55-32, we are amortizing this amount using the effective interest

method over the life of the notes payable of 24 months. For the years ended May 31, 2012 and 2011, we

have recorded $214,234  and $137,490, respectively, in amortization of discount on debt and are reflected

as a component of interest expense in our statement of operations. The remaining aggregate total of

$384,852 and $599,086 for the years ended May 31, 2012 and 2011, respectively,  will be amortized over

the remaining life of the notes.

F-30




Abakan Inc.

(Formerly Waste to Energy Group Inc.)

(A Development Stage Enterprise)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended May 31, 2012 and 2011

NOTE 10 LOANS PAYABLE continued

Convertible Debentures - 2012

On June 7, July 14, and August 29, 2011 we signed three convertible debentures for a total of $846,665,

due June 7, July 14 and August 29, 2013, respectively. As of May 31, 2012, we received all of the

proceeds from these debentures. The notes bear an interest rate of 5% per annum, if any amounts are not

paid when due the interest rate will adjust and will be 10% per annum until paid.

On February 20, 2012, we converted $146,665 of the above debentures into shares of our common stock

as part of the private placements completed in the year ended May 31, 2012 (Note 11). As part of this

conversion the note holder also converted $3,748 of accrued interest, and expensed the remaining

amount of $110,255 from the related discount on debt.

The notes have a provision for conversion of the outstanding amounts owed  into conversion units for

$1.00 per unit; units consists of one share of our common stock and one-half share common stock

warrant to purchase shares of stock for $1.50 per share, with an expiration date of two years from the

conversion date. We have analyzed these detachable warrants in accordance with FASB  ASC 470-20-

25-4, Debt with conversion options, and have determined that they have a beneficial conversion feature.

Accordingly we have valued these using the Black-Scholes method and have arrived at an aggregate

total $815,670, of relative fair value and was recorded as additional paid-in capital and has been

recorded as a discount on debt against the corresponding convertible note payable.  In our valuation of

the warrant value we used the following terms:

June 7, 2011

July 14 2011

August 29, 2011

Expected volatility (based on historical

170.29%

170.29%

170.29%

volatility)

Expected dividends

0.00

0.00

0.00

Expected term in years

2.0

2.0

2.0

Risk-free rate

0.39%

0.38%

0.20%

In accordance with FASB ASC 835-30-35-2, we are amortizing discounts of debt using the effective

interest method over the life of the notes payable of 24 months. For the year ended May 31, 2012, we

have recorded $224,872 in amortization of discount on debt and are reflected as a component of interest

expense in our statement of operations. The remaining aggregate total of $590,798 will be amortized over

the remaining life of the notes.

NOTE 11 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.

F-31




Abakan Inc.

(Formerly Waste to Energy Group Inc.)

(A Development Stage Enterprise)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended May 31, 2012 and 2011

NOTE 11 STOCKHOLDERS' EQUITY - continued

Common Stock Issuances

Private placements

On October 21, 2010, we completed a private placement for 1,100,000 shares of common stock for

$825,000. This was paid for by $425,000 in cash and a conversion of debt owed of $400,000, on the debt

conversion we also incurred a stock expense on note conversion of $37,333, and this is reflected in our

statement of operations.

On October 22, 2010, we completed a private placement for 1,660,000 shares of common stock for cash

of $1,245,000.

On November 16, 2010, we issued 60,000 shares of our common stock for services performed valued at

$60,600.

On December 10, 2010, we issued 150,000 shares of our common stock for a bonus granted to a

consultant for services performed valued at $153,000, which is reflected in consulting fees in our

statement of operations.

On December 10, 2010, we completed a private placement for 90,000 shares of common stock for

$90,900. This was paid for by cash of $3,000, previously recorded as a subscription payable,  and a

conversion of debt owed of $64,500, on the debt conversion we also incurred a stock expense on note

conversion of $23,400, and this is reflected in our statement of operations.

On January 27, 2011, we closed a private placement for $160,000, or 160,000 units consisting of one

share of our common stock and one-half share 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 $160,000.

On March 15, 2011, we issued 150,000 shares of our common stock for an assignment agreement with

MesoCoat valued at $150,000; in addition we also paid $100,000 in cash for a total of $250,000 and is

reflected in Assignment agreement MesoCoat (Note 6) in our balance sheet.

On March 25, 2011, we completed a private placement for 56,960 shares of common stock for $61,517.

This was paid for by conversion of debt owed of $56,690, on the debt conversion we also incurred a stock

expense on note conversion of $4,557, and this is reflected in our operations statement.

On May 2, 2011, we issued 50,000 shares of our common stock for services performed valued at $50,000.

On May 11, 2011, we issued 60,000 shares of our common stock for services performed valued at

$49,200.

On May 17, 2011, we closed a private placement for $115,000, or 115,000 units consisting of one share

of our common stock and one-half share 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 $160,000.

F-32




Abakan Inc.

(Formerly Waste to Energy Group Inc.)

(A Development Stage Enterprise)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended May 31, 2012 and 2011

NOTE 11 STOCKHOLDERS' EQUITY continued

On May 20, 2011, we issued 15,000 shares of our common stock for services performed valued at

$18,600.

On May 25, 2011, we closed a private placement for $65,465, or 65,465 units consisting of one share of

our common stock and one-half share 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 $65,465. In addition, we recorded a

subscription receivable of $65,465 in connection with this placement.

On May 26, 2011, we closed a private placement for $50,000, or 50,000 units consisting of one share of

our common stock and one-half share 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 $50,000.

On May 29, 2011, we closed a private placement for $45,600, or 30,000 units consisting of one share of

our common stock and one-half share 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. This was

paid for by conversion of debt owed of $30,000. On the debt conversion we also incurred a stock expense

on note conversion of $15,600, and this is reflected in our statement of operations.

On May 29, 2011, we closed a private placement for $100,000, or 100,000 units consisting of one share

of our common stock and one-half share 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 $100,000. In addition, we recorded a

subscription receivable of $100,000 in connection with this placement.

On May 31, 2011, we closed three private placements for $334,400, or 220,000 units consisting of one

share of our common stock and one-half share 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.  This

was paid for by conversion of debts owed of $220,000, on the debt conversions we also incurred a stock

expense on note conversion of $114,400, and this is reflected in our statement of operations.

On May 31, 2011, we wrote off an uncollectable subscription receivable of $1,750 for a placement dated

December 16, 2009, and is reflected in loss on debt settlement and is reflected in our statement of

operations.

