UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
þ Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the
quarterly period ended February 28, 2013.
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 April 22, 2013 was 63,664,298.
1
TABLE OF CONTENTS
PART 1- FINANCIAL INFORMATION
Item1.
4
Condensed Consolidated Balance Sheets for the period ended
5
February 28, 2013 (unaudited) and May 31, 2012
Unaudited Condensed Consolidated Statements of Operations for the
6
Three month and nine months ended February 28 & 29, 2013 and 2012, and
cumulative amounts from development stage activities (June 27, 2600 (Inception)
through February 28, 2013)
Unaudited Consolidated Condensed Statements of Cash Flows for the
7
nine months ended February 28 & 29, 2013 and 2012, and cumulative amounts from
development stage activities (June 27, 2006 (inception) through February 28, 2013)
Condensed Notes to Consolidated Financial Statements (Unaudited)
8
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of
37
Operations
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
54
Item 4.
Controls and Procedures
55
PART II-OTHER INFORMATION
Item 1.
Legal Proceedings
56
Item 1A.
Risk Factors
56
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
60
Item 3.
Defaults Upon Senior Securities
64
Item 4.
Mine Safety Disclosures
64
Item 5.
Other Information
64
Item 6.
64
65
66
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
February 28,
May 31,
2013
2012
(unaudited)
ASSETS
Current assets
Cash and cash equivalents
$
179,094 $
859,566
Accounts receivable
69,359
22,854
Note receivable - related parties
4,500
4,500
Prepaid expenses
82,414
183,134
Total current assets
335,367
1,070,054
Non-current assets
Property, plant and equipment, net (Note 4)
5,362,236
3,021,088
Patents and licenses, net (Note 5)
7,636,808
7,776,315
Assignment agreement - MesoCoat (Note 6)
220,397
250,000
Investment - Powdermet (Note 7)
2,516,827
2,710,189
Goodwill
364,384
364,384
Total Assets
$
16,436,019 $
15,192,030
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable
$
887,303 $
425,868
Accounts payable - related parties (Note 11)
229,253
80,773
Capital leases - current portion
24,998
42,999
Loans payable, net of discounts of $171,615 (Note 8)
3,074,219
2,465,165
Accrued interest - loans payable (Note 8)
366,257
183,106
Loan payable- related parties (Note 11)
30,000
-
Accrued interest – related parties (Note 11)
1,373
-
Accrued liabilities
405,645
310,997
Total current liabilities
5,019,048
3,508,908
Non-current liabilities
Loans payable, net of discounts of $444,881 (Note 8)
2,384,996
1,146,277
Capital leases - non-current portion
65,754
72,176
Total liabilities
7,469,798
4,727,361
Commitments and contingencies (Note 13)
Stockholders' equity (Note 9)
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
62,729,454 issued and outstanding – February 28, 2013,
61,465,445 issued and outstanding - May 31, 2012
6,274
6,147
Subscription receivable
(84,000)
-
Subscription payable
101,200
-
Paid-in capital
17,410,008
13,321,527
Contributed capital
5,050
5,050
Accumulated deficit during the development stage
(11,254,059)
(6,322,365)
6,184,473
7,010,359
Non-controlling interest
2,781,748
3,454,310
Total stockholders' equity
8,966,221
10,464,669
Total liabilities and stockholders' equity
$
16,436,019 $
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 nine months ended
February 28 & 29,
February 28 & 29,
(Inception) to
February 28,
2013
2012
2013
2012
2013
Revenues
Commercial
$
61,125 $
15,998 $
131,206 $
47,513 $
208,597
Contract and grants
224,742
577,645
1,549,571
1,267,413
3,648,325
Other income
-
733,583
-
909,565
764,879
285,867
1,327,226
1,680,777
2,224,491
4,621,801
Cost of Revenues
105,521
313,130
647,522
704,161
1,696,720
Gross profit
180,346
1,014,096
1,033,255
1,520,330
2,925,081
Expenses
General and administrative
General and administrative
254,360
186,568
593,037
403,871
1,488,304
Professional fees
133,195
48,142
390,432
204,685
960,233
Professional fees - related parties
15,000
15,000
45,000
45,000
210,000
Consulting
342,066
197,449
965,083
582,238
2,669,378
Consulting - related parties
128,504
76,500
351,181
229,577
1,591,161
Payroll and benefits expense
240,452
214,181
584,129
567,230
1,582,434
Depreciation and amortization
108,359
46,791
302,291
213,021
634,375
Research and development
357,213
248,528
893,407
521,740
1,630,723
Impairment of asset
-
-
-
-
180,000
Stock expense on note conversion
-
12,648
37,223
12,648
528,200
Stock options expense
483,365
350,336
1,382,576
1,142,192
3,971,360
Total expenses
2,062,514
1,396,143
5,544,359
3,922,202
15,446,168
Loss from operations
(1,882,168)
(382,047)
(4,511,104)
(2,401,872)
(12,521,087)
Other (expense) income
Interest expense:
Interest - loans
(90,157)
(125,879)
(313,169)
(204,419)
(638,914)
Interest - related parties
-
(801)
(773)
(934)
(7,333)
Liquidated damages
-
-
-
-
(250,000)
Amortization of discount on debt
(210,265)
(171,681)
(607,350)
(451,003)
(1,220,214)
Total interest expense
(300,422)
(298,361)
(921,292)
(656,356)
(2,116,461)
Interest income
32
5
3,787
226
8,158
Loss on debt settlement
-
-
-
-
(5,257)
Gain on debt settlement
17,715
40,043
17,715
40,043
274,967
Gain on sale of assets
-
-
-
-
429,717
Unrealized gain on MesoCoat acquisition
-
-
-
1,764,345
1,764,345
Equity in Powdermet income/ (loss)
(134,261)
48,471
(193,362)
69,745
866,827
Equity in MesoCoat loss
-
-
-
(44,408)
(586,020)
Total Other (expense) income
(416,936)
(209,842)
(1,093,152)
1,173,595
636,276
Net profit/ (loss) before non-controlling interest
(2,299,104)
(591,889)
(5,604,256)
(1,228,277)
(11,884,811)
Non-controlling interest in MesoCoat Loss
347,246
(150,806)
672,562
(26,939)
630,752
Net profit/ (loss) attributable to Abakan Inc.
(1,951,858)
(742,695)
(4,931,694)
(1,255,216)
(11,254,059)
Provision for income taxes
-
-
-
-
-
Net profit/ (loss)
$ (1,951,858) $ (742,695) $ (4,931,694) $ (1,255,216) $
(11,254,059)
Net profit/ (loss) per share - basic
$
(0.03) $
(0.01) $
(0.08) $
(0.02)
Net profit/ (loss) per share - diluted
$
(0.03) $
(0.01) $
(0.08) $
(0.02)
Weighted average number of common
shares outstanding - basic
62,618,063
59,462,401
62,073,783
59,389,880
Weighted average number of common
shares outstanding - diluted
62,618,063
59,462,401
62,073,783
59,389,880
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 nine months ended
June 27, 2006
February 28 and 29,
(Inception) to
2013
2012
February 28, 2013
CASH FLOWS FROM DEVELOPMENT STAGE ACTIVITIES
Net profit/ (loss) before non-controlling interest
$
(5,604,256) $
(1,228,277) $
(11,884,811)
Adjustments to reconcile net (loss) to net
cash provided by (used in) development stage activities:
Depreciation and amortization
302,291
213,021
634,375
Amortization of discount on debt
607,350
451,003
1,337,620
Amortization of deferred financing fees
-
1,168
-
Stock options expense
1,382,576
1,142,192
3,971,360
Stock expense from note conversion
37,223
12,648
528,200
Stock issued for services
222,125
119,600
902,776
Equity in investee (profit)/ loss
193,363
(25,337)
(280,804)
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
(46,505)
147,964
102,098
Notes receivable - related parties
-
-
(4,500)
Prepaid expenses
127,720
(114,886)
(69,567)
Prepaid expenses - related parties
-
1,485
14,152
Accounts payable
500,944
139,318
1,140,502
Accounts payable - related parties
202,480
13,493
365,984
Accrued interest - related parties
-
-
2,664
Accrued interest - loans payable
261,311
137,007
420,715
Accrued liabilities
94,648
99,003
272,839
Waste to Energy Group Inc.
