UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

    þ     Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended February 28, 2011.

    o     Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from                  to                 .

Commission file number: 000-52784

ABAKAN INC.

 (Exact name of registrant as specified in its charter)

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

 (Address of principal executive offices)    (Zip Code)

 (786) 206-5368

 (Registrant’s telephone number, including area code)

   N/A  

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

Indicate by check mark whether the registrant: (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days:

Yes þ   No o.

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the

registrant was required to submit and post such files). Yes o   No o.

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company as defined by Rule 12b-2 of the Exchange Act:

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. The number of shares outstanding of the issuer’s common stock, $0.0001 par value (the only class of voting stock), at April 18, 2011, was 58,541,960.

PART I – FINANCIAL INFORMATION

ITEM 1.          FINANCIAL STATEMENTS

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

See accompanying notes to financial statements.

See accompanying notes to financial statements.

See accompanying notes to financial statements.

NOTE 1 – BUSINESS

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

Abakan Inc., a wholly-owned subsidiary of Waste to Energy Group Inc., was incorporated in the state of Nevada on November 6, 2009. Abakan Inc. and Waste to Energy Group Inc. entered into an Agreement and Plan of Merger on November 6, 2009. The board of directors of Abakan Inc. and Waste to Energy Group Inc. deemed it advisable and in the best interest of their respective companies and shareholders that Abakan Inc. be merged with and into Waste to Energy Group Inc. with Waste to Energy Group Inc. remaining as the surviving corporation under the name “Abakan Inc.”

Waste to Energy Group Inc., a wholly-owned subsidiary of Your Digital Memories Inc., was incorporated in the state of Nevada on August 13, 2008. Waste to Energy Group Inc. and Your Digital Memories Inc. entered into an Agreement and Plan of Merger on August 14, 2008. The board of directors of Waste to Energy Group Inc. and Your Digital Memories Inc. deemed it advisable and in the best interest of their respective companies and shareholders that Waste to Energy be merged with and into Your Digital Memories Inc. with Your Digital Memories Inc. remaining as the surviving corporation under the name “Waste to Energy Group Inc.”

The Company’s current business plan is to invest in early stage companies. Since such firms are typically pre-commercialization, it is anticipated that for each firm in which the Company decides to invest it will need successive rounds of funding to fund research & development and sales and marketing efforts. 

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

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 

Basis of Presentation

In the opinion of management, the accompanying unaudited financial statements have been prepared in accordance with generally accepted accounting principles (GAAP) for interim financial information and with the instructions to Form 10-Q.  Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the Company’s financial position as of February 28, 2011, and the results of its operations and cash flows for the three and nine months ended February 28, 2011, have been made.  Operating results for the nine months ended February 28, 2011 are not necessarily indicative of the results that may be expected for the year ended May 31, 2011. These condensed financial statements should be read in conjunction with the financial statements and notes for the year ended May 31, 2010, thereto contained in the Company’s Form 10-K.

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – continued
 

Development Stage Enterprise

At February 28, 2011, the Company’s business operations had not fully developed and it is highly dependent upon funding and therefore is considered a development stage enterprise.

Reclassifications

Certain amounts in the period ended February 28, 2010 financial statements have been reclassified to conform to the current period ended February 28, 2011 presentation.

Use of Estimates in the Preparation of Financial Statements

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

NOTE 3 – GOING CONCERN
 

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern.  The Company has net losses for the period of inception to the period ended February 28, 2011, of $4,719,341, and a working capital deficit of $1,014,053.  These conditions raise substantial doubt about the Company’s ability to continue as a going concern.  The Company’s continuation as a going concern is dependent on its ability to meet its obligations, to obtain additional financing as may be required an ultimately to attain profitability.  The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

NOTE 4 - PROPERTY AND EQUIPMENT

Property and equipment consisted of the following:

Depreciation and amortization expense was $4,150 and $7,366 for the nine months ended February 28, 2011 and 2010, respectively. On May 8, 2010, the Company purchased a computer for $916, and November 15, 2010 the Company purchased a printer for $102; these will be depreciated according to the Company’s depreciation policy.