On June 6, 2011, we closed a private placement for $20,000, or 20,000 units consisting of one share of

our restricted common stock and one-half share 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 $20,000.

On June 10, 2011, we closed a private placement for $20,000, or 20,000 units consisting of one share of

our restricted common stock and one-half share 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 $20,000.

F-33




Abakan Inc.

(Formerly Waste to Energy Group Inc.)

(A Development Stage Enterprise)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended May 31, 2012 and 2011

NOTE 11 STOCKHOLDERS' EQUITY continued

On July 6, 2011, we closed a private placement for $30,000, or 30,000 units consisting of one share of our

restricted common stock and one-half share 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 $30,000.

On February 20, 2012, we closed a private placement for $300,000, or 300,000 units consisting of one

share of our restricted common stock and one common stock warrant to purchase shares of our common

stock, with a purchase price of $1.25 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 $300,000.

On March 16, 2012, we closed a private placement for $382,000, or 382,000 units consisting of one share

of our restricted common stock and one common stock warrant to purchase shares of our common stock,

with a purchase price of $2.00 per share and an expiration date of two years from the closing. In

connection with this placement we had no offering costs for a net of $382,000.

On April 20, 2012, we closed a private placement for $29,500, or 18,438 units consisting of one share of

our restricted common stock and one-half common stock warrant to purchase shares of our common

stock, with a purchase price of $2.00 per share and an expiration date of two years from the closing.  In

connection with this placement we had no offering costs for a net of $29,500.

On April 23, 2012, we closed a private placement for $320,000, or 200,000 units consisting of one share

of our restricted common stock and one-half common stock warrant to purchase shares of our common

stock, with a purchase price of $2.00 per share and an expiration date of two years from the closing.  In

connection with this placement we had no offering costs for a net of $320,000.

On April 24, 2012, we closed a private placement for $119,200, or 74,550 units consisting of one share of

our restricted common stock and one-half common stock warrant to purchase shares of our common

stock, with a purchase price of $2.00 per share and an expiration date of two years from the closing.  In

connection with this placement we had no offering costs for a net of $119,200.

On April 25, 2012, we closed a private placement for $25,000, or 15,625 units consisting of one share of

our restricted common stock and one-half  common stock warrant to purchase shares of our common

stock, with a purchase price of $2.00 per share and an expiration date of two years from the closing.  In

connection with this placement we had no offering costs for a net of $25,000.

On May 29, 2012, we closed a private placement for $80,000, or 50,000 units consisting of one share of

our restricted common stock and one-half common stock warrant to purchase shares of our common

stock, with a purchase price of $2.00 per share and an expiration date of two years from the closing.  In

connection with this placement we had no offering costs for a net of $80,000.

On May 30, 2012, we closed a private placement for $430,000, or 268,750 units consisting of one share

of our restricted common stock and one-half  common stock warrant to purchase shares of our common

stock, with a purchase price of $2.00 per share and an expiration date of two years from the closing.  In

connection with this placement we had no offering costs for a net of $430,000.

F-34




Abakan Inc.

(Formerly Waste to Energy Group Inc.)

(A Development Stage Enterprise)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended May 31, 2012 and 2011

NOTE 11 STOCKHOLDERS' EQUITY continued

Conversion of debt to shares

On June 10, 2011, we closed a private placement for $10,000, or 10,000 units consisting of one share of

our restricted common stock and one-half share 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 incurred stock expense on conversion of $5,500.

On February 20, 2012, we converted several debt obligations for $418,793, or 406,595 units consisting of

one share of our restricted common stock and one common stock warrant to purchase shares of our

common stock, with a purchase price of $1.25 per share and an expiration date of two years from the

closing.  In connection with this placement we incurred stock expense on conversion of $12,198.

On February 20, 2012, we also converted accounts payable for $15,450, or 15,000 shares of our restricted

common stock. In connection with this placement we incurred stock expense on conversion of $450.

On March 16, 2012, we converted several debt obligations for $294,300, or 218,000 units consisting of

one share of our restricted common stock and one common stock warrant to purchase shares of our

common stock, with a purchase price of $2.00 per share and an expiration date of two years from the

closing.  In connection with this placement we incurred stock expense on conversion of $76,300.

On April 20, 2012, we converted several debt obligations for $71,719, or 26,562 units consisting of one

share of our restricted common stock and one-half common stock warrant to purchase shares of our

common stock, with a purchase price of $2.00 per share and an expiration date of two years from the

closing.  In connection with this placement we incurred stock expense on conversion of $29,219.

On April 24, 2012, we converted several debt obligations for $13,650, or 5,000 units consisting of one

share of our restricted common stock and one-half common stock warrant to purchase shares of our

common stock, with a purchase price of $2.00 per share and an expiration date of two years from the

closing.  In connection with this placement we incurred stock expense on conversion of $5,650.

On May 30, 2012, we converted several debt obligations for $88,000, 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 $2.00 per share and an expiration date of two years from the

closing.  In connection with this placement we incurred stock expense on conversion of $24,000.

Share based compensation

On June 29, 2011, we issued 50,000 shares of our common stock for services performed valued at

$76,000.

On December 2, 2011, we issued 20,000 shares of our common stock for services performed valued at

$23,600.

On February 20, 2012, we issued 20,000 shares of our common stock for services performed valued at

$20,600.

F-35




Abakan Inc.

(Formerly Waste to Energy Group Inc.)

(A Development Stage Enterprise)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended May 31, 2012 and 2011

NOTE 11 STOCKHOLDERS' EQUITY - continued

Share based compensation - continued

On March 20, 2012, we issued 27,500 shares of our common stock for services performed valued at

$39,050.

Common Stock Warrants

In connection with the above private placements we valued the common stock warrants granted during

the year ended May 31, 2012 and 2011, using the Black-Scholes model with the following assumptions:

January 27, 2011

May 31, 2011

Expected volatility (based

183.18%

178.10%

on historical volatility)

Expected dividends

0.00

0.00

Expected term in years

2.00

2.00

Risk-free rate

0.95%

0.95%

June 6, 2011

June 10, 2011

July 6, 2011

February 20, 2012

Expected volatility

(based on historical

170.29%

170.29%

170.29%

162.25%

volatility)

Expected dividends

0.00

0.00

0.00

0.00

Expected term in years

2.00

2.00

2.00

2.00

Risk-free rate

0.39%

0.41%

0.43%

0.39%

March 16, 2012

April 20, 2012

April 23, 2012

April 25, 2012

Expected volatility

(based on historical

156.34%

156.34%

156.34%

156.34%

volatility)

Expected dividends

0.00

0.00

0.00

0.00

Expected term in

2.00

2.00

2.00

2.00

years

Risk-free rate

0.39%

0.39%

0.39%

0.39%

May 29, 2012

May 30, 2012

Expected volatility

(based on historical

156.34%

156.34%

volatility)

Expected dividends

0.00

0.00

Expected term in

2.00

2.00

years

Risk-free rate

0.39%

0.39%

F-36




Abakan Inc.

