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 November 30, 2012.
o Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the
transition period from
to
.
Commission file number: 000-52784
ABAKAN INC.
(Exact name of registrant as specified in its charter)
Nevada
98-0507522
(State or other jurisdiction of
(I.R.S. Employer
incorporation or organization)
Identification No.)
2665 S. Bayshore Drive, Suite 450, Miami, Florida 33133
(Address of principal executive offices) (Zip Code)
(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 þ 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 o No þ
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 January 14, 2013 was 62,243,003.
1
TABLE OF CONTENTS
PART 1- FINANCIAL INFORMATION
Item1.
Financial Statements:
3
Condensed Consolidated Balance Sheets for the period ended November 30, 2012
4
(Unaudited) and May 31, 2012
Unaudited Condensed Consolidated Statements of Operations for the three and six
5
months ended November 30, 2012 and 2011, and cumulative amounts from
development stage activities (June 27, 2006 (Inception) through November 30,
2012)
Unaudited Condensed Consolidated Statements of Cash Flows for the six months
6
ended November 30, 2012 and 2011, and cumulative amounts from development
stage activities (June 27, 2006 (inception) through November 30, 2012)
Condensed Notes to Consolidated Financial Statements (Unaudited)
8
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of
35
Operations
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
52
Item 4.
Controls and Procedures
52
PART II-OTHER INFORMATION
Item 1.
Legal Proceedings
53
Item 1A.
Risk Factors
53
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
57
Item 3.
Defaults Upon Senior Securities
60
Item 4.
(Removed and Reserved)
60
Item 5.
Other Information
60
Item 6.
Exhibits
60
Signatures
61
Index to Exhibits
62
2
PART I – FINANCIAL INFORMATION
ITEM 1.
FINANCIAL STATEMENTS
As used herein, the terms “Abakan”, “we,” “our,” and “us” refer to Abakan Inc., a Nevada corporation,
and its consolidated subsidiaries, 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.
3
ABAKAN, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
November 30,
May 31,
2012
2012
(unaudited)
ASSETS
Current assets
Cash and cash equivalents
$
715,591
$
859,566
Accounts receivable
85,912
22,854
Note receivable - related parties
4,500
4,500
Prepaid expenses (Note 7)
124,103
183,134
Total current assets
930,106
1,070,054
Non-current assets
Property, plant and equipment, net (Note 4)
4,187,569
3,021,088
Patents and licenses, net (Note 5)
7,672,228
7,776,315
Assignment agreement - MesoCoat (Note 6)
230,267
250,000
Investment - Powdermet (Note 8)
2,651,088
2,710,189
Goodwill
364,384
364,384
Total Assets
$
16,035,642
$
15,192,030
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable
$
643,750
$
425,868
Accounts payable - related parties (Note 12)
190,867
80,773
Capital leases - current portion
36,595
42,999
Loans payable, net of discounts of $171,615 (Note 9)
2,678,132
2,465,165
Accrued interest - loans payable (Note 9)
329,331
183,106
Loan payable- related parties (Note 12)
30,000
-
Accrued interest – related parties (Note 12)
773
-
Accrued liabilities
366,232
310,997
Total current liabilities
4,275,680
3,508,908
Non-current liabilities
Loans payable, net of discounts of $444,881 (Note 9)
2,091,696
1,146,277
Capital leases - non-current portion
60,557
72,176
Total liabilities
6,427,933
4,727,361
Commitments and contingencies (Note 14)
Stockholders' equity (Note 10)
Preferred stock, $0.0001 par value, 50,000,000 shares
authorized, none issued and outstanding
-
-
Common stock, par value $0.0001, 2,500,000,000 shares
62,243,003 issued and outstanding – November 30, 2012,
61,465,445 issued and outstanding - May 31, 2012
6,226
6,147
Subscription receivable
(27,500)
-
Subscription payable
12,000
-
Paid-in capital
15,785,140
13,321,527
Contributed capital
5,050
5,050
Accumulated deficit during the development stage
(9,302,201)
(6,322,365)
6,478,715
7,010,359
Non-controlling interest
3,128,994
3,454,310
Total stockholders' equity
9,607,709
10,464,669
Total liabilities and stockholders' equity
$
16,035,642
$
15,192,030
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
4
ABAKAN INC.
(A DEVELOPMENT STATE ENTERPRISE)
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For three months ended
For six months ended
November 30,
November 30,
(Inception) to
2012
2011
2012
2011
November 30, 2012
Revenues
Commercial
$
50,781 $
25,338 $
70,081 $
31,515 $
147,472
Contract and grants
777,502
391,654
1,324,829
689,768
3,423,583
Other income
(268,756)
131,885
-
175,982
764,879
559,527
548,877
1,394,910
897,265
4,335,934
Cost of Revenues
205,227
220,948
542,001
391,031
1,591,199
Gross profit
354,300
327,929
852,909
506,234
2,744,735
Expenses
General and administrative
General and administrative
176,990
111,098
338,677
217,303
1,233,944
Professional fees
136,933
81,782
257,237
156,543
827,038
Professional fees - related parties
15,000
15,000
30,000
30,000
195,000
Consulting
259,085
159,417
623,017
384,789
2,327,312
Consulting - related parties
123,250
76,500
222,677
153,077
1,462,657
Payroll and benefits expense
160,701
215,442
343,677
353,049
1,341,982
Depreciation and amortization
108,432
84,171
193,932
166,230
526,016
Research and development
242,586
139,964
536,194
273,212
1,273,510
Impairment of asset
-
-
-
-
180,000
Stock expense on note conversion
37,223
-
37,223
-
528,200
Stock options expense
439,427
453,339
899,211
791,856
3,487,995
Total expenses
1,699,627
1,336,713
3,481,845
2,526,059
13,383,654
Loss from operations
(1,345,327)
(1,008,784)
(2,628,936)
(2,019,825)
(10,638,919)
Other (expense) income
Interest expense:
Interest - loans
(119,244)
(42,960)
(223,012)
(78,540)
(548,757)
Interest - related parties
(773)
(133)
(773)
(133)
(7,333)
Liquidated damages
-
-
-
-
(250,000)
Amortization of discount on debt
(215,957)
(155,787)
(397,085)
(279,322)
(1,009,949)
Total interest expense
(335,974)
(198,880)
(620,870)
(357,995)
(1,816,039)
Interest income
62
74
3,755
221
8,126
Loss on debt settlement
-
-
-
-
(5,257)
Gain on debt settlement
-
-
-
-
257,252
Gain on sale of assets
429,717
Unrealized gain on MesoCoat acquisition
-
- -
-
1,764,345
1,764,345
Equity in Powdermet income/ (loss)
(100,276)
(24,775)
(59,101)
21,274
1,001,088
Equity in MesoCoat loss
-
-
-
(44,408)
(586,020)
Total Other (expense) income
(436,188)
(223,581)
(676,216)
1,383,437
1,053,212
Net profit/ (loss) before non-controlling interest
(1,781,515)
(1,232,365)
(3,305,152)
(636,388)
(9,585,707)
Non-controlling interest in MesoCoat Loss
209,062
69,975
325,316
123,867
283,506
Net profit/ (loss) attributable to Abakan Inc.
(1,572,453)
(1,162,390)
(2,979,836)
(1,634,929)
(9,302,201)
Provision for income taxes
-
-
-
-
-
Net profit/ (loss)
$ (1,572,453) $ (1,162,390) $ (2,979,836) $
(512,521) $
(9,302,201)
$
Net profit/ (loss) per share - basic
(0.03) $
(0.02) $
(0.05) $
(0.01)
Net profit/ (loss) per share - diluted
$
(0.03) $
(0.02) $
(0.05) $
(0.01)
Weighted average number of common
shares outstanding - basic
61,999,242
59,377,425
61,806,104
59,353,818
Weighted average number of common
shares outstanding - diluted
61,999,242
59,377,425
61,806,104
59,353,818
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
5
ABAKAN, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Cumulative
amounts from
development stage
activities
For the six months ended
June 27, 2006
November 30,
(Inception) to
2012
2011
November 30, 2012
CASH FLOWS FROM DEVELOPMENT STAGE ACTIVITIES
Net profit/ (loss) before non-controlling interest
$
(3,305,152) $
(636,388) $
(9,585,707)
Adjustments to reconcile net (loss) to net
cash provided by (used in) development stage activities:
Depreciation and amortization
193,932
166,230
526,016
Amortization of discount on debt
397,085
279,322
1,009,949
Amortization of deferred financing fees
-
730
-
Stock options expense
899,211
791,856
3,487,995
Stock expense from note conversion
37,223
-
528,200
Stock issued for services
222,125
76,000
902,776
Equity in investee (profit)/ loss
59,101
23,134
(415,066)
Unrealized gain on MesoCoat acquisition
-
(1,764,345)
(1,764,345)
Gain on sale of capital asset
-
-
(429,717)
Changes in operating assets and liabilities:
Accounts receivable
(63,058)
75,513
85,545
Notes receivable - related parties
-
-
(4,500)
Prepaid expenses
59,031
(25,977)
(138,256)
Prepaid expenses - related parties
-
1,485
14,152
Accounts payable
217,875
272,145
857,433
Accounts payable - related parties
110,094
156,735
273,598
Accrued interest - related parties
-
-
2,664
Accrued interest - loans payable
223,785
77,801
383,189
Accrued liabilities
55,235
96,922
233,426
Waste to Energy Group Inc.
-
-
180,000
Total adjustments
2,411,639
227,551
5,733,059
NET CASH (USED IN) DEVELOPMENT STAGE ACTIVITIES
(893,513)
(408,837)
(3,852,648)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property, plant, equipment and website
(1,214,142)
(626,105)
(2,321,016)
Proceeds from sale of capital assets
-
-
470,000
MesoCoat - minority interest, net of cash assumed in business combination
-
307,650
(2,390,266)
Investment in MesoCoat
-
-
(750,070)
Powdermet - minority interest
-
-
(1,650,000)
Assignment agreement - MesoCoat
-
-
(100,000)
Capitalized patents and licenses
(22,451)
(27,148)
(120,636)
Waste to Energy Group Inc.
-
-
(180,000)
NET CASH PROVIDED BY/ (USED) IN INVESTING ACTIVITIES
(1,236,593)
(345,603)
(7,041,988)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from sale of common stock
1,091,101
245,465
7,022,942
Proceeds from loans payable
1,037,580
944,833
4,888,867
Payments on loans payable
(138,974)
-
(514,625)
Proceeds from loans payable - related parties
66,200
9,000
145,880
Payments on loans payable - related parties
(36,253)
-
(15,190)
Repayments of capital leases
(18,023)
(11,565)
(72,662)
Stock Issuable
(15,500)
-
149,965
Proceeds from capital contributed
-
-
5,050
NET CASH PROVIDED BY FINANCING ACTIVITIES
1,986,131
1,187,733
11,610,227
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS
(143,975)
433,293
715,591
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
859,566
-
-
CASH AND CASH EQUIVALENTS, END OF PERIOD
$
715,591 $
433,293 $
715,591
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6
ABAKAN, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Cumulative
amounts from
development stage
activities
For the three months ended
June 27, 2006
November 30,
(Inception) to
2012
2011
November 30, 2012
Supplemental Disclosures:
Cash paid for income taxes
$
- $
- $
-
Cash paid for interest
$
- $
- $
964
Supplemental Non-cash Disclosures:
Notes and accounts payable converted to stock
Accounts payable - related parties
$
(46,000) $
- $
(251,971)
Loans payable
(157,788)
-
(807,957)
Accrued interest
(10,245)
-
(14,576)
Notes payable - related parties
-
-
(99,515)
Accrued interest - related parties
-
-
(9,724)
Common stock
214,033
-
1,188,493
Subscription payable
-
-
(3,000)
Subscription receivable
-
-
(1,750)
$
- $
- $
-
Stock issued for assignment agreement - MesoCoat
Assignment agreement - MesoCoat
$
- $
- $
(150,000)
Common stock
-
-
150,000
$
- $
- $
-
Capital lease equipment acquired
Property, plant and equipment
$
- $
38,532 $
126,907
Capital lease payable
-
(38,532)
(126,907)
$
- $
- $
-
Non-cash write off of balances
Accounts payable - related parties
$
- $
- $
52,030
Loans payable
-
-
(156)
Accrued interest
-
-
(553)
Notes payable - related parties
-
-
(52,260)
Accrued interest - related parties
-
-
(811)
Subscription receivable
-
-
1,750
$
- $
- $
-
Beneficial conversion valuation
Additional paid-in capital
$
- $
505,873 $
1,241,449
Discount on convertible debts
-
(505,873)
(1,241,449)
$
- $
- $
-
Controlling interest purchase - MesoCoat
Accounts receivable
$
- $
171,457 $
171,457
Property and equipment, net
-
1,899,598
1,899,598
Deferred financing fees
-
3,608
-
Patents and licenses, net
-
2,170,391
7,938,206
Total assets
-
4,245,053
10,009,261
Accounts payable
-
(268,398)
(268,398)
Capital leases
-
(42,906)
(42,907)
Loans Payable and accrued interest
-
(2,415,469)
(2,233,474)
Other accrued liabilities
-
(65,545)
(65,545)
Total liabilities
-
(2,792,318)
(2,610,324)
Net assets
-
1,452,735
7,398,937
Non-controlling interest equity
-
(1,468,023)
(3,412,500)
Goodwill
-
4,335,646
364,384
Investment in MesoCoat
-
(1,849,665)
(1,849,665)
MesoCoat net assets received
$
- $
2,470,693 $
2,501,156
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7
ABAKAN INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the six months ended November 30, 2012 and 2011
NOTE 1 – BUSINESS
Your Digital Memories, Inc. was incorporated in the state of Nevada on June 27, 2006.
Waste to Energy Group Inc., a wholly-owned subsidiary of Your Digital Memories Inc., was incorporated
in the state of Nevada on August 13, 2008. Waste to Energy Group Inc. and Your Digital Memories Inc.
entered into an Agreement and Plan of Merger on August 14, 2008. The board of directors of Waste to
Energy Group Inc. and Your Digital Memories Inc. deemed it advisable and in the best interest of their
respective companies and shareholders that Waste to Energy be merged with and into Your Digital
Memories Inc. with Your Digital Memories Inc. remaining as the surviving corporation under the name
Waste to Energy Group Inc.
Abakan Inc., a wholly-owned subsidiary of Waste to Energy Group Inc., was incorporated in the state of
Nevada on November 6, 2009. Abakan Inc. and Waste to Energy Group Inc. entered into an Agreement
and Plan of Merger on November 6, 2009. The board of directors of Abakan Inc. and Waste to Energy
Group Inc. deemed it advisable and in the best interest of their respective companies and shareholders that
Abakan Inc. be merged with and into Waste to Energy Group Inc. with Waste to Energy Group Inc.
remaining as the surviving corporation under the name “Abakan Inc.”
Unless the context indicates otherwise, all references herein to the “Company”, “we,” “us,” and “our”
refer to Abakan Inc. and its consolidated subsidiaries. The Company is in the development stage as
defined under FASB ASC 915-10, "Development Stage Entities."
On December 10, 2009 the Company purchased a thirty-four percent (34%) interest in MesoCoat, Inc.
("MesoCoat"), and on July 13, 2011 purchased an additional eighteen and one-half percent (18.50%), for
an aggregate total of fifty two and one-half percent (52.50%) of the outstanding stock of MesoCoat.
MesoCoat (formerly “Powdermet Coating Technologies, Inc.”) was incorporated in Nevada as a wholly
owned subsidiary of Powdermet, Inc. (“Powdermet”) on May 18, 2007. Operations began in 2008 and
effective March 31, 2008 it was renamed as MesoCoat. Future success of operations is subject to several
technical hurdles and risk factors, including satisfactory product development, regulatory approval and
market acceptance of MesoCoat’s products and its continued ability to obtain future funding. MesoCoat is
currently in the development stage, as operations consist primarily of research and development
expenditures, and revenues from planned principal operations that have not yet been realized. MesoCoat
has invested heavily in intellectual property, machinery and equipment to initiate the research and
development of its core technology. Currently, MesoCoat’s revenue consists almost entirely of
government grants and cooperative reimbursement agreements.
On March 21, 2011, the Company purchased 596,813 shares of Powdermet from Kennametal, Inc., an
unrelated party, equal to a fully diluted 41% interest in Powdermet.
Powdermet was formed in 1996 as a Delaware corporation and has since developed a product platform of
advanced materials solutions derived from nano-engineered particle agglomerate technology and derived
hierarchically structured materials. Powdermet also owns 47.50% of MesoCoat.
On June 8, 2011, the Company formed a wholly owned subsidiary company named, AMP Distributors,
Ltd. (“AMP Distributors”), a Grand Cayman corporation. AMP Distributors was formed to distribute
MesoCoat products to consumer markets.