ABAKAN INC.

(Formerly Waste to Energy Group Inc.)

(A DEVELOPMENT STAGE ENTERPRISE)

CONDENSED NOTES TO FINANCIAL STATEMENTS (UNAUDITED)

For the nine months ended January 31, 2011 and 2010

NOTE 5 – PREPAID EXPENSES

Prepaid expenses consist of the following at February 28, 2011:

NOTE 6 - INVESTMENT IN NON-CONTROLLING INTEREST

Mesocoat, Inc.

MesoCoat, Inc. (“MesoCoat”) is an Ohio based nanotechnology materials science business in which the Company holds a thirty four percent (34%) equity interest with the option to acquire up to a seventy five percent (75%) interest. On October 25, 2010, November 3, 2010, and January 27, 2011, the Company advanced to Mesocoat $600,000, $500,000, and $160,000, respectively, to represent deposits on the next stage of investment in MesoCoat.

On December 8, 2010, the Company amended the Investment Agreement with MesoCoat to extend the time frame in which it holds 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 MesoCoat’s May 31, 2010 audit. As of February 28, 2011, the Company has made the above discussed deposits on the next stage of its investment, and it plans on completing its next stage of investment before the end of its fiscal year, May 31, 2011.

The Company has analyzed its investment in accordance of “Investments – Equity Method and Joint Ventures” (ASC 323), and concluded that its 34% minority interest investment does give the Company significant influence over Mesocoat’s business actions, board of directors, or management, and therefore the Company accounts for its investment using the Equity Method. An audit of Mesocoat, by a PCAOB registered auditor for the years ended May 31, 2010 and 2009 has been substantially completed. The Company has analyzed its investment in accordance with ASC323 and has determined that no impairment of its investment is necessary at this time; since the Company’s intention to exercise its future options to increase investment represents level 2 indicators of fair value of its existing investment. In addition, the Company has reduced the amount of its investment by $331,414, which represents its equity in Mesocoat’s loss, for the period ended February 28, 2011.

Please see below for a discussion on how the planned purchase of ownership in Powdermet affects the Company’s investment in Mesocoat.

NOTE 6 - INVESTMENT IN NON-CONTROLLING INTEREST - continued

Powdermet, Inc.

Under the terms of the Company’s September 7, 2010 amendment to its stock purchase agreement dated June 28, 2010, it entered into a stock purchase agreement with Kennametal Inc. (“Kennametal”) to purchase from Kennametal 596,813 shares, representing a 41% interest in Powdermet, Inc. (“Powdermet”), in exchange for $1,500,000.

The terms and conditions of the stock purchase agreement required the Company to pay an initial payment of $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 $50,000 per month starting October 1, 2010. The transaction was to have closed no later than December 31, 2010.

The Company made the initial payment of $500,000 on September 7, 2010 and did not make the payment on the balance as agreed; accordingly the Company 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, the Company 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. The Company did not make its payment on the balance as agreed. On March 21, 2011, the entered into an accord and satisfaction agreement to fulfill the terms of its agreement and settled the debt in full to Kennametal in the amount of $1,200,000, thereby completing the purchase of 41% interest in Powdermet.

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

The Company has analyzed its investment in accordance of “Investments – Equity Method and Joint Ventures” (ASC 323), and concluded that its 41% minority interest investment does give it significant influence over Powdermet’s business actions, board of directors, or management, and therefore in future periods the Company will account for its investment using the Equity Method. Although the Company owns 41% of Powdermet, and indirectly an additional 34% of Mesocoat, it still does not have control of Mesocoat, and therefore will continue to account for its investment according to the equity method of accounting.

NOTE 7 – NOTES PAYABLE

As of February 28, 2011 and 2010, the Company’s loans payable balances consist of:

The Company also owed $22,639 and $9,949 in accrued interest for the above notes as of February 28, 2011 and 2010, respectively. In the period ended February 28, 2011, the Company paid $964 interest on a previously paid loan payable, and converted $462,228 of loans payable into common stock as part of the private placements discussed in Note 8. As a result of this note conversion the Company incurred a stock expense on note conversions of $60,733.