(Formerly Waste to Energy Group Inc.)

(A Development Stage Enterprise)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended May 31, 2012 and 2011

NOTE 11 STOCKHOLDERS' EQUITY - continued

Common Stock Warrants - continued

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 Companys warrants. The dividend yield assumption is based on our history and

expectation of dividend payments. All warrants are immediately exercisable upon granting, with the

exception of the warrants connected with the convertible debentures (Note 10), which are immediately

exercisable upon conversion of the debt.

A summary of the common stock warrants granted during the years ended May 31, 2012 and 2011 is

presented below:

Weighted

Average

Weighted

Remaining

Average

Contractual

Aggregate

Number of

Exercise

Terms

Intrinsic

Options

Price

(In Years)

Value

Balance at June 1, 2010

2,300,000

$

0.75

Granted

370,233

1.50

Exercised

-

--

Forfeited or expired

--

--

Balance at May 31, 2011

2,670,233

$

0.85

2.00 years

$

--

Exercisable at May 31, 2011

2,670,233

$

0.85

2.00 years

$

--

Weighted average fair value of

options granted during the year

ended May 31, 2011

$

0.85

Balance at June 1, 2011

2,670,233

$

0.85

Granted

1,696,063

1.67

Exercised

-

-

Forfeited or expired

(2,300,000)

.75

Balance at May 31, 2012

2,066,296

$

1.64

2.00 years

$

--

Exercisable at May 31, 2012

2,066,296

$

1.64

2.00 years

$

--

Weighted average fair value of

options granted during the year

ended May 31, 2012

$

1.64

F-37




Abakan Inc.

(Formerly Waste to Energy Group Inc.)

(A Development Stage Enterprise)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended May 31, 2012 and 2011

NOTE 11 STOCKHOLDERS' EQUITY - continued

Common Stock Warrants - continued

The following table summarizes information about the warrants outstanding at May 31, 2012:

Options Outstanding

Options Exercisable

Range

Number

Weighted

Weighted

Number

Weighted

of

Outstanding

Average

Average

Exercisable

Average

Aggregate

Exercise

at May 31,

Remaining

Exercise

Intrinsic

at May 31,

Exercise

Intrinsic

Price

2012

Contractual Life

Price

Value

2012

Price

Value

$

1.25

706,600

2.00 Years

$

1.25

$

--

706,600     $

1.25

$

--

$

1.50

410,233

2.00 Years

$

1.50

$

--

410,233     $

1.50

$

--

$

2.00

949,463

2.00 Years

$

2.00

$

--

949,463     $

2.00

$

--

2,066,296

2.00 Years

$

1.64

$

--

2,066,296     $

1.64

$

--

NOTE 12 EARNINGS-PER-SHARE CALCULATION

Basic earnings per common share for the years ended May 31, 2012 and 2011 are calculated  by dividing

net income by weighted-average common shares outstanding during the period. Diluted earnings per

common share for the years ended May 31, 2012 and 2011 are calculated by dividing net income by

weighted-average common shares outstanding during the period plus dilutive potential common shares,

which are determined as follows:

For the year ended

For the year ended

May 31, 2012

May 31, 2011

Net earnings from operations

$

(1,119,249)    $

(3,184,984)

Weighted-average common shares

59,752,413

57,058,470

Effect of dilutive securities:

Warrants

-

-

Options to purchase common stock

-

-

Dilutive potential common shares

59,752,413

57,058,470

Net earnings per share from operations:

Basic

$

(0.02)    $

(0.06)

Diluted

$

(0.02)    $

(0.06)

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 Companys common stock.

F-38




Abakan Inc.

(Formerly Waste to Energy Group Inc.)

(A Development Stage Enterprise)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended May 31, 2012 and 2011

NOTE 12 EARNINGS-PER-SHARE CALCULATION - continued

In periods where losses are reported the weighted-average number of common shares outstanding

excludes common stock equivalents because their inclusion would be anti-dilutive.

These securities below were excluded from the calculations above because to include them would be anti-

dilutive:

For the year ended

For the year ended

May 31, 2012

May 31, 2011

Common Stock Equivalents:

Warrants

2,066,296

2,670,233

Options to purchase common stock

5,160,000

5,420,000

Total of Common Stock Equivalents:

7,226,296

8,090,233

NOTE 13 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:

Consulting Agreements

On December 1, 2009 we entered into an agreement with a related individual to provide bookkeeping

services. The terms of the consulting agreement are $2,500 per month payable in consulting fees and

reimbursement to the consultant for all reasonable business expenses incurred by her in the performance

of her duties, and was in effect until December 1, 2010. The consultant was also granted  100,000 stock

options with an exercise price of $0.60 per share; they will vest equally over 2 years and the first third

was vested upon signing (see Note 14). On April 1, 2010, we entered into an amended agreement with

the same related individual to provide bookkeeping services. The terms of the amended consulting

agreement are $5,000 per month payable in consulting fees and reimbursement for all reasonable

business expenses incurred in the performance of her duties effective until April 1, 2011. The agreement

also had a provision to automatically renew for subsequent annual terms unless terminated in writing by

either party.  For the years ended May 31, 2012 and 2011, we expensed $60,000 and $60,000,

respectively, in connection with these contracts and are included in professional fees related party. As

of May 31, 2012 and 2011, we owed $4,751 and $5,000, respectively, and is included in accounts

payable - related party.

F-39




Abakan Inc.

(Formerly Waste to Energy Group Inc.)