8
ABAKAN INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the six months ended November 30, 2012 and 2011
NOTE 1 – BUSINESS - continued
On June 8, 2011, the Company formed a wholly owned subsidiary company named, AMP Distributors,
Ltd. (“AMP Distributors”), a Grand Cayman corporation. AMP Distributors was formed to distribute
MesoCoat products to consumer markets.
On July 27, 2012, the Company formed a wholly owned subsidiary company named, AMP Distributors,
Inc. (“AMP FL”), a Florida corporation. AMP Distributors was formed to distribute MesoCoat products
to consumer markets.
The Company’s plan of operation is to acquire interests in early stage companies. Since those firms are
typically pre-commercialization, it is anticipated that each firm the Company decides to acquire will need
successive rounds of financing to fund research & development, lengthy qualification periods, sales and
marketing efforts. However, this may not necessarily be the case if the Company acquires a new
technology company with existing sales or we agree to a licensing strategy.
The Company’s acquisition strategy is to make sure it negotiates upfront future ownership based on a
series of value creating steps whereby we have the right to continue or discontinue investing based on an
investee meeting those milestone steps. Our approach allows management to forecast potential financing
needs of any given firm in stages to plan for present and future fundraising efforts. Further, our approach
also enables the Company to hedge its investing if it feels a company is not performing up to the goals
that were anticipated during the negotiating process. By taking this approach, each investee company is
expected to reach certain operating milestones prior to receiving the next round of fundraising or us
exercising our next round of acquisition.
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
In the opinion of management, the accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with accounting principles generally accepted in the United States of
America (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 November 30,
2012, and the results of its operations and cash flows for the three and six months ended November 30,
2012, have been made. Operating results for the six months ended November 30, 2012 are not
necessarily indicative of the results that may be expected for the year ended May 31, 2013.
These condensed consolidated financial statements should be read in conjunction with the financial
statements and notes for the year ended May 31, 2012, thereto contained in the Company’s Form 10-K.
9
ABAKAN INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the six months ended November 30, 2012 and 2011
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
Consolidation Policy
The accompanying November 30, 2012 financial statements include the Company’s accounts and the
accounts of its subsidiaries. All significant intercompany transactions and balances have been eliminated in
consolidation. The Company’s ownership of its subsidiaries as of November 30, 2012 is as follows:
Name of Subsidiary
Percentage of Ownership
AMP Distributors (Cayman)
100.00%
AMP Distributors (Florida)
100.00%
MesoCoat, Inc.
52.50%
Earnings (Loss) Per Common Share
The Company computes net loss per share in accordance with FASB ASC 260-10, "Earnings per Share".
FASB ASC 260 requires presentation of both basic and diluted earnings per share (EPS) on the face of
the statement of operations. Basic EPS is computed by dividing net loss available to common
stockholders (numerator) by the weighted average number of shares outstanding (denominator)
during the period. Diluted EPS gives effect to all potentially dilutive common shares outstanding during
the period. Diluted EPS excludes all potentially dilutive shares if their effect is anti-dilutive. The only
potentially dilutive common shares outstanding are stock options and warrants from inception (Note 11).
Non-Controlling Interest
Non-controlling interest represents the minority members’ proportionate share of the equity of MesoCoat,
Inc. The Company’s controlling interest in MesoCoat requires that its operations be included in the
consolidated financial statements. The equity interest of MesoCoat that is not owned by the Company is
shown as non-controlling interest in the consolidated financial statements.
Development Stage Enterprise
At November 30, 2012, the Company’s business operations had not fully developed and the Company is
highly dependent upon funding and therefore is considered a development stage enterprise.
Reclassifications
Certain amounts in the period ended November 30, 2011 financial statements have been reclassified to
conform to the current period ended November 30, 2012 presentation.
Accounts Receivable
Accounts receivable are stated at face value, less an allowance for doubtful accounts. The Company
provides an allowance for doubtful accounts based on management's periodic review of accounts,
including the delinquency of account balances. Accounts are considered delinquent when payments have
not been received within the agreed upon terms, and are written off when management determines that
collection is not probable. As of November 30, 2012 management has determined that no allowance for
doubtful accounts is required.
10
ABAKAN INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the six months ended November 30, 2012 and 2011
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
Accounts Receivable
Accounts receivable are stated at face value, less an allowance for doubtful accounts. The Company
provides an allowance for doubtful accounts based on management's periodic review of accounts,
including the delinquency of account balances. Accounts are considered delinquent when payments have
not been received within the agreed upon terms, and are written off when management determines that
collection is not probable. As of November 30, 2012 management has determined that no allowance for
doubtful accounts is required.
Notes Receivable
Notes receivable are stated at face value, plus any accrued interest earned. The Company analyzes each
note receivable each period for probability of collectability. Notes are considered in default when
payments have not been received within the agreed upon terms, and are written off when management
determines that collection is not probable. As of November 30, 2012 management has determined that no
occurrence of default exists.
Property, Plant and Equipment
Property, plant and equipment are stated at cost less accumulated depreciation and amortization.
Maintenance and repairs are charged to operations as incurred. Depreciation and amortization are based
on the straight-line method over the estimated useful lives of the related assets. When assets are retired or
otherwise disposed of, the cost and accumulated depreciation and amortization are removed from the
accounts, and any resulting gain or loss is reflected in operations in the period realized.
Asset Construction in Progress
Construction in progress assets, represent assets that are in process of construction and rehabilitation in
order to bring them to operational status. All costs are captured in a separate Construction in Progress
account, and are included in the “Property, plant and equipment – net” amounts, and when the asset is
ready to enter service, the total costs are capitalized and depreciation commences per the schedule below.
Depreciation
Depreciation is computed on the straight-line method net of salvage value with useful lives as follows:
Computer equipment and software
3 - 5 years
Office furniture and equipment
5 - 7 years
Machinery and equipment
7 - 10 years
Leasehold improvements
balance of lease term
11
ABAKAN INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the six months ended November 30, 2012 and 2011
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
Patent and Technology Licenses
Patent costs are recorded at the cost to obtain the patent and are amortized on a straight-line basis over their estimated
useful lives up to 20 years, beginning when the patent is secured by the Company. License costs are recorded at
the cost to obtain the license and are amortized on a straight-line basis over effective term of the license, up to 15
years.
Indefinite-Lived Intangible Assets
In accordance with GAAP, Intellectual Property – Research and Development in the amount of $6,120,200
related to the acquisition of MesoCoat, will not be amortized and will be reviewed for impairment on an annual
basis starting fiscal year ending May 31, 2013, due to its indefinite life.
Goodwill
In accordance with GAAP, goodwill in the amount of $364,384 related to the acquisition of MesoCoat will be
evaluated for impairment on an annual basis starting fiscal year ending May 31, 2013.
Revenue Recognition
The Company recognizes revenue when there is persuasive evidence of an arrangement, delivery has
occurred or services have been rendered, the sales price if fixed or determinable, and collectability is
reasonably assured.
Grant Revenue
Revenue from grants is generally recorded when earned as defined under the terms of the agreements. Each
grant document sets the timing of amounts that are allowed to be billed and how to bill those amounts. The Company
generally looks at a two week time period to bill from and work on the incurred costs for the same time period and
bills according to preset amounts that are allowed to be billed for per the grant documents. This is then billed through a
government billing system, reviewed by the government department, and then payment is sent to us.
Research and Development Costs
Research and development costs are charged to expense as incurred and are included in operating expenses. Total
research and development costs were $536,194 and $273,212 for the six months ended November 30, 2012 and
2011, respectively.
Advertising Expenses
Advertising costs are expensed as incurred. Advertising expenses are included in general and
administrative expense in the accompanying statement of operations. Total advertising expenses were
$5,000 and $496 for the six months ended November 30, 2012 and 2011, respectively.
12
ABAKAN INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the six months ended November 30, 2012 and 2011
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
Shipping and Handling Costs
The Company’s shipping and handling costs are included in cost of sales for all periods presented.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with GAAP requires management to make
estimates and assumptions that affect the reported amounts of assets, the disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts of revenues and expenses
during the reporting periods. The more significant areas requiring the use of estimates include asset
impairment, stock-based compensation, beneficial conversion features on debt instruments, and future
income tax amounts. Management bases its estimates on historical experience and on other assumptions
considered to be reasonable under the circumstances. Actual results may differ from the estimates.
Income Taxes
Income taxes are provided for using the liability method of accounting. A deferred tax asset or liability
is recorded for all temporary differences between financial and tax reporting. Deferred tax expense
(benefit) results from the net change during the year in deferred tax assets and liabilities. Valuation
allowances are established when necessary to reduce deferred tax assets to the amount expected to more
likely than not be realized in future tax returns. Tax law and rate changes are reflected in income in the
period such changes are enacted.
Subsequent Events
In accordance with ASC 855-10 “Subsequent Events”, the Company has evaluated subsequent events and
transactions for potential recognition or disclosure in the financial statements through the date the
financial statements were issued (Note 17).
NOTE 3 – GOING CONCERN
The accompanying financial statements have been prepared assuming that the Company will continue as
a going concern. The Company has net losses for the period of June 27, 2006 (inception) to the period
ended November 30, 2012, of $9,302,201, and a working capital deficit of $3,345,574. These
conditions raise substantial doubt about the Company’s ability to continue as a going concern. The
Company’s continuation as a going concern is dependent on its ability to develop additional sources of
capital, and/or achieve profitable operations and positive cash flows. Management’s plan is to
aggressively pursue its present business plan. Since inception we have funded our operations through
the issuance of common stock, debt financing, and related party loans and advances, and we will seek
additional debt or equity financing as required. The accompanying financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
13
ABAKAN INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the six months ended November 30, 2012 and 2011
NOTE 4 – PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following:
November 30, 2012
May 31, 2012
Machinery and equipment
$
734,099
$
427,641
Construction in progress
3,516,352
2,617,196
Computer equipment and office furniture
43,538
35,369
Leasehold improvements
54,177
53,818
4,348,166
3,134,024
Less accumulated depreciation and amortization
(160,597)
(112,936)
$
4,187,569
$
3,021,088
Depreciation and amortization expense was $47,661 and $18,878 for the six months ended November 30,
2012 and 2011, respectively.
NOTE 5 – PATENTS AND LICENSES
Patents and licenses consist of the following:
November 30, 2012
May 31, 2012
Patents
$
82,693 $
72,991
Website
21,000
21,000
Intellectual Property Research and Development
6,120,200
6,120,200
Licenses
1,855,949
1,843,200
8,079,842
8,057,391
Less accumulated amortization
(407,614)
(281,076)
$
7,672,228 $
7,776,315
Amortization expense was $126,538 and $147,354 for the six months ended November 30, 2012 and
2011, respectively. In the six months ended November 30, 2012 and 2011, we have capitalized an
additional $22,451 and $27,148, respectively, on patents and licenses, and have begun amortizing those
according to our policy.
Future amortization patents and licenses as of November 30, 2012 are presented in the table below:
For the years ended May 31,
2013
$
161,860
2014
288,398
2015
288,398
2016
288,398
2017 and beyond
524,974
$ 1,552,028
14
ABAKAN INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the six months ended November 30, 2012 and 2011
NOTE 5 – PATENTS AND LICENSES - continued
Patent license agreement
The Company has an exclusive commercial patent license agreement with a third party which requires the
Company to invest in the research and development of technology and the market for products by
committing to a certain level of personnel hours and $350,000 of expenditures.
The patent license agreement required a total of $50,000 in execution fees which are included in
intangible assets. The patent license agreements requires royalty payments equal to 2.5% of net sales of
the product sold by the Company beginning after the first commercial sale. For the first calendar year
after the achievement of a certain milestone and the following two calendar years during the term of the
agreement, the Company will pay a minimum annual royalty payment of $10,000, $15,000 and $20,000
respectively.
NOTE 6 – ASSIGNMENT AGREEMENT – MESOCOAT
On March 25, 2011, the Company entered into an assignment agreement (the Agreement) whereby it
would assume the exclusive rights to distribute MesoCoat’s products intended for applications specific to
the oil and gas pipeline industry in consideration of $250,000. The Agreement was entered into with a
company that entered into an exclusive distribution agreement with MesoCoat dated October 10, 2008
which was in effect for 10 years following the original date of the exclusive distribution agreement. On
May 31, 2011, the Company completed the transfer of consideration and assumed all rights to the
agreement. We commenced amortization on June 1, 2012, over the remaining term of 76 months, and
have recorded $19,733 in amortization expense as of the six months ended November 30, 2012.
15
ABAKAN INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the six months ended November 30, 2012 and 2011
NOTE 7 – PREPAID EXPENSES
Prepaid expenses consisted of the following at November 30, 2012:
Name
Description
Amount
Steven Ferris
Prepayment for services
$
15,000
Better Investing
Prepayment retainer for services
1,875
IPFS Corporation
Prepayment for insurance
9,070
Optiminera SA
Prepayment retainer for services
25,500
Financial Insights
Prepayment retainer for services
5,000
Crystal Research Associates
Prepayment retainer for services
10,417
Hall, Lamb, & Hall
Prepayment retainer for legal fees
5,782
Fulcrum Financial Inquiry
Prepayment retainer for services
800
Antenna Group
Prepayment retainer for services
15,800
Steven Rosenfeld, PC
Prepayment retainer for legal fees
2,555
Wolf, Rifkin, Shapiro
Prepayment retainer for legal fees
2,000
Rick Beck Engineering
Prepayment retainer for services
12,000
Deposits
Prepayment retainer for services
18,304
Total
$
124,103
Prepaid expenses consisted of the following at May 31, 2012:
Name
Description
Amount
Steven Ferris
Prepayment retainer for services
$
7,500
Better Investing
Prepayment retainer for services
4,125
Urish Popeck & Co
Prepayment retainer for valuation
8,000
Optiminera SA
Prepayment retainer for services
76,500
The Money Channel
Prepayment retainer for services
8,775
Crystal Research Associates
Prepayment retainer for services
41,667
Hall, Lamb, & Hall
Prepayment retainer for legal fees
29,572
Deposits
Prepayment retainer for services
6,995
Total
$
183,134
16
ABAKAN INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the six months ended November 30, 2012 and 2011
NOTE 8 – INVESTMENT IN NON-CONTROLLING INTEREST
Powdermet, Inc.
Under the terms of our September 7, 2010 amendment to our stock purchase agreement dated June 28,
2010, the Company entered into a stock purchase agreement with Kennametal Inc. (“Kennametal”) to
purchase from Kennametal five hundred and ninety six thousand eight hundred and thirteen (596,813)
shares, representing a forty one percent (41%) interest in Powdermet, Inc. (“Powdermet”), in exchange
for one million six hundred fifty thousand dollars ($1,650,000).
The terms and conditions of the stock purchase agreement required the Company to pay an initial
payment of five hundred thousand dollars ($500,000) to Kennametal on September 7, 2010, and the
remainder on or before September 30, 2010. The stock purchase agreement contains additional terms
related to monthly liquidated damages in the amount of fifty thousand ($50,000) per month starting
October 1, 2010. The transaction was to close no later than December 31, 2010.
We made the initial payment of $500,000 on September 7, 2010 and did not make the payment on the
balance as agreed; accordingly we recorded liquidating damages of $50,000 per month beginning October
1, 2010, for a total of $250,000 as of the period ended February 28, 2011.
On January 19, 2011, we amended the Stock Purchase Agreement with Kennametal to complete the purchase of
Powdermet shares from Kennametal no later than February 15, 2011 for $1,150,000. We did not make our payment
on the balance as agreed. On March 21, 2011, we entered into an accord and satisfaction agreement to fulfill the
terms of our agreement and settled our debt in full to Kennametal in the amount of $1,200,000.
Powdermet was the parent company of MesoCoat, owning 66% of MesoCoat at May 31, 2011. Andy
Sherman serves as the chief executive officer of both Powdermet and MesoCoat in addition to his duties
as a member of the Company’s board of directors. Through the Company’s purchase of 41% of
Powdermet, we also gain indirect ownership of the additional shares of MesoCoat that Powdermet owns.
We have analyzed our investment in accordance of “Investments – Equity Method and Joint Ventures”
(ASC 323), and concluded that when the stock purchase agreement was completed our 41% minority
interest investment gave us significant influence over Powdermet’s business actions, board of directors,
and its management, and therefore we account for our investment using the Equity Method. The table
below reconciles our investment amount and equity method amounts to the amount on the accompanying
balance sheet.
March 21, 2011, initial investment
$ 1,650,000
Equity in profit for period of March 21
through May 31, 2011
71,656
Investment balance, May 31, 2011
$ 1,721,656
Equity in profit for year ended May 31, 2012
988,533
Investment balance, May 31, 2012
$ 2,710,189
Equity in loss for six months ended November 30, 2012
(59,101)
Investment balance, November 30, 2012
$ 2,651,088
17
ABAKAN INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the six months ended November 30, 2012 and 2011
NOTE 8 – INVESTMENT IN NON-CONTROLLING INTEREST – continued
Powdermet’s ownership in MesoCoat was diluted when the Company exercised its initial option to
purchase 86,156 shares of common stock from MesoCoat. Powdermet’s ownership in MesoCoat as of
November 30, 2012 is 47.50%.
