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, 2014.
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:
Yesþ Noo
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). Yesþ Noo
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 filero Accelerated filerþ Non-accelerated filero Smaller reporting companyo
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act): Yeso Noþ
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 14, 2014, was 64,489,547.
1
TABLE OF CONTENTS
PART 1- FINANCIAL INFORMATION
Item1.
Financial Statements:
3
Condensed Consolidated Balance Sheets for the period ended
4
February 28, 2014 (unaudited) and May 31, 2013
Unaudited Condensed Consolidated Statements of Operations for the
5
Three and nine months ended February 28, 2014 and 2013, and cumulative
amounts from development stage activities (June 27, 2006 (Inception) through
February 28, 2014)
Unaudited Condensed Consolidated Statements of Cash Flows for the
6
nine months ended February 28, 2014 and 2013, and cumulative amounts from
development stage activities (June 27, 2006 (inception) through February 28, 2014)
Condensed Notes to Consolidated Financial Statements (Unaudited)
7
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of
18
Operations
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
29
Item 4.
Controls and Procedures
30
PART II-OTHER INFORMATION
Item 1.
Legal Proceedings
31
Item 1A.
Risk Factors
31
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
35
Item 3.
Defaults Upon Senior Securities
37
Item 4.
Mine Safety Disclosures
37
Item 5.
Other Information
37
Item 6.
Exhibits
37
Signatures
38
Index to Exhibits
39
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)
CONSOLIDATED BALANCE SHEETS
February 28,
May 31,
2014
2013
ASSETS
Current assets
Cash and cash equivalents
$
59,653 $
233,040
Accounts receivable
109,708
105,523
Note receivable - related parties
4,500
4,500
Prepaid expenses
189,966
117,028
Deferred finance fees, net
14,070
15,799
Total current assets
377,897
475,890
Noncurrent assets
Property, plant and equipment, net
5,576,232
5,595,007
Patents and licenses, net
6,221,380
7,545,163
Assignment agreement - MesoCoat
180,923
210,528
Investment - Powdermet
2,153,695
2,449,312
Goodwill
364,384
364,384
Total Assets
$
$ 14,874,511 $
16,640,284
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable
$
1,773,389 $
890,791
Accounts payable - related parties
568,439
251,004
Capital leases - current portion
29,300
28,006
Loans payable, net of discounts of $0 and $137,364
4,417,948
965,555
Accrued interest - loans payable
241,050
153,825
Loan payable- related parties
18,530
30,000
Accrued interest - related parties
432
1,987
Accrued liabilities
1,200,575
377,392
Total current liabilities
8,249,663
2,698,560
Non-current liabilities
Loans payable
1,482,567
4,241,278
Capital leases – non-current portion
57,864
63,875
Total liabilities
9,790,094
7,003,713
Commitments and contingencies (Note 8)
Stockholders' equity
Preferred stock, $0.0001 par value, 50,000,000 shares
authorized, none issued and outstanding
-
-
Common stock, par value $0.0001, 2,500,000,000 shares
authorized, 64,489,247 issued and outstanding - February28, 2014,
64,284,855 issued and outstanding - May31, 2013
6,451
6,430
Paid-in capital
22,186,848
20,833,426
Subscription receivable
-
(76,244)
Subscription payable
236,000
-
Contributed capital
5,050
5,050
Accumulated deficit during the development stage
(18,479,767)
(13,545,788)
3,954,582
7,222,874
Non-controlling interest
1,129,835
2,413,697
Total stockholders' equity
5,084,417
9,636,571
Total liabilities and stockholders' equity
$
$ 14,874,511 $
16,640,284
4
ABAKAN, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF OPERATIONS
Cumulative
amounts from
development
stage activities
For the three months ended
For the nine months ended
June 27, 2006
February 28,
February 28,
(Inception) to
February 28,
2014
2013
2014
2013
2014
Revenues
Commercial
$
69,120 $
61,125
206,507 $
131,206 $
474,260
Contract and grants
94,400
224,742
229,428
1,549,571
3,984,682
Other income
-
-
10,094
-
774,973
163,520
285,867
446,029
1,680,777
5,233,915
Cost of Revenues
77,824
105,521
264,996
647,522
2,053,267
Gross Profit
85,696
180,346
181,033
1,033,255
3,180,648
Expenses
General and administrative
General and administrative
210,582
254,360
589,692
593,037
2,316,346
Professional fees
99,275
133,195
558,810
390,432
1,641,679
Professional fees - related parties
15,000
15,000
48,028
45,000
273,028
Consulting
280,008
342,066
799,475
965,083
3,886,254
Consulting- related parties
61,500
128,504
180,500
351,181
1,861,730
Payroll and benefits expense
230,890
240,452
1,070,926
584,129
2,918,029
Depreciation and amortization
191,859
108,359
583,924
302,291
1,333,080
Research and development
203,623
357,213
1,033,571
893,407
3,118,077
Impairment of asset
-
-
-
-
180,000
Stock expense on note conversion
-
-
-
37,223
730,097
Stock options expense
352,816
483,365
972,481
1,382,576
5,388,761
Total expenses
1,645,553
2,062,514
5,837,407
5,544,359
23,647,081
Loss from operations
(1 ,559,857)
(1,882,168)
(5,656,374)
(4,511,104)
(20,466,433)
Other (expense) income
Interest expense:
Interest – loans
(79,359)
(90,157)
(178,639)
(313,169)
(726,518)
Interest - related parties
-
-
(1,113)
(773)
(8,446)
Liquidated damages
-
-
-
-
(250,000)
Amortization of discount on debt
-
(210,265)
(137,364)
(607,350)
(1,588,517)
Total interest expense
(79,359)
(300,422)
(317,116)
(921,292)
(2,573,481)
Interest income
7
32
14
3,787
8,179
Loss on debt settlement
-
-
-
-
-
Creditor Fee
-
-
-
-
(241,051)
Gain on debt settlement
-
17,715
-
17,715
274,967
Gain (loss) on sale of assets
(510)
-
(510)
-
428,286
Unrealized gain on MesoCoat acquisition
-
-
-
-
1,764,345
Equity in Powdermet income/ (loss)
(73,047)
(134,261)
(295,617)
(193,362)
503,695
Equity in MesoCoat loss
-
-
-
-
(586,020)
Total Other (expense) income
(152,909)
(416,936)
(613,229)
(1,093,152)
(421,080)
Net (loss) before noncontrolling interest
(1,712,766)
(2,299,104)
(6,269,603)
(5,604,256)
(20,887,513)
Non-controlling interest in MesoCoat Loss
341,231
347,246
1,335,624
672,562
2,407,746
Net (loss) attributable to Abakan Inc.
(1,371,535)
(1,951,858)
(4,933,979)
(4,931,694)
(18,479,767)
Provision for income taxes
-
-
-
-
-
Net (loss)
$
(1,373,535) $
(1,951,858) $
(4,933,979) $
(4,931,694) $
(18,479,767)
Net (loss) per share - basic
$
(0.02) $
(0.03) $
(0.08) $
(0.08)
Net (loss) per share – diluted
$
(0.02) $
(0.03) $
(0.08) $
(0.08)
Weighted average number of common
shares outstanding– basic
64,481,144
62,618,063
64,365,475
62,073,783
Weighted average number of common
shares outstanding– diluted
64,481,144
62,618,063
64,365,475
62,073,783
5
ABAKAN, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF CASH FLOWS
Cumulative
amounts from
development stage
activities
For the nine months ended
June 27, 2006
February 28,
(Inception) to
2014
2013
February 28, 2014
NET CASH (USED IN) DEVELOPMENT STAGE ACTIVITIES
$
(1,656,379) $
(1,718,730)
(7,555,697)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property, plant, equipment and website
(517,519)
(2,415,010)
(4,299,721)
Proceeds from sale of capital assets
-
-
470,921
MesoCoat - minority interest, net of cash assumed in business combination
-
-
(2,390,266)
Investment in MesoCoat
-
-
(750,070)
Powdermet - minority interest
-
-
(1,650,000)
Assignment agreement – MesoCoat
-
-
(100,000)
Capitalized patents and licenses
(31,581)
(59,319)
(174,849)
Waste to Energy Group Inc.
