UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q/A

Amendment No.1

(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.

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/A.

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.

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, pursuant to an Investment Agreement, with the option to acquire up to a seventy five percent (75%) interest. On October 25, 2010, November 3, 2010, and January 27, 2011, we advanced to MesoCoat $600,000, $500,000, and $160,000, respectively, to represent deposits on our next stage of investment in their company.

On December 8, 2010, we 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 MesoCoat’s May 31, 2010 audit. As of February 28, 2011, we have made the above discussed deposits on the next stage of our investment, and we plan on completing our next stage of investment before the end of our fiscal year, May 31, 2011.

We have analyzed our investment in accordance of “Investments – Equity Method and Joint Ventures” (ASC 323), and concluded that our 34% minority interest investment does give us significant influence over MesoCoat business actions, board of directors, or its management, and therefore we will account for our 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. We have analyzed our investment in accordance to ASC323 and have determined that no impairment of our investment is necessary at this time; because we believe our intention to exercise our future options to increase our investment represent level 2 indicators of fair value of our existing investment. The table below reconciles our investment amount and equity method amounts to the amount on the accompanying balance sheet.

NOTE 6 - INVESTMENT IN NON-CONTROLLING INTEREST - continued

MesoCoat, Inc. - continued

Below is a table with summary financial results of operations and financial position of MesoCoat:

Please see below for a discussion on how the planned purchase of ownership in Powdermet, Inc. (“Powdermet”) affects our investment in MesoCoat.

Powdermet, Inc.

The Company entered into a stock purchase agreement date June 28, 2010, as amended on September 7, 2010, 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 in exchange for one million five hundred thousand dollars ($1,500,000).

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

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.

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 8 – STOCKHOLDERS' EQUITY - continued

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.

NOTE 10 – EARNINGS-PER-SHARE CALCULATION

Basic earnings per common share for the periods ended February 28, 2011 and 2010, are calculated by dividing net income by weighted-average common shares outstanding during the period. Diluted earnings per common share for the periods ended February 28, 2011 and 2010 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:

            * =  less than $(.01) per share

Dilutive potential common shares are calculated in accordance with the treasury stock method, which assumes that proceeds from the exercise of all warrants and options are used to repurchase common stock at market value. The amount of shares remaining after the proceeds are exhausted represents the potentially dilutive effect of the securities. The increasing number of warrants used in the calculation is a result of the increasing market value of the Company’s common stock.

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.

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.

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 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.

·         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.

Subsequent to the period covered by this current report, 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 through an Accord and Satisfaction Agreement, to purchase 596,813 shares of Powdermet, equal to a 41% interest in Powdermet, for $1,650,000.

The terms and conditions of the Investment Agreement with Powdermet to acquire an equity interest in MesoCoat and the terms and conditions of the Stock Purchase Agreement with Kennametal, Inc., to acquire an equity interest in Powdermet (and thereby an indirect interest in MesoCoat) were negotiated on an arms-length basis by unrelated parties without the benefit of a third party appraisal of the current or future value of either investment. Rather our valuation of both investments was based on our analysis of what its products and technologies could do, what solutions it had for specific markets, what market share could be captured, how MesoCoat intended to commercialize its products and how realistic were MesoCoat’s financial projections.  We completed a detailed analysis of these questions and prepared a document that specifically considered the facts and supported our conclusions. Our reliance on options to increase our investment in MesoCoat is consistent with our valuation model going forward which dictates that options will only be exercised at the price agreed if developmental milestones in respect to value as determined by us are achieved within the parameters of our agreement. The exercise of the initial option permitted under the Investment Agreement is our measure of the fair value of our investment in MesoCoat on the date of exercise.

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 Powdermet’s 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.

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 a proprietary high-speed application system. The result is protective cladding applications that can 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. MesoCoat’s 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). MesoCoat products nearing commercialization are CermaClad^TM for cladding application and PComP ^TM for ceramic-metallic composite powder thermal spray application.

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 lab and toll powder manufacturer into a commercial sector company.

While MesoCoat’s product focus is on developing advanced cermets to address corrosion and wear coating needs, Powdermet’s product differentiation is based on its ability to build advanced nano-structured metal formulations to address energy efficiency, reduction in hazardous materials, and life cycle cost reduction. Powdermet’s technologies are particularly useful in crash and ballistic energy management markets since they offer weight reduction and the ability to dissipate substantially more impact energy than the aluminum alloys and foamed metals currently available. Powdermet has four materials solution families under development.

Plan of Operation

For the coming year the Company aims to:

·         Assist MesoCoat in positioning itself to succeed in commercialization efforts focused on its CermaClad™ and PComP™ products by:

o   Establishing overseas subsidiaries and plants while supporting their management teams.