NOTE 8 – STOCKHOLDERS' EQUITY

Common Shares – Authorized

The Company has 2,500,000,000 common shares authorized at a par value of $0.0001 per share and 50,000,000 shares of preferred stock, par value $0.0001 per share.  All common stock shares have equal voting rights, are non-assessable and have one vote per share.  Voting rights are not cumulative and, therefore, the holders of more than 50% of the common stock could, if they choose to do so, elect all the directors of the Company.

Common Stock Issuances

For the nine months ended February 28, 2011, the Company issued the following shares:

Private placements

On October 21, 2010, the Company completed a private placement of 1,100,000 shares of common stock for $825,000. This placement was paid for by $425,000 in cash and a conversion of debt owed of $400,000. On the debt conversion the Company also incurred a stock expense on the note conversion of $37,333, and this charge is reflected in its operations statement.

NOTE 8 – STOCKHOLDERS' EQUITY - continued

Private placements - continued

On October 22, 2010, the Company completed a private placement of 1,660,000 shares of common stock for cash of $1,245,000.

On December 10, 2010, the Company extinguished debt in exchange for 240,000 of its common shares valued at $0.75 per share owed to an individual and an entity in the amounts of $112,500 and $64,500 respectively.  This placement included a subscription payable totaling $3,000. On the debt conversion the Company also incurred a stock expense on note conversion of $23,400, and this charge is reflected in its operations statement.

On January 27, 2011, the Company closed a private placement for $160,000, or 160,000 units consisting of one share of its restricted common stock and one-half share common stock warrant to purchase shares of its 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 the Company had no offering costs for a net of $160,000.

Share based compensation

On November 16, 2010, the Company issued 60,000 shares of its common stock for services performed valued at $60,600.

Warrants Granted

A summary of the common stock warrants outstanding as of the period ended February 28, 2011 is presented below:

NOTE 9 – RELATED PARTY TRANSACTIONS

As of February 28, 2011 and 2010, the Company had balances totaling $174,540 and $4,345 outstanding in accounts payable - related party, respectively. In addition to related party transactions mentioned elsewhere, the Company is party to below agreements and transactions detailed below:

Consulting Agreements

a)       On June 1, 2010, the Company entered into a consulting agreement with a company controlled by the spouse of its chief executive officer. The terms of the consulting agreement are $2,500 per month payable in consulting fees and reimbursement to the consultant for all reasonable business expenses incurred by it in the performance of its duties, and rental of office space $1,200, and will be in effect until June 1, 2011. On December 1, 2010, the Company 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 $2,213, and will be in effect until December 1, 2011. For the period ended February 28, 2011 and 2010, the Company expensed $22,500 and $37,500, respectively, in connection with this contract and their previous contract and are included in consulting fees – related parties. As of February 28, 2011 and 2010, the Company owed $342 and $0, respectively, which amounts are included in accounts payable - related party.

b)      On August 20, 2010, the Company entered into a consulting agreement commencing August 1, 2010 with a related individual to perform duties as its chief financial officer. The terms of the consulting agreement are $8,000 per month payable in consulting fees and reimbursement to the consultant for all reasonable business expenses incurred by it in the performance of its duties, and will be in effect until July 31, 2012. The consultant was also granted 200,000 stock options with an exercise price of $0.65 per share; that vest equally over 3 years (see Note 11). For the period ended February 28, 2011 and 2010, the Company expensed $56,000 and $0, respectively, in connection with this contract and such amounts are included in consulting fees – related parties. As of February 28, 2011 and 2010, the Company owed $37,340 and $3,300, respectively, which amounts are included in accounts payable - related party.

ABAKAN INC.

(Formerly Waste to Energy Group Inc.)