-
-
180,000
Total adjustments
3,885,526
573,334
7,324,352
NET CASH (USED IN) DEVELOPMENT STAGE ACTIVITIES
(1,718,730)
(654,943)
(4,560,459)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property, plant, equipment and website
(2,415,010)
(684,839)
(3,521,884)
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
(59,319)
(90,327)
(157,504)
Waste to Energy Group Inc.
-
-
(180,000)
NET CASH PROVIDED BY/ (USED) IN INVESTING ACTIVITIES
(2,474,329)
(467,516)
(8,279,724)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from sale of common stock
2,091,652
545,465
8,023,493
Proceeds from loans payable
1,553,489
1,158,106
5,404,776
Payments on loans payable
(155,278)
(136,995)
(648,335)
Proceeds from loans payable - related parties
66,200
39,626
145,880
Payments on loans payable - related parties
(36,253)
-
(15,190)
Repayments of capital leases
(24,423)
(19,241)
(79,062)
Stock Issuable
17,200
-
182,665
Proceeds from capital contributed
-
-
5,050
NET CASH PROVIDED BY FINANCING ACTIVITIES
3,512,587
1,586,961
13,019,277
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS
(680,472)
464,502
179,094
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
859,566
-
-
CASH AND CASH EQUIVALENTS, END OF PERIOD
$
179,094 $
464,502 $
179,094
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 nine months ended
June 27, 2006
February 28 & 29,
(Inception) to
2013
2012
February 28, 2013
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
$
(100,000) $
(48,523) $
(305,971)
Loans payable
(157,788)
(334,777)
(807,957)
Accrued interest
(10,245)
(7,056)
(14,576)
Notes payable - related parties
-
(30,625)
(99,515)
Accrued interest - related parties
-
(619)
(9,724)
Common stock
268,033
421,600
1,242,493
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
-
4,245,054
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
-
1,452,736
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
$
- $
2,470,694 $
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 nine months ended February 28 & 29, 2013 and 2012
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 of government grants,
cooperative reimbursement agreements and commercial contracts.
On March 21, 2011, the Company purchased 596,813 shares of Powdermet from Kennametal, Inc., an
unrelated party, equal to a fully diluted 41% interest in Powdermet.
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.
8
ABAKAN INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the nine months ended February 28 & 29, 2013 and 2012
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.
Abakan plan of operations is to develop and commercialize their products in advanced coatings and metal
formulations markets as a result of its investment in MesoCoat, Inc. (“MesoCoat”) and Powdermet, Inc.
(“Powdermet”). Abakan is actively involved in supporting their R&D, market development, and
commercialization efforts. Since the Company is in the pre-commercialization phase for the majority of
its products, it is anticipated that the Company will need successive rounds of financing to fund research
& development, lengthy qualification periods, sales and marketing efforts.
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 February 28, 2013,
and the results of its operations and cash flows for the three and nine months ended February 28, 2013,
have been made. Operating results for the nine months ended February 28, 2013are 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.
Consolidation Policy
The accompanying February 28, 2013 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 February 28, 2013 is as follows:
Name of Subsidiary
Percentage of Ownership
AMP Distributors (Cayman)
100.00%
AMP Distributors (Florida)
100.00%
MesoCoat, Inc.
52.50%
9
ABAKAN INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the nine months ended February 28 & 29, 2013 and 2012
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
Earnings (Loss) Per Common Share
The Company computes net loss per share in accordance with FASB ASC 260-10, "Earnings per Share".
FASB ASC 260 requires presentation of both basic and diluted earnings per share (EPS) on the face of
the statement of operations. Basic EPS is computed by dividing net loss available to common
stockholders (numerator) by the weighted average number of shares outstanding (denominator)
during the period. Diluted EPS gives effect to all potentially dilutive common shares outstanding during
the period. Diluted EPS excludes all potentially dilutive shares if their effect is anti-dilutive. The only
potentially dilutive common shares outstanding are stock options and warrants from inception (Note 10).
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 February 28, 2013, the Company’s business operations had not fully developed and the Company is
dependent upon funding and therefore is considered a development stage enterprise.
Reclassifications
Certain amounts in the period ended February 29, 2012 financial statements have been reclassified to
conform to the current period ended February 28, 2013 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 February 28, 2013 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 nine months ended February 28 & 29, 2013 and 2012
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
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 February 28, 2013 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
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.
11
ABAKAN INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the nine months ended February 28 & 29, 2013 and 2012
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
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 $893,407 and $521,740 for the nine months ended February 28 & 29,
2013 and 2012, 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
$6,125 and $1,490 for the nine months ended February 28 & 29, 2013 and 2012, respectively.
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.
12
ABAKAN INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the nine months ended February 28 & 29, 2013 and 2012
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
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 16).
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 February 28, 2013, of $11,254,059, and a working capital deficit of $4,683,681. These conditions
raise substantial doubt about the Company’s ability to continue as a going concern. The Company’s
continuation as a going concern is dependent on its ability to develop additional sources of capital,
and/or achieve profitable operations and positive cash flows. Management’s plan is to aggressively
pursue its present business plan. Since inception we have funded our operations through the issuance of
common stock, debt financing, and related party loans and advances, and we will seek additional debt or
equity financing as required. The accompanying financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
NOTE 4 – PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following:
February 28, 2013
May 31, 2012
Machinery and equipment
$
735,002
$
427,641
Construction in progress
4,714,602
2,617,196
Computer equipment and office furniture
45,253
35,369
Leasehold improvements
54,177
53,818
5,549,034
3,134,024
Less accumulated depreciation and amortization
(186,798)
(112,936)
$
5,362,236
$
3,021,088
Depreciation and amortization expense was $73,862 and $31,000 for the nine months ended February 28
& 29, 2013 and 2012, respectively.
13
ABAKAN INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the nine months ended February 28 & 29, 2013 and 2012
NOTE 5 – PATENTS AND LICENSES
Patents and licenses consist of the following:
February 28, 2013
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
1,893,255
1,843,200
8,117,148
8,057,391
Less accumulated amortization
(480,340)
(281,076)
$
7,636,808 $
7,776,315
Amortization expense was $199,264 and $182,021 for the nine months ended February 28 & 29, 2013
and 2012, respectively. In the nine months ended February 28 & 29, 2013 and 2012, we have capitalized an
additional $59,757 and $90,327, respectively, on patents and licenses, and have begun amortizing those
according to our policy.
Future amortization patents and licenses as of February 28, 2013 are presented in the table below:
For the years ended May 31,
2013
$
89,134
2014
288,398
2015
288,398
2016
288,398
2017 and beyond
562,280
$
1,516,608
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.
14
ABAKAN INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the nine months ended February 28 & 29, 2013 and 2012
NOTE 6 – ASSIGNMENT AGREEMENT – MESOCOAT
On March 25, 2011, the Company entered into an assignment 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 assignment agreement was entered into with a
company that provided for an exclusive ten year distribution agreement with MesoCoat dated effective
October 10, 2008. On May 31, 2011, the Company completed the transfer of the consideration and
assumed all rights to the exclusive distribution agreement. We commenced amortization on June 1, 2012,
over the remaining term of 76 months, and have recorded $29,603 in amortization expense as of the nine
months ended February 28, 2013.
NOTE 7 – INVESTMENT IN NON-CONTROLLING INTEREST
Powdermet, Inc.
The Company entered into a stock purchase agreement with Kennametal, Inc. (“Kennametal”) dated June
28, 2010 to purchase five hundred and ninety six thousand eight hundred and thirteen (596,813) shares,
representing a forty one percent (41%) interest in Powdermet, Inc. (“Powdermet”), from Kennametal 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 contained 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.
The Company made the initial payment of $500,000 on September 7, 2010 and did not make the payment
on the balance as agreed; accordingly the Company recorded liquidating damages of $50,000 per month
beginning October 1, 2010, for a total of $250,000 as of the period ended February 28, 2011.