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

·         Increase investment in MesoCoat.

·         Target existing coating companies to qualify and use our powders produced by MesoCoat and Powdermet.

·         Support 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.

o   Gaining another joint venture agreement with one or two other major oil corporations by fourth quarter 2011.

o   Completing construction of its first operating plant in Euclid, Ohio and begin producing work samples for certification and approval by potential clients by first 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.

The Company will require additional funding over the next twelve months to fulfill its business plan. Not all of the funding sought is currently available though the Company expects to realize additional funding for the prospective exercise of the initial option under the Investment Agreement. Should the Company be unable to secure additional financing from outside sources, the Company will most likely be unable to meet its milestones and may need to scale back operations. Any shortfall in minimum funding will adversely affect the Company’s ability to expand or even continue operations.

Results of Operations

During the nine month period ended February 28, 2011, the Company:

·           Focused our efforts on our interest on the continued development of MesoCoat and its products.

·           Strengthened our management team with industry experts.

·           Enlarged our board of directors.

·           Amended the terms of our Investment Agreement to extend the time frame in which to acquire a 51% in MesoCoat.

·           Sought and concluded financings in December 2010 for $2,250,000 toward the acquisition of equity interests in MesoCoat and Powdermet.

·           Continued to identify prospective business opportunities for merger or acquisition.

During the nine month period ended February 28, 2011, 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.

·         Entering into a Cooperation Agreement with Petroleo Brasiliero S.A. (“Petrobras”).

·         Accelerating R&D schedules by negotiating favorable engineering contracts with third parties.

Subsequent to the nine month period ended February 28, 2011, the Company:

·           We sought and concluded financings in December 2010 for $2,250,000, in March 2011 for $1,500,000 and April 2011 for $500,000 toward the acquisition of equity interests in MesoCoat and Powdermet.

·           We 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 approximately 41% interest in Powdermet for an aggregate of $1,650,000.

Subsequent to the nine month period ended February 28, 2011, the Company assisted MesoCoat with the following developments:

·         Breaking ground on a new 11,000 sq. ft. manufacturing plant in Euclid, Ohio; full-scale 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.

·         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 MesoCoat’s 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 Janeiro, Brazil, and is the largest company in Latin America.

·         Entering into a collaborative effort with the University of Akron (“UA”) to develop and accelerate commercialization of advanced inorganic coatings directed at reducing the nation’s $300 billion corrosion problem; UA’s 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. 

·         Entering into an Exclusive Supply Agreement with Mattson Technology, Inc. (NASDAQ: MTSN) that grants MesoCoat access to Mattson’s Vortek® arc lamp system; MesoCoat will use the ultra-high-intensity lamps in the CermaClad™ process.

Net Losses

For the period from June 27, 2006 (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 compared to $260,368 for the three month period ending February 28, 2010. Net losses for the nine month period ending February 28, 2011 were $2,701,210 compared to $400,303 for the nine month period ending February 28, 2010. The increase in net losses over the comparative three month periods can be primarily attributed to increases in operating expenses to $882,023 from $258,023 and the current period’s realization of liquidated damages associated with our agreement to acquire Powdermet shares of $150,000. The increase in net losses over the comparative nine month periods can be primarily attributed to increases in operating expenses to $2,105,030 from $390,803, the current period’s realization of liquidated damages associated with our agreement to acquire Powdermet shares to $250,000, and the current period’s realization of losses associated with the value of our MesoCoat investment of $331,414.

We expect to continue to operate at a loss through fiscal 2011.

Revenues

We have had no revenues since inception.

Operating Expenses

For the period from inception until February 28, 2011, the Company incurred operating expenses of $3,912,242. 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 three month periods can be primarily attributed to increases in general and administrative expenses (specifically the increase in consulting expenses to $259,571 from $22,800, and the current period’s realization of payroll and benefits expenses of $89,423) and increases in stock option expenses to $347,449 from $135,067. The increase in operating expenses over the comparative nine month periods can be primarily attributed to increases in general and administrative expenses (specifically increases in consulting expenses to $559,974 from $29,800, increases in related party consulting expenses to $265,700 from $108,000, and the current period’s realization of payroll and benefits expenses of $133,444) and increases in stock option expenses to $746,177 from $135,067.

We expect operating expenses will continue to increase as the Company intends to continue to expand operations which expansion will cause it to incur additional costs.

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, accounts payable to related parties, loans payable and accruals, loans payable and accruals to related parties, 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 investments.