(A DEVELOPMENT STAGE ENTERPRISE)

CONDENSED NOTES TO FINANCIAL STATEMENTS (UNAUDITED)

For the nine months ended January 31, 2011 and 2010

NOTE 9 – RELATED PARTY TRANSACTIONS - continued

Notes receivable

a)      On March 1, 2010 a loan of $25,000 paying 10% interest per annum payable by February 26, 2011 was provided to a company owned by a related party. Interest is payable quarterly or as mutually agreed on. Accordingly the Company has recorded interest income of $1,063 on this note. Additionally on April 21, 2010 a loan of $25,000 paying 10% interest per annum payable by April 16, 2011 was provided to a second company owned by the same related party. Interest is payable quarterly or as mutually agreed on. Accordingly the Company has recorded interest income of $1,063 on this note. On December 1, 2010 the Company applied the balance of one of the above $25,000 notes receivable to their accounts payable balance due to the related party and wrote off $1,583 in accrued interest income, which is reflected in loss of debt settlement on the accompanying statement of operations. The remaining amounts owed to the Company may be assigned to a related party of the unrelated party, and applied to their accounts payable once a final agreement is made. Accordingly, the Company has reflected these notes as a contra-payable to offset the payable balance due to the same individual.

b)      On April 29, 2010, the Company entered in to a non-collaterized note receivable with a related company with some common ownership on an interest free basis, payable on demand. During the period ended February 28, 2011, the Company repaid $4,000 cash on this note and has a balance remaining of $4,500.

Prior period adjustment

a)      During the current nine months ended February 28, 2011, the Company reclassified consulting fees – related party to payroll expense on its operations statement in the $35,400, because it has  an employment agreement with the employee and adjusted expenses previously recorded in the year ended May 31, 2010.

NOTE 11 – STOCK – BASED COMPENSATION

2009 Stock Option Plan

The Company’s board of directors adopted and approved a 2009 Stock option Plan (“Plan”) on December 14, 2009, which provides for the granting and issuance of up to 10 million shares of its common stock. As of the year ended May 31, 2010 the Company had granted 3,150,000 options.

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

NOTE 11 – STOCK BASED COMPENSATION - continued

On October 19, 2010, the Company granted 1,200,000 stock options to several consultants at an exercise price of $0.75 per share. On November 17, 2010, the Company granted 25,000 stock options to a consultant at an exercise price of $1.01 per share. On November 20, 2010, the Company granted 1,000,000 stock options to a consultant at an exercise price of $1.01 per share. On January 25, 2011, the Company granted 25,000 stock options to a consultant at an exercise price of $1.25 per share. All of these options expire ten years from the grant date, and vest in equal one third parts on the anniversary of the option grant date. After these grants there are 4,400,000 stock options available for future grant under the Plan.

The board of directors administers the 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.  The Company’s board of directors may amend or modify the Plan at any time.  However, no amendment or modification shall adversely affect the rights and obligations with respect to outstanding awards unless the holder consents to that amendment or modification.

The Plan permits the Company to grant Non-Statutory stock options to 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 the 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 the 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 the Company 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 the Company 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 period ended February 28, 2011 was estimated using the Black-Scholes model with the following assumptions: 

NOTE 11 – STOCK BASED COMPENSATION - 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 Company’s employee stock options. The dividend yield assumption is based on the Company’s history and expectation of dividend payments.

A summary of the options granted to employees and non-employees under the plan and changes during the period ended February 28, 2010 is presented below:

The following table summarizes information about employee stock options under the 2009 Plan outstanding at February 28, 2011:

NOTE 11 – STOCK BASED COMPENSATION - continued

The total value of employee and non-employee stock options granted during the period ended February 28, 2011, was $2,092,266. During period ended February 28, 2011 the Company recorded $746,177 in stock-based compensation expense relating to stock option grants.

At February 28, 2011 there was $3,031,815 of total unrecognized compensation cost related to stock options granted under the plan.  That cost is expected to be recognized pro rata through January 25, 2014.