-
-
(180,000)
NET CASH PROVIDED BY/ (USED) IN INVESTING ACTIVITIES
(549,100)
(2,474,329)
(9,073,985)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from sale of common stock
76,244
2,091,652
9,300,514
Proceeds from loans payable
1,970,000
1,553,489
7,928,579
Payments on loans payable
(29,435)
(155,278)
(612,902)
Proceeds from loans payable - related parties
-
66,200
145,880
Payments on loans payable - related parties
-
(36,253)
(15,137)
Repayments of capital leases
(4,717)
(24,423)
(82,650)
Stock Issuable
20,000
17,200
20,000
Proceeds from capital contributed
-
-
5,050
NET CASH PROVIDED BY FINANCING ACTIVITIES
2,032,092
3,512,587
16,689,334
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(173,387)
(680,472)
59,652
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
233,040
859,566
-
CASH AND CASH EQUIVALENTS, END OF PERIOD
$
59,653 $
179,094 $
59,652
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6
ABAKAN INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the nine months ended February 28, 2014 and 2013
1. 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 Abakan’s financial position as of February 28, 2014, and
the results of its operations and cash flows for the nine months ended February 28, 2014, have been made.
Operating results for the nine months ended February 28, 2014 are not necessarily indicative of the results
for the year.
These condensed consolidated financial statements should be read in conjunction with the financial
statements and notes for the year ended May 31, 2013 contained in Abakan’s Form 10-K.
ConsolidationPolicy
The accompanying February28, 2014 financial statements includeAbakan’s accounts and the accounts of
its subsidiaries. All significantintercompanytransactions and balances have been eliminated in
consolidation. Abakan’s ownership of its subsidiaries as of February28, 2014 is as follows:
Name of Subsidiary
Percentage ofOwnership
AMP SEZC (Cayman)
100.0%
AMP Distributors (Florida)
100.0%
MesoCoat, Inc.
52.5%
MesoCoat, Inc. (“MesoCoat”) formed a wholly-owned subsidiary, MesoCoat Coating Services, Inc. on
June 13, 2013. There was no financial activity during the quarter ending February 28, 2014.
Non-Controlling Interest
Non-controlling interest represents the 47.5% minority shareholders’ proportionate share of the equity of
MesoCoat. Abakan’s 52.5% controlling interest in MesoCoat requires that its operations be included in
its consolidated financial statements. The equity interest of MesoCoat that is not owned by Abakan is
shown as a non-controlling interest in the consolidated financial statements.
Abakan’s 41% minority interest share of Powdermet, Inc.’s (“Powdermet”) income or loss is shown as
“Equity share of Powdermet income (loss)” in the statement of operations of the consolidated financial
statements. On June 13, 2013, Powdermet formed a wholly owned subsidiary, Terves Inc.
Development Stage Enterprise
At February 28, 2014, Abakan’s business operations had not fully developed and are dependent upon
funding and therefore Abakan is considered a development stage enterprise.
7
ABAKAN INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the nine months ended February 28, 2014 and 2013
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
Accounts Receivable
Accounts receivable are stated at face value, less an allowance for doubtful accounts. Abakan 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, 2014 management has determined that no allowance for doubtful
accounts is required.
Subsequent Events
In accordance with ASC 855-10 “Subsequent Events”, Abakan has evaluated subsequent events and
transactions for potential recognition or disclosure in the financial statements through the date the
financial statements were issued (Note 9).
2. GOING CONCERN
The accompanying financial statements have been prepared assuming that Abakan will continue as a
going concern. Abakan had net losses for the period from June 27, 2006 (inception) to the period ended
February 28, 2014, of $18,479,767 and a working capital deficit of $7,871,766. These conditions raise
substantial doubt about Abakan’s ability to continue as a going concern. Abakan’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. Since inception Abakan has funded its operations through
the issuance of common stock, debt financing, related party loans and advances. Abakan is committed to
aggressively pursuing its present business plan and, and will seek additional debt and or equity
financing as required to meet its objectives. The accompanying financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
8
ABAKAN INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the nine months ended February 28, 2014 and 2013
3. INVESTMENT IN NON-CONTROLLING INTEREST
Powdermet, Inc.
Abakan owns a forty one percent (41%) interest in Powdermet. Powdermet owns 47.5% of MesoCoat as
of February 28, 2014. Abakan’s 41% ownership of Powdermet, results in indirect ownership of the
shares of MesoCoat that Powdermet owns. On June 13, 2013, Powdermet formed a wholly owned
subsidiary, Terves Inc. There was minimal financial activity during the quarter ending February 28,
2014, for Terves. The results for Terves Inc. have been consolidated in the results of Powdermet.
We have analyzed our investment in accordance of “Investments – Equity Method and Joint Ventures”
(ASC 323), and concluded that the acquisition of our 41% minority interest gives 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.
Investment balance, May 31, 2013
$
2,449,312
Equityin loss for nine months ended February 28, 2014
(295,617)
Investment balance, February 28, 2014
$
2,153,695
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
February28, 2014
Equity Percentage
41%
41%
Condensed income statement information:
Total revenues
$
1,593,405 $
1,882,043
Total cost of revenues
482,462
774,137
Gross margin
1,110,942
1,107,906
Total expenses
(1,401,889)
(906,956)
Minority interest loss in MesoCoat
(853,525)
(672,562)
Provision for income tax benefit
423,455
-
Net profit/ (loss)
$
(721,017) $
(471,612)
Abakan’s equity in net profit/(loss): 41%
$
(295,617) $
(193,362)
Condensed balance sheet information:
February28, 2014
May 31, 2013
Total current assets
$
1,099,870 $
536,111
Total non-current assets
1,417,763
3,077,305
Total assets
$
2,517,633 $
3,613,416
Total current liabilities
$
408,827 $
260,897
Total non-current liabilities
1,447,701
1,676,463
Total liabilities
1,856,528
1,937,360
Total equity
661,105
1,676,056
Total liabilities and equity
$
2,517,633 $
3,613,416
9
ABAKAN INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the nine months ended February 28, 2014 and 2013
4. LOANS PAYABLE
As of February 28, 2014, and May 31, 2013, the loans payable balance was comprised of:
Description
February 28,
May 31, 2013
2014
Convertible demand note to an unrelated entity bearing 5% interest per annum which
$
1,500,000 $
1,500,000
matures on September 15, 2014. The note is shown net of a discount of $-0- and $-0-,
respectively, attributableto the beneficial conversion feature, and an effective interest rate of
31% due the attached warrants.
Convertible demand note to an unrelated entity bearing 5% interest per annum which
200,000
175,163
matures on September 15, 2014. The note is shown net of a discount of $-0- and $24,837,
respectively, attributableto the beneficial conversion feature, and an effective interest rate of
176% due to the attached warrants.
Convertible demand note to an unrelated entity bearing 5% interest per annum which
500,000
387,473
matures on July 14, 2014. The note is shown net of a discount of $-0- and $112,527,
respectively, attributableto the beneficial conversion feature, and an effective interest rate of
143% due to the attached warrants.
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
19,350
19,350
Uncollateralized demand note to an unrelated entity bearing 8% interest per annum
20,000
20,000
Uncollateralized demand note to an unrelated entity bearing 8% interest per annum
21,308
-
Uncollateralized demand note to an unrelated entity bearing 8% interest per annum
30,867
-
Collateralized term note to an unrelated entity bearing 5% interest per annum which matures
689,000
-
on April 29, 2014
Collateralized term note to an unrelated entity bearing 5% interest per annum which matures
80,000
-
on April 29, 2014
Collateralized term note to an unrelated entity bearing 5% interest per annum which matures
180,000
-
on April 29, 2014
Collateralized term note to an unrelated entity bearing 5% interest per annum which matures
180,000
-
on April 29, 2014
Collateralized term note to an unrelated entity bearing 5% interest per annum which matures
180,000
-
on April 29, 2014
Uncollateralized demand notes to an unrelated entity bearing5% interest per annum
500,000
-
Uncollateralized demand notes to an unrelated entity bearing5% interest per annum
50,000
-
Uncollateralized demand notes to an unrelated entity bearing5% interest per annum
70,000
-
Uncollateralized demand notes to an unrelated entity bearing6% interest per annum
20,000
Collateralized note to an unrelated entity bearing 1% interest for the first year and then 7%
1,000,000
1,000,000
per annumfor years two – seven.