On January 19, 2011, the Company amended the Stock Purchase Agreement with Kennametal to
complete the purchase of Powdermet shares from Kennametal no later than February 15, 2011 for
$1,150,000. The Company did not make its payment on the balance as agreed. On March 21, 2011, the
Company entered into an accord and satisfaction agreement to fulfill the terms of its agreement with
Kennametal and settled its debt in full in the amount of $1,200,000.
Powdermet was formerly the parent company of MesoCoat, owning 66% of MesoCoat at May 31, 2011.
Andy Sherman serves as the chief executive officer of 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, it also gained indirect ownership of the additional shares of MesoCoat that Powdermet owns.
15
ABAKAN INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the nine months ended February 28 & 29, 2013 and 2012
NOTE 7 – INVESTMENT IN NON-CONTROLLING INTEREST – continued
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 nine months ended February 28, 2013
(193,362)
Investment balance, February 28, 2013
$
2,516,827
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
February 28, 2013 is 47.50%.
Below is a table with summary financial results of operations and financial position of Powdermet:
Powdermet Inc.
For the nine months
For the nine months
ended
ended
February 28, 2013
February 29, 2012
Equity Percentage
41%
41%
Condensed income statement information:
Total revenues
$
1,882,043
$
1,601,810
Total cost of revenues
774,137
540,461
Gross margin
1,107,906
1,061,349
Total expenses
(906,956)
891,240
Equity Loss in MesoCoat
(672,562)
0
Net profit/ (loss)
$
(471,612)
$
170,109
Company’s equity in net profit/ (loss)
$
(193,362)
$
69,745
Condensed balance sheet information:
February, 2013
May 31, 2012
Total current assets
$
760,978 $
578,725
Total non-current assets
3,484,557
4,234,600
Total assets
$
4,245,535 $
4,813,325
Total current liabilities
$
268,362 $
395,614
Total non-current liabilities
2,136,445
2,105,370
Total equity
1,840,728
2,312,341
Total liabilities and equity
$
4,245,535 $
4,813,325
16
ABAKAN INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the nine months ended February 28 & 29, 2013 and 2012
NOTE 8 – LOANS PAYABLE
As of February 28, 2013 and May 31, 2012, the loans payable balance comprised of:
Description
February 28, 2013
May 31, 2012
Convertible demand note to an unrelated entity bearing 5% interest per annum which matures
$
479,775 $
400,231
on April 13, 2013. The note is shown net of a discount of $20,225 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
1,468,089
1,214,917
on March 16, 2013. The note is shown net of a discount of $31,911 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
118,194
38,531
on June 7, 2013. The note is shown net of a discount of $81,806 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
262,244
70,671
on July 14, 2013. The note is shown net of a discount of $237,756 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
449
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%
969,984
-
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
53,606
56,043
which matures on July 10, 2018.
Uncollateralized demand notes to an unrelated entity bearing 6% interest per annum
359,100
0
Capital leases payable to various vendors expiring in various years through September 2016;
90,752
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
1,634,574
1,717,546
$46,788 and $82,454, respectively
5,579,967 $
3,726,617
Less current liabilities
3,129,217
2,508,164
Total long term liabilities
$
2,450,750 $
1,218,453
We also owed $367,630 and $183,106 in accrued interest for the above notes as of February 28, 2013
and May 31, 2012, respectively. We also amortized $607,350 and $451,003 in discount on debt as of
February 28 & 29, 2013 and 2012, respectively.
As of February 28, 2013 and May 31, 2012, we had no restrictive covenants attached to any of the
above referenced notes.
17
ABAKAN INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the nine months ended February 28 & 29, 2013 and 2012
NOTE 8 – LOANS PAYABLE - continued
Future maturity of our notes payable as of February 28, 2013 is presented in the table below:
For the years ended May 31,
2013
$
3,129,217
2014
1,119,675
2015
416,612
2016
164,028
2017 and beyond
750,435
$ 5,579,967
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. We received two additional draws on
October 5, 2012 and February 7, 2013 of $316,477 and $69,441 respectively, for a total of $969,984. 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 9 – STOCKHOLDERS' EQUITY
Common Shares – Authorized
The Company has 2,500,000,000 common shares authorized at a par value of $0.0001 per share and
50,000,000 shares of preferred stock, par value $0.0001 per share. All common stock shares have equal
voting rights, are non-assessable and have one vote per share. Voting rights are not cumulative and,
therefore, the holders of more than 50% of the common stock could, if they choose to do so, elect all the
directors of the Company.
Common Stock Issuances
Private placements
For the nine months ended February 28, 2013, 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.
18
ABAKAN INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the nine months ended February 28 & 29, 2013 and 2012
NOTE 9 – STOCKHOLDERS' EQUITY – continued
Common Stock Issuances - continued
Private placements- continued
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.
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.
On December 3, 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 8, 2012, we closed a private placement for a total of $50,600, or 22,000 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 $50,600.
On December 18, 2012, we closed two private placements for a total of $161,000, or 70,000 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 $161,000.
On December 19, 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.
19
ABAKAN INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the nine months ended February 28 & 29, 2013 and 2012
NOTE 9 – STOCKHOLDERS' EQUITY – continued
On December 20, 2012, we closed a private placement for $176,000, or 76,522 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 $176,500.
On December 30, 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.
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.
On February 21, 2013, we converted accounts payables due to related party for $54,000, or 20,000 units
consisting of one share of our restricted common stock. In connection with this placement we did not
incurred any stock expense.
Share based compensation
For the nine months ended February 28, 2013, 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.
On January 8, 2013, we issued 21,429 shares of our common stock for services performed valued at
$60,000.
On February 21, 2013, we issued 10,000 shares of our common stock for future services to be performed
valued at $27,000.
20
ABAKAN INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the nine months ended February 28 & 29, 2013 and 2012
NOTE 9 – STOCKHOLDERS' EQUITY - continued
Common Stock Warrants
In connection with the above private placement we valued the common stock warrants granted during
the nine months ended February 28, 2013, 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%
December
December
December
3, 2012
8, 18, 19,
30, 2012
and 20,
2012
Expected volatility
147.10%
147.10%
147.10%
(based on historical
volatility)
Expected dividends
0.00
0.00
0.00
Expected term in years
2.00
2.00
2.00
Risk-free rate
0.25%
0.28%
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.
21
ABAKAN INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the nine months ended February 28 & 29, 2013 and 2012
NOTE 9 – STOCKHOLDERS' EQUITY – continued
A summary of the common stock warrants granted during the year ended May 31, 2012 and the nine
months ended February 28, 2013 is presented below:
Weighted
Weighted
Average
Average
Remaining
Aggregate
Number of
Exercise
Contractual
Intrinsic
Options
Price
Terms (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
555,011
2.45
Exercised
-
-
Forfeited or expired
-
-
Balance at February 28, 2013
2,621,307
$
1.81
2.00 years
$
--
Exercisable at February 28, 2013
2,621,307
$
1.81
2.00 years
$
--
Weighted average fair value of
options granted during the three
months ended February 28, 2013
$
2.78
Common Stock Warrants - continued
The following table summarizes information about the warrants outstanding at February 28, 2013:
Options Outstanding
Options Exercisable
Range
Number
Weighted
Weighted
Number
Weighted
of
Outstanding
Average
Average
Exercisable
Average
Aggregate
Exercise
at February
Remaining
Exercise
Intrinsic
at February
Exercise
Intrinsic
Price
28, 2013
Contractual Life
Price
Value
28, 2013
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
$
--
$ 2.69
28,250
2.00 Years
$ 2.69
$
--
28,250 $ 2.69
$
--
$ 2.70
112,500
2.00 Years
$ 2.70
$
--
112,500 $ 2.70
$
--
$ 2.80
189,261
2.00 Years
$ 2.80
$
--
189,261 $ 2.80
$
--
2,621,307
2.00 Years
$ 1.81
$
--
2, 621,307 $ 1.81
$
--
22
ABAKAN INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the nine months ended February 28 & 29, 2013 and 2012
NOTE 10 – EARNINGS-PER-SHARE CALCULATION
Basic earnings per common share for the three and nine months ended February 28 & 29, 2013 and 2012
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 months
ended February 28,
ended February 29,
2013
2012
Net earnings (loss) from operations
$
(1,951,858)
$ (742,695)
Weighted-average common shares
62,618,063
59,462,401
Effect of dilutive securities:
Warrants
-
-
Options to purchase common stock
-
-
Dilutive potential common shares
62,618,063
59,462,401
Net earnings per share from operations:
Basic
$
(0.03)
$ (0.01)
Diluted
$
(0.03)
$ (0.01)
23
ABAKAN INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the nine months ended February 28 & 29, 2013 and 2012
NOTE 10 – EARNINGS-PER-SHARE CALCULATION - continued
For the nine months
For the nine months
ended February 28,
ended February 29,
2013
2012
Net earnings (loss) from operations
$
(4,931,694)
$ (1,255,216)
Weighted-average common shares
62,073,783
59,389,880
Effect of dilutive securities:
Warrants
-
-
Options to purchase common stock
-
-
Dilutive potential common shares
62,073,783
59,389,880
Net earnings per share from operations:
Basic
$
(0.08)
$ (0.02)
Diluted
$
(0.08)
$ (0.02)
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 nine months ended February 28 & 29, 2013 and 2012
NOTE 10 – 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
February 28, 2013
February 29, 2012
Common Stock Equivalents:
Warrants
2,621,307
3,416,833
Options to purchase common stock
4,545,000
5,545,000
Total of Common Stock Equivalents:
7,166,307
8,961,833
For the nine
For the nine
months ended
months ended
February 28, 2013
February 29, 2012
Common Stock Equivalents:
Warrants
2,621,307
3,416,833
Options to purchase common stock
4,545,000
5,545,000
Total of Common Stock Equivalents:
7,166,307
8,961,833
NOTE 11 – RELATED PARTY TRANSACTIONS
Due to the common control between the Company and its related parties, the Company is exposed to the
potential that ownership risks and rewards could be transferred among the parties.