(A Development Stage Enterprise)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended May 31, 2012 and 2011

NOTE 13 RELATED PARTY TRANSACTIONS continued

Consulting Agreements - continued

On April 26, 2010, we entered into an employment agreement with a related individual to perform the

duties of Vice President Pipeline Coating Sales. The terms of the employment agreement were $6,000

per month payable in consulting fees, with increases payable with the attaining of certain milestones of

performance, and reimbursement to the employee for all reasonable business expenses incurred by him

in the performance of his duties, and will be in effect until March 31, 2013. The employee was also

granted 400,000 stock options with an exercise price of $0.60 per share; they will vest equally over 3

years, beginning April 26, 2011 and continuing on the anniversary date of signing (see Note 14). For the

year ended May 31, 2012 and 2011, we expensed $90,000 and $87,000, respectively, in connection with

this contract and are included in payroll and benefits expense. On December 20, 2010, we amended the

above employment agreement to include certain performance milestones and shares of our common

stock as payment for completing them. On March 23, 2012, his employment agreement was terminated.

As of May 31, 2012 and 2011, we owed  $85,633 and $12,247, respectively, and is included in accrued

liabilities.

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 consultants role from Chief Financial Officer to general consultant, and all other provisions remain

the same.  The terms of the consulting agreement are $8,000 per month payable in consulting fees and

reimbursement to the consultant for all reasonable business expenses incurred by him in the

performance of his duties, and will be in effect until July 31, 2012. The consultant was also granted

200,000 stock options with an exercise price of $0.65 per share; they will vest equally over 3 years (see

Note 14). For the years ended May 31, 2012 and 2011, we expensed $96,000 and $86,600, respectively,

in connection with this contract and are included in consulting related party. As of May 31, 2012 and

2011, we owed $7,292 and $20,376, respectively, and is included in accounts payable - related party.

On May 1, 2011, we entered into a consulting agreement with a related individual to perform the duties

of Vice President Business Development and a Director of the Company. The terms of the consulting

agreement are $5,000 per month payable in consulting fees, and reimbursement to the consultant for all

reasonable business expenses incurred by him  in the performance of his duties, and will be in effect

until April 30, 2012, and was not renewed. For the years ended May 31, 2012 and 2011, we expensed

$60,000 and $5,000, respectively, in connection with this contract and are included in consulting

related party.  As of May 31, 2012 and 2011, we owed $56,243 and $5,000, respectively, and is included

in accounts payable - related party.

F-40




Abakan Inc.

(Formerly Waste to Energy Group Inc.)

(A Development Stage Enterprise)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended May 31, 2012 and 2011

NOTE 13 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 are $2,500 per month payable in

consulting fees and reimbursement to the consultant for all reasonable business expenses incurred by it

in the performance of its duties, and rental of office space for $1,200 per month, and will be 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 will be in effect until December 1, 2011 and continues in force. For the years ended May

31, 2012 and 2011, we expensed $30,000 and $30,000, respectively, in connection with this contract

and are included in consulting related party.  As of May 31, 2012 and 2011, we owed none and

$10,348, respectively, and is included in accounts payable  - related party.

On May 5, 2011, we entered into an employment agreement commencing May 1, 2011 with a related

individual to perform duties as our Chief Financial Officer. The terms of the employment agreement are

$10,000 per month salary, a car reimbursement of $500 per month and reimbursement to the employee

for all reasonable business expenses incurred by him in the performance of his duties, and  will be in

effect until April 30, 2013. The employee was also granted 400,000 stock options with an exercise price

of $1.00 per share; they will vest equally over 3 years (see Note 14). The employee was also granted a

stock signing bonus of 60,000 shares of our common stock (Note 11) valued at $49,200 and is reflected

in consulting- related party. For the years ended May 31, 2012 and 2011, we expensed  $56,262 and

$10,000, in connection with this contract and is included in payroll and benefits expense. As of May 31,

2012 and 2011 we owed $0 to this employee. On October 24, 2011, this individual resigned his position

as Chief Financial Officer, this agreement was discontinued, and he forfeited the 400,000 stock options

granted to him as part of this agreement.

On June 1, 2011, we entered into a consulting agreement commencing June 1, 2011, with a related

individual to provide services as our Chief Executive Officer. The terms of the consulting agreement are

the consultant will be paid $10,000 per month. We also agreed to reimburse the consultant for all

reasonable business expenses incurred by him  in the performance of his duties, and will be in effect

until June 1, 2012. For the year  ended May 31, 2012, we expensed $120,000 in connection with this

contract, which amount is included in consulting related party.  As of May 31, 2012, we owed $12,487,

which amount is included in accounts payable - related party.

Note receivable Related Party

On April 29, 2010, we entered in to a non-collateralized note receivable with a related company to ours

with some common ownership on an interest free basis, payable on demand. On July 15, 2010, we were

repaid $4,000 cash on this note and as of May 31, 2012 and 2011 we are owed a balance remaining of

$4,500.

F-41




Abakan Inc.

(Formerly Waste to Energy Group Inc.)

(A Development Stage Enterprise)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended May 31, 2012 and 2011

NOTE 13 RELATED PARTY TRANSACTIONS continued

Notes Payable Related Party

For the  year ended May 31, 2012, we entered  into two uncollateralized demand notes to a Company

controlled by our Chief Executive Officers spouse, Proper Financial, bearing 8% interest per annum for

an aggregate total of $9,000. On May 31, 2012, we repaid the principal amount of $9,000 plus accrued

interest of $499. As of May 31, 2012 we owed no balance.

On February 2, 2012, we entered into an uncollateralized demand note to a related individual, bearing

8% interest per annum for an aggregate total of $10,500. We also owed $63 in accrued interest for the

above note as of February 29, 2012. On March 16, this debt and accrued interest was converted into

share of our common stock as discussed in Note 11, and has a zero balance.

License agreement Related Party

The Company has a license agreement with Powdermet,  Inc., a related party,  which grants the

Company an exclusive license to the use of technical information, proprietary know-how, data and patent

rights assigned to and/or owned by Powdermet, Inc. The agreement will end upon the last to  expire valid

claim of licensed patents, unless terminated within the terms of the agreement.

As part of the agreement, the Company has a commitment to purchase consumable powders from

Powdermet, Inc. through July 1, 2013. Also, as part of the agreement the Company will receive

technology transition and development service to support its research and development activities on a cost

reimbursement basis. Total expense related to the cost reimbursement was $275,365 for the year ended

May 31, 2012.

F-42




Abakan Inc.

(Formerly Waste to Energy Group Inc.)