Below is a table with summary financial results of operations and financial position of Powdermet:
Powdermet Inc.
For the six months ended
For the six months ended
November 30, 2012
November 30, 2011
Equity Percentage
41%
41%
Condensed income statement information:
Total revenues
$
1,238,694
$
$
983,055
Total cost of revenues
492,708
417,300
Gross margin
745,986
565,755
Total expenses
890,134
513,866
Net profit/ (loss)
$
(144,148)
$
$
51,890
Company’s equity in net profit/ (loss)
$
(59,101)
$
$
21,274
Condensed balance sheet information:
November 30, 2012
May 31, 2012
Total current assets
$
650,246
$
578,725
Total non-current assets
4,652,477
4,234,600
Total assets
$
5,302,723
$
4,813,325
Total current liabilities
$
255,398
$
395,614
Total non-current liabilities
2,886,727
2,105,370
Total equity
2,160,598
2,312,341
Total liabilities and equity
$
5,302,723
$
4,813,325
18
ABAKAN INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the six months ended November 30, 2012 and 2011
NOTE 9 – LOANS PAYABLE
As of November 30, 2012 and May 31, 2012, the loans payable balance comprised of:
Description
November 30, 2012
May 31, 2012
Convertible demand note to an unrelated entity bearing 5% interest per annum which matures
$
451,261 $
400,231
on April 13, 2013. The note is shown net of a discount of $48,739 and $99,769, respectively,
attributable to the beneficial conversion feature, and an effective interest rate of 30.19%.
Convertible demand note to an unrelated entity bearing 5% interest per annum which matures
1,377,124
1,214,917
on March 17, 2013. The note is shown net of a discount of $122,876 and $285,083,
respectively, attributable to the beneficial conversion feature, and an effective interest rate of
31.19%.
Convertible demand note to an unrelated entity bearing 5% interest per annum which matures
80,295
38,531
on June 7, 2013. The note is shown net of a discount of $119,705 and $161,469, respectively,
attributable to the beneficial conversion feature, and an effective interest rate of 175.84%.
Convertible demand note to an unrelated entity bearing 5% interest per annum which matures
174,824
70,671
on July 14, 2013. The note is shown net of a discount of $325,176 and $429,329, respectively,
attributable to the beneficial conversion feature, and an effective interest rate of 142.77%.
Uncollateralized demand note to an unrelated entity bearing 8% interest per annum
70,000
70,000
Uncollateralized demand note to an unrelated entity bearing 8% interest per annum
3,850
3,850
Uncollateralized demand note to an unrelated entity bearing 8% interest per annum
33
303
Uncollateralized demand note to an unrelated entity bearing 8% interest per annum
19,350
19,350
Uncollateralized demand note to an unrelated entity bearing 8% interest per annum
20,000
20,000
Collateralized note to an unrelated entity bearing 1% interest for the first year and then 7%
900,543
-
per annum for years two - seven
Uncollateralized demand note to a related entity bearing 8% interest per annum
30,000
-
Convertible demand note to an unrelated entity bearing 7.5% imputed interest per annum
54,435
56,043
which matures on July 10, 2018.
Capital leases payable to various vendors expiring in various years through September 2016;
97,152
115,175
collateralized by certain equipment with a cost of $205,157.
Uncollateralized demand note to an unrelated entity for royalties shown net of discount of
1,618,112
1,717,546
$46,788 and $82,454, respectively
$
4,896,979 $
3,726,617
Less current liabilities
2,744,726
2,508,164
Total long term liabilities
$
2,152,253 $
1,218,453
We also owed $330,104 and $183,106 in accrued interest for the above notes as of November 30, 2012
and May 31, 2012, respectively. We also amortized $397,085 and $279,322 in discount on debt as of
November 30, 2012, and 2011, respectively.
As of November 30, 2012 and May 31, 2012, we had no restrictive covenants attached to any of the
above referenced notes.
Future maturity of our notes payable as of November 30, 2012 is presented in the table below:
For the years ended May 31,
2013
$
2,744,726
2014
1,133,227
2015
342,378
2016
151,303
2017 and beyond
525,345
$ 4,896,979
19
ABAKAN INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the six months ended November 30, 2012 and 2011
NOTE 9 – LOANS PAYABLE - continued
Development Loan - MesoCoat
On October 2, 2012 we began drawing against a development loan from the State of Ohio with a
maximum amount of $1,000,000, and bearing an interest rate of one percent the first year after the
disbursement date, and then for years two through seven, the interest rate is seven percent. On October 2,
2012, we received our first payout from this loan of $584,066, and then we received on October 5, 2012 a
second payout of $316,477, for a total of $900,543. The loan is to be repaid over seven years, and is
collateralized the project equipment, one CermaClad system and automated pipe blasting equipment, and
all inventory, equipment, all fixtures, all intangibles and accounts receivables owned by MesoCoat.
NOTE 10 – STOCKHOLDERS' EQUITY
Common Shares – Authorized
The Company has 2,500,000,000 common shares authorized at a par value of $0.0001 per share and
50,000,000 shares of preferred stock, par value $0.0001 per share. All common stock shares have equal
voting rights, are non-assessable and have one vote per share. Voting rights are not cumulative and,
therefore, the holders of more than 50% of the common stock could, if they choose to do so, elect all the
directors of the Company.
Common Stock Issuances
Private placements
For the six months ended November 30, 2012, we issued the following shares:
On July 30, 2012, we closed a private placement for $525,000, or 300,000 units consisting of one share of
our restricted common stock and one-half common stock warrant to purchase shares of our common
stock, with a purchase price of $2.00 per share and an expiration date of two years from the closing. In
connection with this placement we had no offering costs for a net of $525,000.
On September 28, 2012, we closed a private placement for $262,500, or 150,000 units consisting of one
share of our restricted common stock and one-half common stock warrant to purchase shares of our
common stock, with a purchase price of $2.00 per share and an expiration date of two years from the
closing. In connection with this placement we had no offering costs for a net of $262,500.
On October 18, 2012, we closed a private placement for $230,000, or 100,000 units consisting of one
share of our restricted common stock and one-half common stock warrant to purchase shares of our
common stock, with a purchase price of $2.70 per share and an expiration date of two years from the
closing. In connection with this placement we had no offering costs for a net of $230,000.
20
ABAKAN INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the six months ended November 30, 2012 and 2011
NOTE 10 – STOCKHOLDERS' EQUITY – continued
Common Stock Issuances - continued
Private placements- continued
On November 26, 2012, we closed a private placement for $16,100, or 7,000 units consisting of one share
of our restricted common stock and one-half common stock warrant to purchase shares of our common
stock, with a purchase price of $2.70 per share and an expiration date of two years from the closing. In
connection with this placement we had no offering costs for a net of $16,100.
On November 26, 2012, we closed a private placement for $16,100, or 7,000 units consisting of one share
of our restricted common stock and one-half common stock warrant to purchase shares of our common
stock, with a purchase price of $2.70 per share and an expiration date of two years from the closing. In
connection with this placement we had no offering costs for a net of $16,100.
On November 30, 2012, we closed a private placement for $57,500, or 25,000 units consisting of one
share of our restricted common stock and one-half common stock warrant to purchase shares of our
common stock, with a purchase price of $2.70 per share and an expiration date of two years from the
closing. In connection with this placement we had no offering costs for a net of $57,500.
Conversion of debt to shares
On November 30, 2012, we converted several debt obligations for $168,033, or 73,058 units consisting of
one share of our restricted common stock and one-half common stock warrant to purchase shares of our
common stock, with a purchase price of $2.70 per share and an expiration date of two years from the
closing. In connection with this placement we incurred stock expense on conversion of $29,223.
On November 30, 2012, we converted several accounts payables for $46,000, or 20,000 units consisting
of one share of our restricted common stock and one-half common stock warrant to purchase shares of
our common stock, with a purchase price of $2.70 per share and an expiration date of two years from the
closing. In connection with this placement we incurred stock expense on conversion of $8,000.
Share based compensation
For the six months ended November 30, 2012, we issued the following shares for compensation:
On June 1, 2012, we issued 12,500 shares of our common stock for services performed valued at $32,625.
On June 1, 2012, we issued 12,500 shares of our common stock for services performed valued at $27,750.
On July 1, 2012, we issued 12,500 shares of our common stock for services performed valued at $25,000.
On July 9, 2012, we issued 10,000 shares of our common stock for services performed valued at $20,000.
On August 7, 2012, we issued 10,000 shares of our common stock for services performed valued at
$19,000.
On September 18, 2012, we issued 25,000 shares of our common stock for services performed valued at
$42,750.
On November 29, 2012, we issued 20,000 shares of our common stock for services performed valued at
$51,000, including costs of $21,000.
21
ABAKAN INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the six months ended November 30, 2012 and 2011
NOTE 10 – STOCKHOLDERS' EQUITY - continued
Common Stock Warrants
In connection with the above private placement we valued the common stock warrants granted during
the six months ended November 30, 2012, using the Black-Scholes model with the following
assumptions:
July 30,
September
October
November
November
2012
28, 2012
18, 2012
26, 2012
30, 2012
Expected volatility
154.31%
150.62%
150.62%
150.62%
150.62%
(based on historical
volatility)
Expected dividends
0.00
0.00
0.00
0.00
0.00
Expected term in years
2.00
2.00
2.00
2.00
2.00
Risk-free rate
0.23%
0.23%
0.29%
0.27%
0.25%
The expected volatility assumption was based upon historical stock price volatility measured on a daily
basis. The risk-free interest rate assumption is based upon U.S. Treasury bond interest rates appropriate
for the term of the Company’s warrants. The dividend yield assumption is based on our history and
expectation of dividend payments. All warrants are immediately exercisable upon granting.
A summary of the common stock warrants granted during the year ended May 31, 2012 and the six
months ended November 30, 2012 is presented below:
Weighted
Average
Weighted
Remaining
Average
Contractual
Aggregate
Number of
Exercise
Terms
Intrinsic
Options
Price
(In Years)
Value
Balance at June 1, 2011
2,670,233
$
0.85
Granted
1,696,063
1.67
Exercised
-
-
Forfeited or expired
(2,300,000)
0.75
Balance at May 31, 2012
2,066,296
$
1.64
2.00 years
$
--
Exercisable at May 31, 2012
2,066,296
$
1.64
2.00 years
$
--
Weighted average fair value of
options granted during the year
ended May 31, 2012
$
1.64
Balance at June 1, 2012
2,066,296
$
1.64
Granted
337,500
2.23
Exercised
-
-
Forfeited or expired
-
-
Balance at November 30, 2012
2,403,796
$
1.85
2.00 years
$
--
Exercisable at November 30, 2012
2,403,796
$
1.85
2.00 years
$
--
Weighted average fair value of
options granted during the three
months ended November 30, 2012
$
1.85
22
ABAKAN INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the six months ended November 30, 2012 and 2011
NOTE 10 – STOCKHOLDERS' EQUITY - continued
Common Stock Warrants - continued
The following table summarizes information about the warrants outstanding at November 30, 2012:
Options Outstanding
Options Exercisable
Number
Number
Range
Outstanding
Weighted
Weighted
Exercisable
Weighted
of
at
Average
Average
at
Average
Aggregate
Exercise
November
Remaining
Exercise
Intrinsic
November
Exercise
Intrinsic
Price
30, 2012
Contractual Life
Price
Value
30, 2012
Price
Value
$ 1.25
706,600
2.00 Years
$ 1.25
$
--
706,600 $ 1.25
$
--
$ 1.50
410,233
2.00 Years
$ 1.50
$
--
410,233 $ 1.50
$
--
$ 2.00
1,174,463
2.00 Years
$ 2.00
$
--
1,174,463 $ 2.00
$
--
$ 2.70
112,500
2.00 Years
$ 2.70
$
--
112,500 $ 2.00
$
--
2,403,796
2.00 Years
$ 1.85
$
--
2,403,796 $ 1.85
$
--
NOTE 11 – EARNINGS-PER-SHARE CALCULATION
Basic earnings per common share for the three and six months ended November 30, 2012 and 2011 are
calculated by dividing net income by weighted-average common shares outstanding during the period.
Diluted earnings per common share for the six months ended November 30, 2012 and 2011 are calculated
by dividing net income by weighted-average common shares outstanding during the period plus dilutive
potential common shares, which are determined as follows:
For the three months
For the three
ended November 30,
months ended
2012
November 30, 2011
Net earnings (loss) from operations
$
(1,572,453)
$ (1,162,390)
Weighted-average common shares
61,999,242
59,377,425
Effect of dilutive securities:
Warrants
-
-
Options to purchase common stock
-
-
Dilutive potential common shares
61,999,242
59,377,425
Net earnings per share from operations:
Basic
$
(0.03)
$ (0.02)
Diluted
$
(0.03)
$ (0.02)
23
ABAKAN INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the six months ended November 30, 2012 and 2011
NOTE 11 – EARNINGS-PER-SHARE CALCULATION - continued
For the six months
For the six months
ended November 30,
ended November 30,
2012
2011
Net earnings (loss) from operations
$
(2,979,836)
$ (512,521)
Weighted-average common shares
61,806,104
59,353,818
Effect of dilutive securities:
Warrants
-
-
Options to purchase common stock
-
-
Dilutive potential common shares
61,806,104
59,353,818
Net earnings per share from operations:
Basic
$
(0.05)
$ (0.01)
Diluted
$
(0.05)
$ (0.01)
Dilutive potential common shares are calculated in accordance with the treasury stock method, which
assumes that proceeds from the exercise of all warrants and options are used to repurchase common stock
at market value. The amount of shares remaining after the proceeds are exhausted represents the
potentially dilutive effect of the securities. The increasing number of warrants used in the calculation is a
result of the increasing market value of the Company’s common stock.
In periods where losses are reported the weighted-average number of common shares outstanding
excludes common stock equivalents because their inclusion would be anti-dilutive.
24
ABAKAN INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the six months ended November 30, 2012 and 2011
NOTE 11 – EARNINGS-PER-SHARE CALCULATION - continued
These securities below were excluded from the calculations above because to include them would be anti-
dilutive:
For the three
For the three
months ended
months ended
November 30, 2012 November 30, 2011
Common Stock Equivalents:
Warrants
2,403,796
2,710,233
Options to purchase common stock
5,860,000
5,545,000
Total of Common Stock Equivalents:
8,263,796
8,255,233
For the six
For the six
months ended
months ended
November 30, 2012 November 30, 2011
Common Stock Equivalents:
Warrants
2,403,796
2,710,233
Options to purchase common stock
5,860,000
5,545,000
Total of Common Stock Equivalents:
8,263,796
8,255,233
NOTE 12 – RELATED PARTY TRANSACTIONS
Due to the common control between the Company and its related parties, the Company is exposed to the
potential that ownership risks and rewards could be transferred among the parties.
In addition to related party transactions mentioned elsewhere, we have the below agreements and
transactions:
Board of Advisors
On June 1, 2012, we appointed a new member to our Board of Advisors and granted him 100,000 stock
options for their service. The stock options have an exercise price of $2.30 per share of common stock,
and expire ten years from the date of grant. These options vest in equal one-third parts beginning on June
1, 2013, and every grant date anniversary for the next two years. The term of the Board of Advisors
Agreement will be in force until June 1, 2013, and shall renew automatically on an annual basis unless
terminated in writing. We also agreed to reimburse the advisor for all reasonable business expenses.
On June 20, 2012, we appointed a new member to our Board of Advisors and agreed to pay him $5,000
per month for his services beginning July 1, 2012. We also granted him 50,000 stock options for their
service. The stock options have an exercise price of $2.05 per share of common stock, and expire ten
years from the date of grant. These options vest in equal one-third parts beginning on June 20, 2013, and
every grant date anniversary for the next two years. The term of the Board of Advisors Agreement will be
in force until May 31, 2013, and shall renew automatically on an annual basis unless terminated in
writing. We also agreed to reimburse the advisor for all reasonable business expenses.
25
ABAKAN INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the six months ended November 30, 2012 and 2011
NOTE 12 – RELATED PARTY TRANSACTIONS – continued
Board of Advisors - continued
On August 1, 2012, we appointed a new member to our Board of Advisors and agreed to pay him $3,000
per month for his services beginning August 1, 2012. We also granted him 75,000 stock options for his
service. The stock options have an exercise price of $1.95 per share of common stock, and expire ten
years from the date of grant. These options vest in equal one-third parts beginning on August 1, 2013, and
every grant date anniversary for the next two years. The term of the Board of Advisors Agreement will be
in force until August 1, 2013, and shall renew automatically on an annual basis unless terminated in
writing. We also agreed to reimburse the advisor for all reasonable business expenses.