In addition to related party transactions mentioned elsewhere, we have the below agreements and
transactions:
Board of 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. This agreement has subsequently been terminated.
25
ABAKAN INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the nine months ended February 28 & 29, 2013 and 2012
NOTE 11 – 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.
On February 21, 2013, we appointed a new member to our Board of Advisors and agreed to pay up to
$5,000 and 10,000 restricted shares for services rendered through April 30, 2013. Thereafter we agreed
to pay him $3,000 per month for his services through February 28, 2015. We also granted him 15,000
stock options for his services. The stock options have an exercise price of $2.70 per share of common
stock, and expire ten years from the date of grant. These options vest in equal one-third parts beginning
on February 21, 2013, and every grant date anniversary for the next two years. The term of the Board of
Advisors Agreement will be in force until February 28, 2015. 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.
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.
26
ABAKAN INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the nine months ended February 28 & 29, 2013 and 2012
NOTE 11 – RELATED PARTY TRANSACTIONS – continued
On February 1, 2013, the Board of Directors approved the proposal of the Compensation Committee that
all independent members of the Board of Directors and all members of the respective Compensation,
Governance and Nominating Committee be compensated for attending Board or Committee meetings in
the amount of $750. It was also agreed that the Company shall compensate director which is the Head of
the Compensation, Compliance and Nominating Committees $5,000 per annum and issue 20,000
restricted shares which were issued on February 21, 2013.
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 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.
Notes Payable – Related Party
For the nine months ended February 28, 2013, 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 February 28, 2013 we owed $30,000,
and $1,373 of accrued interest.
NOTE 12 – STOCK – BASED COMPENSATION
2009 Stock Option Plan – The Company
Our board of directors adopted and approved our 2009 Stock option Plan (“Plan”) on December 14, 2009,
as amended on June 14, 2012, which provides for the granting and issuance of up to 10 million shares of
our common stock.
27
ABAKAN INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the nine months ended February 28 & 29, 2013 and 2012
NOTE 12 – STOCK – BASED COMPENSATION - continued
For the nine months ended February 28, 2013, the Company granted the following stock options:
For the nine months ended February 29, 2013
Options
Exercise
Expiration
To Whom
Grant Date
Granted
Price
term in years
Granted
Vesting Terms
June 1,
Granted to two
2012
100,000
$
0.75
10.00
consultants
Will vest completely on March 15, 2013
June 12,
Granted to two
Will vest in equal one third parts on the
2012
175,000
$
2.30
10.00
consultants
anniversary date of the option grant date
Will vest in equal one third parts
beginning on September 15, 2012 and
June 15,
Granted to a new
then every September 15th for the next
2012
150,000
$
2.30
10.00
Director
two years
June 20,
Granted to a
Will vest in equal one third parts on the
2012
50,000
$
2.05
10.00
consultant
anniversary date of the option grant date
July 27,
Granted to a
Will vest in equal one third parts on the
2012
75,000
$
1.95
10.00
consultant
anniversary date of the option grant date
August 7,
Granted to a new
Will vest in equal one third parts on the
2012
150,000
$
1.90
10.00
Director
anniversary date of the option grant date
Will vest 25,000 options on Grant date,
remaining 150,000 options in equal one
December
Granted to a new
third parts on the anniversary date of the
5, 2012
175,000
$
2.61
10.00
Director
option grant date
Granted to our
December
new Chief
Will vest in equal one third parts on the
5, 2012
125,000
$
2.61
10.00
Financial Officer
anniversary date of the option grant date
February 1,
Granted to a
Will vest in equal one half parts on
2013
70,000
$
2.70
10.00
consultant
January 31, 2014 and 2015
February
Granted to a
Will vest in equal one third parts
21, 2013
15,000
$
2.70
10.00
consultant
beginning on March 1, 2013
Total
Granted
1,085,000
On December 4, 2012, 200,000 stock options expired without exercise according to the option agreement.
On December 4, 2012, we rescinded 1,500,000 stock options by mutual agreement between the Company
and the respective holder.
After these grants and expirations there are 5,455,000 stock options available for future grant.
28
ABAKAN INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the nine months ended February 28 & 29, 2013 and 2012
NOTE 12 – STOCK – BASED COMPENSATION - continued
2009 Stock Option Plan – The Company - continued
Our board of directors administers our Plan, however, they may delegate this authority to a committee
formed to perform the administration function of the Plan. The board of directors or a committee of the
board has the authority to construe and interpret provisions of the Plan as well as to determine the terms
of an award. Our board of directors may amend or modify the Plan at any time. However, no
amendment or modification shall adversely affect the rights and obligations with respect to outstanding
awards unless the holder consents to that amendment or modification.
The Plan permits us to grant Non-Statutory stock options to our employees, directors and consultants.
The options issued under this Plan are intended to be Non-Statutory Stock Options exempt from Code
Section 409A.
The duration of a stock option granted under our Plan cannot exceed ten years. The exercise price of an
incentive stock option cannot be less than 100% of the fair market value of the common stock on the
date of grant.
The Plan administrator determines the term of stock options granted under our Plan, up to a maximum
of ten years, except in the case of certain events, as described below. Unless the terms of an optionee's
stock option agreement provide otherwise, if an optionee's relationship with us ceases for any reason
other than disability or death, the optionee may exercise any vested options for a period of ninety days
following the cessation of service. If an optionee's service relationship with us ceases due to disability
or death the optionee or a beneficiary may exercise any vested options for a period of 12 months in the
event of disability or death.
Unless the Plan administrator provides otherwise, options generally are not transferable except by will,
the laws of descent and distribution, or pursuant to a domestic relations order. An optionee may
designate a beneficiary, however, who may exercise the option following the optionee's death.