(A Development Stage Enterprise)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended May 31, 2012 and 2011

NOTE 14 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. On

August 20, 2010, we granted 200,000 stock options to our Chief Financial Officer at an exercise price of

$0.65 per share. The options will expire ten years from the grant date, and will vest in equal one third

parts on the anniversary of the option grant date. On October 19, 2010, we granted 1,200,000 stock

options to several consultants at an exercise price of $0.75 per share. On November 17, 2010, we

granted 25,000 stock options to a consultant at an exercise price of $1.01 per share. On January 25,

2011, we granted 25,000 stock options to a consultant at an exercise price of $1.25 per share. On March

16, 2011, we granted 20,000 stock options to a consultant at an exercise price of $1.05 per share. On

April 13, 2011, we granted 100,000 stock options to a consultant at an exercise price of $1.05 per share.

On May 12, 2011, we granted 400,000 stock options to an employee at an exercise price of $1.02 per

share. On May 13, 2011, we granted 250,000 stock options to four consultants at an exercise price of

$1.02 per share. All of these options will expire ten years from the grant date, and will vest in equal one

third parts on the anniversary of the option grant date.  In addition, on May 2, 2011, we granted 150,000

stock options to a consultant at an exercise price of $1.05 per share, and these options will expire ten

years from the grant date, and will vest one-third immediately and the remaining two-thirds over the

next two years on the anniversary date of granting. On August 15, 2011, we granted  25,000 stock

options to a consultant at an exercise price of $1.25 per share, and these options will expire ten years

from the grant date, and will vest in equal one third parts on the anniversary of the option grant date. On

October 24, 2011, we granted 100,000 stock options to our former Chief Financial Officer in connection

with his Separation Agreement at an exercise price of $1.20 per share, and these options will expire five

years from the grant date, and will vest immediately. On January 2, 2012, we granted 100,000 stock

options to a consultant at an exercise price of $1.00 per share, and these options will expire ten years

from the grant date, and will vest in equal one third parts on the anniversary of the option grant date. On

January 5, 2012, we granted 150,000 stock options to a consultant at an exercise price of $1.00 per

share, and these options will expire ten years from the grant date, and will vest in equal one third parts

on the anniversary of the option grant date. On February 1, 2012, we granted 70,000 stock options to a

consultant at an exercise price of $1.07 per share, and these options will expire ten years from the grant

date, and will vest in equal one half parts on the six month anniversary of the option grant date, and

another one half part on the twelve month anniversary of the option grant date. On February 6, 2012, we

granted  25,000 stock options to a consultant at an exercise price of $1.07 per share, and these options

will expire ten years from the grant date, and will vest in equal one half parts on the date of grant, and

another one half part on the six  month anniversary of the option grant date. On February 15, 2012, we

granted 50,000 stock options to a consultant at an exercise price of $1.03 per share, and these options

will expire four years from the grant date, and  will vest in equal one third parts on the anniversary of the

option grant date. During the year ended May 31, 2012, we had 780,000 options that were expired or

forfeited for termination and resignation from service. After these grants there will be 4,840,000

available for future grant.

Our board of directors administers our Plan, however, they may delegate this authority to a committee

formed to perform the administration function of the Plan. The board of directors or a committee of the

board has the authority to construe and interpret provisions of the Plan as well as to determine the terms

of an award.  Our board of directors may amend or modify 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.

F-43




Abakan Inc.

(Formerly Waste to Energy Group Inc.)

(A Development Stage Enterprise)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended May 31, 2012 and 2011

NOTE 14 STOCK BASED COMPENSATION - continued

2009 Stock Option Plan The Company - continued

The Plan permits us to grant Non-Statutory stock options to our employees, directors and consultants.

The options issued under this Plan are intended to be Non-Statutory Stock Options exempt from Code

Section 409A.

The duration of a stock option granted under our Plan cannot exceed ten years.  The exercise price of an

incentive stock option cannot be less than 100% of the fair market value of the common stock on the

date of grant.

The Plan administrator determines the term of stock options granted under our Plan, up to a maximum

of ten years, except in the case of certain events, as described below.  Unless the terms of an optionee's

stock option agreement provide otherwise, if an optionee's relationship with us ceases for any reason

other than disability or death, the optionee may exercise any vested options for a period of ninety days

following the cessation of service.   If an optionee's service relationship with us ceases due to disability

or death the optionee or a beneficiary may exercise any vested options for a period of 12 months in the

event of disability or death.

Unless the Plan administrator provides otherwise, options generally are not transferable except by will,

the laws of descent and distribution, or pursuant to a domestic relations order.  An optionee may

designate a beneficiary, however, who may exercise the option following the optionee's death.

The value of employee and non-employee stock warrants granted during the year ended May 31, 2012

was estimated using the Black-Scholes model with the following assumptions:

August 15, 2011

October 24, 2011

January 2, 5, and

February 6, &

February 1, 2012

15, 2012

Expected volatility (based

170.18%

166.66%

162.25%

162.25%

on historical volatility)

Expected dividends

0.00

0.00

0.00

0.00

Expected term in years

10

5

10

5/10

Risk-free rate

2.29%

1.10%

1.10%

1.10%

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 Companys employee stock options. The dividend yield assumption is based on our

history and expectation of dividend payments.

A summary of the options granted to employees and non-employees under the plan and changes during

the years ended May 31, 2012 and 2011 is presented below:

F-44




Abakan Inc.

(Formerly Waste to Energy Group Inc.)

(A Development Stage Enterprise)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended May 31, 2012 and 2011

NOTE 14 STOCK BASED COMPENSATION - continued

2009 Stock Option Plan The Company - continued

Weighted

Average

Weighted

Remaining

Average

Contractual

Aggregate

Number of

Exercise

Terms

Intrinsic

Options

Price

(In Years)

Value

Balance at June 1, 2010

3,150,000

$

0.64

Granted

2,370,000

0.87

Exercised

-

-

Forfeited or expired

(100,000)

0.60

Balance at May 31, 2011

5,420,000

$

0.75

9.00 years

$

185,000

Exercisable at May 31, 2011

983,240

$

0.63

9.00 years

$

--

Weighted average fair value of

options granted during the year

Ended May 31, 2011

$

0.87

Balance at June 1, 2011

5,420,000

$

0.75

Granted

520,000

1.06

Exercised

-

-

Forfeited or expired

(780,000)

-

Balance at May 31, 2012

5,160,000

$

0.77

9.00 years

$

185,000

Exercisable at May 31, 2012

2,980,829

$

0.71

9.00 years

$

--

Weighted average fair value of

options granted during the year

ended May 31, 2012

$

1.06

F-45




Abakan Inc.