Board of Directors
On June 15, 2012, we appointed a new member to our Board of Directors. We agreed to pay him $15,000
per annum, payable in four equal payments. We also agreed to issue him 10,000 restricted shares of our
common stock and granted him 150,000 stock options for their service. The stock options have an
exercise price of $2.30 per share of common stock, and expire ten years from the date of grant. These
options vest in equal one-third parts beginning on September 15, 2012, and every September 15 after that.
We also agreed to pay for continuing education classes and related travel expenses, for a maximum of
$4,500. This agreement will be in force until May 31, 2015, unless terminated with a sixty day notice. We
also agreed to reimburse the new director for all reasonable business expenses.
On August 7, 2012, we appointed a new member to our Board of Directors. We agreed to issue him
10,000 restricted shares of our common stock and granted him 150,000 stock options for their service.
The stock options have an exercise price of $1.90 per share of common stock, and expire ten years from
the date of grant. These options vest in equal one-third parts beginning on August 7, 2013 and every
August 7 after that. This agreement will be in force until August 7, 2015, unless terminated with a sixty
day notice. We also agreed to reimburse the new director for all reasonable business expenses.
Notes Payable – Related Party
For the six months ended November 30, 2012, we entered into two uncollateralized demand notes to a
Company controlled by our Chief Executive Officer’s spouse, Prosper Financial, bearing 8% interest
per annum for an aggregate total of $66,200. On August 31, 2012, we applied $6,200 of principal in
addition to $59.24 of accrued interest to advances owed to us by the same company. On September 25,
2012, we also made a cash principal payment of $30,000. As of November 30, 2012 we owed $30,000,
and $773 of accrued interest.
26
ABAKAN INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the six months ended November 30, 2012 and 2011
NOTE 13 – STOCK – BASED COMPENSATION
2009 Stock Option Plan – The Company
Our board of directors adopted and approved our 2009 Stock option Plan (“Plan”) on December 14, 2009,
as amended on June 14, 2012, which provides for the granting and issuance of up to 10 million shares of
our common stock.
On June 12, 2012, we granted 175,000 stock options to two consultants at an exercise price of $2.30 per
share. The options will expire ten years from the grant date, and will vest in equal one third parts on the
anniversary of the option grant date.
On June 1, 2012, we granted 100,000 stock options to two consultants at an exercise price of $0.75 per
share. The options will expire ten years from the grant date, and will vest in completely on March 15,
2013.
On June 15, 2012, we granted 150,000 stock options to a new director at an exercise price of $2.30 per
share. The options will expire ten years from the grant date, and will vest in equal one third parts
beginning on September 15, 2012, and then every September 15th for the next two years.
On June 20, 2012, we granted 50,000 stock options to a consultant at an exercise price of $2.05 per share.
The options will expire ten years from the grant date, and will vest in equal one third parts on the
anniversary of the option grant date.
On July 27, 2012, we granted 75,000 stock options to a consultant at an exercise price of $1.95 per share.
The options will expire ten years from the grant date, and will vest in equal one third parts on the
anniversary of the option grant date.
On August 7, 2012, we granted 150,000 stock options to a new director at an exercise price of $1.90 per
share. The options will expire ten years from the grant date, and will vest in equal one third parts on the
anniversary of the option grant date.
After these grants there will be 4,140,000 available for future grant.
Our board of directors administers our Plan, however, they may delegate this authority to a committee
formed to perform the administration function of the Plan. The board of directors or a committee of the
board has the authority to construe and interpret provisions of the Plan as well as to determine the terms
of an award. Our board of directors may amend or modify the Plan at any time. However, no
amendment or modification shall adversely affect the rights and obligations with respect to outstanding
awards unless the holder consents to that amendment or modification.
The Plan permits us to grant Non-Statutory stock options to our employees, directors and consultants.
The options issued under this Plan are intended to be Non-Statutory Stock Options exempt from Code
Section 409A.
The duration of a stock option granted under our Plan cannot exceed ten years. The exercise price of an
incentive stock option cannot be less than 100% of the fair market value of the common stock on the
date of grant.
27
ABAKAN INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the six months ended November 30, 2012 and 2011
NOTE 13 – STOCK – BASED COMPENSATION - continued
2009 Stock Option Plan – The Company - continued
The Plan administrator determines the term of stock options granted under our Plan, up to a maximum
of ten years, except in the case of certain events, as described below. Unless the terms of an optionee's
stock option agreement provide otherwise, if an optionee's relationship with us ceases for any reason
other than disability or death, the optionee may exercise any vested options for a period of ninety days
following the cessation of service. If an optionee's service relationship with us ceases due to disability
or death the optionee or a beneficiary may exercise any vested options for a period of 12 months in the
event of disability or death.
Unless the Plan administrator provides otherwise, options generally are not transferable except by will,
the laws of descent and distribution, or pursuant to a domestic relations order. An optionee may
designate a beneficiary, however, who may exercise the option following the optionee's death.
The value of employee and non-employee stock warrants granted during the six months ended
November 30, 2012 was estimated using the Black-Scholes model with the following assumptions:
June 1, 2012
June 12, 2012
June 15, 2012
June 20, 2012
Expected volatility (based on
200.15%
154.39%
154.39%
154.39%
historical volatility)
Expected dividends
0.00
0.00
0.00
0.00
Expected term in years
10
10
10
10
Risk-free rate
0.95%
1.67%
1.60%
1.65%
July 27, 2012
August 7, 2012
Expected volatility (based on historical volatility)
154.39%
154.39%
Expected dividends
0.00
0.00
Expected term in years
10
10
Risk-free rate
1.58%
1.66%
The expected volatility assumption was based upon historical stock price volatility measured on a daily
basis. The risk-free interest rate assumption is based upon U.S. Treasury bond interest rates appropriate
for the term of the Company’s employee stock options. The dividend yield assumption is based on our
history and expectation of dividend payments.
A summary of the options granted to employees and non-employees under the plan and changes during
the year ended May 31, 2012 and the six months ended November 30, 2012 is presented below:
28
ABAKAN INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the six months ended November 30, 2012 and 2011
NOTE 13 – STOCK – BASED COMPENSATION - continued
2009 Stock Option Plan – The Company - continued
A summary of the options granted to employees and non-employees under the plan and changes during
the year ended May 31, 2012 and the six months ended November 30, 2012 is presented below:
Weighted
Average
Weighted
Remaining
Average
Contractual
Aggregate
Number of
Exercise
Terms
Intrinsic
Options
Price
(In Years)
Value
Balance at June 1, 2011
5,420,000
$
0.75
Granted
520,000
1.06
Exercised
-
-
Forfeited or expired
(780,000)
-
Balance at May 31, 2012
5,160,000
$
0.77
9.00 years
$
185,000
Exercisable at May 31, 2012
2,980,829
$
0.71
9.00 years
$
--
Weighted average fair value of
options granted during the year ended
May 31, 2012
$
1.06
Balance at June 1, 2012
5,160,000
$
0.77
Granted
700,000
1.93
Exercised
-
-
Forfeited or expired
-
-
Balance at November 30, 2012
5,860,000
$
0.90
9.00 years
$
185,000
Exercisable at November 30, 2012
2,980,829
$
0.71
9.00 years
$
--
Weighted average fair value of
options granted during the year ended
November 30, 2012
$
1.06
29
ABAKAN INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the six months ended November 30, 2012 and 2011
NOTE 13 – STOCK – BASED COMPENSATION - continued
2009 Stock Option Plan – The Company - continued
The following table summarizes information about employee stock options under the 2009 Plan
outstanding at November 30, 2012:
Options Outstanding
Options Exercisable
Weighted
Number
Range
Number
Average
Weighted
Exercisable
Weighted
of
Outstanding
Remaining
Average
at
Average
Aggregate
Exercise
at November
Contractual
Exercise
Intrinsic
November
Exercise
Intrinsic
Price
30, 2012
Life
Price
Value
30, 2012
Price
Value
$ 0.60
1,945,000
8.00 Years
$
0.60
$
--
1,900,040 $ 0.60
$
--
$ 0.65
1,400,000
8.00 Years
$
0.65
$
120,000
394,968 $ 0.65
$
--
$ 0.75
200,000
9.00 Years
$
0.75
$
15,000
100,000 $ 0.75
$
--
$ 1.00
50,000
10.00 Years
$
1.00
$
--
-- $ 0.00
$
--
$ 1.01
225,000
9.00 Years
$
1.01
$
--
106,656 $ 1.01
$
--
$ 1.02
650,000
10.0 Years
$
1.02
$
50,000
116,660 $ 1.02
$
--
$ 1.03
50,000
4.00 Years
$
1.03
$
--
-- $ 0.00
$
--
$ 1.05
270,000
10.0 Years
$
1.05
$
--
83,330 $ 1.05
$
--
$ 1.07
95,000
10.00 Years
$
1.07
$
--
12,500 $ 1.07
$
--
$ 1.20
100,000
5.0 Years
$
1.20
$
--
100,000 $ 1.20
$
--
$ 1.25
25,000
10.0 Years
$
1.25
$
--
-- $ 0.00
$
--
$ 1.30
250,000
10.0 Years
$
1.30
$
--
166,675 $ 1.30
$
--
$ 1.90
150,000
10.0 Years
$
1.90
$
--
-- $ 0.00
$
--
$ 1.95
75,000
10.0 Years
$
1.95
$
--
-- $ 0.00
$
--
$ 2.05
50,000
10.0 Years
$
2.05
$
--
-- $ 0.00
$
--
$ 2.30
325,000
10.0 Years
$
2.30
$
--
-- $ 0.00
$
-
5,860,000
9.0 Years
$
0.90
$
185,000
2,980,829 $ 0.71
$
--
The total value of employee and non-employee stock options granted during the six months ended
November 30, 2012 and 2011, was $1,315,619 and $143,267, respectively. During six months ended
November 30, 2012 and 2011 the Company recorded $899,211 and $791,856, respectively, in stock-
based compensation expense relating to stock option grants.
At November 30, 2012 and 2011 there was $1,747,689 and $2,130,783, respectively, of total
unrecognized compensation cost related to stock options granted under the plan. That cost is expected
to be recognized pro-rata through August 7, 2015. The following table represents the stock options
expense for the each of the next four fiscal years ended May 31:
For years ended May 31,
Expense
2013
$
622,717
2014
706,184
2015
408,568
2016
10,220
$
1,747,689
30
ABAKAN INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the six months ended November 30, 2012 and 2011
NOTE 13 – STOCK – BASED COMPENSATION - continued
Stock Option Plan - MesoCoat
MesoCoat accounts for equity awards using the grant-date fair value.
The Company’s stock option plan (the Stock Option Plan) is intended to advance the interest of the
Company and its shareholders. Options granted under the Stock Option Plan can be either incentive stock
options or non-qualified stock options. The Stock Option Plan authorized the issuance of a maximum of
9,000 shares of the Company’s common stock. These options have a term of six years and will expire
beginning August 2014 through November 2014.
A summary of the Company’s stock option plan as of November 30, 2012, and the changes during the
period then ended is presented in the table below:
Options Outstanding
Number of
Weighted
Shares
Average
Exercise
Price
Outstanding at May 31, 2012
4,450 $
2.68
Granted
-
Exercised
-
Forfeited
-
Outstanding at November 30, 2012
4,450 $
2.68
Options exercisable at November 30, 2012
3,150 $
1.95
NOTE 14 – COMMITMENTS
Leases
In August 2011, the Company entered into a non-cash leasing arrangement where services are provided in
exchange for an asset. The Company has an obligation to provide 600 hours of services at a fair value of
$120,000 as consideration during the period from August 2011 to August 2017. The Company has
recorded this capital lease at its fair value.
The Company leases its office space in Miami on a month to month basis at a cost of $2,213 a month paid
to Prosper Financial, Inc., a related party. The Company is also committed to a non-cancellable operating
lease for a vehicle that expired in March 2012.
MesoCoat subleases its research and development and laboratory space, in Ohio, from Powdermet, a related
party. The cost of the sub-lease to MesoCoat is $6,700 per month that expires on May 31, 2020.
31
ABAKAN INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the six months ended November 30, 2012 and 2011
NOTE 14 – COMMITMENTS - continued
Leases - continued
MesoCoat also leases machinery and equipment under various capital lease arrangements, which expires
through September 2016. These leases are included in long-term and short-term debt and the related assets have
been capitalized.
Total expense related to the operating leases was $40,200 and $26,889 for the six months ended
November 30, 2012 and 2011. Interest expense for the leases for the six months ended November 30, 2012
and for the period of July 13 through November 30, 2012 was $612 and $1,991.
Minimum annual rental commitments are as follows at November 30, 2012:
For the years ended May 31,
Capital Leases
Operating Leases
2013
$
28,562 $
40,200
2014
23,181
80,400
2015
22,197
80,400
2016
21,273
80,400
2017 and thereafter
7,951
328,300
Total minimum lease payments
$
103,164 $
609,700
Less amount representing interest
(6,012)
Present value of net minimum capital lease payments
97,152
Less current maturities
(36,595)
Long-term obligations under capital leases
$
60,557
Consulting agreement
On September 18, 2012, we entered into a consulting agreement commencing September 18, 2012, with
an unrelated individual to provide investor public relations consulting. The terms of the consulting
agreement are that the consultant is paid $5,000 per month; in addition the consultant was issued 25,000
shares of our restricted common stock for the initial three month period. Then commencing December
18, 2012 and each quarter after the Company will issue Shares of our restricted common stock valued at
$60,000 per quarter. We also agreed to reimburse the consultant for all reasonable business expenses
incurred by him in the performance of his duties, with a term expiring September 18, 2013.
32
ABAKAN INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the six months ended November 30, 2012 and 2011
NOTE 15 - EMPLOYEE BENEFIT PLANS
The Company has a 401(k) Plan (the Plan) covering substantially all of its employees who are at least age
21 and have completed three months of service. Participating employees may elect to contribute, on a tax
deferred basis, a portion of their compensation in accordance with Section 401(k) of the Internal Revenue
Code. Additional matching contributions may be made to the Plan at the discretion of the Company. For
the six months ended November 30, 2012, the Company contributed $10,339.
NOTE 16 – RECENT ACCOUNTING PRONOUNCEMENTS
We have examined all recent accounting pronouncements and believe that none of them will have a
material impact on the financial statements of the Company.
NOTE 17– SUBSEQUENT EVENTS
Management has evaluated subsequent events after the balance sheet date, through the issuance of the
financial statements, for appropriate accounting and disclosure. The Company has determined that there
were no such events that warrant disclosure or recognition in the financial statements, except for the
below:
Private Placements
On December 7, 2012, we closed two private placements for a total of $279,450, or 121,500 units
consisting of one share of our restricted common stock and one-half common stock warrant to purchase
shares of our common stock, with a purchase price of $2.70 per share and an expiration date of two years
from the closing. In connection with this placement we had no offering costs for a net of $279,450.
On December 10, 2012, we closed a private placement for $230,000, or 100,000 units consisting of one
share of our restricted common stock and one-half common stock warrant to purchase shares of our
common stock, with a purchase price of $2.70 per share and an expiration date of two years from the
closing. In connection with this placement we had no offering costs for a net of $230,000.
On December 18, 2012, we closed three private placements for a total of $211,600, or 92,000 units
consisting of one share of our restricted common stock and one-half common stock warrant to purchase
shares of our common stock, with a purchase price of $2.70 per share and an expiration date of two years
from the closing. In connection with this placement we had no offering costs for a net of $211,600.
On December 24, 2012, we closed a private placement for $103,500, or 45,000 units consisting of one
share of our restricted common stock and one-half common stock warrant to purchase shares of our
common stock, with a purchase price of $2.70 per share and an expiration date of two years from the
closing. In connection with this placement we had no offering costs for a net of $103,500.
33
ABAKAN INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the six months ended November 30, 2012 and 2011
NOTE 17– SUBSEQUENT EVENTS - continued
Board of Directors
On December 5, 2012, we appointed a new member to our Board of Directors. We agreed to grant him
175,000 stock options for his service. The stock options have an exercise price of $2.61 per share of
common stock, and expire ten years from the date of grant. These options vest as follows; 25,000 upon
the date of this agreement and then in equal parts of 50,000 options beginning on December 5, 2013 and
every December 5 after that. This agreement will be in force until December 5, 2015, unless terminated
with a sixty day notice. We also agreed to reimburse the new member of the Board for all reasonable
business expenses.
Employment agreement
On December 5, 2012, we entered into an employment agreement commencing December 10, 2012
with a related individual to perform duties as our Chief Financial Officer. The individual was a prior
director and resigned the effective date of this agreement. The employee retained previously issued
stock options. The terms of the employment agreement are $16,000 per month salary of which a portion
is deferred. The employment agreement will end on December 31, 2015 and which time it can be
renewed for 2 one year periods. In the event that this agreement is terminated, the employee may be
eligible for severance pay based upon the length of employment. The employee was also granted
125,000 stock options with an exercise price of $2.61 per share; they will vest equally over 3 years
beginning December 9, 2013. The employee was also given a retention award to be paid $20,000 in
common shares the month following the anniversary date of his employment.