The value of employee and non-employee stock warrants granted during the nine months ended
February 28, 2013 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%
29
ABAKAN INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the nine months ended February 28 & 29, 2013 and 2012
NOTE 12 – STOCK – BASED COMPENSATION - continued
July 27,
August 7,
December 5,
February 1,
February 21,
2012
2012
2012
2012
2012
Expected volatility (based on
154.39%
154.39%
147.16%
147.16%
147.16%
historical volatility)
Expected dividends
0.00
0.00
0.00
0.00
0.00
Expected term in years
10
10
10
10
10
Risk-free rate
1.58%
1.66%
1.60%
2.04%
1.99%
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 nine months ended February 28, 2013 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
1,085,000
2.18
Exercised
-
-
Forfeited or expired
(1,700,000)
$
0.64
Balance at February 28, 2013
4,545,000
$
1.02
9.00 years
$
212,000
Exercisable at February 28, 2013
1,780,829
$
0.71
9.00 years
$
--
Weighted average fair value of
options granted during the nine months
ended February 28, 2013
$
2.18
30
ABAKAN INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the nine months ended February 28 & 29, 2013 and 2012
NOTE 12 – STOCK – BASED COMPENSATION - continued
2009 Stock Option Plan – The Company - continued
The following table summarizes information about employee stock options under the 2009 Plan
outstanding at February 28, 2013:
Options Outstanding
Options Exercisable
Weighted
Number
Range
Number
Average
Weighted
Exercisabl
Weighted
Aggregat
of
Outstanding
Remaining
Average
e at
Average
e
Exercis
at February
Contractual
Exercise
Intrinsic
February
Exercise
Intrinsic
e Price
28, 2013
Life
Price
Value
28, 2013
Price
Value
$ 0.60
745,000
8.0 Years
$
0.60
$
--
700,040 $ 0.60
$
--
$ 0.65
900,000
8.0 Years
$
0.65
$
120,000
394,968 $ 0.65
$
--
$ 0.75
200,000
9.0 Years
$
0.75
$
15,000
100,000 $ 0.75
$
--
$ 1.00
50,000
10.0 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
4.0 Years
$
1.03
$
--
-- $ 0.00
$
--
$ 1.05
270,000
10.0 Years
$
1.05
$
--
83,330 $ 1.05
$
--
$ 1.07
95,000
10.0 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
$
--
$ 2.61
300,000
10.0 Years
$
2.61
$
27,000
-- $ 0.00
$
--
$ 2.70
85,000
10.0 Years
$
2.70
$
--
-- $ 0.00
$
--
4,545,000
9.0 Years
$
1.02
$
212,000
1,780,829 $ 0.71
$
--
The total value of employee and non-employee stock options granted during the nine months ended
February 28, 2013 and 2012, was $2,334,912 and $518,484, respectively. During nine months ended
February 28, 2013 and 2012 the Company recorded $1,382,576 and $1,142,192, respectively, in stock-
based compensation expense relating to stock option grants.
31
ABAKAN INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the nine months ended February 28 & 29, 2013 and 2012
NOTE 12 – STOCK – BASED COMPENSATION - continued
At February 28, 2013 and 2012 there was $2,178,000 and $2,134,260, 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
$
323,272
2014
1,006,579
2015
722,940
2016
125,209
$
2,178,000
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 2015 through December 2017.
A summary of the Company’s stock option plan as of February 28, 2013, and the changes during the
period then ended is presented in the table below:
Options Outstanding
Weighted
Average
Number of
Exercise
Shares
Price
Outstanding at May 31, 2012
4,120 $
18.11
Granted
3,000
32.13
Exercised
-
Forfeited
-
Outstanding at February 28, 2013
7,120 $
24.02
Options exercisable at February 28, 2013
3,249 $
18.11
32
ABAKAN INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the nine months ended February 28 & 29, 2013 and 2012
NOTE 13 – 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.
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. On
August 15, 2011, MesoCoat entered in to a lease in Ohio to be used as a testing facility. The cost of the lease is
$3,750 per month and expires February 28, 2014. MesoCoat has an option to renew the lease for three additional
years.
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 $119,020 and $49,075 for the nine months ended
February 28 & 29, 2013 and 2012. Interest expense for the leases for the nine months ended February 28 &
29, 2013 and 2012 was $664 and $2,593.
Minimum annual rental commitments are as follows at February 28, 2013:
For the years ended May 31,
Capital Leases
Operating Leases
2013
$
26,498 $
35,661
2014
24,020
130,143
2015
23,846
80,400
2016
21,834
80,400
2017 and thereafter
0
321,600
Total minimum lease payments
$
96,198 $
648,204
Less amount representing interest
(5,446)
Present value of net minimum capital lease payments
90,752
Less current maturities
(24,998)
Long-term obligations under capital leases
$
65,754
33
ABAKAN INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the nine months ended February 28 & 29, 2013 and 2012
NOTE 13 – COMMITMENTS - continued
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.
On February 1, 2013, we entered into a consulting agreement commencing February 1, 2013, with an
unrelated individual to provide investor public relations consulting. The terms of the consulting
agreement is that he is paid $10,000 per month and received 70,000 stock options for the service. The
stock options have an exercise price of $2.70 per share of common stock, and expire ten years from the
date of grant. These options vest in equal parts on January 31, 2014 and January 31, 2015. The term of
the consulting agreement expires January 31, 2015 unless terminated in writing by either party. We also
agreed to reimburse the advisor for all reasonable business expenses.
NOTE 14 - 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 nine months ended February 28, 2013, the Company contributed $16,570.
NOTE 15 – 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.
34
ABAKAN INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the nine months ended February 28 & 29, 2013 and 2012
NOTE 16– 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:
Common stock issuances and stock options
On March 1, 2013, the Board of Directors approved a private placement for $761,300, or 331,000 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.
On March 18, 2013, the Board of Directors approved the issuance of 48,622 restricted common shares for
services rendered of $127,200 and 100 restricted common shares to fulfill a prize drawing for the
Company’s common stock.
On March 22, 2013, the Board of Directors authorized the grant of 100,000 stock options with an exercise
price of $2.80 per share that expire ten years from the date of grant with vesting in equal one-third
increments annually beginning on December 10, 2013 for consulting services to be rendered.
On April 2, 2013, the Board of Directors approved the issuance of 13,600 restricted common shares for
services rendered of $63,720.
On April 2, 2013, the Board of Directors approved the issuance of 16,522 units for services rendered of
$38,000consisting 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.
On April 2, 2013, the Board of Directors approved the issuance of 15,000 restricted common shares for an
aggregated of $22,300 pursuant to the exercise of a Warrant to Purchase Common Shares dated July 6,
2011.
On April 4, 2013, the Company entered into two on-demand Promissory Notes for a total of $150,000
which bear 6% interest per annum.
On April 13, 2012, the Board of Directors approved the issuance of 500,000 restricted common shares
and 250,000 share purchase warrants with an exercise price of $1.50 for a period of two years from the
date of conversion pursuant to the conversion of an outstanding promissory note.
35
ABAKAN INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the nine months ended February 28 & 29, 2013 and 2012
NOTE 16– SUBSEQUENT EVENTS - continued
Recent Developments
On April 8, 2013, MesoCoat entered into a memorandum of understanding with a Brazilian developer for
the construction and lease of a build–to-suit manufacturing facility for large-scale clad pipe
manufacturing inside the new Suape Export Processing Zone in Pernambuco State, Brazil. The
memorandum of understanding requires MesoCoat to provide a $500,000 refundable deposit within
fifteen days of execution. Should the parties to the memorandum of understanding not enter into a final
agreement the deposit will be refunded.
On April 10, 2013, the Company entered into a waiver and exchange agreement with Sonoro Invest S.A.
pursuant to which agreement those amounts due to Sonoro on March 16, 2013 and June 6, 2013,
respectively, were combined in a new note due September 15, 2013 in the principal amount of
$2,105,877, which amount includes a penalty amount and default interest for failure to satisfy that amount
due to Sonoro on March 16, 2013, that bears interest at 5% per annum.
On April 13, 2013, LLI Trading Limited elected to convert that amount due in principal of $500,000 into
500,000 restricted common shares and 250,000 share purchase warrants with an exercise price of $1.50
for a period of two years from the date of conversion.
36
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 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).
37
CermaCladTM cladding applications are nearing commercialization and commercial sales of PComP TM, a
cermet-metallic composite powder for thermal spray applications have commenced.