(Formerly Waste to Energy Group Inc.)

(A Development Stage Enterprise)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended May 31, 2012 and 2011

NOTE 14 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, 2012:

Options Outstanding

Options Exercisable

Weighted

Range

Number

Average

Weighted

Number

Weighted

of

Outstanding

Remaining

Average

Exercisable

Average

Aggregate

Exercise

at May 31,

Contractual

Exercise

Intrinsic

at May 31,

Exercise

Intrinsic

Price

2012

Life

Price

Value

2012

Price

Value

$

0.60

1,945,000

8.00 Years

$

0.60

$

--

1,900,040     $

0.60

$

--

$

0.65

1,400,000

8.00 Years

$

0.65

$

120,000

394,968     $

0.65

$

--

$

0.75

100,000

9.00 Years

$

0.75

$

15,000

100,000     $

0.75

$

--

$

1.00

50,000

10.00 Years      $

1.00

$

--

--     $

0.00

$

--

$

1.01

225,000

9.00 Years

$

1.01

$

--

106,656     $

1.01

$

--

$

1.02

650,000

10.0 Years

$

1.02

$

50,000

116,660     $

1.02

$

--

$

1.03

50,000

4.00 Years

$

1.03

$

--

--     $

0.00

$

--

$

1.05

270,000

10.0 Years

$

1.05

$

--

83,330     $

1.05

$

--

$

1.07

95,000

10.00 Years      $

1.07

$

--

12,500     $

1.07

$

--

$

1.20

100,000

5.0 Years

$

1.20

$

--

100,000     $

1.20

$

--

$

1.25

25,000

10.0 Years

$

1.25

$

--

--     $

0.00

$

--

$

1.30

250,000

10.0 Years

$

1.30

$

--

166,675     $

1.30

$

--

5,160,000

9.0 Years

$

0.77

$

185,000

2,980,829     $

0.71

$

--

The total value of employee and non-employee stock options granted during the years ended  May 31,

2012 and 2011, was $541,490 and $2,015,157, respectively. During years ended May 31, 2012  and 2011

the Company recorded $1,311,032 and $964,439, respectively, in stock-based compensation expense

relating to stock option grants.

At May 31, 2012 and 2011 there was $1,331,281 and $2,779,371, respectively, of total unrecognized

compensation cost related to stock options granted under the plan.  That cost is expected to be

recognized pro-rata through February 15, 2015. 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

2013

$

973,575

2014

297,645

2015

60,061

$

1,331,281

F-46




Abakan Inc.

(Formerly Waste to Energy Group Inc.)

(A Development Stage Enterprise)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended May 31, 2012 and 2011

NOTE 14 STOCK BASED COMPENSATION - continued

Stock Option Plan - MesoCoat

MesoCoat accounts for equity awards using the grant-date fair value.

The Companys stock option plan (the Stock Option Plan) is intended to advance the interest of the

Company 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 the Companys common stock. These options have a term of six years and will expire

beginning August 2014 through November 2014.

A summary of the Companys stock option plan as of May 31, 2012, and the changes during the year

then ended is presented in the table below:

Options Outstanding

Number of

Weighted

Shares

Average Exercise

Price

Outstanding at May 31, 2011

4,200    $

1.95

Granted

250

18.11

Exercised

-

Forfeited

-

Outstanding at May 31, 2012

4,450    $

2.68

Options exercisable at May 31, 2012

3,150    $

1.95

NOTE 15 COMMITMENTS

Consulting Agreements

On March 15, 2011, we entered into a consulting agreement commencing April 1, 2011 with an

unrelated individual to provide business consulting. The terms of the consulting agreement are a

minimum 20 hours per month at $110 per hour or $2,200 per month payable in consulting fees and

reimbursement to the consultant for all reasonable business expenses incurred by him in the

performance of his duties, and was in effect until March 31, 2012.

On March 16, 2011, we entered into a consulting agreement commencing March 16, 2011, with an

unrelated individual to provide graphic design work for print and website and website maintenance. The

terms of the consulting agreement are $500 per month and reimbursement to the consultant for all

reasonable business expenses incurred by him  in the performance of his duties, and was in effect until

April 16, 2012. In addition, the consultant was also granted 20,000 stock options, with an exercise price

of $1.05 per share of common stock, and will expire ten years from the date of the agreement (see Note

14).

F-47




Abakan Inc.

(Formerly Waste to Energy Group Inc.)

(A Development Stage Enterprise)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended May 31, 2012 and 2011

NOTE 15 COMMITMENTS - continued

Consulting Agreements- continued

On April 13, 2011, we entered into a consulting agreement commencing April 13, 2011, with an

unrelated individual to provide business consulting in South East Asia. The terms of the consulting

agreement included a grant of  100,000 stock options, with an exercise price of $1.05 per share of

common stock that expire ten years from the date of the agreement, and vest over three years on the

anniversary date of April 13 (see Note 14). We also agreed to reimburse the consultant for all reasonable

business expenses incurred by him in the performance of his duties, with a term expiring April 12, 2014.

On May 2, 2011, we entered into a consulting agreement commencing May 2, 2011, with an unrelated

individual to provide business consulting in the Europe and Asia geographic region. The terms of the

consulting agreement included a grant of  50,000 shares of our restricted common stock, and 150,000

stock options, with an exercise price of $1.05 per share of common stock that expire ten years from the

date of the agreement, that vest as follows; one-third on the date of the agreement, the remaining two-

thirds over two years on the anniversary date of May 2 (see Note 14). We also agreed to reimburse the

consultant for all reasonable business expenses incurred by it in the performance of its duties. The

agreement was in effect until May 1, 2012.

On May 20, 2011, we entered into a consulting agreement commencing May 20, 2011, with an

unrelated individual to provide business consulting. The terms of the consulting agreement included a

grant of 5,000 shares of our restricted common stock each month, and a prepayment of 15,000 shares on

signing the agreement. We also agreed to reimburse the consultant for all reasonable business expenses

incurred by him in the performance of his duties. The agreement was in effect until August 19, 2011.