34
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 quarterly 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 quarterly report. Our fiscal year end is May 31.
Abakan
Abakan expects to become a leader in the multi-billion dollar advanced coatings and metal formulations
markets as a result of its investment in MesoCoat, Inc. (“MesoCoat”) and Powdermet, Inc.
(“Powdermet”). MesoCoat and Powdermet each have the potential to substantially impact the surface
engineering and energy management needs of Fortune 1000 companies and government entities. Towards
this end, Abakan is actively involved in supporting their R&D, market development, and
commercialization efforts.
Abakan has to date acquired a 52.5% controlling interest in MesoCoat and a 41% non-controlling interest
in Powdermet. Since Powdermet owns 47.5% of MesoCoat, Abakan’s interest in Powdermet represents
an additional 19.5% indirect interest in MesoCoat.
MesoCoat
MesoCoat’s Business
MesoCoat is an Ohio based materials science company intent on becoming a technology leader in metal
protection and repair based on its metal 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 proprietary high-speed application systems. The result is
protective cladding applications that will be offered on a competitive basis with existing market solutions.
The coating materials unite high strength, hardness, fracture toughness, and a low coefficient of friction
into one product structure. 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).
CermaCladTM cladding applications are nearing commercialization and commercial sales of PComP TM, a
cermet-metallic composite powder for thermal spray applications have commenced.
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CermaClad™
CermaClad™ is a premier metallurgically bonded clad carbon steel solution optimized to manage the
risks and consequences of wear and corrosion damage and the failure of large assets including oil and gas
risers and flowlines, refinery/chemical processing towers and transfer lines, power plant heat exchanger
tubes, ships, and bridges. In corrosive environments, including seawater, road salt, mining slurry transport
lines, unprocessed oil containing water and carbon dioxide, chemical processing and transportation
equipment, metals production, and other large industrial applications, asset owners and operators either
need to continually maintain and replace major assets, or fabricate these assets using expensive, corrosion
resistant alloy (CRA) materials, which substantially run up costs. CermaClad™ offers a competing,
lower cost solution allowing the owner or operator to clad their carbon steel with a corrosion resistant
alloy coating at typically less than ½ the cost of using solid CRA. Cladding solutions such as
CermaClad™ is estimated to save up to 75% of the cost of using solid alloys, while providing equivalent
maintenance free corrosion lifetimes equal to the life of the asset. Clad metals are widely used in oil and
gas exploration and production, marine transportation, mining, petrochemical processing and refining,
nuclear, paper and pulp, desalination, and power generation industries. Each industry sector has slightly
different needs and requirements. For instance, to meet growing global energy demands, oil companies
continue to extend their offshore drilling efforts into deeper seas. The higher temperatures and corrosivity
(carbon dioxide and hydrogen sulfide content) of these deeper reserves eliminate plastics and other
competing material solutions from consideration, resulting in a significantly increased use of corrosion
resistant alloys - and lower-cost clad pipe alternatives.
CermaClad™ is MesoCoat’s proprietary cladding process which utilizes a high density infrared fusion
heat source – an arc lamp – to melt, fuse, and metallurgically bond (make inseparable) metals, corrosion
resistant alloys and/or cermets onto metal substrates such as plate, pipe, or large components. Using this
process, products like risers and flowlines can be protected against harsh operating environments with
great efficiency and speed compared to competing weld overlay products. Today, clad steel is a
specialized segment of the steel industry where it is projected that demand will outstrip supply in the next
few years. Management believes that the CermaClad™ process and equipment offers the lowest capital
cost per unit production, and is scalable to large volumes with low to modest capital investment and plant
requirements.
Management believes the competitive advantages of CermaClad™ over current competing technologies
and products are:
CermaClad™ and other clad overlays can be produced at a 50-80% lower cost than alternative
solid alloy products.
CermaClad™ produces a metallurgically bonded overlay, reducing the risk of catastrophic failure
and the buckling of mechanically lined pipes such as those supplied by industry leader.
CermaClad™ can be applied to seamless pipe, or after pipe welding, eliminating 90% of special
metal welds which are difficult, expensive, and also a common source of early failure.
CermaClad™ application technology occurs with a 30-40cm wide infrared “torch” compared to
less than 1 cm wide for laser or inert gas welding torches, resulting in application rates over an
order of magnitude faster than current weld overlay technologies.
Due to its high productivity compared to traditional weld overlay, and the elimination of the need
for deformation processing (steel mill) of bulk metals, CermaClad™ capital and start-up costs are
two to ten times lower than competing technologies.
Compared to weld overlay, CermaClad™ produces a smooth overlay that is virtually free of base
metal dilution, improving inspectability and corrosion resistance. This characteristic enables the
use of thinner, even lower cost cladding alternatives in many applications. Smooth surfaces also
decrease flow resistance, enabling reduced friction losses in pipeline applications.
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The CermaClad™ product line in development today is as follows:
CermaClad™ CR (Corrosion Resistant Alloys). Product line that offers a lower cost alternative to
solid nickel and stainless steel alloys for oil and gas, pulp and paper, and chemical process
industry vessels, pipes, flowlines, risers, jumpers, valves, and components.
CermaClad™ WR (Wear Resistant). Product line of metal matrix composite and nanocomposite
wear resistant materials to extend life of steel structures such as hydrotransport slurry lines, pump
components, valve components, spools, T’s, and elbows for mining, mineral processing, and oil
sands/heavy oil production.
CermaClad™ HT (High Temperature). Product line of high temperature claddings for heat
exchanger tubing, boiler, and other energy production components offering greater compositional
control (higher performance) and lower cost than solid alloys or traditional weld overlays.
CermaClad™ LT (Low Thickness). Exploits the unique high purity capabilities of the
CermaClad™ process to provide thin (less than 0.5mm) claddings for providing 50-200 year
corrosion free life in atmospheric and seawater corrosion environments and applicable to marine
structures, fuel and cargo tanks, bridges, architectural steel, and transportation structures.
PComP™
PComP™ is a series of nanocomposite cermet coatings that are used to impart wear and corrosion
resistance, and to restore dimensions, of metal components. PComP™ competes against chrome and
nickel plating, and tungsten carbide in the multibillion dollar inorganic metal finishing market.
Competing materials like hexavalent chrome, carbides and tungsten carbide cobalt have become major
headaches for industrial producers in the metal finishing industry since these materials are on the EPA’s
hazardous materials watch list and are legally banned in several countries. Industry currently spends
billions annually on these hazardous materials, and MesoCoat’s customers can gain a competitive
advantage while mitigating environmental liabilities by adopting green products and processes such as
PComP™ thermal spray coatings into their product offerings. While businesses grapple with the need to
transition away from these harmful products, MesoCoat has developed a performance leading solution
platform which has shown order of magnitude improvements in head to head wear and corrosion
performance testing.
PComP™, named for its particulate composite powders, is one of the few economically viable industry
replacement solutions for hard chrome and carbides due to the product line’s advanced corrosion, friction,
wear and thermal barrier properties.
MesoCoat scientists have developed and patented a family of corrosion resistant coating solutions that
combine extreme wear resistance, fracture toughness (resiliency), and a low friction coefficient all in one
product. In conventional materials science toughness normally decreases as hardness and wear resistance
increase. By combining nano-level structure control and advanced ductile phase toughening materials
science, MesoCoat has developed a patented coating structure that can be both very tough and very wear
resistant. Equally important, the hardness of a wear coating normally limits the ease with which it can be
machined. The unique nanostructural design of the PComP™ coating solutions results in a coatings that
can be machined through a finish grinder much faster than a product with a traditional carbide coating.
The speed of coating application and final machining results in higher productivity and lower costs in
metal finishing operations.
The unique nano-structure of the PComP™ coatings also result in friction properties approaching those of
diamond-like carbon films and solid lubricants, but with the ability to be used structurally and applied to
large components at a fraction of the cost of coatings such as diamond-like carbon. The low friction
reduces wear, and improved energy efficiency and life in sliding components such as drilling rotors,
plungers, mandrels, ball and gate valves, and metal processing equipment.
37
The PComP™ product line is currently positioned to compete with two dominant product alternatives:
hard chrome plating and tungsten carbide thermal spray coatings. The PComP™ family of nanocomposite
coatings consists of five products, all of which have shown, in testing by third parties, to provide better
wear, corrosion and mechanical properties at a lower life cycle cost than most of today’s alternatives.
The PComP™ product platform, combined with the CermaClad™ large area weld overlay technologies
provide a high degree of product differentiation and a sustainable competitive advantage in the $10 billion
inorganic metal finishing markets, which include OEM components and the maintenance, repair, and
overhaul of industrial assets and machinery in the “components and coatings” segment of MesoCoat’s
business (as opposed to the clad steel business lines discussed under the CermaClad™ product line
above).
MesoCoat is selling these products through different channels appropriate to the specific market. The
majority of commercial sector accounts will have access to these advanced coatings and coating processes
by buying coating application services from MesoCoat. This is generally a regional business. Large
OEM’s and Government agencies like the U.S. Air Force would procure raw powders and apply them for
their specific products under license as they are vertically integrated to do their own thermal spray and
coating applications using dedicated maintenance and repair depots. Recently, several defense
organizations have been given congressional mandates to make better use of their existing equipment
(planes, helicopters, jets, tanks and other armored vehicles, etc.) as budgets for the purchase of new
equipment will be limited over the next few years. MesoCoat’s low-cost, long-life coating materials
should appeal to government buyers striving to meet budgetary restrictions. Finally, to achieve more
rapid penetration of a territorial (geographic) market for coating services, MesoCoat is actively qualifying
licensed application partners in certain territories (Houston, Alberta, and Los Angeles as three examples)
to provide services in territories it is not currently able to service. This strategy will lead eventually to
acquisition or market entry into these markets, while supporting economies of scale for the powder
production needed to meet product cost targets.
The competitive advantages of PComP™ for each of its initial target markets are as follows:
Wear and corrosion resistance and dimensional restoration
PComP™ T-HT (High Toughness) is a titanium carbon-nitride based high corrosion/wear
resistant, low friction high velocity oxygen fuel (HVOF) coating that competes with hard
chrome and diamond like carbone PVD (physical vapor deposition) alternatives for
hydraulic cylinders, piston rings, bearings, rotating shafts, and valve components where
low stick-slip, corrosion, and modest wear resistance are required. PComP™ provides
both wear and corrosion resistance (unlike chrome), and significantly reduces
environmental safety and health liabilities. Furthermore, in many applications, thermal
spray coatings such as PComP™ provide life multiples over chrome (80 times in cylinder
liner application in testing reported by Caterpillar). Lower coefficient of friction protects
seals from premature wear and reduces energy consumption in rotating components
through lower friction losses, and the lower coating stresses and higher toughness enable
thicker coatings to be applied than chrome or other alternatives, meaning component life
can be extended through enabling additional repair cycles. PComP™ T-HT has
significantly higher build-up rates than that of carbides, and grinding and finishing can be
done faster and cheaper with conventional grinding techniques compared to the
expensive diamond finishing process used for competing carbide coatings.
38
PComP™ T-HH (High Hardness) is a higher wear resistance, cobalt based version of
PComP™ T-HT coating for hard chrome replacement in environments that need better
wear resistance but have less severe corrosion requirements. PComP™ T-HH also
provides good corrosion resistance in non-water environments and its low coefficient of
friction and lack of coarse by-products also protects seals and mating surfaces from
premature wear.
PComP™ S is a silicon-nitride based hard chrome replacement solution for aerospace
applications that exhibits high toughness, wear resistance and displays increased
spallation resistance. PComP™ S also has the lowest density of any chrome alternative,
enabling significant fuel savings to be realized in transportation markets.
PComP™W is MesoCoat’s “nano-engineered” tungsten carbide coating solution that
offers industry leading toughness and wear resistance for thermal spray coatings, making
it better for critical high wear applications such as gate valves and downhole drilling
tools. PComP™ W replaces conventional tungsten carbide cobalt in the thermal spray
industry and provides increased wear resistance, design allowable (stress levels), and
reduced friction in abrasive wear applications, with higher toughness and impact
resistance than ceramic alternatives such as alumina-titania. PComP™W is also
significantly more robust and lower cost than competing detonation gun and alternate
coatings, achieving excellent results with much higher throughput and lower operating
cost equipment such as standard HVOF guns.
Metals processing equipment
PComP-MB™ is a metal boride coating designed for use in molten metal processing.
PComP-MB™ has completed laboratory testing showing greater than two and one half
times the life of the state of the art molybdenum boride coatings in galvanizing lines, and
ten times the resistance of conventional WC coatings to molten metal erosion and wear.
PComP-MB™ is preparing for market launch in the $60 million zinc pot roll and bearing
coatings market, while also of interest to the diecasting, paper and pulp, and other related
industries
Thermal barrier coatings
ZComP™ is MesoCoat’s nanocomposite thermal barrier coatings that offer 50% lower
thermal conductivity, with improved toughness and cyclic thermal life compared to
conventionally structured thermal barrier coatings in the $500 million thermal barrier
coatings market.
MesoCoat is actively forming partnerships to introduce these performance-leading
materials into the turbine engine market, Mesocoat has recently completed and/or
continues to work with Powdermet Inc under contract with the Department of Energy for
power turbines, and with the Air Force (Oklahoma Air Logistics Center), The Ohio
Aerospace Institute (OAI), General Dynamics Information Systems, and under a space
act agreement with NASA for propulsion turbine applications of these engineered
nanocomposite thermal barrier coatings.
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Stage of Development
MesoCoat’s PComP-W high performance materials are now established with initial customers and
adoption is increasing through qualified regional application partners with capacity being expanded to
match growing demand, while PComP-T best-value chrome alternatives are still in qualification and
limited beta release through application partners with original equipment. A seven-fold capacity
expansion and introduction of higher value coating application (component) services is underway to be
completed in the second half of FY2013. High revenue Cermaclad corrosion resistant (CR) and wear
resistant (WR) products are nearing market entry with the completion of the first clad pipe production
facility in the third quarter of FY2013. The following table indicates our estimated timeline for the
commercial introduction and geographic territory expansion of those products that are most imminent:
PRODUCT
COMMERCIAL TIMELINE
TIME (MONTHS)
PComP™ T
Initial Partner Sales
Current
PComP™ W
Growing partner sales
Current
PComP™MB
Market Entry for zinc pot rolls
4
PComP™ Coating Services
Market Entry
Current
CermaClad™ CR
Euclid Market Entry
4
CermaClad™ CR
Brazil market entry
12-15
Cermaclad™ CR
Asia-Pacific market entry
18-24
CermaClad™ WR
Market Entry
6
CermaClad™ WR
Canada expansion
14-18
License agreement with Powdermet, Inc.
On July 22, 2008, MesoCoat entered into a license agreement with Powdermet. The agreement gives
MesoCoat a royalty-free, exclusive, perpetual license to PComP™ intellectual property, certain
equipment, and contracts and business lists, including seven supporting patents, the trademark, and
supporting confidential and trade secret information, including formulations, processes, customer lists and
contracts, for all Powdermet technologies in the field of wear and corrosion resistant coatings. MesoCoat
was at the time of licensing a wholly owned subsidiary of Powdermet, and Powdermet currently retains a
47.50% ownership position in MesoCoat. The agreement also includes Powdermet’s commitment to
provide manufacturing expertise and technical capabilities supporting PcomP™ powders on a priority
basis. Powdermet retains the exclusive manufacturing rights for the first 50 tons of PComP™ powders
through July 1, 2013. The license agreement will end upon the last valid claim of licensed patents to
expire, unless terminated earlier within the terms of the agreement.
MesoCoat's exclusivity agreement with Mattson Technology, Inc.
Mattson Technology, Inc. (“Mattson”) is the developer and manufacturer of the Vortek™ high power
plasma arc lamps, and is a high energy plasma arc lamp developer. The principal provisions of an
exclusivity agreement dated April 7, 2011 between MesoCoat and Mattson Technology, Inc. are as
follows:
Mattson has provided the exclusive right and license to MesoCoat to purchase and use the high
intensity Vortek lamp in MesoCoat’s products in the wear reducing and corrosion resistant
coatings, claddings and related surface treatments market.
The exclusivity period runs to the end of 2017 and is conditional on an escalating minimum
number of 5 lamps being ordered on an annual basis starting in 2012, subject to certain
extensions.
40
In return for these rights MesoCoat is obligated to pay Mattson a fee of $2 million in five equal
installments starting from the date of the successful performance of the first unit.
Included in this agreement is a sliding scale price discount based upon the number of units to be
ordered each year.
MesoCoat’s exclusive patent license agreement with UT-Battelle LLC.