NOTE 12 – RECENT ACCOUNTING PRONOUNCEMENTS

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

NOTE 13– SUBSEQUENT EVENTS

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

·         On March 16, 2011 the Company authorized the issuance of a convertible promissory note to Sonoro Invest SA in the sum of $1,500,000 at a rate of 5% interest per annum, convertible at the option of the holder into $1.00 units consisting of one common share and one half warrant to purchase common stock with an exercise price of $1.50 per share for a period of two years from the conversion.

·         On March 21, 2011, the Company entered into an accord and satisfaction agreement to fulfill the terms of its agreement and settled its debt in full to Kennametal in the amount of $1,200,000.

·         On March 25, 2011 the Company entered into an Assignment Agreement for the exclusive right to distribute MesoCoat’s products intended for application specific to the oil and gas pipeline industry.

·         On March 25, 2011 the Company authorized the issuance of 150,000 shares of its common stock to a company as consideration for entering into an Assignment Agreement.

·         On March 25, 2011 the Company authorized the issuance of 56,960 shares of its common stock to a company as a bonus for amending an Employment Agreement with the company’s principal.

ITEM 2.         MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

This Management’s Discussion and Analysis of Financial Condition and Results of Operations and other parts of this current report contain forward-looking statements that involve risks and uncertainties. Forward-looking statements can also be identified by words such as “anticipates,” “expects,” “believes,” “plans,” “predicts,” and similar terms. Forward-looking statements are not guarantees of future performance and our actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such differences include but are not limited to those discussed in the subsection entitled Forward-Looking Statements and Factors That May Affect Future Results and Financial Condition below. The following discussion should be read in conjunction with our financial statements and notes thereto included in this current report. Our fiscal year end is May 31.

Overview

The Company intends to become a leader in the multi-billion dollar advanced coatings and metal formulations markets by assembling controlling interests in a small portfolio of next generation technology firms. We expect to achieve this goal by investing in R&D firms that have the potential to substantially impact the surface engineering and energy management needs of Fortune 1000 companies and government entities. The Company is actively involved in supporting the R&D, market development, and commercialization efforts of those entities in which it has invested and continues to identify prospective future investments.

We have to date successfully acquired non-controlling interests in MesoCoat, Inc. (“MesoCoat”), an advanced coatings company based in Ohio, and in MesoCoat’s parent company, Powdermet Inc. (“Powdermet”), a metal formulations company based in Ohio. The Company is also currently evaluating future acquisition opportunities to add to its portfolio.

Plan of Operation

The Company’s plan of operation for the coming year is to develop its 61% direct and indirect non-controlling equity investment in MesoCoat and position the firm to succeed in commercialization efforts while evaluating whether to increase that investment to 85% pursuant to the terms and conditions of our agreement with the shareholders of MesoCoat. The Company has loaned MesoCoat $1,600,000 against the option to increase its direct equity interest in MesoCoat to 51% and intends to complete the exercise of this option before the end of its fiscal year end. We have also begun to develop our 41% direct non-controlling equity investment in Powdermet towards commercializing its proprietary technology. Further, the Company is constantly seeking out other prospective business acquisitions.

A tremendous need exists today to find better corrosion protection and wear prevention technologies to replace many of the coating materials currently used in the $89 billion coatings industry. MesoCoat offers two such solutions. MesoCoat plans to sell its CermaClad™ market solution at approximately 20% below the market price of today’s corrosion resistant alloy (CRA) clad materials. The ability to decrease below the market price of current offerings is due primarily to the efficiency of the process. MesoCoat expects to sell PComP™ application services to commercial buyers and the U.S. military. 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. MesoCoat offers government agencies the ideal environmentally friendly anti-corrosion/wear resistant material solutions it needs today to sustain current platforms.

Powdermet is building new “metal formulations” as well as providing advanced “energy management” solutions over a broad range of commercial applications for the transportation, infrastructure and ballistic management markets.  Powdermet has four product families with high commercial potential under development including:  SComP, a family of syntactic metal composites known for their light weight properties and ability to absorb 500% more impact energy when compared to current best practice impact and ballistic materials like aluminum alloys; MComP, a family of nanocomposite metal and metal matrix composites designed to be a market replacement for beryllium, aluminum and magnesium in structural applications; EnComP, a diverse family of engineered microstructure energy based solutions; and SynFoam, a family of structurally insulating syntactic ceramic composites combining strength, high temperature functionality and low thermal conductivity into one multifunctional material.