CermaClad™
CermaClad™ is a premier metallurgically bonded clad carbon steel solution optimized to manage the
risks and consequences of wear and corrosion damage and the failure of large assets including oil and gas
risers and flowlines, refinery/chemical processing towers and transfer lines, power plant heat exchanger
tubes, ships, and bridges. In corrosive environments, including seawater, road salt, mining slurry transport
lines, unprocessed oil containing water and carbon dioxide, chemical processing and transportation
equipment, metals production, and other large industrial applications, asset owners and operators either
need to continually maintain and replace major assets, or fabricate these assets using expensive, corrosion
resistant alloy (CRA) materials, which substantially run up costs. CermaClad™ offers a competing,
lower cost solution allowing the owner or operator to clad their carbon steel with a corrosion resistant
alloy coating at typically less than ½ the cost of using solid CRA. Cladding solutions such as
CermaClad™ 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
38
use of thinner, even lower cost cladding alternatives in many applications. Smooth surfaces also
decrease flow resistance, enabling reduced friction losses in pipeline applications.
The CermaClad™ product line in development today is as follows:
CermaClad™ CRA (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, flow lines, 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
39
reduces wear, and improved energy efficiency and life in sliding components such as drilling rotors,
plungers, mandrels, ball and gate valves, and metal processing equipment.
The PComP™ product lines are currently being 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 currently selling these advance coating materials through different channels appropriate to
the specific market. In the future, the majority of the commercial sector accounts will have the ability to
order coating application services from MesoCoat on a regional basis. Large OEM’s and government
agencies like the U.S. Air Force procure raw powders and apply them for their specific products under
license as such agencies 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 is to be limited over the next
few years. MesoCoat’s low-cost, long-life coating materials appeal to government buyers striving to meet
budgetary restrictions. An effort to expand geographically the market for coating services is now
underway, as MesoCoat is actively qualifying licensed application partners that already have an existing
customer base in certain territories (Houston, Alberta, and Los Angeles ) to provide services in territories
that it is not currently able to service directly. We believe that this strategy will lead 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.
40
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, and is working with Powdermet under
completed or in-progress contracts with the Department of Energy for power turbines, 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 engineered nanocomposite thermal barrier coatings.
41
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 plating alternatives are still in qualification
and limited beta release through coating applicators that have partnered with original equipment
manufacturer. A seven-fold capacity expansion and introduction of higher value coating application
(component) services is underway to be completed in the second half of 2013. The Cermaclad™
corrosion resistant (CRA) product is nearing market entry with the completion of the first clad pipe
production facility expected in the third quarter of 2013. 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
3
PComP™ Coating Services
Market Entry
Current
CermaClad™ CRA
Euclid Market Entry
6
CermaClad™ CRA
Brazil market entry
12
Cermaclad™ CRA
Asia-Pacific market entry
18
CermaClad™ WR
Market Entry
15
CermaClad™ WR
Canada expansion
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., provides
MesoCoat with certain exclusivity rights in exchange for exclusivity payments. The exclusivity
agreement further requires Mattson to supply products to MesoCoat on the terms and conditions of a
supply agreement yet to be finalized. Mattson and MesoCoat are currently engaged in negotiations
focused on defining the relationship of the respective parties going forward and those obligations agreed
under the exclusivity agreement.
42
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.
MesoCoat has successfully completed 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 consists of the design and verification of a pipe ID cladding
system prototype, further verification of the suitability of the CermaClad™ process and equipment for
producing alloy 625 CRA clad line pipe product, and the delivery of design specifications for a future
43
production facility. Phase III of the cooperation agreement is intended to demonstrate the ability to
achieve commercial production in order to procure production orders from Petrobras.
Phase II is close to completion, including the design, production, and demonstration of a miniaturized
CermaClad™ fusing system that is able to operate inside an 8” diameter pipe 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 being reviewed by
Petrobras for final approval while work continues on an expanded scope which includes the 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 a 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 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 for the
Phase III manufacturing scale-up to include improved environment sensors, feedback process control
system development, and additional 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.
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.
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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 recently signed a development contract to further
develop its high temperature flowline insulation product for an established company, and with 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.
46
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.
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 entered into a memorandum of understanding with Cone S.A. for construction of a
manufacturing facility for large-scale clad pipe manufacturing inside the new Suape Export Processing
Zone ("Suape EPZ") in Pernambuco State, Brazil. The memorandum of understanding includes finalized
architectural designs, a leasing / financing arrangement for the land and the building, which has allowed
the permitting process to commence in a designated free trade zone. Regulations related to EPZ’s allow
us to be highly competitive in Brazil as any foreign producer of similar products incurs up to 56% in
import duties on their products along with freight costs. Current legislation allows us to trade in the
region provided 80% of our revenues consist of exports from Brazil or to Petrobras’ offshore oil field
developments. Amendments to the current legislation are expected to reduce this revenue requirement to
60%. Suape EPZ is estimated to be operational towards the end of this year and is the only EPZ
administered by a private entity as opposed to a government institution. Construction of our plant is
expected to run in parallel with the building of the requisite customs facilities as our operation will be the
first within the Suape EPZ. Fifteen days after the signing of this MOU, MesoCoat is required to make a
$500,000 refundable deposit. If the parties do not enter into a final acceptable by both parties, the deposit
shall be returned less reasonable cost.
Given the wide range of Abakan’s assumptions, the growth strategy depends largely upon successful
product development and qualification, availability of capital, timely delivery of specialty manufacturing
equipment, availability of skilled workforce, global industrial demand, and overall execution of our global
expansion plans. 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.
47
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:
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 nine month period ended February 28, 2013:
We focused our efforts on our interest on the continued development of MesoCoat products.
We completed equity financings in the amount of $2,091,652.
We continued negotiations with prospective joint venture partners in regions, such as Russia,
South Korea, and the Middle East, in which we do not intend to operate independently
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, adopted corporate governance charters and
appointed a chief financial officer.
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.
We entered into negotiations to construct a manufacturing plant in Brazil on a “build to suit”
basis.
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Revenues
For the period from June 27, 2006 (inception) until February 28, 2013, Abakan realized revenues of
$4,621,801. Revenues for the three month period ended February 28, 2013 were $285,867 as compared to
$1,327,226 for the three month period ended February 29, 2012, a decrease of 78%. Revenues for the nine
month period ended February 28, 2013 were $1,680,777 as compared to $2,224,491 for the nine month
period ended February 29, 2012, a decrease 24%. Revenues over the comparative three and nine month
periods can be wholly attributed to the operations of MesoCoat.
Revenue in the current three month period consisted of commercial revenues of $61,125 as compared to
$15,998 in the prior comparative period, contracted grant revenues of $244,742 as compared to $577,645
in the prior comparative period, and other income of zero as compared to $733,583 in the prior
comparative period. The decrease in revenue in the current three month period over the prior comparative
period is attributed to the reduction in grant applications as MesoCoat concentrated on commercializing
its products. MesoCoat also realized $733,583 of other revenue in the prior comparative period primarily
from the amounts paid by Petrobras under the terms of the cooperation agreement Commercial revenue
increased as MesoCoat continues to concentrate on the development of commercial products.
Revenue in the current nine month period was derived from commercial revenues of $131,206 as
compared to $47,513 in the prior comparative period, contract and grant revenues of $1,549,571 as
compared to $1,267,413 in the prior comparative period, and other income of zero as compared to
$909,565 in the prior comparative period. The decrease in revenue in the current nine month period over
the prior comparative period is due to the reduction in grant applications as MesoCoat concentrated on
commercializing its products. The largest decrease in revenue was in the prior period’s other revenue,
which revenue was comprised mostly of amounts paid by Petrobras under the terms and conditions of the
cooperation agreement. Other revenue for the current period was zero as the first two stages of the
cooperation agreement near completion. Commercial revenue increased as MesoCoat continues to
concentrate on the development of commercial products.
We expect revenue 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 February 28, 2013, Abakan realized a gross profit of
$2,925,081. Gross profit for the three month period ended February 28, 2013 was $180,346 compared to
$1,014,096 for the three month period ended February 29, 2012, a decrease of 82%. Gross profit for the
nine month period ended February 28, 2013 was $1,033,255 compared to $1,520,330 for the nine month
period ended February 29, 2012, a decrease of 32%. Gross profits in the current three and nine month
periods can be wholly attributed to the operations of MesoCoat. Gross profit decreased over the
comparative three and nine month periods as a result of the decrease in other revenue generated under the
terms and conditions of the cooperation agreement with Petrobras.
We expect gross profits to increase over the next twelve months as the business moves towards the
commercialization of its products.