MesoCoat has obtained a two stage, exclusive license from UT-Battelle, LLC to utilize two patents in its
processes to develop products for wear and corrosion applications. The initial non-commercial exclusive
license was entered into on September 22, 2009, which enabled MesoCoat to conduct development work
to prove out the technology within the field of use. The second stage of the agreement comprises a
commercial exclusive license, executed on March 7, 2011, that permits MesoCoat to conduct commercial
sales utilizing the licensed process and technology. The license is valid through the expiration of the last
patent in 2024 and required that MesoCoat invest in additional research and development of the
technology and the market for products that stem from the technology by committing to a certain level of
personnel hours and $350,000 in expenditures. MesoCoat has met the aforesaid conditions of the license
agreement.
Stage I and II license fees of $50,000 have been paid against the agreement and a royalty of $15,000 or
2.5% of revenues generated in the United States that utilize the technology, minus allowable costs as
defined by contract, whichever is greater, are due March 31 on an annual basis beginning after the first
commercial sale. For the first calendar year after the achievement of a certain milestone and the following
two calendar years during the term of the agreement, MesoCoat is obligated to pay a minimum annual
royalty payment of $10,000, $15,000 and $20,000 respectively.
Cooperation agreement with Petroleo Brasileiro S.A
MesoCoat entered into a cooperation agreement dated January 7, 2011, with Petroleo Brasileiro S.A
(“Petrobras”) for the purpose of carrying out development work and conducting validation tests in
connection with applying the CermaClad™ process to coating the internal surfaces of pipes for use in the
oil and gas industry. The term of the cooperative agreement was initially for 18 months during which
time MesoCoat, with the assistance of Petrobras, carried out development work and a series of tests
divided into two phases with the prospect of a third phase. Phase I was designed to verify that the
CermaClad™ process and the resultant materials for compliance with industry standards and acceptability
for clad pipe use in order to modify the existing system for the internal coating of pipes. Phase II was
designed to develop a prototyping facility that could coat the inner surface of a 10 inch diameter pipe and
verify that the CermaClad™ process was suitable for application to line pipe in accordance with current
industry standards. The prospective third phase would be designed to finalize the design and construction
of a coating facility in Brazil with the capacity for producing cladding on the interior diameter of pipes
and tubes with section lengths of at least 12 meters.
The immediate objective of the cooperation agreement, subject to obtaining successful results, in each of
Phase I and II, is that the materials and processes tested result in American Petroleum Institute (API) and
Det Norte Veritas (DNV) approval for the CermaClad™ process. API and DNV approvals would,
assuming the completion of a suitable manufacturing facility as anticipated by the prospective third
phase, permit MesoCoat market entry into the oil and gas industry and cause full scale production
activities.
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MesoCoat has successfully completing Phase I of the cooperation agreement by demonstrating that the
CermaClad™ process is capable of producing pipe products that meet API 5LD -Specifications for CRA
clad steel pipe on flat coupons. Phase II consist of the design and verification of a pipe ID cladding
system prototype, and to further verify the suitability of the CermaClad™ process and equipment for
producing alloy 625 CRA clad line pipe product and delivering designs for a future production facility.
Phase III of the cooperative agreement is to demonstrate commercial producability leading to production
orders for Petrobras products.
Phase II is close to being completed, including the design, production, and demonstration of a
miniaturized CermaClad™ fusing system that is able to operate inside an 8” diameter pipe that is
integrated into a pipe manipulation and coating control system. MesoCoat has verified parameters for
CRA material deposition and produced ID clad pipe coupons that meet industry requirements under API
5LD for alloy 625-metallurgically bonded clad pipe. The Phase II final report has been submitted and is
in review by Petrobras for final approval, whole work continues on an expanded scope which includes
addition of thermal modeling and imaging to enhance instrumentation and control of the pipe cladding
process prior to the delivery of clad pipe sections for qualification testing.
Additional cooperative efforts with Petrobras are envisioned including girth welding demonstration,
advanced quality control and inspection methods, added cladding alloy development, expanded testing
specific to pre-salt projects, and qualification of additional base metals (X70) as a means to reduce
product insertion risk and qualify MesoCoat as a supplier for additional Petrobras project needs, including
collaboration in the areas of quality assurance, secondary operations, process improvement, product
production and cost reduction.
The development team is being expanded to include a dedicated manufacturing engineering team during
the current Phase III manufacturing scale-up to include improved severe environment sensors, feedback
process control system development and further system modifications and upgrades focused on
maximizing product yields, performance and system productivity.
Powdermet
Powdermet’s Business
Powdermet was formed in 1996 and has since developed a product platform of advanced materials
solutions derived from nano-engineered particle agglomerate technology and derived hierarchically
structured materials. These advanced materials include energy absorbing ultra-lightweight syntactic- and
nano-composite metals in addition to the PComP™ nanocomposite cermets exclusively licensed to
MesoCoat. The business has historically financed itself through corporate engineering consulting fees,
government contracts and grants (over 90), and recently through partnerships with prime contractors and
systems integrators. Powdermet now expects to transition from an engineered nano-powder R&D
laboratory and toll powder manufacturer into a commercial sector company.
While 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.
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Powdermet has four materials solution families under development:
SComP™ - A family of syntactic metal composites known for their light weight properties and
ability to absorb more impact energy than any other known material. SComP™ can provide
weight savings over aluminum and magnesium alloys without magnesium’s corrosion and wear
limitations, reducing structural weight by 10-30% in targeted aerospace, consumer electronics,
and transportation applications. One new patent applications was filed this quarter on low
density ,mill product and method of manufacture
MComP™ - A family of hierarchically structured, rare earth free, nanocomposite metal and metal
matrix composites that provide higher strength and temperature capability compared to traditional
aluminium and magnesium allows. MComP™ is designed to be a market replacement for
beryllium, aluminum and magnesium in structural applications, without relying on scare and
expensive rare earths to produce high strength and thermal stability. Targeted applications include
aerospace and defense and transportation market segments, as well as electrical transmission and
distribution.
EnComP™ - A diverse family of nano-engineered particle based solutions for energy
storage. Current developments include record setting energy density nanoparticle filled films for
capacitors, structured nanocomposite anode and cathode materials for thermal and lithium ion
batteries, and inflatable hydrogen storage media capable of energizing power fuel cells down to -
34C. A new patent application was filed related to environmentally-triggered reactive
composites, with applications to well perforation devices, reactive warheads, and dissolvable
frack balls for shale gas field completions for new product launches in the EnComP product
family
SynFoam™ - A family of structural, thermally insulating syntactic ceramic composites
combining strength, high temperature functionality and low thermal conductivity into one
multifunctional material. Applications include rocket propulsion and re-entry vehicle systems,
and structural insulation for high temperature energy production and use including flowlines and
heat treatment furnaces. Two new patent applications were filed for high temperature structural
insulation, and for high temperature insulation for production flowlines to support new product
releases in the Synfoam Product line.
Powdermet’s two developmental products closest to commercialization are SynFoam™ and EnComP™.
Powdermet also produces custom-engineered powders and nanopowders, provides advanced materials
contract research and development services, and derives significant revenues from tolls and contract
development and manufacturing services. The company signed initial trial orders with Shell to further
develop its high temperature flowline insulation product, and a venture backed battery start-up to
transition its nanostructured anode production technology for advanced lithium ion batteries.
AMP Distributors Ltd./AMP Distributors, Inc.
AMP Distributors Ltd. (“AMP”) and AMP Distributors, Inc. (“AMP FL”) were formed by Abakan in
June of 2011 and July 27, 2012 respectively as a Cayman Island company and a Florida corporation for
the primary purpose of negotiating, executing and administrating international sales of MesoCoat's
products. AMP and AMP FL will also be tasked with acquiring equipment and coating materials for
Abakan’s international transactions. AMP has appointed a managing director with over 15 years of
experience in the offshore financial services industry and retained Kariola Limited, a consultancy
organization, to assist it with technical advice and entry into the Far East markets.
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Plan of Operation
Abakan’s plan of operation for the coming year is to assist MesoCoat to succeed in commercialization
efforts focused on its CermaClad™ and PComP™ products. To achieve this success Abakan aims to:
Complete investments in manufacturing scale-up and market entry for Cermaclad™ clad steel
products
Establish overseas subsidiaries and plants while supporting their management teams.
Gain market entry by creating awareness and establishing relationships with key reference
customers and clients
Increase its investment in MesoCoat to a direct 75% interest.
Target and qualify existing coating application companies as approved application partners to
apply powders produced by MesoCoat and Powdermet to grow market share in additional
geographic regions. These partners will also be evaluated as future acquisition candidates.
Expand PComP production to multiple tons/month of nanocomposite powder shipments
Initiate commercial coating services in Euclid, Ohio and add additional production cells
Launch additional PComP nanocomposite coating variants (-MB, ZComP) in the metal finishing
and energy generation markets
Assist MesoCoat in achieving the following objectives and milestones
o Becoming American Petroleum Institute (API) and DNV compliant for CermaClad™
corrosion and wear resistant alloys products through a cooperative agreement with
Petrobras and ongoing development work.
o Gaining approved vendor status through product qualification efforts with Petrobras and
at least 2 other major and national oil companies and supporting engineering firms
o Completing construction of its first clad pipe operating plant in Euclid, Ohio and
complete manufacturing scale-up to production, and obtain plant certification and
approval for bidding clad pipe jobs.
o Execute on our plan of geographic expansion by constructing CermaClad™ and
PComP™ operating plants in strategic market locations (Houston, Alberta, Brazil asia-
pacific and the Middle East).
o Expand Cermaclad horizontal markets by completing development and launching
Cermaclad wear products, heat exchanger/high temperature products, and low thickness
transportation and infrastructure products
o Continuing the formation of strategic partnerships and a pipeline of potential clients for
the CermaClad™ and PComP™ product lines.
Growth Strategy
Abakan intends to grow MesoCoat over the next five years by actively supporting their R&D, market
development, and commercialization efforts and by applying the expertise of its board of directors and
board of advisors to the expansion of operations on a global basis. Management will rely on both project
and investor financing to build new production facilities in emerging markets in a manner dedicated to
capturing market share and enhancing shareholder value.
The accomplishment of these objectives relies on either of two growth strategies. The first is a
conservative or “organic” strategy that requires an additional $16,000,000 in financing. The second
strategy is considered a moderate strategy which requires early market acceptance and an additional
$45,000,000 to $50,000,000 in financing (dependent on the level of cash flow achieved and the level of
project debt financing secured). On realizing sufficient financing and further market acceptance,
MesoCoat plans to launch between six and fifteen operating plants worldwide, up to 4 CRA plants, 3 WR
Plants, 1 CRA powder plant, 4 PComP plants and 1 PComP powder plant.
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Our plan for strategic global positioning requires us to determine the location for any given
manufacturing plant based on the prospect of servicing multiple corporations over a range of industry
sectors. Accordingly, we have identified Brazil as our initial region of focus due to the significant impact
of oil and mining sectors in that country. West Africa is another part of the world that would benefit
significantly from the application of MesoCoat’s products since the oil industry in that part of the world is
plagued with corrosion and high pressure problems that are similar to those encountered in offshore
Brazilian oil fields. Locations in Asia offer additional opportunities for MesoCoat.
MesoCoat is currently negotiating an agreement with a turn-key development and construction company
for its first offshore manufacturing plant to be constructed in Brazil on a “build to suit” basis. The
agreement being negotiated includes architectural designs and permits, in addition to offering a leasing or
financing arrangement for the land and the building. Building and producing in Brazil will enable us to be
highly competitive in that market as any foreign producer of similar products will have to incur up to 56%
in import duties on their products along with freight costs. Abakan has held discussions with the
governing bodies of several Brazilian jurisdictions that have indicated an interest in attracting high
technology companies and offered the possibility of providing incentives such as grants and loan
guarantees.
Given the wide range of Abakan’s assumptions, the growth strategy depends largely upon the successful
execution of the product development, marketing plans and plant openings for CermaClad™ and
PComP™. Given our strategy of targeting strategic global regions with multiple potential clients with
multiple product lines, we believe that it is feasible for us to meet our expectations. Nonetheless, Abakan
will carefully monitor the risks associated with achieving the goals in each growth scenario to ensure that
MesoCoat can meet client expectations.
While Abakan explores each opportunity it is aware of the inherent risks that often come with operating
in offshore markets. Risks might include those associated with politics, currency or even the environment
about which we will seek advice from experienced professionals in each offshore jurisdiction. Further, we
expect that recent additions to our board of directors and our board of advisors will assist us in
successfully navigating these prospective pitfalls based on years of experience within the international
arena.
Operational Logistics
CermaClad™, PComP™ SComP™, MComP™ and ENComP™ are platform technologies with extensive
product potential in multiple large market verticals. Abakan and related operations should play a major
role in six distinct product segments of the value chain: raw materials/consumables, application
equipment, coating (cladding) services, casting, fabrication, and maintenance & repair of existing assets.
By playing a major role in these six segments of the value chain, Abakan and its partners may prove to be
an influential player in defining market prices and trends in the structural composites, steel plate, sheet,
bar, and tubular products industries. Our vision is to form partnerships, and set up captive or regional
facilities with the power players in the target industry. Most of these large manufacturers have project
management and installation capabilities besides fabrication, and thus partnerships with these companies
would help us build one-stop-shops for customers, where the customers define the
specifications/requirements and we, and our value chain partners would take care of the steel fabrication,
coating/cladding operations, casting, assembly integration, and inspection activities. We intend to partner
with a major suppliers or end users within geographic regions. Depending on the amount of financing
available, we are considering three approaches to this market:
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High Capital Intensity: Abakan will continue to self-finance and act as owner-operator.
Medium Capital Intensity: Abakan intends to enter into joint venture partnerships, with it being
the operator at 51% ownership and the partner at 49% ownership.
Low Capital Intensity: Abakan expects to enter into joint ventures with supply chain partners
which would act as operators and financiers with 51% ownership while it would act as the
technology supplier with 49% ownership. Within these arrangements we do not intend to be a
licensor but rather participate in the operations and service end of the businesses.
Additional Funding
MesoCoat will require additional funding over the next twelve months to fulfill its business plan. Not all
of the funding sought is currently available though MesoCoat expects to receive additional funding from
Abakan. Should MesoCoat be unable to secure additional financing from outside sources or Abakan,
MesoCoat will most likely be unable to meet its milestones and may need to scale back operations. Any
shortfall in minimum funding will adversely affect MesoCoat’s ability to expand or even continue
operations.
Results of Operations
During the six month period ended November 30, 2012:
We continued its search to identify prospective business opportunities for merger or acquisition.
We focused our efforts on our interest on the continued development of MesoCoat products.
We completed equity financing in the amount of $1,506,180
We continued negotiations with prospective joint venture partners in regions, such as Russia, in
which we do not intend to operate on our own.
We continued negotiations with prospective joint venture partners in respect to technological
applications that we do not intend to develop on our own.
We added two independent directors to the board and adopted corporate governance charters.
We continued our due diligence in respect to determining a suitable site for an additional
MesoCoat manufacturing facility in Brazil.
Secured a $1 million low interest loan from the State of Ohio to partially fund equipment for the
new 11,000 sq. ft CermaClad™ clad piping manufacturing plant in Euclid, Ohio.
Revenues
For the period from June 27, 2006 (inception) until November 30, 2012, Abakan realized revenues of
$4,335,934. Revenues for the three month period ended November 30, 2012 were $559,527 as compared
to $548,877 for the three month period ended November 30, 2011, an increase of 2%. Revenues for the
six month period ended November 30, 2012 were $1,394,910 as compared to $897,265 for the six month
period ended November 30, 2011, an increase of 55%. Revenues over the comparative periods can be
wholly attributed to the operations of MesoCoat. Revenue in the current six month period was derived
from commercial revenues of $70,081 as compared to $31,515 in the prior comparative period, contract
and grant revenues of $1,324,829 as compared to $689,768 in the prior comparative period, and other
income of none as compared to $175,982 in the prior comparative period. Other income in the respective
six month periods is primarily comprised of amounts paid by Petrobras under the terms and conditions of
the cooperation agreement that has been reclassified to commercial, contract and grant revenues for better
classification. As a result the current three month period reflects a negative amount for other revenue due
to the reclassification of these revenues.
46
We expect revenue to continue to increase over the next twelve months as MesoCoat’s commercial and
government sponsored contracts that commenced late last year are completed and new products under
development are brought on line for commercial sales.
Gross Profit
For the period from June 27, 2006 (inception) until November 30, 2012, Abakan realized a gross profit of
$2,744,735. Gross profit for the three month period ended November 30, 2012 was $354,300 compared to
$327,930 for the three month period ended November 30, 2011, an increase of 8% . Gross profit for the
six month period ended November 30, 2012 was $852,909 compared to $506,234 for the six month
period ended November 30, 2011, an increase of 68%. Gross profits in the current three month periods
can be wholly attributed to the operations of MesoCoat.
We expect gross profits to continue to increase over the next twelve months as the business moves
towards the commercialization of its products.