Going Concern

Our auditors have expressed an opinion as to the Company’s ability to continue as a going concern as a result of net losses of $2,018,132, and a working capital deficit of $205,399 as of May 31, 2010. The Company’s ability to continue as a going concern is subject to the ability of the Company to realize a profit and /or obtain funding from outside sources. Management’s plan to address the Company’s ability to continue as a going concern includes: (i) obtaining funding from the private placement of debt or equity; (ii) realizing a gain from its investments in MesoCoat and Powdermet; (iii) converting debt to equity and (iv) obtaining loans and grants from financial or government institutions. Management believes that it will be able to obtain funding to allow the Company to remain a going concern through the methods discussed above, though there can be no assurances that such methods will prove successful.

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

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 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/A 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 ineffective in recording, processing, summarizing, and reporting information required to be disclosed, within the time periods specified in the Commission’s rules and forms, and such information was not accumulated and communicated to management, including the chief executive officer and the chief financial officer, to allow timely decisions regarding required disclosures.

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

Legal proceedings were initiated by Powdermet against Dean M. Baker and Advanced Powder Solutions (APS), Inc. et al (“Baker”) in July of 2006 in the Superior Court of the State of California, County of Los Angeles. The claims alleged violation of the Uniform Trade Secrets Act, misappropriation of trade secrets, breach of contract, conversion and intentional interference with prospective business advantage. The claim sought damages of $10,000,000 and punitive damages of $20,000,000 plus the legal fees incurred in prosecuting the suit. Subsequent to the date of this quarterly report, the suit was taken to jury trial on March 17, 2011, and the parties are awaiting a verdict.

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 may 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 $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 by MesoCoat, historical losses may continue into the future.

The Company’s 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 Company’s 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 endeavors will require that sufficient funding be available to the Company to assist in the development of its 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 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.

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.

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.

Market acceptance of our products and processes produced by MesoCoat and Powdermet will be 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 such products is therefore critical to our growth. If our customers do not accept or purchase the products or processes produced by MesoCoat and Powdermet, then our revenue, cash flow and operating results will be negatively impacted.

General economic conditions will affect our operations.

Changes in the general domestic and international climate may adversely affect the financial performance of the Company, MesoCoat and Powdermet. Factors that may contribute to a change in the general economic climate include industrial disputes, interest rates, inflation, international currency fluctuations and political and social reform. Further, the delayed revival of the global economy is not conducive to rapid growth, particularly of technology companies with newly commercialized products.

MesoCoat and Powdermet rely upon patents and other intellectual property.

MesoCoat and Powdermet rely on a combination of patent applications, trade secrets, trademarks, copyrights and licenses, together with non-disclosure and confidentiality agreements, to establish and protect proprietary rights to technologies they develop. Should either of MesoCoat or Powdermet be unable to adequately protect their intellectual property rights or become subject to a claim of infringement, their businesses and that of the Company may be materially adversely affected.

MesoCoat and Powdermet expect to prepare patent applications in accordance with their respective worldwide intellectual property strategies on acquiring new technologies. However, neither they nor the Company can be certain that any patents will be issued with respect to future patents pending or future patent applications. Further, neither they nor the Company know whether any future patents will be upheld as valid, proven enforceable against alleged infringers or be effective in preventing the development of competitive patents. The Company believes that MesoCoat and Powdermet have each implemented a sophisticated internal intellectual property management system to promote effective identification and protection of their products and know-how in connection with the technologies they have developed and may develop in the future

We may not be able to effectively manage our growth.

We expect considerable future growth in our business. Such growth will come from the addition of new plants, the increase in global personnel, and the commercialization of new products. Additionally, our products should have an impact on the cladding industry; as companies learn that they can receive materials with a short lead time at a higher quality and lower price, market demand should grow, expanding the overall market itself. To achieve growth in an efficient and timely manner, we will have to maintain strict controls over our internal management, technical, accounting, marketing, and research and development departments. We believe that we have retained sufficient quality personnel to manage our anticipated future growth though we are still striving to improve financial accounting oversight to ensure that adequate reporting and control systems in place. Should we be unable to successfully manage our anticipated future growth by adherence to these strictures, costs may increase, growth could be impaired and our ability to keep pace with technological advances may be impaired which failures could result in a loss of future customers.

Environmental laws and other governmental legislation may affect our business.

Should the technologies which each of MesoCoat and Powdermet have under development not comply with applicable environmental laws the Company’s business and financial results could be seriously harmed. Furthermore, changes in legislation and governmental policy could also negatively impact us. Although we are currently unaware of any introduced or proposed bills, or policy, that might cause us to make specific changes to our operations, no assurance can be given that if new legislation is passed we will be able to make the changes to comport our technologies with future regulatory requirements.