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Net Losses
For the period from June 27, 2006 (inception) until February 28, 2013, Abakan incurred net losses of
$11,254,059. Net losses for the three month period ended February 28, 2013 were $1,951,858 compared
to net loss of $742,696 for the three month period ended February 29, 2012, an increase of 163%. Net
losses for the nine month period ended February 28, 2013 were $4,931,694 compared to a net loss of
$1,255,216 for the nine month period ended February 29, 2012, an increase of 393%.
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 decrease in revenues and the increase in general and administrative expenses
as Abakan continues to increase research and development costs, add consultants, expand its management
team, and research additional plant locations.
Nets losses in the current nine month period as compared to net losses in the prior nine month period can
be primarily attributed to the decrease in revenues, the increase in general and administrative expenses
and a prior nine month period book entry gain of $1,764,345 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 realize 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
general and administrative expenses which include professional fees, payroll expenses, research and
development costs and the depreciation and amortization of existing assets.
Despite management’s focus on ensuring operating efficiencies, we expect to continue to operate at a loss
through fiscal 2013.
Expenses
For the period from June 27, 2006 (inception) until February 28, 2013, Abakan incurred operating
expenses of $15,446,168. Operating expenses for the three month period ended February 28, 2013 were
$2,062,514 as compared to $1,396,143 for the three month period ended February 29, 2012, an increase
of 48%. Operating expenses for the nine month period ended February 28, 2013 was $5,544,359
compared to $3,922,201 the nine month period ended February 29, 2012, an increase of 41%. The
increase in operating expenses over the comparative three and nine month periods can be attributed to
increases in administrative costs, professional fees, consulting fees, consulting fees to related parties,
payroll, depreciation and amortization, and research and development as Abakan continues to develop its
product for commercial applications.
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.
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Other Expense/Income
For the period from June 27, 2006 (inception) until February 28, 2013, Abakan realized other income of
$636,276. Other expense for the three month ended February 28, 2013 was $416,969 as compared to
$209,842 for the three month period ended February 29, 2012, an increase of 98%. Other expense for the
nine month period ended February 28, 2013 was $1,093,152 as compared to other income of $1,173,595
for the nine month period ended February 29, 2012. 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
amortization of discount as result of additional notes and the loss associated with our equity interest in
Powdermet. The transition to other expense in the current nine month period over other income in the
prior nine month period can be primarily attributed to a book entry gain of $1,764,345 in the prior
comparative nine 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.
Capital Expenditures
Abakan has spent significant amounts on capital expenditures for the period from June 27, 2006
(inception) to February 28, 2013 which amounted to $3,521,884. 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 February 28, 2013 Abakan had current assets of $335,367 consisting of cash and cash equivalents
of $179,094, accounts receivable of $69,359, a note receivable from a related party of $4,500, and prepaid
expenses of $82,414. Abakan had total assets of $16,436,019 consisting of current assets, property, plant
and equipment of $5,362,236, patents and licenses of $7,636,808, an assignment agreement of $220,397,
an investment in Powdermet of $2,516,827, and goodwill of $364,384.
As of February 28, 2013, Abakan had current liabilities of $5,019,048, consisting of accounts payable of
$887,303, accounts payable to related parties of $229,253, capital leases of $24,998, loans payable of
$3,074,219, accrued interest of $366,257, loan payable to related parties of $30,000, accrued interest to
related party of $1,373 and accrued liabilities of $405,645. Abakan had total liabilities of $7,469,798
consisting of current liabilities of $5,019,048 and long-term liabilities of $2,450,750. Long-term liabilities
consist of loans payable of $2,384,996 and capital leases of $65,754.
Abakan had stockholders’ equity of $8,966,221 and a working capital deficit of $4,683,681 at February
28, 2013.
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For the period from June 27, 2006 (inception) to February 28, 2013, Abakan’s net cash used in
development stage activities was $4,560,459. Net cash used in development stage activities for the nine
month period ended February 28, 2013 was $1,718,730 as compared to $654,943 for the nine month
period ended February 29, 2012. Net cash used in development stage activities in the current nine 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. Balance sheet
accounts that actually affect cash but are not income statement related items and thus are added or
deducted to arrive at cash used include accrued liabilities, accounts payable, accrued interest on loans
payable, and prepaid expenses offset by changes in accounts receivable.
We expect to continue to generate negative cash flow in operating activities until such time as net losses
transition to net income.
For the period from June 27, 2006 (inception) until February 28, 2013, Abakan’s net cash used in
investing activities was $8,279,724. Net cash used in investing activities for the nine months ended
February 28, 2013, was $2,474,329 as compared to net cash used in investing activities of $467,516 for
the nine month period ended February 29, 2012. 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 February 28, 2013, Abakan’s net cash provided by
financing activities was $13,019,277. Net cash provided by financing activities for the nine months ended
February 28, 2013 was $3,512,587 as compared to $1,586,961 the nine months ended February 29, 2012.
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.
Subsequent to period end, on March 16, 2013, the principal and interest due on a convertible promissory
note payable to Sonoro Invest S.A (“Sonoro”), dated March 17, 2011, came due. Abakan entered into
discussions with Sonoro as to how best to resolve the outstanding amount. During these discussions a
default notice dated March 28, 2013, noticed the default on March 17, 2013, and based on a cross-default
provision, noticed that the original default had caused an additional note dated June 7, 2011, to be
accelerated into default. On April 10, 2013, Abakan entered into a waiver and exchange agreement with
Sonoro Invest S.A. pursuant to which Sonoro waived the default and combined those amounts due to
Sonoro as of March 16, 2013 and June 6, 2013, respectively, into a new note due September 15, 2013, in
the principal amount of $2,105,877, which amount includes a penalty amount and default interest, that
bears interest at 5% per annum.
Subsequent to period end, on April 13, 2013, the principal due on a convertible promissory note payable
to LLI Trading, Ltd. dated April 13, 2011, in the amount of $500,000 was converted on the election of the
holder into 500,000 of our restricted common shares and 250,000 share purchase warrants, with an
exercise price of $1.50 for a period of two years from the date of conversion.
52
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 private equity placements prior to period end pursuant to which Abakan had raised
$2,091,652 during the nine month period ended February 28, 2013. Nevertheless, additional capital will
be required to meet obligations and needs over the next twelve months. Except for the private equity
placements noted, we had no other commitments or arrangements for financing at February 28, 2013,
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 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.
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 February 28, 2013, 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 $11,254,059 and a working capital deficit of $4,683,681 as of February 28, 2013. 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 net 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, which addresses the accounting
for stock-based payment transactions in which an enterprise receives employee services in exchange for
(a) equity instruments of the enterprise or (b) liabilities that are based on the fair value of the enterprise’s
equity instruments or that may be settled by the issuance of such equity instruments. We have adopted
Accounting Standards Codification Topic (“ASC”) 718, Share-Based Payment, which addresses the
accounting for stock-based payment transactions in which an enterprise receives employee services in
exchange for (a) equity instruments of the enterprise or (b) liabilities that are based on the fair value of the
enterprise’s equity instruments or that may be settled by the issuance of such equity instruments. We
account for equity instruments issued in exchange for the receipt of goods or services from other than
employees in accordance with ASC 505. Costs are measured at the estimated fair market value of the
consideration received or the estimated fair value of the equity instruments issued, whichever is more
reliably measurable. The value of equity instruments issued for consideration other than employee
services is determined on the earliest of a performance commitment or completion of performance by the
provider of goods or services.
Recent Accounting Pronouncements
We have examined all recent accounting pronouncements and believe that none of them will have a
material impact on 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 February 28, 2013. 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 has adopted an audit committee
charter, formed an audit committee comprised of independent members of its board of directors, and
55
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 February 28, 2013, that materially affected, or is reasonably likely
to materially affect, our internal control over financial reporting.
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
which were subsequently sold 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 $11,254,059 for the period from June 27, 2006 (inception) to February 28,
2013. 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 $11,254,059 and $4,683,681 respectively as of
February 28, 2013. Unless Abakan is able to produce net revenue over successive future periods its ability
to continue as a going concern will be in jeopardy.
56
Abakan requires additional capital funding.