Net Losses/Income
For the period from June 27, 2006 (inception) until November 30, 2012, Abakan incurred net losses of
$9,302,201. Net losses for the three month period ended November 30, 2012 were $1,572,453 compared
to net loss of $1,162,390 for the three month period ended November 30, 2011. Net losses for the six
month period ended November 30, 2012 were $2,979,836 compared to a net loss of $512,521 for the six
month period ended November 30, 2011, an increase of 470%.
Net losses in the current three month period as compared to net losses in the prior three month period can
be primarily attributed to the increase in research and development expenses and costs associated with
consultants as Abakan continues to develop its products. The increase in losses for the six month period
when compared to the same period in the previous year is primarily attributed to a book entry gain of
$1,764,345 in the prior six month period that did not affect net losses relative to actual cash used due to
an unrecognized gain on the acquisition of MesoCoat. We do not expect to return to net income in the
near term as anticipated increases in revenue and gross profit are likely to be parried by increases in
operational expenses associated most significantly with increases in general and administrative expenses,
professional fees, payroll expenses, research and development costs and depreciation and amortization of
existing assets.
Despite management’s focus on ensuring operating efficiencies we do expect to continue to operate at a
loss through fiscal 2013.
Expenses
For the period from June 27, 2006 (inception) until November 30, 2012, Abakan incurred operating
expenses of $13,383,654. Operating expenses for the three month period ended November 30, 2012 were
$1,699,627 as compared to $1,336,713 for the three month period ended November 30, 2011, an increase
of 23%. Operating expenses for the six month period ended November 30, 2012 was $3,481,845
compared to $2,526,058 the six month period ended November 30, 2011, an increase of 35%. The
increase in operating expenses over the comparative three and six month periods can be primarily
attributed to increases in research and development costs and amounts paid to consultants, which
expenses increased by a combined $181,290 and $480,210 for the three and six month periods
respectively. The increases were in part the result of adding an employee to the research and
development department and the utilization of consultants in product development and the identification
of potential locations for new facilities.
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We expect that operating expenses will continue to increase as our aggressive growth strategy over the
next five years will require significant increases in personnel and facilities along with significant research
and development to ensure that products nearing commercialization are brought to market as quickly and
as effectively as possible.
Other Expense/Income
For the period from June 27, 2006 (inception) until November 30, 2012, Abakan realized other income of
$1,053,212. Other expense for the three month ended November 30, 2012 was $436,188 as compared to
$223,581 for the three month period ended November 30, 2011, an increase of 95%. Other expense for
the six month period ended November 30, 2012 was $676,216 as compared to other income of
$1,383,437 for the six month period ended November 30, 2011. The primary reasons for the increase in
other expense in the current three month period over the comparative three month period were the growth
in interest expense as result of additional notes and the loss associated with our equity interest in
Powdermet. The transition to other expense in the current six month period over other income in the prior
six month period can be primarily attributed to a book entry gain of $1,764,345 in the prior comparative
six month period that did not affect other income relative to actual cash used in that period due to an
unrecognized gain on the acquisition of MesoCoat.
We expect to continue to incur other expense in future periods due to the interest accruing on convertible
debt and the anticipated increase in the amortization of discount on debt over the next twelve months.
Income Tax Expense (Benefit)
Abakan 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
Abakan believes that inflation has not had a material effect on operations for the period from June 27,
2006 (inception) to November 30, 2012.
Capital Expenditures
Abakan has spent significant amounts on capital expenditures for the period from June 27, 2006
(inception) to November 30, 2012 which amounted to $2,321,016. A large portion of these expenditures
are related to plant, property and equipment in the construction of the manufacturing facility in Euclid,
Ohio.
Liquidity and Capital Resources
Abakan has been in the development stage since inception, and has experienced significant changes in
liquidity, capital resources, and stockholders’ equity.
As of November 30, 2012 Abakan had current assets of $930,106 consisting of cash and cash equivalents
of $715,591, accounts receivable of $85,912, a note receivable from a related party of $4,500, and prepaid
expenses of $124,103. Abakan had total assets of $16,035,642 consisting of current assets, property, plant
and equipment of $4,187,569, patents and licenses of $7,672,228, an assignment agreement of $230,267,
an investment in Powdermet of $2,651,088, and goodwill of $364,384.
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As of November 30, 2012 Abakan had current liabilities of $4,275,680, consisting of accounts payable of
$643,750, accounts payable to related parties of $190,867, capital leases of $36,595, loans payable of
$2,678,132, accrued interest of $329,331, loan payable to related parties of $30,000, accrued interest to
related party of $773 and accrued liabilities of $366,232. Abakan had total liabilities of $6,427,933
consisting of current liabilities, loans payable of $2,091,696 and capital leases of $60,557.
Abakan had stockholders’ equity of $9,607,709 and a working capital deficit of $3,345,574 at November
30, 2012.
For the period from June 27, 2006 (inception) to November 30, 2012, Abakan’s net cash used in
development stage activities was $3,852,648. Net cash used in development stage activities for the six
month period ended November 30, 2012 was $893,513 as compared to $408,837 for the six month period
ended November 30, 2011. Net cash used in development stage activities in the current six month period
can be attributed primarily to a number of items that are book expense items which do not affect the total
amount relative to actual cash used including depreciation, amortization of discount on debt, stock issued
for services and stock option expense offset by equity in investee profit. Actual cash items used, that are
not income statement related items, include accrued liabilities, accounts payable, accrued interest on loans
payable, and prepaid expenses offset by changes in accounts receivable.
We expect to continue to generate negative cash flow in operating activities until such time as net losses
transition to net income.
For the period from June 27, 2006 (inception) until November 30, 2012, Abakan’s net cash used in
investing activities was $7,041,988. Net cash used in investing activities for the six months ended
November 30, 2012, was $1,236,593 as compared to net cash used in investing activities of $345,603 for
the six month period ended November 30, 2011. Net cash used in investing activities in the current period
can be primarily attributed to the purchase of property, plant and equipment, and capitalized patents and
licenses.
We expect to continue to generate negative cash flow in investing activities as Abakan increases its
investment in property, plant and equipment through MesoCoat.
For the period from June 27, 2006 (inception) until August 31, 2012, Abakan’s net cash provided by
financing activities was $11,610,227. Net cash provided by financing activities for the six months ended
November 30, 2012 was $1,986,131 as compared to $1,187,733 the six months ended November 30,
2011. Net cash provided by financing activities in the current period is attributable to proceeds from the
sale of common stock and loans payable, including related party loans, offset by payments on loans
payable, including those to related parties, and repayments on capital leases.
We expect to continue to generate positive cash flow from financing activities as Abakan seeks new
rounds of financing to build its business.
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Our current assets are insufficient to meet our current obligations or to satisfy our cash needs over the
next twelve months and as such Abakan will require additional debt or equity financing. Management to
this end initiated a private equity placement prior to period end pursuant to which Abakan had raised
$1,506,180, during the six month period ended November 30, 2012. Nevertheless, additional capital will
be required to meet obligations and needs over the next twelve months. Except for the private equity
placement noted, we had no other commitments or arrangements for financing at November 30, 2012,
though we continue to pursue a number of prospective sources that include industry or strategic partners,
sale of additional equity, the sale of additional equity, the procurement of long term debt, shareholder
loans or the settlement of additional debt for equity. We face certain financial obstacles to attracting new
financing due to our historical record of net losses and working capital deficits. Therefore, despite our
efforts we can provide no assurance that Abakan will be able to obtain the financing required to meet its
stated objectives or even to continue as a going concern.
Abakan does not expect to pay cash dividends in the foreseeable future.
Abakan has a defined stock option plan titled “The Abakan Inc., 2009 Stock Option Plan” and contractual
commitments with all of its officers and directors.
Abakan has plans for the significant purchase or sale of any plant or equipment in connection with the
completion of the manufacturing facility under construction in Euclid, Ohio. MesoCoat has obtained
verbal commitments for future capital expenditures from Abakan and Powdermet to fund any shortfalls
(including plant and equipment) in the construction of the Euclid facility should it not be able to raise
funds in the normal course of business. Further, MesoCoat has secured a $1,000,000 loan from the Ohio
Third Frontier program that can be drawn down at any time in connection with the new manufacturing
facility. MesoCoat had drawn down $900,543 in connection with the loan as of November 30, 2012.
Abakan intends to increase the number of employees engaged by MesoCoat on completion of the new
Euclid, Ohio manufacturing facility.
Off Balance Sheet Arrangements
As of November30, 2012, Abakan 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
Abakan’s auditors have expressed an opinion as to its ability to continue as a going concern as a result of
net losses of $9,302,201 and a working capital deficit of $3,345,574 as of November 30, 2012. Our ability
to continue as a going concern is dependent on realizing net income from operations, gains on investment,
obtaining funding from outside sources or realizing some combination of these objectives. Management’s
plan to address Abakan’s ability to continue as a going concern includes: (i) obtaining funding from the
private placement of debt or equity; (ii) net income from operations; (iii) realizing a gain from its
investment in Powdermet; (iv) converting debt to equity; and (v) obtaining loans and grants from
financial or government institutions. Management believes that it will be able to obtain funding to allow
Abakan to remain a going concern through the methods discussed above, though there can be no
assurances that such methods will prove successful.
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Forward Looking Statements and Factors That May Affect Future Results and Financial Condition
The statements contained in the section titled Results of Operations and Description of Business, with the
exception of historical facts, are forward looking statements. We are ineligible to rely on the safe-harbor
provision of the Private Litigation Reform Act of 1995 for forward looking statements made in this
quarterly report. Forward looking statements reflect our current expectations and beliefs regarding our
future results of operations, performance, and achievements. These statements are subject to risks and
uncertainties and are based upon assumptions and beliefs that may or may not materialize. These
statements include, but are not limited to, statements concerning:
our anticipated financial performance;
uncertainties related to the commercialization of proprietary technologies held by entities in which
we have an investment interest;
our ability to generate revenue from operations or gains on investments;
our ability to raise additional capital to fund cash requirements for operations;
the volatility of the stock market; and
general economic conditions.
We wish to caution readers that our operating results are subject to various risks and uncertainties that
could cause our actual results to differ materially from those discussed or anticipated including the factors
set forth in the section entitled Risk Factors included elsewhere in this report.
We also wish to advise readers not to place any undue reliance on the forward looking statements
contained in this report, which reflect our beliefs and expectations only as of the date of this report. We
assume no obligation to update or revise these forward looking statements to reflect new events or
circumstances or any changes in our beliefs or expectations, other that is required by law.
Critical Accounting Policies
The notes to the audited financial statements for Abakan for the years ended May 31, 2012 and 2011,
included in Abakan's Form 10-K filed with the Commission, discusses those accounting policies that are
considered to be significant in determining the results of operations and financial position. Our
management believes that their accounting principles conform to accounting principles generally (GAAP)
accepted in the United States of America.
The preparation of financial statements in conformity with GAAP requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the year. The more significant areas requiring the use of estimates include
asset impairment, stock-based compensation, beneficial conversion features on debt instruments, and
future income tax amounts. Management bases its estimates on historical experience and on other
assumptions considered to be reasonable under the circumstances. Actual results may differ from the
estimates.
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Stock-Based Compensation
We have adopted Accounting Standards Codification Topic (“ASC”) 718, Share-Based Payment, which
addresses the accounting for stock-based payment transactions in which an enterprise receives employee
services in exchange for (a) equity instruments of the enterprise or (b) liabilities that are based on the fair
value of the enterprise’s equity instruments or that may be settled by the issuance of such equity
instruments.
Recent Accounting Pronouncements
We have examined all recent accounting pronouncements and believe that none of them will have a
material impact on our financial statements.
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 quarterly report, an evaluation was carried out by Abakan’s
management, with the participation of the chief executive officer and the chief financial officer, of the
effectiveness of Abakan’s disclosure controls and procedures (as defined in Rules 13a-15(e) under the
Securities Exchange Act of 1934 (“Exchange Act”)) as of November 30, 2012. Disclosure controls and
procedures are designed to ensure that information required to be disclosed in reports filed or submitted
under the Exchange Act is recorded, processed, summarized, and reported within the time periods
specified in the 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, Abakan’s management concluded, as of the end of the period covered by this
report, that Abakan’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
Since the end of Abakan’s prior reporting period on Form 10-K, Abakan adopted an audit committee
charter, formed an audit committee comprised of independent members of its board of directors, and
involved said audit committee in overseeing the completion of this periodic report on Form 10-Q, thereby
effecting a change in internal control over financial reporting (as defined in Rule 13a-15(f) of the
Exchange Act) during the period ended November 30, 2012, that materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting.
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PART II – OTHER INFORMATION
ITEM 1.
LEGAL PROCEEDINGS
Abakan and Stratton S.A. (“Stratton”) initiated legal proceedings against First Canadian Capital Corp.
(“First Canadian”) on December 10, 2012, in the Circuit Court of the 6th Judicial Circuit In and For
Pinellas County, Florida. The claim is based on First Canadian’s alleged failure to perform according to
the terms of a consulting agreement dated December 1, 2011, pursuant to which First Canadian was to
provide services aimed at raising investor awareness, attracting investment and identifying prospective
financial parties in exchange for a monthly cash fee and Abakan shares. Abakan seeks the return of the
56,000 shares proffered or in the alternative for a judgment in an amount to be ascertained in excess of
$1,000,000 for the fair market value of the shares. Abakan believes that it will be successful in the pursuit
of its claims.
Abakan initiated legal proceedings against Uptick Capital, LLC. (“Uptick”) on November 7, 2012, in the
United States District Court for the Southern District of New York Superior Court. The claim is based on
Uptick’s alleged failure to perform according to the terms of a consulting agreement dated November 1,
2010, pursuant to which Uptick was to identify and introduce suitable investors to Abakan in exchange
for certain consideration including 60,000 shares. Abakan seeks the return of the 60,000 shares proffered
or in the alternative for a judgment in an amount to be ascertained in excess of $1,000,000 for damages in
addition to reasonable attorney’s fees and court costs. Abakan believes that is will be successful in the
pursuit of its claims.
ITEM 1A.
RISK FACTORS
Abakan’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.
Abakan has a history of significant operating losses and such losses may continue in the future.
Abakan incurred net losses of $9,302,201 for the period from June 27, 2006 (inception) to November 30,
2012. Since we have been without significant revenue since inception and have only recently transitioned
to producing limited revenue, as a result of the business combination with MesoCoat, historical losses
may continue into the future.
Abakan has a history of uncertainty about continuing as a going concern.
Abakan’s audits for the periods ended May 31, 2012 and 2011 expressed an opinion as to its ability to
continue as a going concern as a result of net losses of $6,322,365 and a working capital deficit of
$2,438,854 as of May 31, 2012 which had increased to $9,302,201 and $3,345,574 respectively as of
November 30, 2012. Unless Abakan is able to produce net revenue over successive future periods its
ability to continue as a going concern will be in jeopardy.
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Abakan’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.
Abakan’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 Abakan. The success of these endeavors will require that sufficient funding be available to
assist in the development of its business interests. Currently, Abakan’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.
MesoCoat and Powdermet compete with larger and better financed corporations.
Competition within the industrial coatings industry and other high technology industries is intense. While
each of MesoCoat and Powdermet’s products are distinguished by next-generation innovations that are
more sophisticated and cost effective than many competitive products currently in the market place, a
number of entities and new competitors may enter the market in the future. Some of MesoCoat’s and
Powdermet’s existing and potential competitors have longer operating histories, greater name recognition,
larger customer bases and significantly greater financial, technical and marketing resources than we do,
including well known multi-national corporations. Accordingly, MesoCoat’s and Powdermet’s products
could become obsolete at any time. Competitors could develop products similar to or better than our own,
finish development of new technologies in advance of either MesoCoat’s or Powdermet’s research and
development, or be more successful at marketing new products, any of which factors may hurt our
prospects for success.
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Market acceptance of the products and processes produced by MesoCoat and Powdermet is critical to our
growth.
We expect to generate revenue and realize a gain on our interest in Powdermet from the development and
sale of products and processes produced by MesoCoat and Powdermet. Market acceptance of those
products is therefore critical to our growth. If our customers do not accept or purchase those products or
processes produced by MesoCoat and Powdermet, then our revenue, cash flow and operating results will
be negatively impacted.
General economic conditions will affect our operations.
Changes in the general domestic and international climate may adversely affect the financial performance
of Abakan, 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 Abakan 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
Abakan can be certain that any patents will be issued with respect to future patents pending or future
patent applications. Further, neither they nor Abakan 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. Abakan 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.
55
Environmental laws and other governmental legislation may affect our business.
Should the technologies which each of MesoCoat and Powdermet have under development not comply
with applicable environmental laws then Abakan’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.
Abakan and those subsidiaries in which it holds an interest may face liability claims on future products.