On December 1, 2011, we entered into a consulting agreement commencing December 1, 2011, with an

unrelated individual to provide investor relations and corporate communications consulting. We made

the initial payment of $40,680, issued the initial issuance of 20,000 shares of our common stock, and

granted the initial payment of 35,000 options to purchase shares of our common stock for $1.00 that

expire in 24 months. On February 6, 2012, we notified the consultant of termination due to lack of

performance and that the remaining contract was void, and to return to the Company the 20,000

restricted common shares, and that all stock options granted were rescinded and no longer in effect.

On March 1, 2012, we entered into a consulting agreement commencing March 1,  2012, with an

unrelated individual to provide investor relations consulting. The terms of the consulting agreement are

that the consultant is paid  $6,000 per month in addition the consultant was issued 50,000 shares of our

restricted common stock for the six month period. The shares will be issued in 12,500 share increments

each month on the signing date, May 1, July 1, and August 31. We also agreed to reimburse the

consultant for all reasonable business expenses incurred by him in the performance of his duties,  with a

term expiring September 1, 2012.

F-48




Abakan Inc.

(Formerly Waste to Energy Group Inc.)

(A Development Stage Enterprise)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended May 31, 2012 and 2011

NOTE 15 COMMITMENTS - continued

Consulting Agreements- continued

On March 1, 2012, we entered into a consulting agreement commencing March 1,  2012, with an

unrelated individual to provide capital investment consulting. The terms of the consulting agreement are

that the consultant is paid $102,000 for the twelve month term; at the start of each subsequent quarter,

the consultant and the Company will review the work performed and the projected work for the

following quarter to ensure the retainer balance is sufficient to pay for the requested services. We also

agreed to reimburse the consultant for all reasonable business expenses incurred by him in the

performance of his duties with a term expiring March 1, 2013.

On March 26, 2012, we entered into a consulting agreement commencing March 26, 2012, with an

unrelated individual to provide capital investment consulting. The terms of the consulting agreement are

that the consultant is paid $5,000 per month; in addition the consultant was issued 15,000 shares of our

restricted common stock for the initial three month period. Then commencing July 1, 2012 and each

quarter after the Company will issue 15,000 shares. We also agreed to reimburse the consultant for all

reasonable business expenses incurred by him  in the performance of his duties, with a term expiring

September 26, 2012, at which time the agreement will become a month to month agreement.

Leases

In August 2011, the Company entered into a non-cash leasing arrangement where services are provided in

exchange for an asset. The Company has an obligation to provide 600 hours of services at a fair value of

$120,000 as consideration during the period from August 2011 to August 2017. The Company has

recorded this capital lease at its fair value. During the year ended May 31, 2012, the Company completed

143 hours of service with a fair value of $28,600. This amount is included in revenue.

The Company leases its office space in Miami on a month to month basis at a cost of $2,213 a month paid

to Prosper Financial,  Inc., a related party. The Company is also committed to a non-cancellable operating

lease for a vehicle that expired in March 2012.

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 $6,700 per month that expires on May 31, 2020.

MesoCoat also leases machinery and equipment under various capital lease arrangements,  which expires

through September 2016. These leases are included in long-term and short-term debt and the related assets have

been capitalized.

Total expense related to the operating leases was $148,854 for the period of July 13 through May 31, 2012.

Interest expense for the leases for the period of July 13 through May 31, 2012 was $2,593.

F-49




Abakan Inc.

(Formerly Waste to Energy Group Inc.)

(A Development Stage Enterprise)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended May 31, 2012 and 2011

NOTE 15 COMMITMENTS - continued

Leases - continued

Minimum annual rental commitments are as follows at May 31, 2012:

For the years ended May 31,

Capital Leases

Operating Leases

2013

$

46,585      $

86,100

2014

23,181

80,400

2015

22,197

80,400

2016

21,273

80,400

2017 and thereafter

7,951

328,300

Total minimum lease payments

$

121.187      $

655,600

Less amount representing interest

(6,012)

Present value of net minimum capital lease payments

115,175

Less current maturities

(42,999)

Long-term obligations under capital leases

$

72,176

NOTE 16 INCOME TAXES

The following is an analysis of deferred tax assets as of May 31, 2012 and 2011:

Deferred

Valuation

Tax Assets

Allowance

Balance

Deferred tax assets at May 31, 2010

$

272,631

$      (272,631)

$

-

Provision to tax returns true ups

29,506

(29,506)

-

Additions for the year

475,058

(475,058)

-

Net deferred tax assets at May 31, 2011

$

777,195

$      (777,195)

$

-

Tax effective of rate change

984,449

(984,449)

-

Provision to tax return true ups

142,476

(142,476)

-

Additions for the year

378,172

(378,172)

-

Deferred tax assets at May 31, 2012

$

2,282,292

$   (2,282,292)

$

-

F-50




Abakan Inc.

(Formerly Waste to Energy Group Inc.)

(A Development Stage Enterprise)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended May 31, 2012 and 2011

NOTE 16 INCOME TAXES - continued

Deferred income taxes are provided to recognize the effects of temporary differences between financial

reporting and income tax reporting. These differences arise principally from federal net operating losses,

stock compensation expense, basis differences in investments in affiliates and the use of accelerated

depreciation methods for tax purposes as opposed to the straight-line depreciation method for financial

reporting purposes and Federal net operating losses.

Temporary differences between financial statement carrying amounts and tax basis of assets and

liabilities that give rise to significant deferred  tax assets and liabilities are presented below at May 31:

2012

2011

Deferred tax assets:

Current:

Compensation accruals

$

87,096

$

-

Non-current:

Deferred tax assets:

Net operating loss carry forward

1,962,349

461,935

Fixed asset basis differences

113,236

-

Stock options

880,187

220,956

Equity loss in affiliates, net

-

70,493

Other

387

23,811

Total non-current deferred tax assets

2,956,159

777,195

Deferred tax liabilities:

Equity profit in affiliates, net

(161,217)

-

Book fair value adjustment of

(599,746)

-

investment in affiliate

Total non-current deferred tax

(760,963)

-

liabilities

Net non-current deferred tax liabilities

2,195,196

777,195

Net deferred tax liability before valuation

2,282,292

777,195

allowance

Valuation allowance

(2,282,292)

(777,195)

Net deferred tax asset

$

-

$

-

F-51




Abakan Inc.

(Formerly Waste to Energy Group Inc.)