Uncollateralized demand note to a related entity bearing 8% interest per annum
18,530
30,000
Convertible demand note to an unrelated entity bearing 7.5% imputed interest per annum
42,184
48,228
which matures on July 10, 2018.
Uncollateralized notes to an unrelated entity bearing 8% interest per annum, matures on
405,000
405,877
September 15, 2014
Capital leases payable to various vendors expiring in various years through September 2016;
87,164
91,881
collateralized by certain equipment with a cost of $205,157.
Collateralized 5 year term note to an unrelated entity bearing5.15% interest
138,956
-
Uncollateralized demand note to an unrelated entity for royalties shown net of discount of
-
1,576,892
$23,108
$
6,006,209 $
5,328,714
Less current liabilities
4,465,778
1,023,561
Total long term liabilities
$
1,540,431 $
4,305,153
10
ABAKAN INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the nine months ended February 28, 2014 and 2013
4. LOANS PAYABLE - CONTINUED
On October 30, 2013, Abakan and MesoCoat entered into an agreement with an unrelated entity in which
$680,000 of uncollateralized demand notes and $9,000 in accrued interest were exchanged for a
$689,000, 5% secured promissory note maturing on April 29, 2014. The agreement also includes the
commitment by the unrelated entity to loan MesoCoat $80,000 on closing and three loans of $180,000
loans on November 11, 2013, December 10, 2013 and January 10, 2014 under the same terms of the
$689,000 note. As of February 28, 2014, the Company had received the additional $180,000 tranches
dated December 10, 2013, and January 10, 2014.
5. STOCKHOLDERS' EQUITY
Common Stock Issuances
For the nine months ended February 28, 2014, Abakan issued the following shares for services and
compensation:
On October 25, 2013, we issued 19,802 shares of our common stock for services performed valued at
$60,000.
On October 25, 2013, we issued 25,000 shares of our common stock for services performed valued at
$73,500.
On October 25, 2013, we issued 57,242 shares of our common stock to the MesoCoat Inc. Supplemental
Discretionary Tax-Qualified Profit Sharing Plan and Trust valued at $72,728.
On October 25, 2013, we issued 25,699 shares of our common stock to the Powdermet, Inc. Supplemental
Discretionary Tax-Qualified Profit Sharing Plan and Trust valued at $72,728.
On December 4, 2013, we issued 50,000 shares of our common stock for exercise of stock options
converted valued at $32,500, and paid for by an outstanding balance of accounts payable.
On December 4, 2013, we issued 10,000 shares of our common stock for services performed valued at
$12,000.
On January 3, 2014, we issued 16,649 shares of our common stock per the terms of his employment
agreement valued at $20,000.
A summary of the common stock warrants granted, forfeited or expired during the nine months ended
February 28, 2014 and the year ended May 31, 2013 is presented below:
11
ABAKAN INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the nine months ended February 28, 2014 and 2013
5. STOCKHOLDERS' EQUITY - CONTINUED
A summary of the common stock warrants granted, forfeited or expired during the nine months ended
February 28, 2014 and the year ended May 31, 2013 is presented below:
Weighted
Weighted
Average
Average
Remaining
Number of
Exercise
Contractual
Warrants
Price
Terms (In Years)
Balance at June 1, 2012
2,066,296
$
1.64
2.00 years
Granted
1,186,934
2.35
Exercised
(270,233)
1.50
Forfeited or expired
(140,005)
1.50
Balance at May 31, 2013
2,842,992
$
1.80
1.18 years
Granted
-
-
Exercised
-
-
Forfeited or expired
(706,595)
1.25
Balance at February 28, 2014
2,136,397
$
1.98
.67 years
Exercisable at February 28, 2014
2,136,397
$
1.98
.67 years
Weighted average fair value of
options granted during the nine months
ended February 28, 2014
$
NA
The following table summarizes information about the common stock warrants outstanding at February
28, 2014:
Warrants Exercisable
Weighted
Weighted
Weighted
Range of
Average
Average
Average
Exercise
Number
Remaining
Exercise
Number
Exercise
Price
Outstanding
Contractual Life
Price
Exercisable
Price
$
1.25
600,000
.15 Years
$
1.25
$
600,000 $
1.25
$
1.50
250,000
1.15 Years
$
1.50
$
250,000 $
1.50
$
2.00
574,463
.29 Years
$
2.00
$
574,463 $
2.00
$
2.70
576,272
.89 Years
$
2.70
$
576,272 $
2.70
$
3.00
135,662
1.14 Years
$
3.00
$
135,662 $
3.00
2,136,397
.72 Years
$
1.98
$
2,136,397 $
1.98
12
ABAKAN INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the nine months ended February 28, 2014 and 2013
6. EARNINGS-PER-SHARE CALCULATION
Basic earnings per common share for the three and nine months ended February 28, 2014 and 2013 are
calculated by dividing net income by weighted-average common shares outstanding during the period.
Diluted earnings per common share for the three and nine months ended February28, 2014 and 2013 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 February28, 2014 ended February28, 2013
Net earnings (loss) from operations
$
(1,371,535)
$ (1,951,858)
Weighted-average common shares
64,481,144
62,618,063
Effect of dilutive securities:
Warrants
-
-
Options to purchase common stock
-
-
Dilutive potential common shares
64,481,144
62,618,063
Net earnings per share from operations:
Basic
$
(0.02)
$ (0.03)
Diluted
$
(0.02)
$ (0.03)
For the nine months
For the nine months
ended February28, 2014 ended February 28, 2013
Net earnings (loss) from operations
$
(4,933,979)
$ (4,931,694)
Weighted-average common shares
64,365,475
62,073,783
Effect of dilutive securities:
Warrants
-
-
Options to purchase common stock
-
-
Dilutive potential common shares
64,365,475
62,073,783
Net earnings per share from operations:
Basic
$
(0.08)
$ (0.08)
Diluted
$
(0.08)
$ (0.08)
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.
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.
13
ABAKAN INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the nine months ended February 28, 2014 and 2013
6. 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 months ended
For the three months
February28, 2014
ended February28, 2013
Common Stock Equivalents:
Warrants
2,136,397
2,136,397
Options to purchase common stock
4,166,667
4,545,000
Total of Common Stock Equivalents:
6,303,064
7,166,307
For the nine months ended
For the nine months ended
February28, 2014
February28, 2013
Common Stock Equivalents:
Warrants
2,136,397
2,136,397
Options to purchase common stock
4,166,667
4,545,000
Total of Common Stock Equivalents:
6,303,064
7,166,307
7. STOCK BASED COMPENSATION
2009 Stock Option Plan – Abakan
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.
The total value of employee and non-employee stock options granted during the nine months ended
February 28, 2014 and 2013, was $824,362 and $2,334,912, respectively.
For the nine months ended February 28, 2014, Abakan granted 580,000 stock options, of these, 80,000
were granted to an officer of MesoCoat on June 14, 2013. The officer is no longer employed with the
company and the options were not vested and no longer outstanding.
We granted 100,000 stock options to an employee of MesoCoat on December 5, 2013, at an exercise price
of $1.25 per share that expire ten years from the grant date, and vest in equal one third parts on each
anniversary of the option grant date.
We granted 100,000 stock options to an employee of MesoCoat on December 5, 2013,at an exercise price
of $1.25 per share that expire ten years from the grant date, and vest in equal one third parts on each
anniversary of the option grant date.
We granted 200,000 stock options to a consultant of Abakan on December 5, 2013, at an exercise price of
$1.25 per share that expire ten years from the grant date, and vest in equal one third parts on each
anniversary of the option grant date.
14
ABAKAN INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the nine months ended February 28, 2014 and 2013
7. STOCK BASED COMPENSATION - CONTINUED
2009 Stock Option Plan – Abakan - continued
We granted 50,000 stock options to a legal advisor of Abakan on December 5, 2013, at an exercise price
of $1.25 per share that expire ten years from the grant date, and vest in equal one third parts on each
anniversary of the option grant date.