The Company will require a minimum additional amount of $3,000,000 in debt or equity funding over the next twelve months to fulfill its business plan though it will seek a higher amount to aggressively pursue its commercialization strategy for MesoCoat and Powdermet products. The funding sought is not currently available, though we are in the process of securing verbal commitments from prospective investors for private placements of our restricted common stock. Should we be unable to secure additional financing from outside sources or our existing shareholder base, we will most likely be unable to meet our milestones, and may need to scale back operations. Any shortfall in minimum funding will adversely affect our ability to expand or even continue operations.

Results of Operations

During the nine month period ended February 28, 2011, we (i) focused our efforts on our non-controlling interest in MesoCoat, (ii) progressed our efforts to acquire a non-controlling interest in Powdermet, (iii) strengthened our management team with industry experts, (iii) enlarged our board of directors, (iv) sought financings and a concluded a financing in December 2011 for $2,250,000 to close our respective acquisition agreements with MesoCoat and Kennametal, and (v) continued to identify prospective business opportunities for merger or acquisition. The agreements regarding our investments with MesoCoat and Powermet have advanced as follows:

·         On December 8, 2010, the Company amended the Investment Agreement with MesoCoat to extend the time frame in which it holds the exclusive option to acquire a fully diluted 51% interest in MesoCoat until five business days subsequent to the completion of MesoCoat’s May 31, 2010 audit, which audit is substantially compete, though not issued, as of the date of this filing.

·         On January 19, 2011, the Company’s amended the Stock Purchase Agreement with Kennametal to complete the purchase of Powdermet shares from Kennametal and on March 21, 2011, the Company entered into an accord and satisfaction agreement to conclude the terms and conditions of an amended stock purchase agreement pursuant to which the Company purchased from Kennametal 596,813 shares in Powdermet, or 41% interest, in exchange for an aggregate of a previous payment of $500,000 and final payment of $1,200,000. The funding for the final payment was provided by a convertible promissory note issued on March 16, 2011 to Sonoro Invest SA in the sum of $1,500,000.

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

Subsequent to the period ended February 28, 2011:

·         The Company entered into an Assignment Agreement for the exclusive right to distribute MesoCoat’s products intended for application specific to the oil and gas pipeline industry.

• MesoCoat broke ground on a new 11,000 sq. ft. manufacturing plant in Euclid, Ohio. Full-s cale production from the plant is expected to begin early in 2012. The plant will be able to produce 10,000 square meters of CermaClad tubing per year and will be able to fabricate PComP products for application in the aerospace, oil and gas, mining, and chemical processing industries.

·         MesoCoat signed a Cooperation Agreement with Petroleo Brasileiro S.A.  (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 is the largest company in Latin America

·         MesoCoat entered into a collaborative effort with the University of Akron to develop and accelerate commercialization of advanced inorganic coatings directed at reducing the nation’s $300 billion corrosion problem. The university’s Corrosion and Reliability Engineering (CAREs) program and MesoCoat will perform development, testing and risk reduction of advanced inorganic coatings in a new joint-use facility to be built at the university financed by a $2 million grant. MesoCoat will provide development engineers and technicians to supervise and train university interns as well as their award winning CermaClad™ high energy density, large area, high speed cladding technology to apply these advanced coatings to various metal surfaces

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

Net Losses

For the period from inception until February 28, 2011, the Company incurred net losses of $4,719,341. Net losses for the three month period ending February 28, 2011 were $1,066,280 as compared to $260,368 for the three month period ending February 28 , 2010. Net losses for the nine month period ended February 28, 2011 were $2,701,210 as compared to $400,303 for the nine month period ended February 28 , 2010. The increase in net losses over the comparative periods can be primarily attributed to operating expenses, liquidated damages associated with our agreement to acquire shares of Powdermet, and losses associated with the value of our investment in MesoCoat.