Although MesoCoat and Powdermet intend to implement exhaustive testing programs to identify
potential material defects in technology they develop, any undetected defects could harm their reputation
and that of Abakan, diminish their customer base, shrink revenues and expose themselves and us to
product liability claims. Any imposition of liability that is not covered by insurance or is in excess of
insurance coverage could have a material adverse effect on our business, results of operations and
financial condition.
The market for our stock is limited and our stock price may be volatile.
The market for our common stock has been limited due to low trading volume and the small number of
brokerage firms acting as market makers. Due to the limitations of our market and the volatility in the
market price of our stock, investors may face difficulties in selling shares at attractive prices when they
want to sell. The average daily trading volume for our stock has varied significantly from week to week
and from month to month, and the trading volume often varies widely from day to day.
Abakan’s common stock is currently deemed to be “penny stock”, which makes it more difficult for
investors to sell their shares.
Abakan’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 Abakan remains subject
to the penny stock rules for any significant period, it could have an adverse effect on the market, if any,
for our securities. If the Abakan’s securities are subject to the penny stock rules, investors will find it
more difficult to dispose of our securities.
56
The elimination of monetary liability against Abakan’s directors, officers and employees under Nevada
law and the existence of indemnification rights to our directors, officers and employees may result in
substantial expenditures by Abakan and may discourage lawsuits against our directors, officers and
employees.
Abakan’s certificate of incorporation contains a specific provision that eliminates the liability of directors
for monetary damages to us and our stockholders; further, Abakan is prepared to give such
indemnification to its directors and officers to the extent provided by Nevada law. Abakan may also have
contractual indemnification obligations under its employment agreements with its executive officers. The
foregoing indemnification obligations could result in our incurring substantial expenditures to cover the
cost of settlement or damage awards against directors and officers, which Abakan may be unable to
recoup. These provisions and resultant costs may also discourage us from bringing a lawsuit against
directors and officers for breaches of their fiduciary duties and may similarly discourage the filing of
derivative litigation by our stockholders against the Abakan’s directors and officers even though such
actions, if successful, might otherwise benefit the us and our stockholders.
ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On January 8, 2013, Abakan authorized the issuance of 435,022 shares of restricted common shares and
435,022 share purchase warrants, two warrants are convertible into one additional share at an exercise
price of $2.70 for a two year period from the date of issue to the following entities for cash, in reliance
upon the exemption from registration provided by Section 4(2), Regulation D or Regulation S of the
Securities Act:
Name
Consideration
Basis
Shares
Warrant
Exemption
Enrique Sanz De
Santamaria
$ 50,600
Cash
22,000
11,000 Sec 4(2)/Reg D
Jose Maria Ribot
Rodriguez
$ 149,500
Cash
65,000
32,500 Sec 4(2)/Reg S
Jose Maria Robot
Barroso
$ 129,950
Cash
56,500
28,250 Sec 4(2)/Reg S
Maria Eugenia Barroso
Rivera
$ 103,500
Cash
45,000
22,500 Sec 4(2)/Reg S
Darrell L. Payne
$ 230,000
Cash
100,000
50,000
Sec 4(2)/Reg D
Pierre Arbour
$ 57,500
Cash
25,000
12,500 Sec 4(2)/Reg D
Jose Vicente Estevez
Alverde
$ 103,500
Cash
45,000
22,500 Sec 4(2)/Reg S
River Fish Holdings
$ 176,000
Cash
76,522
38,261 Sec 4(2) Reg S
Abakan complied with the exemption requirements of Section 4(2) of the Securities Act based on the
following factors: (1) the issuance was an isolated private transactions by Abakan which did not involve a
public offering; (2) the offeree had access to the kind of information which registration would disclose;
and (3) the offeree is financially sophisticated.
Abakan complied with the requirements of Regulation D of the Securities Act by: (i) foregoing any
general solicitation or advertising to market the securities; (ii) offering only to an accredited offeree; (iii)
having not violated antifraud prohibitions with the information provided to the offeree; (iv) being
available to answer questions by the offeree; and (v) providing restricted common shares and warrants to
the offeree.
57
Abakan complied with the requirements of Regulation S of the Securities Act by having directed no
offering efforts in the United States, by offering common shares and warrants only to offerees who were
outside of the United States at the time of the offering, and ensuring that the offerees to whom the
securities were offered and authorized were non-U.S. offerees with addresses in foreign countries.
On January 8, 2013, Abakan authorized the issuance of 21,429 restricted common shares for services
rendered pursuant to a consulting agreement valued at $2.80 a share to the Red Chip Companies Inc. in
reliance upon the exemption from registration provided by Section 4(2) of Securities Act.
Abakan complied with the exemption requirements of Section 4(2) of the Securities Act based on the
following factors: (1) the issuance was an isolated private transactions by Abakan which did not involve a
public offering; (2) the offeree had access to the kind of information which registration would disclose;
and (3) the offeree is financially sophisticated.
On December 5, 2012, Abakan authorized the grant of 175,000 stock options with an exercise price of
$2.61 per share that expire ten years from the date of grant with 25,000 vesting on grant and the
remaining vesting in equal one-third increments annually beginning on December 5, 2013 to Raymond
Tellini for independent director services rendered, in reliance upon the exemption from registration
provided by Section 4(2) of the Securities Act.
Abakan complied with the exemption requirements of Section 4(2) of the Securities Act based on the
following factors: (1) the issuance was an isolated private transactions by Abakan which did not involve a
public offering; (2) the offeree had access to the kind of information which registration would disclose;
and (3) the offeree is financially sophisticated.
On December 5, 2012, Abakan authorized the grant of 125,000 stock options with an exercise price of
$2.61 per share that expire ten years from the date of grant vesting in equal one-third parts annually
beginning on December 9, 2013 to David Charbonneau for employee servicesrendered, in reliance upon
the exemption from registration provided by Section 4(2) of the Securities Act.
Abakan complied with the exemption requirements of Section 4(2) of the Securities Act based on the
following factors: (1) the issuance was an isolated private transactions by Abakan which did not involve a
public offering; (2) the offeree had access to the kind of information which registration would disclose;
and (3) the offeree is financially sophisticated.
On November 29, 2012, Abakan authorized the issuance of 245,058 shares of restricted common shares
and 245,058 share purchase warrants, two warrants are convertible into one additional share at an exercise
price of $2.70 for a two year period from the date of issue to the following entities for cash, payment of
note payable, interest, and accounts payable, in reliance upon the exemptions from registration provided
by Section 4(2), Regulation D or Regulation S of the Securities Act:
Name
Consideration Basis
Shares
Warrant Exemption
River Fish Holdings
$ 161,000
Note & interest
70,000
70,000 Sec 4(2)/Reg S
Orsa &Company
$ 23,000
Accounts Payable
10,000
10,000 Sec 4(2)/Reg D
Costas M. Takkas
$ 23,000
Accounts Payable
10,000
10,000 Sec 4(2)/Reg D
Steven Ferris
$ 57,500
Cash
25,000
25,000 Sec 4(2)/Reg D
Bank Gutenberg AG
$ 7,033
Interest
3,058
3,000 Sec 4(2)/Reg S
Kenneth Iriart
$ 16,100
Cash
7,000
7,000 Sec 4(2)/Reg D
Ammon & Associates $ 230,000
Cash
100,000 100,000 Sec 4(2)/Reg D
58
Abakan complied with the exemption requirements of Section 4(2) of the Securities Act based on the
following factors: (1) the issuance was an isolated private transactions by Abakan which did not involve a
public offering; (2) the offeree had access to the kind of information which registration would disclose;
and (3) the offeree is financially sophisticated.
Abakan complied with the requirements of Regulation D of the Securities Act by: (i) foregoing any
general solicitation or advertising to market the securities; (ii) offering only to an accredited offeree; (iii)
having not violated antifraud prohibitions with the information provided to the offeree; (iv) being
available to answer questions by the offeree; and (v) providing restricted common shares and warrants to
the offeree.
Abakan complied with the requirements of Regulation S of the Securities Act by having directed no
offering efforts in the United States, by offering common shares and warrants only to offerees who were
outside of the United States at the time of the offering, and ensuring that the offerees to whom the
securities were offered and authorized were non-U.S. offerees with addresses inforeign countries.
On November 29, 2012 Abakan authorized the issuance of 20,000 restricted common shares for services
rendered pursuant to a consulting agreement valued at $1.70 a share to Financial Insights in reliance upon
the exemption from registration provided by Section 4(2) of Securities Act.
Abakan complied with the exemption requirements of Section 4(2) of the Securities Act based on the
following factors: (1) the issuance was an isolated private transactions by Abakan which did not involve a
public offering; (2) the offeree had access to the kind of information which registration would disclose;
and (3) the offeree is financially sophisticated.
On September 28, 2012, Abakan authorized the issuance of 150,000 restricted common shares and
150,000 share purchase warrants, two warrant convertible into an additional share at an exercise price of
$2.00 for a two year period from the date of issue, for $262,500 or $1.75 a share to Ammon & Associates,
Inc. in reliance upon the exemptions from registration provided by Section 4(2) and Regulation D of the
Securities Act of 1933, as amended (“Securities Act”).
Abakan complied with the exemption requirements of Section 4(2) of the Securities Act based on the
following factors: (1) the issuance was an isolated private transactions by Abakan which did not involve a
public offering; (2) the offeree had access to the kind of information which registration would disclose;
and (3) the offeree is financially sophisticated.
Abakan complied with the requirements of Regulation D of the Securities Act by: (i) foregoing any
general solicitation or advertising to market the securities; (ii) offering only to an accredited offeree; (iii)
having not violated antifraud prohibitions ��with the information provided to the offeree; (iv) being
available to answer questions by the offeree; and (v) providing restricted common shares and warrants to
the offeree.
On September 18, 2012, Abakan authorized the issuance of 25,000 restricted common shares for
services rendered pursuant to a consulting agreement valued at $1.71 a share to Red Chip Companies, Inc.
in reliance upon the exemption from registration provided by Section 4(2) of Securities Act.
Abakan complied with the exemption requirements of Section 4(2) of the Securities Act based on the
following factors: (1) the issuance was an isolated private transactions by Abakan which did not involve a
public offering; (2) the offeree had access to the kind of information which registration would disclose;
and (3) the offeree is financially sophisticated.
59
ITEM 3.
DEFAULTS ON SENIOR SECURITIES
None.
ITEM 4.
MINE SAFETY DISCLOSURE
Not applicable.
ITEM 5.
OTHER INFORMATION
None.
ITEM 6.
EXHIBITS
Exhibits required to be attached by Item 601 of Regulation S-K are listed in the Index to Exhibits on page
62 of this Form 10-Q, and are incorporated herein by this reference.
60
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.
Abakan Inc.
Date
/s/ Robert H. Miller
January 11, 2013
By: Robert H. Miller
Its: Chief Executive Officer, and Director
/s/ David G. Charbonneau
January 11, 2013
By: David G. Charbonneau
Its: Chief Financial Officer and Principal Accounting Officer
61
INDEX TO EXHIBITS
Exhibit No.
Exhibit Description
3.1*
Articles of Incorporation and Certificate of Amendment, incorporated hereto by reference to
the Form SB-2, filed with the Commission on June 19, 2007.
3.2*
Bylaws, incorporated hereto by reference to the Form SB-2, filed with the Commission on
June 19, 2007.
10.1*
Lease Agreement between Powdermet and Sherman Properties, LLC dated March 7, 2007,
incorporated hereto by reference to the Form 10-K filed with the Commission on September
13, 2011.
10.2*
License agreement between MesoCoat and Powdermet dated July 22, 2008, incorporated
hereto by reference to the Form 10-K/A-2 filed with the Commission on December 27, 2011.
10.3*
Exclusive license between MesoCoat and UT-Battelle, LLC, dated September 22, 2009,
incorporated hereto by reference to the Form 10-K/A-2 filed with the Commission on
December 27, 2011.
10.4*
Articles of Merger dated November 9, 2009, incorporated hereto by reference to the Form 8-
K filed with the Commission on December 9, 2009.
10.5*
Agreement and Plan of Merger dated November 9, 2009, incorporated hereto by reference to
the Form 8-K filed with the Commission on December 9, 2009.
10.5*
Consulting agreement dated December 1, 2009, between Abakan and Mr. Greenbaum,
incorporated hereto by reference to the Form 8-K filed with the Commission on May 28,
2010.
10.7*
Employment agreement dated December 1, 2009, between MesoCoat and Andrew Sherman,
incorporated hereto by reference to the Form 10-K filed with the Commission on September
13, 2011.
10.8*
Consulting agreement date December 1, 2009 between Abakan and Prosper Financial Inc.,
incorporated hereto by reference to the Form 10-K filed with the Commission on September
13, 2011.
10.9*
Consulting agreement dated December 8, 2009 between Abakan and Robert Miller,
incorporated hereto by reference to the Form 10-K filed with the Commission on September
13, 2011.
10.10*
Investment Agreement dated December 9, 2009, between Abakan, MesoCoat and
Powdermet, incorporated hereto by reference to the Form 8-K filed with the Commission on
December 17, 2009.
10.11*
Agreement date March 17, 2010 between Abakan and Sonnen Corporation, incorporated
hereto by reference to the Form 10-K filed with the Commission on September 13, 2011.
10.12*
Agreement dated April 30, 2010 between Abakan and Mr. Buschor, incorporated hereto by
reference to the Form 8-K filed with the Commission on May 11, 2010.
10.13*
Commercial lease agreement date June 1, 2010, between Powdermet and MesoCoat,
incorporated hereto by reference to the Form 10-K filed with the Commission on September
13, 2011.
10.14*
Stock Purchase Agreement dated June 29, 2010 between Abakan and Kennametal,
incorporated hereto by reference to the Form 8-K filed with the Commission on September
15, 2010.
10.15*
Employment agreement dated August 20, 2010, between Abakan and Mr. Takkas,
incorporated hereto by reference to the Form 8-K filed with the Commission on August 26,
2010.
10.16*
Amendment No. 1 to Stock Purchase Agreement between Abakan and Kennametal dated
September 7, 2010, incorporated hereto by reference to the Form 8-K filed with the
Commission on September 15, 2010.
62
10.17*
Amendment to the Investment Agreement dated December 8, 2010, between Abakan,
MesoCoat and Powdermet, incorporated hereto by reference to the Form 10-Q filed with the
Commission on January 19, 2011.
10.18*
Cooperation Agreement between MesoCoat and Petroleo Brasileiro S.A. dated January 11,
2011, incorporated by reference to the Form 8-K/A-3 filed with the Commission on March 6,
2012. (Portions of this exhibit have been omitted pursuant to a request for confidential
treatment.)
10.19*
Amendment No. 2 to Stock Purchase Agreement between Abakan and Kennametal dated
January 19, 2011, incorporated hereto by reference to the Form 8-K filed with the
Commission on July 13, 2011.
10.20*
Accord and Satisfaction Agreement dated March 21, 2011 between Abakan and Kennametal,
Inc., incorporated hereto by reference to the Form 8-K filed with the Commission on March
25, 2011.
10.21*
Assignment Agreement dated March 25, 2011 with Polythermics LLC and MesoCoat,
incorporated hereto by reference to the Form 10-Q/A filed with the Commission on
September 27, 2011.
10.22*
Exclusivity Agreement between MesoCoat and Mattson Technology, Inc. dated April 7,
2011, incorporated hereto by reference to the Form 8-K/A-3 filed with the Commission on
March 6, 2012. (Portions of this exhibit have been omitted pursuant to a request for
confidential treatment.)
10.23
Third Amendment to the Investment Agreement between Abakan, MesoCoat and Powdermet
dated December 21, 2012.
14
Code of Business Conduct & Ethics adopted on December 10, 2012.
21*
Subsidiaries of Abakan incorporated hereto by reference to the Form 10-K filed with the
Commission on September 13, 2012.
31.1
Certification of the Chief Executive Officer pursuant to Rule 13a-14 of the Exchange Act as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, attached.
31.2
Certification of the Chief Financial Officer pursuant to Rule 13a-14 of the Exchange Act as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, attached.
32.1
Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, attached.
32.2
Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, attached.
99*
Powdermet audited financial statements for the period ended May 31, 2012 incorporated
hereto by reference to the Form 10-K filed with the Commission on September 13, 2012.
101. INS XBRL Instance Document†
101. PRE XBRL Taxonomy Extension Presentation Linkbase†
101. LAB XBRL Taxonomy Extension Label Linkbase†
101. DEF XBRL Taxonomy Extension Label Linkbase†
101. CAL XBRL Taxonomy Extension Label Linkbase†
101. SCH XBRL Taxonomy Extension Schema†
*
Incorporated by reference to previous filings of Abakan.
†
Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed “furnished”
and not “filed” or part of a registration statement or prospectus for purposes of Section 11 or
12 of the Securities Act of 1933, or deemed “furnished” and not “filed” for purposes of
Section 18 of the Securities and Exchange Act of 1934, and otherwise is not subject to
liability under these sections.
63