We granted 50,000 stock options to a consultant of Abakan on December 5, 2013, at an exercise price of
$1.25 per share that expire ten years from the grant date, and vest in equal halves on December 5, 2013,
and the first anniversary of the option grant date.
A summary of the options granted to employees and non-employees under the plan and changes during
the nine months ended February 28, 2014 and the year ending May 31, 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, 2012
5,160,000
$
0.77
9.00 years
$
185,000
Granted
1,135,000
2.39
Exercised
-
-
Forfeited or expired
(2,495,000)
$
0.69
Balance at May 31, 2013
3,800,000
$
1.26
7.78 years
$
108,750
Granted
580,000
1.48
Exercised
(50,000)
0.65
Forfeited or expired
(163,333)
2.10
(16,754)
Balance at February 28, 2014
4,166,667
$
1.26
7.27 years
$
91,996
Exercisable at February28, 2014
2,629,997
$
0.92
7.27 years
$
--
Weighted average fair value of
options granted during the nine
months ending February 28, 2014
$
1.48
8. COMMITMENTS
There were no new commitments for the nine months period ending February 28, 2014.
15
ABAKAN INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the nine months ended February 28, 2014 and 2013
9. SUBSEQUENT EVENTS
Management has evaluated subsequent events after the balance sheet date, through the issuance of the
financial statements, for appropriate accounting and disclosure. Abakan has determined that there were no
such events that warrant disclosure or recognition in the financial statements, except for the following:
Share Issuances
On February 21, 2014, we closed a private placement for $20,000, 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 $1.50 per share and an expiration date of two years from the closing. In
connection with this placement we had no offering costs for a net of $20,000. But the Company did not
issue the share until April 9, 2014, and as such this is reflected in Stock issuable on the Condensed
Consolidated Balance Sheet as of February 28, 2014.
On February 24, 2014, we agreed to issue $216,000 or 216,000 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 $1.50 per share and an expiration date of two years from the closing for services
to be rendered. In connection with this placement we had no offering costs for a net of $216,000. But the
Company did not issue the share until April 9, 2014, and as such this is reflected in Stock issuable on the
Condensed Consolidated Balance Sheet as of February 28, 2014.
On March 4, 2014, we closed a private placement for $20,000, 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 $1.50 per share and an expiration date of two years from the closing. In
connection with this placement we had no offering costs for a net of $20,000.
Private Placement
The Company authorized a new private placement offering on April 8, 2014, to be sold to accredited
investors of up to six million (6,000,000) units on or before April 11, 2014 at a price of $0.80 per unit,
each unit comprised of one (1) share of common stock, par value $0.0001 and one (1) share purchase
warrant that would entitle the holder thereof to purchase one (1) additional share of Common Stock in
exchange for two (2) share purchase warrants at an exercise price of $1.20 for a period of two years from
the date of each placement in exchange for one (1) whole share purchase warrant at a price per share of
$1.20 per share.
On April 9, 2014, we closed a private placement for $400,000, or 500,000 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 $1.20 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 $400,000.
16
ABAKAN INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the nine months ended February 28, 2014 and 2013
9. SUBSEQUENT EVENTS - CONTINUED
Conversion of debt to shares
On April 9, 2014, we converted several debt obligations for an aggregate total of $751,414, or 939,268
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 $1.20 per share and an expiration date of
two years from the closing.
On April 9, 2014, we agreed to issue, an aggregate amount of $70,000 or 70,000 shares of our restricted
common stock, for debt owed to two unrelated vendors. In connection with this placement we had no
offering costs for a net of $70,000.
Consulting agreement
On March 31, 2014, Prosper Financial Inc., a related party, terminated its consulting agreement with the
Company.
17
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 and with the financial statements, notes and the Management
Discussion and Analysis of Financial Conditions and Results of Operations section for the year ended
May 31, 2013, contained in Abakan’s Form 10-K. Our fiscal year end is May 31.
Abakan
Abakan, through its subsidiaries, designs, develops, manufactures, and markets advanced nano-composite
materials, innovative fabricated metal products, highly engineered metal composites, and engineered
reactive materials for applications in the oil and gas, petrochemical, mining, aerospace and defense,
energy, infrastructure and processing industries. Our technology portfolio currently includes high-speed,
large-area metal cladding technology, long-life nano-composite anti-corrosion and-wear coating
materials, high-strength, lightweight metal composites, and energetic materials. Operations are conducted
through our subsidiary, MesoCoat, Inc. (“MesoCoat”) and our affiliate, Powdermet, Inc. (“Powdermet”).
Abakan holds a 52.5% controlling interest in MesoCoat and a 41% non-controlling interest in Powdermet.
Powdermet directly owns the remaining 47.5% of MesoCoat. Abakan’s interest in Powdermet represents
an additional 19.5% indirect interest in MesoCoat. The combined direct and indirect interest equals a
total 72.0% ownership of MesoCoat by Abakan.
MesoCoat
MesoCoat’s Business
MesoCoat is an Ohio based materials science company intending to become 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 nano-composite 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 further developed advanced
nano-composite coating materials as well as a proprietary high speed metal cladding process. MesoCoat
is focused on combining corrosion and wear resistant alloys and nano-engineered cermet materials with
proprietary high-speed coating or cladding application systems, which will improve the performance life
of any coated product at a better value proposition than current alternatives.
1
MesoCoat’s commercial revenues are comprised of sales of PComP™ powders. Additional revenue is
realized from grants and commercial development contracts for product development and customer-
specific solutions. MesoCoat also expects to realize revenue through the provision of thermal spray
application services. The first commercial order for thermal spray application services was accepted
during this reporting period and additional orders have since been accepted. MesoCoat has recently
acquired more production equipment to increase PComP™ powder production and expand coating
services to meet current and projected demand. PComP™ nano-composite cermet coating solutions unite
high wear, corrosion resistance, and toughness, with a low friction coefficient into one product structure
using patented microstructural engineering techniques. MesoCoat’s Cermaclad™ cladding solutions
offer improved metallurgy and higher application rates compared to other hardfacing and weld cladding
alternatives. Three of MesoCoat’s PComP™ wear products, PComP™-W333, PComP™ W104, and
PComP™-T48 are utilized by original equipment manufacturers (OEM’s) and are being sold
commercially . PComP™-M nano-composite metal boride solutions for molten metal corrosion resistance
are undergoing extended field testing in preparation for market launch. MesoCoat’s CermaClad™ CRA
solutions, primarily alloy 625 claddings, are in the process of extensive internal and external evaluation,
certification, and qualification to API (American Petrochemical Institute) and major oil company
standards to ensure compliance with rigorous industry requirements. Cermaclad™ WRA (wear resistant
alloys), including tungsten carbine, nano-composite chromium carbide, and structurally amorphous metal
(SAM) alloy claddings are also undergoing advanced testing and qualification for use in the construction
equipment, mining, and oil sands extraction industries.
PComP™
PComP™ is a family of nano-composite cermet coatings that are used to impart wear and corrosion
resistance, and to restore the dimensions of metal components, in an environmentally acceptable manner.
Our product competes against chrome and nickel plating, and tungsten carbide thermal spray coatings 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 many are
banned in a number of countries. While businesses grapple with the need to transition away from these
harmful products, PComP™ has become a performance, award winning, leading solutions platform in
head to head wear and corrosion performance testing while being recognized as 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.
The PComP™ portfolio of products utilize nano-structural engineering within a patented family of
corrosion resistant coating solutions that combine extreme wear resistance, fracture toughness
(resiliency), and a low friction coefficient in one product. Conventional materials science normally causes
toughness to decrease as hardness and wear resistance increase. Our combination of nano-level structure
control and advanced ductile phase toughening materials science with engineered nitride, carbide, and
boride ceramic materials, has developed patented coating systems that are both very tough and very wear
resistant. These materials are tailored for specific environments and applications such as molten metal
processing, oil and gas pumping and flow control, and aerospace hydraulics. The unique nano-structure of
the PComP™ coatings also result in decreased friction properties similar to those of diamond-like carbon
films and solid lubricants that can be used structurally and applied to large components at a fraction of the
cost of coatings such as diamond-like carbon. Low friction reduces wear, improves energy efficiency and
extends the life of sliding components, such as drilling rotors, plungers, mandrels, ball and gate valves,
and metal processing equipment.