Abakan requires additional funds, either through equity offerings, debt placements or joint ventures to
develop our operations. Such additional capital will result in dilution to our current shareholders. Our
ability to meet long-term financial commitments will depend on future cash. There can be no assurance
that any future income will generate sufficient funds to enable us to meet our financial commitments.
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
57
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.
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
58
anticipated future growth by adherence to these strictures, costs may increase, growth could be impaired
and our ability to keep pace with technological advances may be impaired which failures could result in a
loss of future customers.
Environmental laws and other governmental legislation may affect our business.
Should the technologies which each of MesoCoat and Powdermet have under development not comply
with applicable environmental laws 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.
59
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 April 13, 2013, Abakan authorized the issuance of 500,000 restricted common shares and granted
250,000 share purchase warrants at an exercise price of $1.50 for a period of two years from the date of
grant on the conversion of $550,000 due comprised of principal and interest to LLI Trading Limited in
reliance upon the exemptions from registration provided by Regulation S and 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.
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 only to an offeree who was outside of the
United States at the time of the offering, and ensuring that the offeree to whom the securities were offered
and authorized was a non-U.S. offeree with an address in a foreign country.
On April 2, 2013, Abakan authorized the issuance of 50,122 restricted common shares for services
rendered, the grant of 8,261 share purchase warrants at an exercise price of $2.70 for a period of two
years from the date of grant and the issuance of 15,000 shares pursuant to the exercise of warrants in
reliance upon the exemptions from registration provided by Regulation D and Section 4(2) of Securities
Act.
Name
Consideration Basis
Shares
Warrants Exemption
Sam Thomas
$15,000 Services
6,522 3,261
Reg D/Sec 4(2)
Orsa & Company
$23,000 Services
10,000 5,000
Reg D/Sec. 4(2)
Financial Insights
$54,000 Services
20,000
Reg D/Sec 4(2)
Syndicate Consulting
$ 9,720 Services
3,600
Reg. D/Sec 4(2)
Lynn Foster
$22,500 Warrant Exercise 15,000
Reg D/Sec. 4(2)
60
Abakan complied with the exemption requirements of Section 4(2) of the Securities Act based on the
following factors: (1) the issuances were isolated private transactions by Abakan which did not involve a
public offering; (2) the offerees had access to the kind of information which registration would disclose;
and (3) the offerees are financially sophisticated.
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 accredited offerees; (iii)
having not violated antifraud prohibitions with the information provided to the offerees; (iv) being
available to answer questions by the offerees; and (v) providing restricted common shares to the offerees.
On March 22, 2013, Abakan authorized the grant of 100,000 stock options with an exercise price of
$2.80 per share that expire ten years from the date of grant with vesting in equal one-third increments
annually beginning on December 10, 2013 to Andrew C. Hall for consulting services rendered, in reliance
upon the exemptions from registration provided by Section 4(2) and Regulation D 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.
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 offere; (iii)
having not violated antifraud prohibitions with the information provided to the offere; (iv) being available
to answer questions by the offeree; and (v) providing restricted stock options to the offeree.
On March 18, 2013, Abakan authorized the issuance of 48,622 restricted common shares for services
rendered and 100 restricted common shares for a prize offering in reliance upon the exemptions from
registration provided by Section 4(2), Regulation D and Regulation S of Securities Act.
Name
Consideration
Basis
Shares
Exemption
BCQS International Brazil Ltd
$42,000
Services
15,000
Reg. S/Sec 4(2)
RedChip Companies Inc.
$60,000
Services
23,622
Reg. D/Sec. 4(2)
Financial Insights
$25,400
Services
10,000
Reg. D/Sec 4(2)
Allan McBride
$ 9,720
Prize
100
Sec 4(2)
Abakan complied with the exemption requirements of Section 4(2) of the Securities Act based on the
following factors: (1) the issuances were an isolated private transactions by Abakan which did not involve
a public offering; (2) the offerees had access to the kind of information which registration would disclose;
and (3) the offerees are financially sophisticated.
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 accredited offerees; (iii)
having not violated antifraud prohibitions with the information provided to the offerees; (iv) being
available to answer questions by the offerees; and (v) providing restricted common shares to the offerees.
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 only to an offeree who was outside of the
United States at the time of the offering, and ensuring that the offeree to whom the securities were offered
and authorized was a non-U.S. offeree with an address in a foreign country.
61
On March 1, 2013, Abakan authorized the issuance of 331,000 shares of restricted common shares and
165,500 share purchase warrants 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 exemptions from registration provided by Section
4(2), Regulation D or Regulation S of the Securities Act:
Name
Consideration
Basis
Shares
Warrant
Exemption
Stratton SA
$ 533,600
Subscription
232,000 116,000
Sec 4(2)/Reg. S
Jose Maria Ribot
Rodriguez
$ 101,200
Subscription
44,000
22,000 Sec 4(2)/Reg. S
Steven R. Ferris
$ 126,5000
Subscription
55,000
27,500 Sec 4(2)/Reg. D
Abakan complied with the exemption requirements of Section 4(2) of the Securities Act based on the
following factors: (1) the issuances were isolated private transactions by Abakan which did not involve a
public offering; (2) the offerees had access to the kind of information which registration would disclose;
and (3) the offerees are financially sophisticated.
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 accredited offerees; (iii)
having not violated antifraud prohibitions with the information provided to the offerees; (iv) being
available to answer questions by the offerees; and (v) providing restricted common shares and warrants to
the offerees.
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 February 21, 2013, Abakan authorized the issuance of 20,000 restricted common shares for services
rendered pursuant to director services valued at $2.70 a share to Stephen Goss 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 February 21, 2013, Abakan authorized the issuance of 10,000 restricted common shares for services
rendered pursuant a consulting agreement valued at $2.70 a share and a grant of 15,000 stock options with
an exercise price of $2.70 per share that expire ten years from the date of grant that vest in equal one-third
parts beginning February 21, 2012 to Damian Kotecki 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 and grant were 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.
62
On February 1, 2013, Abakan authorized the grant of 70,000 stock options with an exercise price of
$2.70 per share that expire ten years from the date of grant that vest in equal one-half increments annually
beginning on January 31, 2014 to Donorvest Corporation, the principal of which of Steven Ferris, for
consulting 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 grant was an isolated private transaction 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 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 grant to the following entities for cash, in reliance
upon the exemptions from registration provided by Section 4(2), Regulation D and Regulation S of the
Securities Act:
Name
Consideration
Basis
Shares
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 issuances were isolated private transactions by Abakan which did not involve a
public offering; (2) the offerees had access to the kind of information which registration would disclose;
and (3) the offerees are financially sophisticated.
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 accredited offerees; (iii)
having not violated antifraud prohibitions with the information provided to the offerees; (iv) being
available to answer questions by the offerees; and (v) providing restricted common shares and warrants to
the offerees.
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.
63
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,25,000 of which vest on grant and the
remaining vest in equal one-third increments annually beginning on December 5, 2013 to Raymond
Tellini for 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 that vest in equal one-third parts annually
beginning on December 9, 2013 to David Charbonneau for employee 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.
ITEM 3.
DEFAULTS ON SENIOR SECURITIES
None.
ITEM 4.
MINE SAFETY DISCLOSURE
Not applicable.
ITEM 5.
OTHER INFORMATION
None.
ITEM 6.
Exhibits required to be attached by Item 601 of Regulation S-K are listed in the Index to Exhibits on page
66 of this Form 10-Q, and are incorporated herein by this reference.
64
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.
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
April 22, 2013
By: Robert H. Miller
Its: Chief Executive Officer, and Director
/s/ David G. Charbonneau
April 22, 2013
By: David G. Charbonneau
Its: Chief Financial Officer and Principal Accounting Officer
65
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.
66
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, dated effective July 12, 2012 incorporated by reference to the
Form 10-Q filed with the Commission on January 14, 2013.
14*
Code of Business Conduct & Ethics adopted on December 10, 2012 incorporated by
reference to the Form 10-K filed with the Commission on September 13, 2012.
21*
Subsidiaries of Abakan incorporated hereto by reference to the Form 10-K filed with the
Commission on September 13, 2012.
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.
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.
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.
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.
67