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

Operating Expenses

Operating expenses for the three month period ended February 28, 2011 were $882,023 as compared to $258,968 for the three month period ended February 28, 2010. Operating expenses for the nine month period ended February 28, 2011 were $2,105,030 as compared to $390,803 for the nine month period ended February 28, 2010. The increase in operating expenses over the comparative periods can be attributed to increases in general and administrative expenses, stock expense on a note conversion, and stock option expenses. General and administrative expenses include accounting costs, consulting fees, employment costs, and professional fees.

Income Tax Expense (Benefit)

The Company may have a prospective income tax benefit resulting from a net operating loss carry-forward and start up costs that will offset any future operating profit.

Impact of Inflation

The Company believes that inflation has not had a material effect on operations for the period from June 27, 2006 (inception) to February 28, 2011.

Capital Expenditures

The Company has not spent any significant amounts on capital for the period from June 27, 2006 (inception) to February 28, 2011.

Liquidity and Capital Resources

The Company has been in the development stage since inception. As of February 28, 2011 the Company had a working capital deficit of $1,014,053, current assets of $9,408 consisting of cash, note receivable, and prepaid expenses, and total assets of $2,649,255 consisting of current assets, investments in MesoCoat and Powdermet, computer equipment, and a website. As of February 28, 2011 the Company had current and total liabilities of $1,023,461, consisting of accounts payable and accruals, accounts payable to related parties, loans payable and accruals, and accrued liabilities. Stockholders equity in the Company was $1,625,793 as of February 28 , 2011.

For the period from inception until February 28, 2011, the Company’s cash flow used in operating activities was $1,458,064. Cash flow used in operating activities for the nine month period ending February 28, 2011, was $730,413 compared to $387,901 for the nine month period ending February 28, 2010. Cash flow used in operating activities during the current nine month period can be attributed to net losses from operations. We expect to continue to use cash flow in operating activities until such time as we realize a gain on our portfolio investments.

For the period from inception until February 28, 2011, the Company’s cash flow used in investing activities was $3,370,510. Cash flow used in investing activities for the nine month period ending February 28, 2011, was $1,761,018 as compared to $1,400,030 for the nine month period ending February 28, 2011. Cash flow used in the current period can be primarily attributed to the payment of $1,260,000 to MesoCoat and its payment of $500,000 to Kennametal as a deposit against purchasing an equity interest in Powdermet. Since the end of the period we have used cash flow in investing activities by concluding our purchase of Powdermet shares and expect to use additional cash flow in investing activities to increase our investment in MesoCoat.

For the period from inception until February 28, 2011, the Company’s cash flow provided by financing activities was $4,832,237. Cash flow provided by financing activities for the nine month period ending February 28, 2011 was $2,454,529 as compared to $2,145,448 for the nine month period ending February 28 , 2011. Cash flow provided by financing activities in the current period is attributable to proceeds from the sale of common stock and loans payable. We expect to continue to have cash flow provided by financing activities as the Company completes new rounds of financing as it seeks to build on its investment portfolio.

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 have no commitments or arrangements for this financing though we are pursuing a number of prospective sources that include shareholder loans, the sale of equity, or the procurement of long term debt. 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.

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

Off Balance Sheet Arrangements

As of February 28, 2011, the Company had no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources that is material to stockholders.

Going Concern

The Company’s auditors have expressed an opinion as to its ability to continue as a going concern as a result of net losses of $2,018,132 and a working capital deficit of $205,399 as of May 31, 2010, which have increased to $4,719,341 and $1,014,053, respectively, as of February 28, 2011.Our ability to continue as a going concern is dependent on realizing a profit from operations and gains on investment or obtaining funding from outside sources. Management’s plan to address the Company’s ability to continue as a going concern includes: (i) obtaining funding from the private placement of debt or equity; (ii) realizing a gain from its investments in MesoCoat and Powermet; and (iii) obtaining loans and grants from financial or government institutions. Management believes that it will be able to obtain funding to allow the Company to remain a going concern through the methods discussed above, though there can be no assurances that such methods will prove successful.