2
Equally important, the unique nano-structural design and material combinations of the PComP™ coating
solutions results in coatings can be applied and machined much faster than a product based on traditional
carbide or other ceramic coating. The higher speeds associated with the final machining of PComP™
coating applications result in higher productivity and reduced costs in metal finishing operations, while
meeting the highest performance requirements of targeted applications.
The PComP™ product lines are being positioned to compete with two dominant product alternatives:
hard chrome plating and tungsten carbide thermal spray coatings. Our family of nano-composite 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. PComP™
product lines are expected to provide a high degree of product differentiation and a sustainable
competitive advantage in the $10 billion inorganic metal finishing markets, which include original
equipment manufacturer (“OEM”) components and the maintenance, repair, and overhaul of industrial
assets and machinery in the “components and coatings” segment of our business.
MesoCoat is selling PComP™ coating materials through different channels appropriate to each specific
market. OEM’s and government agencies like the U.S. Air Force have procured PComP™ raw powders,
have applied our powders using their own thermal spray and coating application processes. MesoCoat
may offer coating application services to prospective customers that do not have the capacity to coat their
own products. An effort to expand geographically our reach into the higher margin market for coating
services is underway. MesoCoat is in the process of qualifying regional application to provide thermal
spray coating services, and identifying regional metal finishing suppliers for the possibility of future
acquisition. The realization of an expansion of our ability to service the need for coating application
services is expected to support the economies of scale required for powder production in order to meet
product cost targets.
CermaClad™
CermaClad™ is MesoCoat’s cladding process, exclusively licensed from Oak Ridge National Laboratory,
which utilizes a high power plasma arc lamp, to melt, fuse, and metallurgically bond metals, corrosion
resistant alloys and/or cermets onto metal substrates, such as plate, pipe, or large components to protect
against harsh operating environments. Our metallurgically bonded clad steel solution is optimized to
manage the consequences of wear and corrosion damage that can lead to the failure of large oil and gas
assets. Oil and gas risers, flowlines, refinery/chemical processing towers and transfer lines, power plant
heat exchanger tubes, ships, and bridges all suffer from wear and corrosion damage over time. Within
corrosive environments, including seawater, road salt, mining slurry transport lines, unprocessed oil
containing water, hydrogen sulfide, carbon dioxide, chemical processing and transportation equipment,
metals production, and other large industrial applications, asset owners or operators either need to
continually maintain and periodically replace major assets, or fabricate assets using expensive, corrosion
resistant alloy (CRA) materials.
CermaClad™ expects to offer a competing, lower overall cost solution to expensive alloys that combines
lower cost carbon steel clad with a corrosion resistant alloy. A clad steel solution such as CermaClad™ is
less than half the cost of solid alloy alternatives with maintenance free corrosion lifetimes equal to the
projected life of any given asset which may range from 30 to 100 years. Management believes that the
CermaClad™ process and related equipment will offer the lowest capital cost per unit production, and is
scalable to large volumes with low to modest capital investment in plant requirements.
3
CermaCladTM clad products are being developed and qualified for cladding the inside of full length pipe
for use within the oil and gas industries. Clad metals are widely accepted 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, as well as the greater difficulty and expense to
inspect, maintain, and replace damaged assets, eliminate plastics and other competing material solutions
from consideration, have significantly increased the use of corrosion resistant alloys and lower cost clad
pipe alternatives.
MesoCoat has made significant progress in quality control and the reliability of the pipe cladding process,
including the development of correlations between control variables, dependant variables, and cladding
quality. Our work has generated detailed analytical models of the fusion process that enable us to predict,
measure, control, and understand the fusion cladding process, and how that process relates to cladding
and base metal quality and performance. Most recently, these efforts have enabled the controlled
production of fully clad short sections of pipe with strong metallurgical bond, uniform quality, and good
surface finish. In line with these efforts, it has become necessary to make modifications to our full sized
production equipment that will enable a reliable process and reduce total process costs. We expect to
implement these modifications and upgrades over the next few months, which when completed will allow
us to increase the size of pipe sections to be clad, which when accomplished, we expect one of the major
corporations that are experiencing significant financial losses due to the availability of clad pipe will
express interest to participate in accelerating readiness for production and participation in all of their
growing project demands for clad pipe.
Samples of coated pipe sections that have been produced on our full size production equipment are now
being sent out to major end users, after being subjected to internal and third party testing. Longer pipe
sections will be produced in the same manner and delivered to Petrobras under our Joint Development
Program as well as to other oil majors for their evaluation and qualification.
Mattson Exclusivity Agreement
Due to ongoing supply and support issues with our arc lamp component supplier, Mattson Technology
Inc. (“Mattson”), on October 16, 2014, MesoCoat elected to exit the mutual exclusivity agreement with
Mattson and initiated projects to solve the supply and reliability issues associated with the use of full
scale production equipment that have been hindering and limiting commercialization efforts. Management
has been evaluating the assets acquired from Mattson in order to determine to what extent the assets have
been impaired.
Meanwhile, we determined to design a new HDIR (High Density Infrared) plasma lamp system in-house.
In support of this effort, NASA Glenn was awarded a GLIDE contract in addition to the ongoing
company-funded space act agreement to support lamp components and controls development. Our efforts
and those of NASA Glenn have to date produced a new reflector design that is better able than the
previous designs to measure the amount of light required by our CermaClad™ process. We are also
testing anode prototype designs which are exhibiting the same or better anode lifetime properties that are
less expensive than previous anode designs. We expect to have the first MesoCoat working prototype
lamp head in July 2014.
4
LIMO/LILAS Agreement
On November 21, 2013, the Company entered into a Memorandum of Understanding with Lissotschenko
Mikrooptic GmbH (“LIMO”) to support Cermaclad-LT (low thickness) product commercialization, and
to extend the application of our cladding technology to smaller diameter pipes. The LIMO technology
creates a new type of thermal micro-climate that delivers superior performance in accuracy and process
control compared to the plasma arc lamp. Highly efficient semiconductor laser technology would extend
Abakan´s capabilities to more portable systems for covering smaller diameter pipes while still providing
significant productivity.
On April 4th, the parties to the Memorandum of Understanding determined to replace the Memorandum of
Understanding in it entirety with a Definitive Agreement, to assign those obligations of LIMO to its sister
company LILAS GmbH (“LILAS). The execution of the Definitive Agreement remains subject to the
execution of a Shareholder Agreement between the principal of LIMO and LILAS with a third party that
would fund the objectives of the Definitive Agreement to the tune of€3,000,000 in exchange for the
exclusive rights to all coating applications developed for the LILAS laser systems except those rights
associated with thin 50 -500 micron coating of the internal diameter of pipe for which rights Abakan
would pay the third party€1,500,000 within twelve months of the third party’s initial payment to LILAS.
Abakan would also retain a right of first refusal to joint venture all of the other applications with the third
party.
Sales Agency Agreement for Mexico and Central America
Abakan announced on September 16, 2013, the execution of an exclusive sales agent agreement with
Metallurgic Solutions, S.A. de CV (“MetalSol”) intended to facilitate the introduction of MesoCoat’s
products into Mexico and Central America. MetalSol is working with MesoCoat’s to identify prospective
production and service operations in Mexico for PComP™ long-life metal coatings, CermaClad™ clad
steel, and future products that are yet to be developed for commercial applications.
MetaSol has since been in contact with certain prospective customers for the PComP™ family of powders
and coatings. PComP™ M and PComP™ W powders have been delivered to these sales prospects for
testing and we expect to have the first results of this testing mid-summer.Metasol has also been in contact
with the organization in Mexico responsible for drafting a national standard for the cladding of pipes used
for corrosive oil and gas applications. We expect that our product specifications will be considered in the
documentation of that process.
Ohio Department of Development’s Third Frontier Commission Loan
On February 12, 2014, MesoCoat has been awarded a loan of $1,500,000 by the Ohio Department of
Development’s Ohio Third Frontier Commission to scale up PComP™ production and expand PComP™
coating services. The loan will help MesoCoat to increase PComP™ production from 18 tons to 160 tons
per year increasing projected powder sales revenues to $1,600,000 a month and thermal spray revenues to
$1,000,000 per month over the next few years. The terms and conditions of the loan require MesoCoat to
make a like contribution to fund the scale up of which MesoCoat has contributed a significant portion to
date. The proceeds of the loan are yet to be disbursed pending the execution of formal loan
documentation.