The Company and those subsidiaries in which it holds and will hold 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 we develop, any undetected defects could harm their reputations and that of the Company, diminish their customer base, shrink revenues and expose them 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.
 

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

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

Our internal controls over financial reporting are not considered effective, which 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. Since we are unable 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 common stock is currently deemed to be “penny stock”, which makes it more difficult for investors to sell their shares.

The Company’s common stock is and will be subject to the “penny stock” rules adopted under section 15(g) of the Exchange Act. The penny stock rules apply to companies whose common stock is not listed on the NASDAQ Stock Market or other national securities exchange and trades at less than $5.00 per share or that have tangible net worth of less than $5,000,000 ($2,000,000 if the company has been operating for three or more years). These rules require, among other things, that brokers who trade penny stock to persons other than “established customers” complete certain documentation, make suitability inquiries of investors and provide investors with certain information concerning trading in the security, including a risk disclosure document and quote information under certain circumstances. Many brokers have decided not to trade penny stocks because of the requirements of the penny stock rules and, as a result, the number of broker-dealers willing to act as market makers in such securities is limited. If the Company remains subject to the penny stock rules for any significant period, it could have an adverse effect on the market, if any, for the Company’s securities. If the Company’s securities are subject to the penny stock rules, investors will find it more difficult to dispose of the Company’s securities.

The Company complied with the exemption requirements of Section 4(2) of the Securities Act based on the following factors: (1) the issuance was an isolated private transaction by the Company which did not involve a public offering; (2) the offeree has access to the kind of information which registration would disclose; and (3) the offeree is financially sophisticated.

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

The Company complied with the exemption requirements of Regulation S by having directed no offering efforts in the United States, by offering common shares only to one offeree who was outside the United States at the time of the offering, and ensuring that the offeree to whom the common shares were offered and authorized was a non-U.S. offeree with an address in a foreign country.

On March 16, 2011 the board of directors of the Company authorized the grant of 20,000 options to purchase shares of the Company’s common stock to David Vander Gulik, which options have an exercise price of $1.05 per share, expire ten years from the grant date, in reliance on the exemption from registration provided by Section 4(2) of the Securities Act.

The Company complied with the exemption requirements of Section 4(2) of the Securities Act based on the following factors: (1) the grants were isolated private transactions by the Company which did not involve a public offering; (2) the grantees have access to the kind of information which registration would disclose; and (3) the grantees are financially sophisticated.

On February 3, 2011 the board of directors of the Company authorized the issuance of 160,000 shares of its common stock and 80,000 warrants to purchase common stock with an exercise price of $1.50 per share for a period of two years from the date of issuance to Paramount Trading Company, Inc., in exchange for $160,000 or $1.00 per unit pursuant to the exemptions from registration provided by Section 4(2) and Regulation S of the Securities Act.

The Company complied with the exemption requirements of Section 4(2) of the Securities Act based on the following factors: (1) the issuance was an isolated private transaction by the Company which did not involve a public offering; (2) the offeree has access to the kind of information which registration would disclose; and (3) the offeree is financially sophisticated.

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

On January 25, 2011, the board of directors of the Company authorized the grant of 25,000 stock options to Anupam Ghildyal for services rendered, which options have an exercise price of $1.25 per share, expire ten years from the grant date, and will vest in equal one third parts on the anniversary of the grant date, which options were authorized in reliance upon an exemption from registration provided by Section 4(2) of the Securities Act.

The Company complied with the exemption requirements of Section 4(2) of the Securities Act based on the following factors: (1) the issuance was an isolated private transaction by the Company which did not involve a public offering; (2) the offeree has access to the kind of information which registration would disclose; and (3) the offeree is financially sophisticated.

On December 10, 2010 the board of directors of the Company extinguished debt in the amount of $177,000 and realized a subscription payable of $3,000 for an aggregate of $180,000 in exchange for shares of common stock valued at $0.75 per share in reliance upon the exemptions from registration provided by Section 4(2) and Regulation S of the Securities Act as follows:

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 have access to the kind of information which registration would disclose; and (3) the offerees are financially sophisticated.

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

On October 22, 2010 the board of directors of the Company authorized the issuance of 1,600,000 shares of its common stock to Bank Julius Baer & Co.  Ltd. in exchange for $1,245,000 valued at $0.75 per share in reliance upon the exemptions from registration provided by Section 4(2) and Regulation S of the Securities Act.

The Company complied with the exemption requirements of Section 4(2) of the Securities Act based on the following factors: (1) the issuances 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 exemption requirements of Regulation S by having directed no offering efforts in the United States, by offering common shares only to offerees who were outside the United States at the time of the offering, and ensuring that the persons to whom the common shares were issued and authorized were non-U.S. persons with addresses in foreign countries.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.