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

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

·         our anticipated financial performance;

·         uncertainties related to the 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 consolidated financial statements for the Company for the years ended May 31, 2010 and 2009, included in the Company’s most recent Form 10-K filed with the Commission, discussed those accounting policies that are considered to be significant in determining the results of operations and financial position. Our management believes that their accounting principles conform to accounting principles generally accepted in the United States of America.

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

Stock-Based Compensation

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

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

Recent Accounting Pronouncements

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

ITEM 3.          QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not required.

ITEM 4.          CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

In connection with the preparation of this report, an evaluation was carried out by the Company’s management, with the participation of the chief executive officer and the chief financial officer, of the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (“Exchange Act”)). Disclosure controls and procedures are designed to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the Commission’s rules and forms, and that such information is accumulated and communicated to management, including the chief executive officer and the chief financial officer, to allow timely decisions regarding required disclosures.

Based on that evaluation, the Company’s management concluded, as of the end of the period covered by this report, that the Company’s disclosure controls and procedures were effective in recording, processing, summarizing, and reporting information required to be disclosed, within the time periods specified in the Commission’s rules and forms, and such information was accumulated and communicated to management, including the chief executive officer and the chief financial officer, to allow timely decisions regarding required disclosures.

Changes in Internal Control over Financial Reporting

There have been no changes in internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) during the period ended February 28, 2011 that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II – OTHER INFORMATION

ITEM 1.          LEGAL PROCEEDINGS

None.

ITEM 1A.       RISK FACTORS

The Company’s operations and securities are subject to a number of risks. Below we have identified and discussed the material risks that we are likely to face. Should any of the following risks occur, they will adversely affect our business, financial condition, and/or results of operations as well as the future trading price and/or the value of our securities.

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

The Company incurred net losses of $4,719,341 for the period from June 27, 2006 (inception) to February 28, 2011. Since we have been without significant revenue since inception and currently have no revenue producing operations outside of that produced from our interests in portfolio investment companies, historical losses may continue into the future.

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

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

There are significant commercialization risks related to technological businesses.

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

The Company competes with larger and better financed corporations.

Competition within the industrial coatings industry and other high technology industries is intense. While the Company’s products are distinguished by next-generation innovations that are more sophisticated and cost effective than many competitive products currently in the market place, a number of entities and new competitors may enter the market in the future. Some of our existing and potential competitors have longer operating histories, greater name recognition, larger customer bases and significantly greater financial, technical and marketing resources than we do, including well known multi-national corporations. Accordingly, our products could become obsolete at any time. Competitors could develop products similar to or better than our own, finish development of new technologies in advance of the Company’s research and development, or be more successful at marketing new products, any of which factors may hurt our prospects for success

General economic conditions will affect our operations.

Changes in the general domestic and international climate may adversely affect the 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.

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

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

We may not be able to effectively manage our growth.

We expect considerable future growth in our business. However, to achieve this growth in an efficient and timely manner, we will have to maintain strict controls over our internal management, technical, accounting, marketing, and research and development departments. We believe that we have retained sufficient quality personnel to manage our anticipated future growth and have adequate reporting and control systems in place. Should we be unable to successfully manage our anticipated future growth by adherence to these strictures, costs may increase, growth could be impaired and our ability to keep pace with technological advances may be impaired which failures could result in a loss of future customers.

We may rely upon patents and other intellectual property.

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

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

Environmental laws and other governmental legislation may affect our business.

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

We may face liability claims on our future products.

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

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

The market for our common stock has been limited due to low trading volume and the small number of brokerage firms acting as market makers. Because of the limitations of our market and volatility of the market price of our stock, investors may face difficulties in selling shares at attractive prices when they want to. The average daily trading volume for our stock has varied significantly from week to week and from month to month, and the trading volume often varies widely from day to day.
 

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

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

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

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

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

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

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

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

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

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

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

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

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

15g-9               which defines sales practice requirements.

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

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

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

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