5
Northern Alberta Institute of Technology
Subsequent to period end, MesoCoat received a $2.75 million funding commitment from certain
Canadian federal and provincial agencies for an 18 month collaborative effort with the Northern Alberta
Institute of Technology (“NAIT”) to develop wear-resistant clad pipes to transport the abrasive oil sands
from mining sites to processing/refining facilities. The total project cost for setting-up a R&D facility
within NAIT's Souch campus, and related activities is $4,260,000, of which $1,500,000 is being funded
by Western Economic Diversification' Canada; $1,250,000 is being funded by Enterprise and Advanced
Education, Alberta; $750,000 is being funded by MesoCoat; $450,000 is being funded by Abakan; and
$310,000 being funded by NAIT. A portion of MesoCoat’s funding commitment will include supplying
the lamp system and covering certain of the personnel costs.
Anticipated Product Development Timeline
The anticipated product development timeline detailed below is based on management’s estimate of the
time requisite to bring the respective products to market, all of which products are subject to uncertainties
surrounding the actual completion date of any number of items as is normal in product development.
Note, certain of the anticipated commercial timelines presented have not advanced since the end of our
last periodic reporting period. Unless otherwise explained below in respect to specific products, the
unanticipated delays are attributed, in large part, to ongoing supply and support issues with our arc lamp
component supplier, Mattson.
PRODUCT
COMMERCIAL TIMELINE
TIME (MONTHS)
As of 11/30/13
PComP™ W
Growth and expansion
Current
PComP™ T
Partner sales
Current
PComP™ M
Market entry
Current
PComP™ S
Qualification
Postponed indefinitely
ZComP™
Development
24
CermaClad™ CRA
Full scale product API qualification
8
CermaClad™ WR
Development
14
CermaClad™ LT
Development
21
CermaClad™ HT
Incubation
36
PComP™ M has moved into market entry, with the receipt of initial trial orders from two primary metal
producers. MesoCoat is currently in the process of installing equipment to handle the coating of industry
standard rollers used to carry components through molten metal baths. Subject to successful delivery and
performance matching prior test results, we expect these initial orders will turn into recurring business
producing an industry-leading solution will also provide a base from which MesoCoat coating solutions
may be able to leverage customer relationships to include routine component repair services.
Market entry of PComP™ S, specifically developed for military transport applications, as well as
ZComP™ turbine engine life extension materials have been delayed due to sequestration cuts and the
reassessment of priorities in the defense sector. Our expectation, with recent budget agreements, is that
this ongoing delay will may be resolved and that our progress into penetrating these target markets may
resume. Market entry of ZComPTM has also been delayed due the Company’s focus on PComPTM M
Interest in Cermaclad™ WR continues to be high, but market entry has encountered significant delays
which are now being addressed with the announcement of a collaborative funding commitment to set up a
full scale clad pipe manufacturing facility in Alberta for Cermaclad™ WR and to commence sales our
product.
6
Product Commercial Anticipated Expansion Timeline
Our intermediate term plan is to expand the presence of our products into the Asia-Pacific and Brazil
markets. We have negotiated the terms of a “build to suit” agreement through our Asian subsidiary, PT
Indonesia MesoCoat to construct a manufacturing plant on the island of Batam, Indonesia. Due to
ongoing concerns surrounding negotiations to construct a build to suit facility in Recife, Brazil we have
broadened our search for a prospective site and possibly a local partnership that may be a more favorable
way to pave market entry into Brazil. The expected time-frames for either expansion are yet to be
finalized.
Results of Operations
(000)
For the three months ended
For the nine months ended
February 28,
Change
February 28,
Change
Revenues
2014
2013
$
%
2014
2013
$
%
Commercial
$
69 $
61 $
8
13
$
206 $
131 $
75
57
Contract and grants
95
225
(130)
(58)
230
1,550
(1,320)
(85)
Other income
-
-
-
-
10
-
10
-
164
286
(122)
(43)
446
1,681
(1,235)
(73)
Gross profit
86
180
(94)
(52)
181
1,033
(852)
(82)
General and administrative
1,293
1,579
(286)
(18)
4,865
4,162
703
17
Stock options expense
353
483
(130)
(27)
972
1,382
(410)
(30)
Operation Loss
(1,560)
(1,882)
(322)
(17)
(5,656)
(4,511)
(1,145)
25
Interest exp & amortization
of discount on debt
(79)
(300)
(221)
(74)
(317)
(921)
(604)
(66)
Other income (expense)
(74)
(117)
(43)
(37)
(296)
(172)
(124)
(72)
Loss before non-
controlling interest
(1,713)
(2,299)
(586)
3
(6,269)
(5,604)
(665)
(12)
Non-Controlling interest in
MesoCoat loss
341
347
(6)
(2)
1,336
672
(664)
98
Loss before income taxes
(1,372)
(1,952)
(580)
(30)
(4,933)
(4,932)
(1)
1
Income taxes
-
-
-
-
-
-
Net Income
(1,372)
(1,952)
(580)
(30)
(4,933)
(4,932)
(1)
1
Revenues
The increase in commercial revenue for both the three and nine month periods ended February 28, 2014,
over the prior comparative periods ended February 28, 2013, is the result of the commercial sales of
PComP™ powders of $7,995 and $75,301 respectively. The decrease in contract and grant revenue in
the three and nine month periods ending February 28, 2014, over the prior comparative periods ended
February 28, 2013, is due to a reduction in grant applications, as we focused on commercializing
PComP™ powders.
We expect commercial revenue to increase over the next six months in line with the growth in our
capacity for PComP™ powder production having been delayed for six months during the installation of
new larger scale manufacturing equipment and the completion of certain qualifying processes required for
larger batch sizes. Despite the recent decrease in contract and grant revenue, we expect grant revenue to
increase over the next six months as our submissions of grant applications has increased over the last two
quarterly periods. Meanwhile, our focus remains on commercializing existing product lines.
7
Gross Profit
The decrease in gross profits for both of the three and nine month periods ended February 28, 2014, over
the prior comparative periods ended February 28, 2013, can be attributed to the decrease in contract and
grant revenue of $130,342 and $1,320,143 respectively. The change in focus from grants to commercial
revenue has caused us to reallocate employees to research and development work from grant work over
the current periods which reallocation has had a negative effect on grant revenue.
We expect gross profit to remain consistent over the next six months followed by an increase over the
following six months. Gross profit realized from grant revenue is expected to increase as we have
recently submitted more grant applications than in earlier periods while our profit margin is expected to
grow as we expand sales of the PComP™ and anticipate sales of our CermaClad™ product.
Net Losses
The $468,204 decrease in net losses in the three month period ended February 28, 2014, over the three
month period ended February 28, 2013, can be primarily attributed to overall decreases in general and
administrative expenses, stock expense, interest paid, the smaller gain associated with our non-controlling
equity interest in MesoCoat, the smaller loss associated with our equity interest in Powdermet in the
current period and the decrease in other expenses.
The $114,404 increase in net losses in the nine month period ended February 28, 2014, over the nine
month period ended February 28, 2013, can be primarily attributed to the decrease in gross profit, and the
increase in professional fees, payroll and benefits, depreciation and amortization, research and
development, the larger loss associated with our equity interest in Powdermet, offset by the decrease in
consulting expenses, consulting provided by related parties, stock expense, interest paid, other expenses
and the larger gain associated with our non-controlling equity interest in MesoCoat.
We do not expect to realize net income in the near term as anticipated operational expenses associated
most significantly with research and development, consulting, payroll expenses and the depreciation and
amortization of existing assets are expected to increase. The increases are expected to be the direct result
of continued research and development costs associated with the CermaClad™ product line in addition to
costs anticipated for the building of a manufacturing plant in Batam, Indonesia.
Despite management’s focus on ensuring operating efficiencies, we expect to continue to operate at a loss
through fiscal 2014.