(A Development Stage Enterprise)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended May 31, 2012 and 2011

NOTE 16 INCOME TAXES - continued

The following is reconciliation from the expected statutory Federal income tax rate to the Companys

actual income tax rate for the years ended May 31:

2012

2011

Expected income tax (benefit) at

Federal statutory tax rate 34% and 15%

$

(380,545)

$

(475,257)

Permanent differences

2,372

199

Tax effect of rate change

(984,449)

-

Other adjustments

(142,474)

-

Change in valuation allowance

1,505,096

475,058

Income tax expense

$

-

$

-

We currently have three years of tax returns that are subject to examination, including the fiscal years

ended May 31, 2011, 2010 and 2009, 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 net operating loss carry forward as of May 31, 2011 expires as follows:

Expiring Year

Amount

2027

$

554

2028

61,834

2029

352,219

2030

1,044,860

2031

1,715,508

2032

2,596,641

Total

$

5,771,616

These loss carryovers could be limited under the Internal Revenue Code should a significant change in

ownership occur.

NOTE 17 - 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 year ended May 31, 2012, the Company contributed $19,376.

F-52




Abakan Inc.

(Formerly Waste to Energy Group Inc.)

(A Development Stage Enterprise)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended May 31, 2012 and 2011

NOTE 18 RECENT ACCOUNTING PRONOUNCEMENTS

We have examined all recent accounting pronouncements and believe that none of them will have a

material impact on the financial statements of the Company.

NOTE 19 SUBSEQUENT EVENTS

Management has evaluated subsequent events after the balance sheet date, through the issuance of the

financial statements, for appropriate accounting and disclosure.  The Company has determined that there

were no such events that warrant disclosure or recognition in the financial statements, except for the

below:

Board of Advisors

On June 1, 2012, we appointed a new member to our Board of Advisors and granted him 100,000 stock

options for their service. The stock options have an exercise price of $2.20 per share of common stock,

and expire ten years from the date of grant. These options vest in equal one-third parts beginning on June

1, 2013, and every grant date anniversary for the next two years. The term of the Board of Advisors

Agreement will be in force until June 1, 2013, and shall renew automatically on an annual basis unless

terminated in writing. We also agreed to reimburse the advisor for all reasonable business expenses.

On June 20, 2012, we appointed  a new member to our Board of Advisors and agreed to pay him $5,000

per month for his services beginning July 1, 2012. We also granted him 50,000 stock options for their

service. The stock options have an exercise price of $2.05 per share of common stock, and expire ten

years from the date of grant. These options vest in equal one-third parts beginning on June 20, 2013, and

every grant date anniversary for the next two years. The term of the Board of Advisors Agreement will be

in force until May 31, 2013, and shall renew automatically on an annual basis unless terminated in

writing. We also agreed to reimburse the advisor for all reasonable business expenses.

Board of Directors

On June 15, 2012, we appointed a new member to our Board of Directors. We agreed to pay him $15,000

per annum, payable in four equal payments.  We also agreed to issue him 10,000 restricted  shares of our

common stock and granted him 150,000 stock options for their service. The stock options have an

exercise price of $2.30 per share of common stock, and expire ten years from the date of grant. These

options vest in equal one-third parts beginning on September 15, 2012, and every September 15 after that.

We also agreed to pay for continuing education classes and related travel expenses, for a maximum of

$4,500. This agreement will be in force until May 31, 2015, unless terminated with a sixty day notice. We

also agreed to reimburse the advisor for all reasonable business expenses.

On August 7, 2012, we appointed a new member to our Board of Directors. We agreed to issue him

10,000 restricted shares of our common stock and granted him 150,000 stock options for their service.

The stock options have an exercise price of $1.90 per share of common stock, and expire ten years from

the date of grant. These options vest in equal one-third parts beginning on August 7, 2013 and every

August 7 after that. This agreement will be in force until August 7, 2015, unless terminated  with a sixty

day notice. We also agreed to reimburse the advisor for all reasonable business expenses.

F-53




Abakan Inc.

(Formerly Waste to Energy Group Inc.)

(A Development Stage Enterprise)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended May 31, 2012 and 2011

NOTE 19 SUBSEQUENT EVENTS- continued

Stock Options Granted

On June 12, 2012, we granted  75,000 stock options to a consultant at an exercise price of $2.30 per share,

and these options will expire ten years from the grant date, and will vest in equal one third parts on the

anniversary of the option grant date, beginning on June 12, 2012

Private Placement

On July 25, 2012, we closed a private placement for $525,000, or 300,000 units consisting of one share of

our restricted  common stock and one-half common stock warrant to purchase shares of our common

stock, with a purchase price of $2.00 per share and an expiration date of two years from the closing.  In

connection with this placement we had no offering costs for a net of $525,000.

F-54




ITEM 9.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON

ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A.

CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

In connection with the preparation of this annual report, an evaluation was carried out by the Companys

management, with the participation of the chief executive officer and the acting chief financial officer, of

the effectiveness of the Companys disclosure controls and procedures (as defined in Rules 13a-15(e) and

15d-15(e) under the Securities Exchange Act of 1934 (Exchange Act)) as of May 31, 2012. Disclosure

controls and procedures are designed to ensure that information required to be disclosed in reports filed or

submitted under the Exchange Act is recorded, processed, summarized, and reported within the time

periods specified in the Commissions rules and forms, and that such information is accumulated and

communicated to management, including the chief executive officer and the chief financial officer, to

allow timely decisions regarding required disclosures.

Based on that evaluation, the Companys management concluded, as of the end of the period covered by

this report, that the Companys disclosure controls and procedures were not effective in recording,

processing, summarizing, and reporting information required to be disclosed, within the time periods

specified in the Commissions rules and forms, and such information was accumulated and communicated

to management, including the chief executive officer and the chief financial officer, to allow timely

decisions regarding required disclosures.

Managements Report on Internal Control over Financial Reporting

The Companys management is responsible for establishing and maintaining adequate internal control

over financial reporting. The Companys internal control over financial reporting is a process, under the

supervision of the chief executive officer and the chief financial officer, designed to provide reasonable

assurance regarding the reliability of financial reporting and the preparation of the Companys financial

statements for external purposes in accordance with United States generally accepted accounting

principles (GAAP).  Internal control over financial reporting includes those policies and procedures that:

    Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the

transactions and dispositions of the Companys assets.

    Provide reasonable assurance that transactions are recorded as necessary to permit preparation of

the financial statements in accordance with generally accepted accounting principles, and that

receipts and expenditures are being made only in accordance with authorizations of management

and the board of directors.

    Provide reasonable assurance regarding prevention or timely detection of unauthorized

acquisition, use, or disposition of the Company