Expenses
The $416,961 decrease in operating expenses in the three month period ended February 28, 2014, over
the comparative three month period ended February 28, 2013, can be primarily attributed to decreases
research and development of $153,590, stock option expense of $130,594, professional fees of $33, 920,
consulting fees of $82,058, consulting services rendered by related parties of $67,004 and general and
administration fees of $43,778, offset by increases in depreciation and amortization of $83,500.
8
The $293,048 increase in operating expenses in the nine month period ending February 28, 2014, over
comparative nine month period ended February 28, 2013, can be primarily attributed to an increase in
professional fees of $168,378, which increase is due in part to the representation required in connection
with our agreements with Metasol, LIMO and ongoing litigation, payroll and benefits of $486,797, a
portion of which increase can be attributed to the addition of two employee positions in the period and the
contribution of Abakan stock to the MesoCoat and Powdermet retirement plans of valued at
approximately $235,000, research and development of $140,164, which increase is due to increased
focus on commercializing our products, and depreciation and amortization of $281,633, which increased
due in part to the onset of the depreciation of the new CermaClad™ equipment and leasehold
improvements in Euclid, Ohio compensated by elimination of the amortization expense relating to the
Mattson mutual exclusivity agreement, offset by a decrease in consulting expense of $165,608, which
decrease is due in part to the termination of services rendered by a Washington, D.C. based lobbying
firm, consulting services rendered by related parties of $170,681, and stock option expense of $410,095,
which decreased due to the vesting of stock options that had already been expensed.
We expect that operating expenses will 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 activity to ensure that products nearing commercialization are brought to market as quickly
and as effectively as possible.
Interest Expense and Amortization of Discount on Debt
The $221,063 and $604,176 decreases in interest and amortization of discount of debt expenses in the
three and nine month periods ending February 28, 2014, over the prior comparative periods ended
February 28, 2013, can be attributed to the elimination of amortization of discount on debt in the current
three month period and decrease in the current nine month period, and the decrease in interest expenses in
both periods.
Other Expense
The $303,073 and $518,969 decreases in other expense in the three and nine month periods ending
February 28, 2014, versus the prior comparative periods ended February 28, 2013, can be primarily
attributed to the decreases in interest in both periods and the decrease in losses associated with our equity
interest in Powdermet in the current three month period and offset by the increase in losses associated our
equity interest in Powdermet in the current nine month period.
We expect to continue to incur other expense in future periods due to interest accruing on convertible debt
and the anticipated increase in interest expense anticipated for new debentures that will be required for
future growth.
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 once taxable income is generated.
Capital Expenditures
Abakan has spent significant amounts of investment activities for the period from June 27, 2006,
(inception) to February 28, 2014, which amounted to $9,073,958. A large portion of these expenditures
9
are related to plant, property and equipment in the construction of the manufacturing facility in Euclid,
Ohio, and its equity interests in MesoCoat and Powdermet.
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.
Abakan had stockholders’ equity of $5,123,463 and a working capital deficit of $7,871,766 at February
28, 2014.
Cash flows
Key elements to the Consolidation Statement of Cash Flows for the nine months ended February, 2014
and 2013:
For thenine months ending
February 28,
2014
2013
Since Inception
Net Change in Cash and Cash Equivalents
Provided by (used in):
Development Stage activities
$ (1,656,379) $ (1,718,730) $
(7,555,697)
Investing activities
( 549,100)
(2,474,329)
(9,073,985)
Financing activities
2,032,092
3,512,587
16,689,334
Net Change in cash and cash equivalents
$
(173,387) $
(680,472) $
59,652
Net cash used in development stage activities resulted from current period loss plus certain non-cash
items which included depreciation, amortization of discount on debt, stock issued for services and stock
option plus net change accrued liabilities, accounts payable, accrued interest on loans payable, prepaid
expenses and accounts receivable. We expect to continue to generate negative cash flow in operating
activities until such time as net losses transition to net income.
Net cash used in investing activities in the nine month period ending February 28, 2014, 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.
Net cash provided by financing activities in the nine month period ending February 28, 2014, is
attributable to proceeds from the sale of common stock, loans payable and stock issuable, offset by
payments on loans payable 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.
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. We had no firm
commitments or arrangements for financing at February 28, 2014. Abakan’s financings to date have
come from current shareholders that it expects will continue in the immediate future, as we continue to
pursue a number of prospective sources that include investment banks, industry and/or strategic partners,
the sale of additional equity, and the procurement of short and long term debt. During the current quarter
Abakan received equity investments of $336,000. Subsequent to quarter end, Abakan received equity
investments of $400,000 and $671,414 on current debt that converted to equity. We face certain financial
obstacles to attracting new financing due to our status as a technology company just entering sales with a
historical record of net losses and working capital deficits. Therefore, despite our efforts we can provide
10
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.
MesoCoat has plans for the purchase of plant or equipment in connection with expansion of the PComP™
powder production commercial line and has obtained verbal commitments for future capital expenditures
from Abakan and Powdermet to fund any shortfalls (including plant and equipment) 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
PComP™ product line expansion and upon completion of development and commercialization of the
Cermaclad™ product at the new Euclid, Ohio manufacturing facility.
Off Balance Sheet Arrangements
As of February 28, 2014, 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 that refers to our ability to continue as a going concern as a
result of net losses of $18,479,767 and a working capital deficit of $7,871,766 as of February 28, 2014.
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) revenue from operations; (iii) converting debt to
equity; and (iv) obtaining loans and grants from financial or government institutions. Management
believes that it will be able to obtain funding to allow Abakan to remain a going concern through the
methods discussed above, though there can be no assurances that such methods will prove successful.
Forward Looking Statements and Factors That May Affect Future Results and Financial Condition
The statements contained in the section titled Results of Operations and Description of Business, with the
exception of historical facts, are forward looking statements. 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
11
§ 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.
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Derivative Instruments
Interest Rate Risk
Our exposure to interest rate risk primarily relates to the interest income generated by excess cash
deposited in interest bearing accounts. The cash and cash equivalents are held for working capital
purposes. We have not used derivative financial instruments. We have not been exposed nor do we
anticipate being exposed to material risks due to changes in market interest rates. Declines in interest
rates, however, will reduce future investment income, at our current balance levels the change in our
interest income will not be material, assuming consistent balance levels.
Interest rate risk also refers to our exposure to movements in interest rates associated with our interest
bearing liabilities. The interest bearing liabilities are denominated in U.S. dollars and the interest expense
is based on the market rates of interest. If the credit markets in the United States changed significantly it
could cause a material change in our interest expense and our costs of borrowing.
Credit Risk
Credit risk refers to our exposures to financial institutions, suppliers and customers that have in the past
and may in the future experience financial difficulty, particularly in light of recent conditions in the credit
markets and the global economy. As of February 28, 2014, our cash and cash equivalents are held in
deposits with maturities of three months or less with banks and other financial institutions having credit
ratings of BBB or above. We generally monitor the financial performance of our suppliers and customers,
as well as other factors that may affect their access to capital and liquidity. Presently, we believe that we
will not incur material losses due to our exposures to such credit risk.
12
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, 2014. 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 the prior reporting period, there have been no changes in internal control over financial
reporting that have materially affected, or are reasonably likely to materially affect, Abakan’s internal
control over financial reporting.
13
PART II – OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Uptick Capital, LLC.
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 sought the return of the 60,000 shares delivered
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. Uptick countersued
Abakan for breach of the terms of the consulting agreement. The matter has been resolved amicably
without compensation being paid by either party.
Paloma Capital Group Ltd.
Abakan initiated legal proceedings against Paloma Capital Group Ltd (“Paloma”) on July 2, 2013, in the
Circuit Court in and for Miami-Dade County. The claim is based on Paloma’s failure to perform
according to the terms of a consulting agreement dated May 2, 2011, pursuant to which Paloma was to
introduce suitable investors to Abakan in exchange for certain consideration including 50,000 shares of
Abakan and 150,000 stock options to purchase shares of Abakan. The suit demands the return of the
Abakan shares and the cancellation of the stock options. Paloma is yet to be served with the complaint.
Abakan believes it 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 has incurred net losses of $18,479,767 for the period from June 27, 2006 (inception) to February
28, 2014. 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, 2013 and 2012 expressed an opinion as to its ability to
continue as a going concern as a result of net losses of $18,479,767 since inception and a working capital
deficit of $7,871,766 as of February 28, 2014. Unless Abakan is able to produce net income over
successive future periods its ability to continue as a going concern will be in jeopardy.
14
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.
MesoCoat has secured its assets against the payment of certain loan amounts due in April of 2014.
Should MesoCoat be unable to repay amounts due to a third party creditor of approximately $1,340,000
on April 29, 2014, all of its assets, with limited exceptions, absent any change in certain loan documents,
will become the property of a third party creditor on declaration of default. Abakan is in the process of
securing a financing sufficient to repay said creditor and is confident that MesoCoat’s obligations will be
satisfied or otherwise amended to avert any default. However, neither the financing to satisfy MesoCoat’s
loan obligations nor any changes to the terms and conditions of the loan documents have yet been agreed.
Abakan’s success is dependent on its ability 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 commercialize proprietary technologies
to produce sufficient revenue to sustain and expand operations. 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. Should the Company be unable to improve its financial condition
through debt or equity offerings, the ability to successfully advance its 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.
15
MesoCoat and Powdermet compete with larger and better financed corporations.
Competition within the industrial coatings industry and other high technology industries is intense. While
each of MesoCoat and Powdermet’s products are distinguished by next-generation innovations that are
more sophisticated and cost effective than many competitive products currently in the market place, a
number of entities and new competitors may enter the market in the future. Some of MesoCoat’s and
Powdermet’s existing and potential competitors have longer operating histories, greater name recognition,
larger customer bases and significantly greater financial, technical and marketing resources than we do,
including well known multi-national corporations. Accordingly, MesoCoat’s and Powdermet’s products
could become obsolete at any time. Competitors could develop products similar to or better than our own,
finish development of new technologies in advance of either MesoCoat’s or Powdermet’s research and
development, or be more successful at marketing new products, any of which factors may hurt our
prospects for success.
Market acceptance of the products and processes produced by MesoCoat and Powdermet is critical to
our growth.
We expect to generate revenue from our interest in MesoCoat and realize a gain on our interest in
Powdermet from the 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 the Company may be materially adversely affected.
MesoCoat and Powdermet expect to prepare patent applications in accordance with their respective
worldwide intellectual property strategies on acquiring new technologies. However, neither they nor the
Company can be certain that any patents will be issued with respect to future patents pending or future
patent applications. Further, neither they nor 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
16
We may not be able to effectively manage our growth.
We expect considerable future growth in our business. Such growth will come from the addition of new
plants, the increase in global personnel, and the commercialization of new products. Additionally, our
products should have an impact on the cladding industry; as companies learn that they can receive
materials with a short lead time at a higher quality and lower price, market demand should grow,
expanding the overall market itself. To achieve growth in an efficient and timely manner, we will have to
maintain strict controls over our internal management, technical, accounting, marketing, and research and
development departments. We believe that we have retained sufficient quality personnel to manage our
anticipated future growth though we are still striving to improve financial accounting oversight to ensure
that adequate reporting and control systems in place. Should we be unable to successfully manage our
anticipated future growth by adherence to these strictures, costs may increase, growth could be impaired
and our ability to keep pace with technological advances may be impaired which failures could result in a
loss of future customers.
Environmental laws and other governmental legislation may affect our business.
Should the technologies which each of MesoCoat and Powdermet have under development not comply
with applicable environmental laws 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 entities in which it holds an interest may face liability claims.
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.
17
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 Abakan’s securities are subject to the penny stock rules, investors will find it more
difficult to dispose of our securities.
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 articles of incorporation contains a specific provision that eliminates the liability of directors for
monetary damages to us and our stockholders; further, Abakan is prepared to give such indemnification to
its directors and officers to the extent provided by Nevada law. Abakan may also have contractual
indemnification obligations under its employment agreements with its executive officers. The foregoing
indemnification obligations could result in our incurring substantial expenditures to cover the cost of
settlement or damage awards against directors and officers, which Abakan may be unable to recoup.
These provisions and resultant costs may also discourage us from bringing a lawsuit against directors and
officers for breaches of their fiduciary duties and may similarly discourage the filing of derivative
litigation by our stockholders against the Abakan’s directors and officers even though such actions, if
successful, might otherwise benefit the us and our stockholders.
ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On January 4, 2014, Abakan authorized the issuance of 16,949 restricted common shares 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.
On December 5, 2013, Abakan authorized the grant of 100,000 stock options with an exercise price of
$1.25 per share that expire ten years from the date of grant vesting in equal one-third parts annually
beginning on first anniversary date of the grant to Evelina Vogli for employee services rendered, in
reliance upon the exemption from registration provided by Section 4(2) of the Securities Act.
18
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, 2013, Abakan authorized the grant of 200,000 stock options with an exercise price of
$1.25 per share that expire ten years from the date of grant vesting in equal one-third parts annually
beginning on first anniversary date of the grant to Costas M. Takkas for incentive to continue advising
and consultation, 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, 2013, Abakan authorized the grant of 50,000 stock options with an exercise price of
$1.25 per share that expire ten years from the date of grant vesting in equal one-third parts annually
beginning on first anniversary date of the grant to Orsa & Company for incentive to continue advising and
consultation, 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, 2013, Abakan authorized the grant of 50,000 stock options with an exercise price of
$1.25 per share that expire ten years from the date of grant vesting one-half on date of the grant and one-
half on the first anniversary date of the grant to Vladmir Chernyakov for incentive to continue advising
and consultation, 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 4, 2013, Abakan authorized the issuance of 10,000 restricted common shares for services
within 10 days after acceptance of the investor relation agreement valued at $1.25 a share to Surety
Financial Group Inc. in reliance upon the exemption from registration provided by Section 4(2) of
Securities Act. Abakan further authorized the issuance of additional 10,000 shares on June 1, 2014, in the
event the investor relations agreement is not terminated.
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.
19
On December 4, 2013, Abakan authorized the grant of 100,000 stock options with an exercise price of
$1.25 per share that expire ten years from the date of grant vesting in equal one-third parts annually
beginning on first anniversary date of the grant to Anupam Ghildyal 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.
On December 4, 2013, Abakan issued 50,000 restricted shares to Orsa & Company at a price of $.65
pursuant to the exercise of vested stock options that were granted on October 10, 2010, for consulting
services, in reliance upon the exemption from registrations 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 DISCLOSURES
Not applicable.
ITEM 5.
OTHER INFORMATION
None.
ITEM 6.
EXHIBITS
Exhibits required to be attached by Item 601 of Regulation S-K are listed in the Index to Exhibits on page
37 of this Form 10-Q, and are incorporated herein by this reference.
20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf bythe undersigned, thereunto duly authorized.
Abakan Inc.
Date
_/s/ Robert Miller________________________________
April 14, 2014
____---
By: Robert H. Miller
Its: Chief Executive Officer, and Director
/s/ David Costas
_________________________________
April 14, 2014
By: David Costas
Its: Chief Financial Officer and Principal Accounting Officer
21
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 the Company 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 the Company 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 the Company 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 the Company, 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 the Company 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 the Company 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 the Company 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 the Company and Mr. Takkas,
incorporated hereto by reference to the Form 8-K filed with the Commission on August 26,
2010.
22
10.16*
Amendment No. 1 to Stock Purchase Agreement between the Company and Kennametal
dated September 7, 2010, incorporated hereto by reference to the Form 8-K filed with the
Commission on September 15, 2010.
10.17*
Amendment to the Investment Agreement dated December 8, 2010, between the Company,
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 the Company 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 the Company 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.)
14*
Code of Business Conduct & Ethics adopted on June 13, 2012, and incorporated hereto by
reference to the Form 10-K filed with the Commission on September 13, 2012.
21*
Subsidiaries of the Company, incorporated hereto by reference to the Form 10-K filed with
the Commission on August 29, 2013.
31.1
Certification of the Chief Executive Officer pursuant to Rule 13a-14 of the Exchange Act as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, attached.
31.2
Certification of the Chief Financial Officer pursuant to Rule 13a-14 of the Exchange Act as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, attached.
32.1
Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, attached.
32.2
Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, attached.
99*
Powdermet audited financial statements for the period ended May 31, 2013, incorporated
hereto by reference to the Form 10-K filed with the Commission on August 29, 2013.
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 the Company.
†
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.
23